Page 15 - Azerbaijan State University of Economics
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Girma, Abebe Gule: The Role of Financial Development in Post-War Economic Growth

                    However, the effectiveness of international humanitarian aid and foreign economic
                    assistance  depends  on  the  quality  of  socio-economic  policies  and  the  size  of  aid
                    received by the country (Collier and Dollar 2002). Among key determinants of post-
                    war  economic  recovery  are  geographic  location,  natural  resources,  international
                    remittances, credibility, and effectiveness of monetary and fiscal policies (Nkurunziza
                    2008; Felipe et al. 2010; Polchanov, 2017).

                    In this paper, we focus on the role of the financial sector. We specifically examine
                    whether financial development accelerates economic growth in post-war countries.
                    Prior literature on finance shows that financial development is one of the significant
                    determinants of economic growth (King and Levine 1993). As Schumpeter argued,
                    financial services contribute to technological innovation and economic development
                    through mobilizing savings, accumulating, and allocating capital efficiently. Despite
                    the prior literature thoroughly investigating the nexus between the financial sector and
                    economic growth, this relationship in the context of war-torn economies, especially
                    during the post-war period is underexplored. We believe the effect of this relationship
                    will be more evident in societies experiencing the consequences of warfare. Post-war
                    economies suffer from the lack of sustainable economic recovery and often the risk
                    of renewed conflict rises if socio-economic challenges are not overcome. Moreover,
                    economic gains in post-war economies may not be distributed across different groups
                    of society which further increases civil unrest. The development of the financial sector
                    can  provide  war-torn  societies  with  long-term  productivity  growth  and  economic
                    efficiency improvements for equitably growth.

                    Our study results show that financial development significantly and positively drives
                    postwar economic growth. The financial sector is an essential part of the country's
                    economic system, and the development of this sector is expected to contribute towards
                    growth and reconstruction of the post-conflict society economy. The objective of this
                    study  was  to  investigate  the  effect  of  financial  sector  development  on  postwar
                    economic growth and explore the mechanisms of this effect through the control of
                    monetary and other variables.

                    The paper contributes to three different angles. First, it examines the effect of financial
                    development on fostering postwar economic growth in the recent war-torn countries.
                    Second, it compares the effect of financial development in three phases of periods:
                    the  prewar  period,  the  war  period,  and  the  postwar  period.  Third,  since  the  link
                    between  financial  development  and  economic  growth  did  not  have  single
                    argumentative  conclusion,  this  study  contributes  by  adding  new  evidence  on  the
                    finance development nexus economic growth relationship.



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