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Girma, Abebe Gule: The Role of Financial Development in Post-War Economic Growth
These studies suggest that the effect of financial development on economic growth
depends on human capital, the efficiency of corporate investments and the financial
markets, and the effectiveness of regulatory environment. Different from these
studies, we focus on the war-torn societies and examine the effect of financial
devleopment on economic growth, specifically during the post-war period. Aghion et
al. (2004) show that temporary macroeconomic shocks have large and persistent
effects. Thus countries that are going through a phase of financial development and
experiencing warfare may become more unstable in the short run and financial shocks
may lead to negative economic growth. Aghion et al. (2005) show that when country
falls behind technologically and suffers from a loss of human capital, it becomes
increasingly difficult to absorb new global technology and innovate faster which is
the key to convergence to global living standards. The lower the level of financial
devleopment in the country, the greater will be this disadvantage. Our paper
investigates this effect and examines the role of financial development for post-war
economic growth.
RESEARCH METHODOLOGY
We use macroeconomic panel data on eight select countries with lengthy war
experience from 1970-2007. The sample countries selected based on data availability
such that we require at least 10 years of data after the war to see the immediate effects
of financial sector development on the economic growth of a post-war society. We
also compare the effect of financial development on economic growth after the war
period, to the same effect during the pre-war and during the war periods. Our
dependent variable is the proxy variable used for the dependent variable is the real
GDP per capita annual growth rate. Following previous studies (Abdul Rahman,
Muhammad Arshad Khan, and Lanouar Charfeddine, 2020) (Bist, 2018) (Dimitrios
Asteriou and Konstantinos Spanos, 2019) (Biplab Kumar Guru, Inder Sekhar Yadav,,
2019), we use domestic credit provided to private sector (scaled by GDP) as the key
explanatory variable and our proxy for financial development. We include official
exchange rate, money supply annual growth, and lending interest rate to control for
the effect of monetary and fiscal policy. Also, we control general national
expenditures, central government debt, domestic saving, trade openness, foreign
direct investment, and foreign aid to isolate the effect of financial development. We
retrieved the data for all the variables used in this study from the World Bank database.
Taking to consider from the theoretical linkages between financial development and
economic growth relationship advocated, our theoretical models presented. First, in
line with our analytical framework, this study proposes a theoretical model where real
GDP per capita is driven primarily by financial development and sets of control
variables during postwar/war and prewar periods.
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