Essays on financial development and economic growth

  • Reem Lanjawi

    Student thesis: Doctoral Thesis


    The financial sector is generally considered a key element of the financial system of an economy and as such its overall contribution and effectiveness can be gauged in terms of the role it plays in a country’s economic development and growth. Since the 1980s, the United Arab Emirate (UAE) has undergone several economic changes and reforms, the purpose of which has been to diversify the economy away from its dependence on a declining oil sector towards the creation of a stable and vibrant economy in which newly established industries, based on financial services and tourism, can prosper. The empirical literature has examined issues specific to finance and growth using data for the UAE, but few studies examine the extent to which financial development has progressed using a longer time series data, and whether financial development has been influential in stimulating economic growth with alsmost all studies using cross-sectional data. The main contribution of this thesis is to provide a detail analysis of the main drivers of financial development and, in particular, the linkages between financial sector development and economic growth as well as the exploration of the savings-growth nexus. The study uses time series data for the period of analysis covers 1980 to 2013. This period has seen the UAE project itself as being an emerging and more diversified developing economy. Accompanying this development has been improvements in the UAE financial system and the gradual emergence of more financial institutions and financial instruments.
    The study employed the ARDL approach to investigate the short-run and long-run association between financial deepening and growth in the real economy. Two models were estimated separately using the ARDL approach. One model covered the financial deepening by applying domestic credit to the private sector as percentage of GDP, as dependent variable, and monetisation ratio, real per capita income and number of bank branches as dependent variables. The estimators were found cointegrated with all independent variables found to affect financial deepening in the short-run. However, in the long-run only the real per capita income and the monetisation ratio were found cointegrated with the domestic credit to private sector as percentage of GDP. In the second model GDP was taken as the dependent variable and gross investment as percent of real GDP, domestic credit to private sector as percent of GDP, total trade percentage of GDP as a measure of trade openness, and oil prices taken as independent variables. It was found that gross investment as percent of GDP and trade openness were statistically insignificantly affecting growth. However, domestic credit to private sector in percentage of real GDP and oil prices were affecting growth patterns in the long-run. This suggests that the development in financial sector causes changes in the growth patterns in the UAE in the long-run. Furthermore, the variations in the oil prices in international market affect the growth pattern positively.
    The study further examines the savings-growth nexus. One reason is the absence of enough empirical evidence in the literature using time series data analysis. Studies involving cross-sectional data analysis seem to be prone to certain limitations as they unrealistically assume that saving-growth association is homogenous across countries. The causal link and long-run association between saving and growth can only be established using time series data. The study finds that saving is statistically significantly affected by domestic liquidity percentage of real GDP, foreign savings as percent of real GDP, dependency ratio and real interest rate. In case of all independent variables, the sign and magnitude of the associated coefficients were strong and statistically significant. This implies that growth in case of the UAE is dependent upon saving in long-run and conforms with the group of authors claiming that the causality goes from saving to economic growth.
    Finally, the existing literature on the statistical linkage between stock market development and growth in the real economic activities presents a mixed response. There are several cross-sectional studies, which argue that there is a positive link between stock variables and the real economy while others argue that the development in the stock market does show any significant impact on real economic activities. This study filled the gap in the literature by exploring the financial development and economic growth relationship using time series data. The results from this study support the hypothesis that the size of equity markets is positively linked with economic growth. This implies that Arab countries and UAE in particular should consider these determinants to increase the GDP growth rate when formulating policies for the development of the stock market.
    Date of AwardMar 2019
    Original languageEnglish
    SupervisorAndrew Wood (Supervisor)

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