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Financial development and economic growth: evidence from Niger

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par Oumarou Seydou
Xiamen University - Master of Economics Applied Finance 2012

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Chapter 1 Introduction

Niger's economic growth in the past decades has been relatively modest and was below the population growth rate, in the early 1960s through to the late 1970s economic growth was weakened by series of droughts that adversely affected the agricultural sector (accounting 40 percent of Niger GDP). From 1979 to 1982, economic growth was strengthened due to the world demand for uranium (Niger's main export product). This improved the terms of trade and raised export revenues base of the country. However, this strong growth was short lived due to the collapse of the global uranium price in the early 1980s, causing and accelerating prolonged recession. Although the 1994 devaluation of the CFA1 franc improved the country's external competitiveness, real GDP growth was too low to boost per capita income; IMF (2007); Ministry of Finance and economy of Niger (2006).

Over the years, the study of economic growth has become one of the hottest research areas due to the strategic implications of economic growth to national development. Modern theories on economic growth offer several explanations to this; Katheline (2000). According to the classic definition of François Perroux (1981), economic growth is «an increase in the capacity of an economy to produce goods and services, compared from one period of time to another''. In practice, gross domestic product (GDP) is used to measure economic growth and the rate of economic growth is evaluated by the rate of change of GDP. The financial sector is an important contributor to GDP in every economy. Therefore, the level of growth and development of an economy is tied partly to profound reforms made in the financial and monetary structures as well as policy interventions. Changes in the financial sector are fundamental and vital for these reforms due to its role in spreading risk and mobilizing savings. It is therefore imperative to highlight the contributions of this sector to economic growth. Nonetheless, economic theories are divided on the importance of this sector in economic growth; Bagehot (1873); Hicks (1969); Goldsmith (1969); Schumpeter (1912); Robinson (1952); Lucas (1988).

1 Local currency share by an eight former French colonies in West Africa

Consequently, two main hypotheses are advanced whose central issue is whether or not the financial sector supports economic development. The first is led by Bagehot and others; Bagehot (1873); Mackinnon (1973); Shaw (1973); and Schumpeter (1912). They highlight the active role of the financial sector in promoting economic growth; Robinson (1952) and Lucas (1988) on the other hand believe there is no relationship between the financial sector and economic growth.

Crises in the banking sector in 1980s resulted in collapse of banks in developing countries especially in Africa; particularly, south of the Sahara. It forced the West African and Monetary Union (WAEMU) countries (among which Niger is a member) to engage in financial liberalization advocated by researchers as an intervention measure; McKinnon and Shaw (1973). This intervention, as envisaged at the time, would allow the recovery of the banking and the financial sectors and in fact, propel the growth of the economy. Unfortunately, the intervention has not been successful due to the fact that the financial sector is highly concentrated with higher intermediation margins; resulting in excess liquidity which has adverse effects on banking efficiency; Igué (2006).

A developed financial sector enhances economic growth, by promoting and mobilizing savings and providing information on investments opportunities so that resources can be channeled to productive ventures. It monitors the disbursement of funds, promotes trading, diversification and management of risk as well as facilitating the exchange of goods and services leading to economic growth; Levine (1997, 2004).

The objective of this study is to investigate whether the development of financial sector in Niger in the past 40 years has contributed to economic growth or not. Empirically, real GDP was used to indicate economic growth; two variables were used to indicate financial development. Financial deepening M2/GDP denoted by FD, and credit to the private sector to GDP by CP. Based on these, investigation to determine whether or not there was any relationship between financial development and economic growth in Niger was done.

1.1. Motivation

There have been some studies on the financial development and economic growth in some WAEMU countries, however to the best of my knowledge there has not been any report in the case of Niger. Its financial sector has not been given the necessary attention in research studies as an important indicator of economic growth. Hence, the need to fill this research and academic gap is of paramount importance. This study therefore, aims at analyzing the relationship between the financial development and economic growth of Niger and providing implicit and explicit policy suggestions that may be adopted by policy makers to promote financial development and economic growth.

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