2.2 Financial development: a less factor for economic
growth
In fact, the issue of the relationship between financial
development and economic growth is still debated. Some economists believe there
is no significant relationship between financial system and economic growth.
For instance, Lucas (1988) dismissed the finance-economic growth relationship
by stating that economists «badly over-stress» the role financial
factors play in economic growth. Mayer (1988) argues that a developed stock
market is not important for financing of companies. Nonetheless, some authors
such as Robinson (1952) assert that economic growth creates demand for
financial instruments and that where enterprise leads, finance follows. Nguema
(2000) studied financial intermediation and growth on Gabon, and concluded that
despite the regular periods of excess liquidity in the banking system, banks
did not finance growth. In other words, the development of the financial sector
did not influence the economic growth of the country.
2.3 Financial liberalization and economic growth in the
WAEMU countries
Generally, the term "financial repression" refers to the
effects of strict regulation of financial systems and the arrays of
restrictions imposed by States on the activity of financial institutions.
Adopting financial liberalization policies was often considered a prerequisite
for healthy and efficient financial sector; McKinnon and Shaw (1973).
Theoretical and empirical studies conclude that financial development plays
important role in economic growth, and that less developed financial systems
may hinder economic growth, and that reforms involving the deployment of market
mechanisms must be pursued. Evidence from these studies has been the foundation
for the wave of financial liberalization of many developed and developing
economies. For the WAEMU countries, the liberalization of financial systems to
stop the collapse of the banks and propel investment began in the late 1980s;
WAEMU annual report (2003). The reforms were primarily liberalization of
interest rates, elimination of credit, operationalization of the minimum
reserve system, renovation of the money market, creation of the Regional Stock
Exchange known as Bourse Regionale de Valeures Mobilieres (BRVM) in French, and
promotion of the microfinance sector. These
measures were implemented (as part of the liberalization
policy in the monetary area) to improve the efficiency of banks for economic
growth. However, some argue that financial repression has a reducing effect on
growth.
McKinnon and Shaw (1973), King and Levine (1993) are the main
advocates for financial liberalization. For them, a repressed financial system
where the state controls the banking sectors is ineffective because government
plays important role in credit allocation, through the maintenance of very low
interest rates, subsidized interest rates for priority sectors (especially
SOEs) and very high reserve requirements. This development is believed to
disturb relative prices and resource allocation. Financial liberalization
therefore, must first promote greater collection of savings, by increasing the
supply of savings instruments and raising real interest rates. There is also
the tendency to finance less productive investments in a financially repressed
economy; McKinnon (1973). Furthermore, Shaw (1973) showed that the rate limits
aggravate risk aversion and liquidity preference of financial intermediaries.
According to Fry (1997), credit allocation is usually based on political
affiliations rather than on the basis of efficiency in a repressed financial
system. King and Levine (1993) also stated that financial repression reduces
the services offered by the financial system for clients. It hinders innovation
and weakens the growth rate of the economy. Therefore, theoretically, there is
ample evidence that shows that financial repression adversely affects both the
financial sphere and the real economy. Hence, the liberalization of financial
systems advocated by economists as a measure to induce economic growth seems to
be in the right direction. In contrast, a second approach argues that financial
liberalization is harmful to financial development innovation and economic
growth. Stiglitz (1981) opined that the function of capital markets, driven
mainly by financial liberalization is affected by asymmetric information flow
which undermines its effectiveness. For example, the head of a credit bank has
more information on the terms and conditions on loans than the client who is
taking risks to borrow. This results in adverse selection, and moral hazard.
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