Financial development and economic growth: evidence from West Africa

Abstract

In this paper, we employ the Geweke (1982) decomposition method to examine the Granger causality between finance and growth in West Africa. Our sample contains twelve ECOWAS member countries (Economic Community of West African States) and we distinguish two subsamples: seven WAEMU countries which constitute an economic and monetary union (with the CFA Franc as their common currency) and five non-WAEMU countries. Data are from the World Bank (2008) and cover the period 1962-2006. The results show that:(1) finance leads economic growth in countries which have the common currency, (2) the reverse causation dominates in the other countries, (3) there is greater feedback between financial development and economic growth in countries sharing the common currency, (4) there is more instantaneous (contemporaneous) causality between finance and growth in WAEMU than in non-WAEMU countries suggesting that financial development affects growth and vice-versa in the short term in WAEMU countries. The first result can be explained by financial stability which suggests accelerating the process of creation of common currency for all West African countries. This paper highlights that the finance-growth nexus may vary across countries at similar stages of development and suggests that the existence of a stable monetary union may intensify the relationship between financial development and economic growth in developing countries.Finance; growth; Granger causality; monetary union; ECOWAS; Geweke decomposition test. 1