Governance and Financial Development: Evidence from the Middle East and North Africa Region

Badry Hechmy

Abstract


Since the 1990s, the promotion of good governance has been a priority for major international organizations such as the International Monetary Fund and the World Bank.  This article aims to estimate the effect of institutional development on financial development in MENA countries during the period 1996 to 2013.  Drawing on Demetriades and Luintel (1996) and Ito (2006), the econometric approach used is based on the GMM, the autocorrelation test for errors of Arellano and Bond (1991), and the over-identification test of Sargan for dynamic panel data. The results derived from this study show a considerable delay in financial development in MENA countries compared to several other emerging countries in Asia and Latin America. Furthermore, it shows a negative effect of institutional development on financial development.  This unexpected relationship between these two variables has two explanations. First, the delusory level of institutional development of some countries in the region actually remains under the threshold beyond which it begins to positively affect the financial sector. Second, the political unrest experienced by the region during the study period has encouraged the informal financial sector to the detriment of the formal sector.

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