On the Causal Nature between Financial Development and Economic Growth in the Democratic Republic of the Congo: Is it Supply Leading or Demand Following?
Abstract
This paper seeks to study and answer the question on the nature and direction of the causality between financial development and economic growth in the Democratic Republic of the Congo (DRC) using data from 2004 to 2019. The long-term relationship not being robust, we opted for the short-term dynamics with the causality test in the sense of Granger to support this question. The results indicated the existence of a one-way causality from economic growth to financial development. This result is in line with the Demand following hypothesis, given the country’s economic and financial landscape, which presents a less deep financial system. Consequently, choices of growth policies (increase in knowledge, infrastructure, pleasant business climate, structural reforms, etc.) should be adopted to enhance and develop the Congolese financial system. However, we recognize that once growth is restored and becomes sustainable, financial development could lead to sustained and resilient economic growth.
References
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[37] Hassan, M.K., Sanchez, B., and Yu, J.S. 2011. Financial development and economic growth: New evidence from panel data. The Quarterly Review of Economics and Finance, 51: 88–104. https://doi.org/10.1016/j.qref.2010.09.001
[38] Hsueh, S.J., Hu, Y.H., and Tu, C.H. 2013. Economic growth and financial development in Asian Countries: A bootstrap panel Granger causality analysis. Economic Modelling, 32: 294-301.
[39] Ilunga, S.K., and Pinshi, C.P. 2018. Quel rôle pour les banques centrales dans la promotion de la croissance économique? MPRA Paper no. 99706.
[40] Ismail, F., Ab-Rahim, R., and Pei-Chin, L. 2019. Nexus Between Financial Development and Economic Growth in Malaysia. International Journal of Academic Research in Business and Social Sciences, 9(1). 10.6007/IJARBSS/v9-i1/5328
[41] Kamalu, K., Wan Ibrahim, W.H., Ahmad, A.U., and Mustapha, U.A. 2019. Causal link between financial developments, financial inclusion and economic growth in Nigeria. International Journal of Scientific & Technology Research, Volume 8, December.
[42] Kar, M., and Pentecost, E.J. 2000. Financial development and economic growth in Turkey. Further evidence on the causality Issue, Department of Economics, Loughborough University.
[43] Kar, M., Nazlıoğlu, S., and Ağır, H. 2011. Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis. Economic Modelling, 28: 685-693.
[44] Kenza, M., and Mohamed, B. 2015. Financial development and economic growth in Algeria: An econometric analysis of the transmission channels. International Journal of Economic and Business Review, Volume 3, February.
[45] King, R.G., and Levine, R. 1993. Finance and growth: Schumpeter might be right. Quarterly Journal of Economics. 108: 717-737
[46] Kumar, R.R. 2011. Do remittances, exports and financial development matter for economic growth? A case study of Pakistan using bounds approach. Journal of International Academic Research, Volume 11.
[47] Kuznets, S. 1955. Economic growth and income inequality. American Economic Review, 45: 1-28.
[48] Levine, R. 2005. Finance and Growth: Theory and Evidence. In Handbook of Economic Growth, Eds. P. Aghion and S. N. Durlauf, 865 - 934. Amsterdam: Elsevier.
[49] Lewis, W. A. 1995. The Theory of Economic Growth. Allen and Unwin, London.
[50] Lonzo, L.G., and Kabwe, O.F. 2015. Intermédiation financière et croissance économique en République Démocratique du Congo. MPRA Paper no. 61261, January.
[51] Lucas, R. 1988. On the Mechanics of Economic Development. Journal of Monetary Economics, 22: 3-42.
[52] Luintel, K.B. and Khan, M. 1999. A quantitative reassessment of the finance-growth nexus: Evidence from a multivariate VAR. Journal of Development Economics, 60: 381-405.
[53] McKinnon, R. 1973. Money and Capital in Economic Development. Washington, D.C.: Brookings Institution. Paperback ISBN: 978-0815756132.
[54] Mollaahmetoğlu, E., and Akçalı, B.Y. 2019. The Missing-Link between Financial Development and Economic Growth: Financial Innovation. Procedia Computer Science, 158: 696 - 704.
[55] Musamali, A.R., Nyamongo, M.E., and Moyi, D.E. 2014. The relationship between financial development and economic growth in Africa. Research in Applied Economics, 6: 190-208.
[56] Nayak, B.S., and Yingnan, Z. 2019. Critical reflections on different trends in the relationship between financial developments and economic growth in China. International Journal of Economics and Finance; 11(3), February. https://doi.org/10.5539/ijef.v11n3p89
[57] Nazlıoğlu, S., Ege, I., and Bayrakdaroğlu, A. 2009. Financial development and economic growth: Cointegration and causality analysis for Turkey. Banking Finance Letters, 1: 59-66.
[58] Ndako, U.B. 2017. Financial development, investment and economic growth: Evidence from Nigeria. Journal of Reviews on Global Economics, 6: 33-41.
[59] Odhiambo, N.M. 2008. Financial depth, savings, and economic growth in Kenya: A dynamic causal linkage. Economic Modeling, 25: 704-713.
[60] Odhiambo, N.M. 2009. Finance-growth-poverty nexus in South Africa: A dynamic causality linkage. The Journal of Socio-Economics, 38: 320-325.
[61] Okpara, G.C., and Onoh, A.N., Ogbonna, B M., Iheanacho, E. 2018. Econometrics analysis of financial development and economic growth: Evidence from Nigeria. Global Journal of Management and Business Research, Volume 18.
[62] Olutan, R. 2012. Financial development and economic growth in Africa: lessons and prospects. Business and Economic Research, 2(2).
[63] Öztürk, I., and Acaravci, A. 2013. The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Economics, 36: 262-267.
[64] Patrick, H.T. 1966. Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 14: 174-89.
[65] Pinshi, C.P. 2017a. Boucle rétroactive entre la volatilité des flux de capitaux et la stabilité financière: Résultat pour la République Démocratique du Congo. HAL Id: hal-01577198, Working Paper, August.
[66] Pinshi, C.P. 2017b. A macroprudential perspective on financial stability. Global Journal of Management and Business Research: C Finance, 17: 27-42.
[67] Pinshi, C.P. 2020. Rethinking error correction model in macroeconometric analysis: A relevant review. Journal of Applied Economic Sciences, Volume XV, Summer, 2(68): 267-274.
[68] Rajan, R.G., Zingales, L. 1998. Financial dependence and growth. American Economic Review, 88: 559–586.
[69] Robinson, J. 1952. The Generalization of the General Theory and Other Essays. The McMillan Press Ltd, London. E-book: ISBN 978-1-349-16188-1
[70] Schumpeter, J. 1911. A Theory of Economic Development. Harvard University Press.
[71] Shan, J., Jianhong, Q. 2006. Does financial development “lead” economic growth? The case of China. Annals of Economics and Finance, 1: 197-216.
[72] Shahbaz, M., Lean, H.H. 2012. Does financial development increase energy consumption? The role of industrialization and urbanization in Tunisia. Energy Policy, 40: 473-479.
[73] Shaw, E. 1973. Financial Deepening in Economic Development. New York: Oxford University Press.
[74] Shittu, A.I. 2012. Financial intermediation and economic growth in Nigeria. British Journal of Arts and Social Science, 4: 164-179.
[75] Singh, A. 1997. Financial liberalization, stock markets and economic development. The Economic Journal, Volume 107.
[76] Soytaş, U., and Küçükkaya, E. 2011. Economic growth and financial development in Turkey: New evidence. Applied Economics Letters, 18: 595-600.
[77] Spears, A. 1992. The Role of financial intermediation in economic growth in Sub - Saharan Africa. Canadian Journal of Development Studies, 13: 361-380.
[78] Stern, N. 1989. The economics of development: A survey. The Economic Journal: 597-685.
[79] Wood, A. 1993. Financial development and economic growth in Barbados: Causal evidence. Savings and Development, 17: 379-380.
[2] Ahmed, S.M., and Ansari, M.I. 1998. Financial sector development and economic growth: The South-Asian experience. Journal of Asian Economics, 9: 503-517.
[3] Akinboade, O.A. 1998. Financial development and economic growth in Botswana: A test for causality. Savings and Development, 22: 331-348.
[4] Akinlo, A.E., and Egbetunde, T. 2010. Financial development and economic growth: The experience of 10 Sub-Saharan African countries revisited. The Review of Finance and Banking, 2: 17-28.
[5] Akitoby, B., and Cinyabuguma, M. 2004. Sources of growth in the Democratic Republic of the Congo: a cointegration approach. International Monetary Fund, IMF Working Paper no.04/114.
[6] Al-Ammam, M. 2005. Causality between Financial an Economic Growth: The Case of Kuwait, Oman and Saudi Arabia. Colorado State University.
[7] Al-Qudah, A.M. 2017. Financial development and economic growth of Jordan. Research Journal of Finance and Accounting, 7: 143-152.
[8] Altaee, A.H., and Al-Jafari, K.M. 2015. Financial development, trade openness and economic growth: A trilateral analysis in Bahrain. International Journal Economics and Finance, 7: 241-254.
[9] Ang, J.B., and McKibbin, W.J. 2007. Financial liberalization, financial sector development and growth: Evidence from Malaysia. Journal of Development Economics, 84: 215-233.
[10] Athanasios, V., and Antonios, A. 2010. Financial development and economic growth: An empirical analysis for France. International Review of Applied Economic Research, Volume 5, December.
[11] Bagehot, W. 1873. Lombard Street: A Description of Money Market. Federal Reserve of New York, Homewood, IL: Richard D. Irwin, 1962 Edition. ISBN-10: 0-88355-677-4.
[12] Bangake, C., and Eggoh, J. 2011. Further evidence on finance-growth causality: A panel data analysis. Economic Modelling, 35: 176-188. https://doi.org/10.1016/j.ecosys.2010.07.001
[13] Bhattacharya, P.C., and Sivasubramanian, M.N. 2003. Financial development and economic growth in India: 1970-1971 to 1998-1999. Applied Financial Economics, 13: 925-929.
[14] Beck, T., Levine R., and Norman, L. 2000. Finance and the Sources of Growth. Journal of Financial Economics, 58: 261-300.
[15] Beck, T., and Levine, R. 2004. Stock markets, banks, and growth: Panel evidence. Journal of Banking and Finance, 28: 423-442.
[16] Berthelemg, J.C., and Varoudakis, A. 1996. Financial Development Policy and Growth. OECD.
[17] Bist, J.P. 2018. Financial development and economic growth: Evidence from a panel of 16 African and non-African low-income countries. Cogent Economics and Finance. https://doi.org/10.1080/23322039.2018.1449780
[18] Calderon, C. 2003. The Direction of Causality between financial development and economic growth. Journal of Development Economics, 72(1): 321-334.
[19] Chandavarkara, A. 1992. Of Finance and development: neglected and unsettled questions. World Development, 20: 133-142.
[20] Christopoulos, D.K., and Tsionas, E.G. 2004. Financial development and economic growth: Evidence from panel unit root test and cointegration test. Journal of Development Economics, 73: 55-74. https://doi.org/10.1016/j.jdeveco.2003.03.002
[21] Deidda, L., and Fattouh, B. 2002. Non-linearity between finance and growth. Economics Letters, 74: 339-343.
[22] De Gregoria, J., and Guidotti, P.E. 1995. Financial development and economic growth. World Development, 23: 433-448.
[23] Dematriades P.O., and Hussain, K.A. 1996. Does financial development cause economic growth? Time series evidence from 16 countries. Journal of Development Economics, 51: 387 - 411.
[24] Demetriades, P.O., and James, G.A. 2011. Finance and growth in Africa: The Broken Link. Economic Letters 113.
[25] Demirguc-Kunt, A. 2006. Finance and economic development: Policy choices for developing countries. World Bank Policy Research Working Paper no. 3955.
[26] Demirgüç-kunt, A., and Levine, R. 2008. Finance, financial sector policies and long-run growth. Banque mondiale, Policy Research Working Paper, no. 4469, January.
[27] Ductor, L., and Grechyna, D. 2015. Financial development, real sector, and economic growth. International Review of Economics & Finance, 37: 393–405.
[28] Fase, M.M., and Abma, R.C. 2003. Financial environment and economic growth in selected Asian countries. Journal of Asian Economics, 14: 11-21.
[29] Gelbard, E., Gulde, A.M., and Maino, R. 2014.Développement financier en Afrique subsaharienne: Les enjeux pour une croissance soutenue. Revue D’économie Financière, 4(116): 19-42.
[30] Ghirmay, T. 2004. Financial development and economic growth in sub-Saharan African countries: Evidence from time series analysis. African Development Review, 16: 415-432.
[31] Goldsmith, R. 1969. Financial Structure and Development. 1st Edition New Haven: Yale University Press.
[32] Granger, C.W. 1969. Investigating causal relations by econometric models and cross-spectral methods. Économetrica, 37(3): 424-438.
[33] Greenwood, J., and Bruce, S. 1997. Financial markets in development, and the development of financial markets. Journal of Economic Dynamic and Control, 21: 145-181.
[34] Gries. T., Kraft, M., and Meierrieks, D. 2009. Linkages between financial deepening, trade openness, and economic development: Causality evidence from Sub-Saharan Africa. World Development, 37: 1849-1860. https://doi.org/10.1016/j.worlddev.2009.05.008
[35] Gupta S.K., and Rao, R.P. 2018. The causal relationship between financial development and economic growth: an experience with BRICS economies. Journal of Social and Economic Development, 2(20). 10.1007/s40847-018-0071-5
[36] Hasan, H. 2818. Relationship between financial development and economic growth: Empirical evidence in Indonesia. International Journal of Economics and Finance, 10(12).
[37] Hassan, M.K., Sanchez, B., and Yu, J.S. 2011. Financial development and economic growth: New evidence from panel data. The Quarterly Review of Economics and Finance, 51: 88–104. https://doi.org/10.1016/j.qref.2010.09.001
[38] Hsueh, S.J., Hu, Y.H., and Tu, C.H. 2013. Economic growth and financial development in Asian Countries: A bootstrap panel Granger causality analysis. Economic Modelling, 32: 294-301.
[39] Ilunga, S.K., and Pinshi, C.P. 2018. Quel rôle pour les banques centrales dans la promotion de la croissance économique? MPRA Paper no. 99706.
[40] Ismail, F., Ab-Rahim, R., and Pei-Chin, L. 2019. Nexus Between Financial Development and Economic Growth in Malaysia. International Journal of Academic Research in Business and Social Sciences, 9(1). 10.6007/IJARBSS/v9-i1/5328
[41] Kamalu, K., Wan Ibrahim, W.H., Ahmad, A.U., and Mustapha, U.A. 2019. Causal link between financial developments, financial inclusion and economic growth in Nigeria. International Journal of Scientific & Technology Research, Volume 8, December.
[42] Kar, M., and Pentecost, E.J. 2000. Financial development and economic growth in Turkey. Further evidence on the causality Issue, Department of Economics, Loughborough University.
[43] Kar, M., Nazlıoğlu, S., and Ağır, H. 2011. Financial development and economic growth nexus in the MENA countries: Bootstrap panel granger causality analysis. Economic Modelling, 28: 685-693.
[44] Kenza, M., and Mohamed, B. 2015. Financial development and economic growth in Algeria: An econometric analysis of the transmission channels. International Journal of Economic and Business Review, Volume 3, February.
[45] King, R.G., and Levine, R. 1993. Finance and growth: Schumpeter might be right. Quarterly Journal of Economics. 108: 717-737
[46] Kumar, R.R. 2011. Do remittances, exports and financial development matter for economic growth? A case study of Pakistan using bounds approach. Journal of International Academic Research, Volume 11.
[47] Kuznets, S. 1955. Economic growth and income inequality. American Economic Review, 45: 1-28.
[48] Levine, R. 2005. Finance and Growth: Theory and Evidence. In Handbook of Economic Growth, Eds. P. Aghion and S. N. Durlauf, 865 - 934. Amsterdam: Elsevier.
[49] Lewis, W. A. 1995. The Theory of Economic Growth. Allen and Unwin, London.
[50] Lonzo, L.G., and Kabwe, O.F. 2015. Intermédiation financière et croissance économique en République Démocratique du Congo. MPRA Paper no. 61261, January.
[51] Lucas, R. 1988. On the Mechanics of Economic Development. Journal of Monetary Economics, 22: 3-42.
[52] Luintel, K.B. and Khan, M. 1999. A quantitative reassessment of the finance-growth nexus: Evidence from a multivariate VAR. Journal of Development Economics, 60: 381-405.
[53] McKinnon, R. 1973. Money and Capital in Economic Development. Washington, D.C.: Brookings Institution. Paperback ISBN: 978-0815756132.
[54] Mollaahmetoğlu, E., and Akçalı, B.Y. 2019. The Missing-Link between Financial Development and Economic Growth: Financial Innovation. Procedia Computer Science, 158: 696 - 704.
[55] Musamali, A.R., Nyamongo, M.E., and Moyi, D.E. 2014. The relationship between financial development and economic growth in Africa. Research in Applied Economics, 6: 190-208.
[56] Nayak, B.S., and Yingnan, Z. 2019. Critical reflections on different trends in the relationship between financial developments and economic growth in China. International Journal of Economics and Finance; 11(3), February. https://doi.org/10.5539/ijef.v11n3p89
[57] Nazlıoğlu, S., Ege, I., and Bayrakdaroğlu, A. 2009. Financial development and economic growth: Cointegration and causality analysis for Turkey. Banking Finance Letters, 1: 59-66.
[58] Ndako, U.B. 2017. Financial development, investment and economic growth: Evidence from Nigeria. Journal of Reviews on Global Economics, 6: 33-41.
[59] Odhiambo, N.M. 2008. Financial depth, savings, and economic growth in Kenya: A dynamic causal linkage. Economic Modeling, 25: 704-713.
[60] Odhiambo, N.M. 2009. Finance-growth-poverty nexus in South Africa: A dynamic causality linkage. The Journal of Socio-Economics, 38: 320-325.
[61] Okpara, G.C., and Onoh, A.N., Ogbonna, B M., Iheanacho, E. 2018. Econometrics analysis of financial development and economic growth: Evidence from Nigeria. Global Journal of Management and Business Research, Volume 18.
[62] Olutan, R. 2012. Financial development and economic growth in Africa: lessons and prospects. Business and Economic Research, 2(2).
[63] Öztürk, I., and Acaravci, A. 2013. The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Economics, 36: 262-267.
[64] Patrick, H.T. 1966. Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 14: 174-89.
[65] Pinshi, C.P. 2017a. Boucle rétroactive entre la volatilité des flux de capitaux et la stabilité financière: Résultat pour la République Démocratique du Congo. HAL Id: hal-01577198, Working Paper, August.
[66] Pinshi, C.P. 2017b. A macroprudential perspective on financial stability. Global Journal of Management and Business Research: C Finance, 17: 27-42.
[67] Pinshi, C.P. 2020. Rethinking error correction model in macroeconometric analysis: A relevant review. Journal of Applied Economic Sciences, Volume XV, Summer, 2(68): 267-274.
[68] Rajan, R.G., Zingales, L. 1998. Financial dependence and growth. American Economic Review, 88: 559–586.
[69] Robinson, J. 1952. The Generalization of the General Theory and Other Essays. The McMillan Press Ltd, London. E-book: ISBN 978-1-349-16188-1
[70] Schumpeter, J. 1911. A Theory of Economic Development. Harvard University Press.
[71] Shan, J., Jianhong, Q. 2006. Does financial development “lead” economic growth? The case of China. Annals of Economics and Finance, 1: 197-216.
[72] Shahbaz, M., Lean, H.H. 2012. Does financial development increase energy consumption? The role of industrialization and urbanization in Tunisia. Energy Policy, 40: 473-479.
[73] Shaw, E. 1973. Financial Deepening in Economic Development. New York: Oxford University Press.
[74] Shittu, A.I. 2012. Financial intermediation and economic growth in Nigeria. British Journal of Arts and Social Science, 4: 164-179.
[75] Singh, A. 1997. Financial liberalization, stock markets and economic development. The Economic Journal, Volume 107.
[76] Soytaş, U., and Küçükkaya, E. 2011. Economic growth and financial development in Turkey: New evidence. Applied Economics Letters, 18: 595-600.
[77] Spears, A. 1992. The Role of financial intermediation in economic growth in Sub - Saharan Africa. Canadian Journal of Development Studies, 13: 361-380.
[78] Stern, N. 1989. The economics of development: A survey. The Economic Journal: 597-685.
[79] Wood, A. 1993. Financial development and economic growth in Barbados: Causal evidence. Savings and Development, 17: 379-380.
Published
2020-12-22
How to Cite
PINSHI, Christian P..
On the Causal Nature between Financial Development and Economic Growth in the Democratic Republic of the Congo: Is it Supply Leading or Demand Following?.
Journal of Advanced Studies in Finance, [S.l.], v. 11, n. 2, p. 96-107, dec. 2020.
ISSN 2068-8393.
Available at: <https://journals.aserspublishing.eu/jasf/article/view/5761>. Date accessed: 19 apr. 2024.
doi: https://doi.org/10.14505//jasf.v11.2(22).04.
Section
Journal of Advanced Studies in Finance
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