Abstract
This paper tests the relationship between financial development, quality of institutions and poverty. To this end, we reviewed the literature and selected indicators of poverty, financial development and quality of institutions. Empirically, we used the three-stage least squares method to examine a sample of 132 countries observed over the 1980–2014 period. First, we proved that financial development does not improve the situation of the poor, while the effect of institution quality on poverty and financial development depends on the choice of indicators. Our robustness analysis pointed to the sensitivity of our results to the different financial development, quality of institutions and poverty indicators.
Similar content being viewed by others
Notes
The Trickle Down’s theory of development is widely used in the 70th with the liberal politics of Ronal Reagan. This approach is recommended by The Chicago School guaranteeing that the wealth of the upper social classes would eventually benefit society as a whole. The main idea was to demonstrate that tax policies favoring the rich always end up favoring the poorest.
It should be noted that some authors preferred the use of the six indicators of Kauffman et al. (2009) from the Worldwide Governance Indicators, Heritage Foundation, International Country Risk Guide.
Readers interested in the subject may consult the following literature review: Hall and Lawson (2014). Economic Freedom of the World: An Accounting of the Literature.
References
Abdin, J. (2016). Financial development and poverty reduction: Exploring the links between the issues using evidence from Bangladesh. International Journal of Financial Research, 7(4), 44–65.
Abosedra, S., Muhammad Shahbaz, M., & Nawaz, K. (2016). Modeling causality between financial deepening and poverty reduction in Egypt. Social Indicators Research, 126(3), 955–969.
Aggarwal, R., & Goodell, J. W. (2010). Financial markets versus institutions in European countries: Influence of culture and other national characteristics. International Business Review, 19(5), 502–520.
Balach, R., & Law, S. H. (2015). Effects of financial development, institutional quality, and human capital on economic performance in SAARC countries. The Empirical Economics Letters, 14(2), 131–141.
Baltagi, B. H. (2011). Econometrics (5th ed.). Berlin: Springer.
Baltagi, B. H., Demetriades, P., & Law, S. H. (2009). Financial development and openness: Panel data evidence. Journal of Development Economics, 89(2), 285–296.
Beck, T., Demirguc-Kunt, A., & Levine, R. (2007). Finance, inequality and the poor. Journal of Economic Growth, 12(1), 27–49.
Boudriga, A., & Ghardallou, W. (2012). Democracy and financial development: Does the institutional quality matter. https://pdfs.semanticscholar.org/3193/129d17a4f170277b42323bc4f772a54207e3.pdf.
Boyd, J. H., Levine, R., & Smith, B. (2001). The impact of inflation on financial sector performance. Journal of Monetary Economics, 47(2), 221–248.
Cameron, A. C., & Trivedi, P. K. (2005). Microeconometrics: Methods and applications. New York, USA: Cambridge University Press.
Cepparulo, A., Cuestas, J. C., & Intartaglia, M. (2017). Financial development, institutions and poverty alleviation: An empirical analysis. Applied Economics, 49(36), 1–12.
Charlton, A. (2008). Capital market liberalization and poverty. In J. A. Ocampo & J. Stiglitz (Eds.), The initiative for policy dialogue series (pp. 121–138). New York: Oxford Press.
Chemli, L. (2014). The nexus among financial development and poverty reduction: An application of ARDL approach from the MENA region. Journal of Economics and Development Studies, 2(4), 125–134.
Cherif, M., & Gazdar, K. (2010). Macroeconomic and institutional determinants of stock market development in MENA Region: New results from a panel data analysis. International Journal of Banking and Finance, 7(01), 8.
Colombage, S. R. N. (2009). Financial markets and economic performances: Empirical evidence from five industrialized economies. Research in International Business and Finance, 23(3), 339–348.
Compton, R. A., Giedeman, D. C., & Hoover, G. A. (2011). Panel evidence on economic freedom and growth in the United States. European Journal of Political Economy, 27(3), 423–435.
Datt, G., & Ravallion, M. (2002). Why has economic growth been more pro-poor in some states of India than others? Journal of Development Economics, 68(2), 381–400.
Deng, S., Elyasiani, E., & Mao, C. X. (2007). Diversification and the cost of debt of bank holding companies. Journal of Banking & Finance, 31(8), 2453–2473.
Dhrifi, A. (2015). Financial development and the growth–inequality–poverty triangle: A comparative study between developed and developing countries. Journal of the Knowledge Economy, 6(4), 1163–1176.
Effiong, E. (2016). Financial development, institutions and economic growth: Evidence from Sub-Saharan Africa. Working Paper/March 2016.
Girma, S., & Shortland, A. (2008). The political economy of financial development. Oxford Economic Papers, 60(4), 567–596.
Gwartney, J., Lawson, R., & Hall, J. (2015). Economic freedom of the world: 2015 annual report. Vancouver: Fraser Institute.
Habibullah, M. S., & Law, S. H. (2006). Financial development, institutional quality and economic performance in East Asian economies. Review of Applied Economics, 2(2), 201–216.
Hafer, R. W. (2013). Economic freedom and financial development: International evidence. Cato Journal, 33(1), 111–126.
Hair, J. F., Babin, B. J., Anderson, R. E., & Black, W. C. (2010). Multivariate data analysis: A global prospective (Vol. 7). Upper Saddle River, NJ: Pearson.
Hall, J. C., & Lawson, R. A. (2014). Economic freedom of the world: An accounting of the literature. Contemporary Economic Policy, 32(1), 1–19.
Hasan, I., Wachtel, P., & Zhou, M. (2009). Institutional development, financial deepening and economic growth: Evidence from China. Journal of Banking & Finance, 33(1), 157–170.
Ho, S. Y., & Njindan Iyke, B. (2017). Does financial development lead to poverty reduction in China? Time series evidence. Journal of Economics and Behavioral Studies, 9(1), 99–112.
Huang, Y. (2010a). Political institutions and financial development: An empirical study. World Development, 38(12), 1667–1677.
Huang, Y. (2010b). The determinants of financial development. New York: Palgrave Macmillan.
Huang, Y., & Sing, R. S. (2015). Financial deepening, property rights, and poverty: Evidence from Sub-Saharan Africa. Journal of Banking and Financial Economics, 1(3), 130–151.
Huang, Y., & Temple, J. (2005). Does external trade promote financial development? Working Paper No. 05-575/July 2005.
Huybens, E., & Smith, B. D. (1999). Inflation, financial markets and long-run real activity. Journal of Monetary Economics, 43(2), 283–315.
Jaffee, D., & Levonian, M. (2001). Structure of banking systems in developed and transition economies. European Financial Management, 7(2), 161–181.
Jeanneney, S. G., & Kpodar, K. (2008). Financial development and poverty reduction: Can there be a benefit without a cost? The Journal of Development Studies, 47(1), 143–163.
Johansson, A. C., & Wang, X. (2012). Financial sector policies, poverty and inequality. Working Paper CERC-CCER Conference No. 24/September (2012).
Kauffman D., Kraay, A., & Mastruzzi, M. (2009). Governance matters VIII: Aggregate and individual Governance indicators, 1996–2008. World Bank Policy Research Working Paper, No. 4978.
Knack, S., & Keefer, P. (1995). Institutions and economic performance: Cross country tests using alternative institutional measures. Economics and Politics, 7(3), 207–227.
Kpodar, K. R., & Jeanneney S. G. (2006). Développement financier, instabilité financière et croissance economique. Économie & Prévision, 147(3), 87–111.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. The Journal of Finance, 52(3), 1131–1150.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1999). The quality of government. Journal of Law Economics and Organization, 15(1), 222–279.
Law, S. H., Ibrahim, M. H., & Azman-Saini, W. N. W. (2012). Institutional quality thresholds and the finance—Growth nexus. Journal of Banking & Finance, 37(12), 5373–5381.
Levine, R. (1998). The legal environment, banks, and long-run economic growth. Journal of Money, Credit and Banking, 30(3), 596–613.
Mantecon, T. (2009). Mitigating risks in cross border acquisitions. Journal of Banking & Finance, 31, 640–651.
Mauro, P. (1995). Corruption and growth. The Quarterly Journal of Economics, 110(3), 681–712.
Minea, A., & Villieu, P. (2010). Financial development, institutional quality and maximizing-growth trade-off in government finance. Economic Modelling, 27(1), 324–335.
Noreen, S., Gill, A. R., & Ali Khan, R. E. (2012). Financial development and poverty in Pakistan: Causality analysis. Archives Des Sciences, 65(11), 223–233.
North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge: Cambridge University Press.
Odhiambo, N. M. (2009). Finance–growth–poverty nexus in South Africa: A dynamic causality linkage. The Journal of Socio-Economics, 38(2), 320–325.
Perez-Moren, S. (2011). Financial development and poverty in developing countries: A causal analysis. Empirical Economics, 41(1), 57–80.
Quartey, P. (2005). Financial sector development, savings mobilization and poverty reduction in Ghana. UNU-WIDER (2005). Working Paper No. 71/December 2005.
Rachdi, H., & Mensi S. (2012). Does institutions quality matter for financial development and economic growth nexus? Another look at the evidence from MENA countries. In Economic Research Forum/September, WP-No. 705.
Rajan, R., & Ramcharan, R. (2011). Land and credit: A study of the political economy of banking in the United States in the early 20th century. Journal of Finance, American Finance Association, 66(6), 1895–1931.
Rajan, R. G., & Zingales, L. (2003). The great reversals: The politics of financial development in the twentieth century. Journal of Financial Economics, 69(1), 5–50.
Rashid, A., & Intartaglia, M. (2017). Financial development—Does it lessen poverty? Journal of Economic Studies, 44(1), 69–86.
Sehrawat, M., & Giri, A. K. (2015). Financial development, poverty and rural–urban income inequality: Evidence from South Asian countries. Quality & Quantity, 50(2), 577–590.
Seven, U., & Coskun, Y. (2016). Does financial development reduce income inequality and poverty? Evidence from emerging countries. Emerging Markets Review, 26, 34–63.
Shahbaz, M. (2009). Financial performance and earnings of poor people: A case study of Pakistan. Journal of Yasar University, 4(16), 2557–2572.
Shahbaz, M., & Ur Rehman, I. (2013). Multivariate-based Granger causality between financial deepening and poverty: The case of Pakistan. Quality & Quantity, 48(6), 3221–3241.
Singh, R. J., & Huang, Y. (2015). Financial deepening, property rights, and poverty: Evidence from Sub-Saharan Africa. Journal of Banking and Financial Economics, 1(3), 130–151.
Todaro, M. P. (2007). Economic development (6th edn.). NY: Addison Wesley Longman Ltd.
Uddin, G. S., Arouri, M., Teulon, F., & Shahbaz, M. (2014). Financial development and poverty reduction nexus: A cointegration and causality analysis in Bangladesh. Economic Modelling, 36(C), 405–412.
Wang, Y., Cheng, L., Wang, H., & Li, L. (2015). Institutional quality, financial development and OFDI. Pacific Science Review, 16(2), 127–132.
Yahyaoui, A., & Rahmani, A. (2009). Développement Financier et Croissance Economique: Rôle de la Qualité des Institutions. Panoeconomicus, 56(3), 327–357.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Kaidi, N., Mensi, S. & Ben Amor, M. Financial Development, Institutional Quality and Poverty Reduction: Worldwide Evidence. Soc Indic Res 141, 131–156 (2019). https://doi.org/10.1007/s11205-018-1836-0
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11205-018-1836-0