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

  • Badry Hechmy Faculty of Economic Sciences and Management of Tunis, University of Tunis El Manar, Tunisia
Keywords: Financial Deepening, Governance, Institutional Development, MENA, GMM


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.


Acemoglu, D., Johnson, S., Robinson, J. A., and Yared, P. (2008). Income and Democracy. American Economic Review, 98(3):808–42.

Arellano, M. and Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies, 58(2):277–297.

Barth, J. R., Nolle, D. E., Phumiwasana, T., and Yago, G. (2003). A Cross-Country Analysis of the Bank Supervisory Framework and Bank Performance. Financial Markets, Institutions & Instruments, 12(2):67–120.

Beck, T. and Levine, R. (2008). Legal Institutions and Financial Development, pages 251–278. Springer Berlin Heidelberg, Berlin, Heidelberg.

Beck, T., Levine, R., and Loayza, N. (2000). Finance and the sources of growth. Journal of Financial Economics, 58(1–2):261–300.

Blundell, R. and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1):115–143.

Chinn, M. D. and Ito, H. (2002). Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence. Working Paper 8967, National Bureau of Economic Research.

Demetriades, P. O. and Luintel, K. B. (1996). Financial Development, Economic Growth and Banking Sector Controls: Evidence from India. The Economic Journal, 106(435):359–374.

Edison, H. (2003). Testing the Links. How Strong Are the Links Between Institutional Quality and Economic Performance? Finance and Development, 40(2):35–37.

Engerman, S. L. and Sokoloff, K. L. (1994). Factor Endowments: Institutions, and Differential Paths of Growth Among New World Economies: A View from Economic Historians of the United States. Working Paper 66, National Bureau of Economic Research.

Fukuyama, F. (1995). Trust: The Social Virtues and the Creation of Prosperity. New York: Free Press.

Galindo, A. J., Chong, A., and Calderon, C. A. (2001). Structure and Development of Financial Institutions and Links with Trust: Cross-Country Evidence. IDB Publications (Working Papers) 6482, Inter-American Development Bank.

Guiso, L., Sapienza, P., and Zingales, L. (2004). The Role of Social Capital in Financial Development. American Economic Review, 94(3):526–556.

Holtz-Eakin, D., Newey, W., and Rosen, H. S. (1988). Estimating Vector Autoregressions with Panel Data. Econometrica, 56(6):1371–1395.

Im, K. S., Pesaran, M., and Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115(1):53–74.

Ito, H. (2006). Financial development and financial liberalization in Asia: Thresholds, institutions and the sequence of liberalization. The North American Journal of Economics and Finance, 17(3):303–327.

Kaufmann, D., Kraay, A., and Mastruzzi, M. (2006). Governance matters V: aggregate and individual governance indicators for 1996-2005. Policy Research Working Paper Series 4012, The World Bank.

King, R. G. and Levine, R. (1995). Financial Intermediation and Economic Development. In Mayer, C. and Vives, X., editors, Capital Markets and Financial Intermediation, pages 156–189. Cambridge University Press, Cambridge/New York/Melbourne.

Knack, S. and Keefer, P. (1997). Does Social Capital Have an Economic Payoff? A Cross-Country Investigation. The Quarterly Journal of Economics, 112(4):1251–1288.

La Porta, R., de Silanes, F. L., Shleifer, A., and Vishny, R. W. (1997). Trust in Large Organizations. The American Economic Review, 87(2):333–338.

La Porta, R., de Silanes, F. L., Shleifer, A., and Vishny, R. W. (1998). Law and Finance. Journal of Political Economy, 106(6):1113–1155.

La Porta, R., Lopez-de Silane, F., Shleifer, A., and Vishny, R. W. (1996). Trust in Large Organizations. Working Paper 5864, National Bureau of Economic Research.

Levin, A. and Lin, C.-F. (1993). Unit Root Tests in Panel Data: New Results. University of California at San Diego, Economics Working Paper Series.

Levine, R. (1998). The Legal Environment, Banks, and Long-Run Economic Growth. Journal of Money, Credit and Banking, 30(3):596–613.

Levine, R., Loayza, N., and Beck, T. (2000). Financial intermediation and growth: Causality and causes. Journal of Monetary Economics, 46(1):31–77.

Love, I. (2003). Financial Development and Financing Constraints: International Evidence from the Structural Investment Model. Review of Financial Studies, 16(3):765–791.

Mama, T. (2006). Pour la mort de l’Etat en Afrique: de quel Etat faut-il souhaiter la mort? In Bekolo-Ebe, B., Mama, T., and Fouda, S. M., editors, Mondialisation, Exclusion et Dveloppement Africain: Stratgies Des Acteurs Publics et Privs, volume 2, pages 453–463. Maisonneuve & Larose.

McKinnon, R. I. (1973). Money and Capital in Economic Development, 1973. Washington, DC: The Brookings Institution.

Merton, R. C. (1992). Financial Innovation and Economic Performance. Journal of Applied Corporate Finance, 4(4):12–22.

Myrdal, G. (1963). Challenge to Affluence: The Emergence of an Under-Class. New York: Pantheon Books.

Putnam, R., Leonardi, R., and Nanetti, R. (1994). Making Democracy Work: Civic Traditions in Modern Italy. Princeton paperbacks. Princeton University Press.

Rajan, R. G. and Zingales, L. (1998). Financial Dependence and Growth. American Economic Review, 88(3):559–86.

Robinson, J. (1952). The Model of an Expanding Economy. The Economic Journal, 62(245):42–53.

Schumpeter, J. A. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle. Cambridge, MA: Harvard University Press.

Shaw, E. (1973). Financial Deepening in Economic Development. Economic Development Report. Oxford University Press.

Stiglitz, J. E. and Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. American Economic Review, 71(3):393–410.

Wurgler, J. (2000). Financial markets and the allocation of capital. Journal of Financial Economics, 58(1–2):187–214.

How to Cite
Hechmy, B. (2016). Governance and Financial Development: Evidence from the Middle East and North Africa Region. Econometric Research in Finance, 1(2), 115 - 127.
Bookmark and Share