This study aims to empirically examine the impact of financial liberalization on economic development in Ethiopia over the period of 1984-2014. In doing so, the ARDL approach to Co-integration and Error Correction Model were employed to investigate the long run and short run relationships.
Accordingly, the empirical results obtained from the study indicate that financial widening has contributed significantly to the increase in saving and the level of economic growth. Even though, the total deposit happens to generate more investment; there is shortage of supply of credit. In addition, the study indicates financial widening and credit to the private sector exhibited a significant positive association with financial development while total banks credit bearing a significant impact on industrial development.
However, the overall financial reform showed insignificant association both with economic growth and industrial development. The efficiency in allocating financial resources show significant positive association with share of banks credit to the private sector, however, the overall financial reform has positive insignificant impact on efficiency of resource allocation. The contribution of financial sector after the deregulation has a mixed result on welfare. In terms of catalyzing employment opportunity, financial widening and the overall liberalization policy measure have played a positive role while the financial development has no significant impact on employment creation. Financial widening has significant positive impact on poverty alleviation while the overall policy measure has insignificant impact on the impoverished.
Consequently, the result of the study indicate the overall financial liberalization measure actually decrease the likelihood of financial instability and indicates the direction of causality going from economic growth to financial development proving the demand leading hypothesis, which in turn portrays the heavy involvement of government in the financial sector.
Table of Contents
1. INTRODUCTION
1.1. Background of the Study
1.2. Statement of the Problem
1.3 Objectives of the Research
1.3.1 General objective:
1.3.2 Specific objectives:
1.4 Research Hypotheses
1.5 Significance of the study
1.6 Scope and limitations of the study
1.6.1 Scope of the Study
1.6.2 Limitation of the study
1.7 Structure of the study
2. REVIEW OF RELATED LITERATURE
2.1 The Role of Finance on Economic Growth
2.1.1 Supply Leading Hypothesis view
2.1.2 Demand Following Hypothesis view
2.1.3 Bi-directional Causality view
2.1.4 No Causality view
2.2 Financial Repression
2.3 Rationale of Financial Repression
2.4 Types of Financial Repression
2.5 Consequence of Financial Repression
2.6 Financial Liberalization: Views, causes and Approaches
2.7 Liberalization and its Impact on Interest Rates, Savings and Investment
2.8 Effect of Reserve requirement on Credit Availability
2.9 The Role of Securities market on Growth
2.10 Liberalization of the External Account
2.11 The Role of Liberalization in Allocative Efficiency
2.12 Financial Intermediation
2.13 Sequencing of the financial liberalization
2.14 Financial Liberalization and Welfare
2.15 Financial Liberalization and Financial Fragility
2.16 Overview of the Ethiopian economy
2.17. Overview of the Monitory Policy
2.18 Research Gap
3. RESEARCH DESIGN AND METHODOLOGY
3.1 Research design
3.2 Data and sources
3.3 Econometric Model
3.3.1 Financial Sector Widening
3.3.2 Interest Rate, Saving and investment
3.3.3 Economic Growth and industrialization
3.3.4 Financial Development
3.3.5 Efficiency in Resource Allocation
3.3.6 Employment Opportunities
3.3.7 Poverty Alleviation and Redistribution of Income
3.3.8 Financial Sustainability
3.4 Estimation method
4. DATA ANALYSIS AND DISCUSSION
4.1 Construction of the Financial Liberalization Index (FLI)
4.2 The Financial Liberalization Index equation
4.3 Unit Root test
4.4 Model Stability and Diagnostic Test
4.5 Financial sector Widening
4.6 Interest rate saving and investment
4.7 Economic growth and industrial development
4.8 Financial Deepening
4.9 Efficiency of Resource Allocation
4.10 Employment Opportunity
4.11 Poverty Alleviation and Distribution of Income
4.12 Financial Sustainability
4.13 Nexus between finance and economic growth
5. CONCLUSION AND FUTURE RESEARCH DIRECTION
5.1. Empirical finding and Policy implications
5.2 Direction for Future Research
Research Objectives and Themes
This study aims to empirically examine the impact of financial liberalization on economic development in Ethiopia over the period 1984-2014, utilizing the ARDL approach to Co-integration and an Error Correction Model to analyze long-run and short-run relationships.
- Construction and analysis of a Financial Liberalization Index (FLI) for Ethiopia.
- Investigation of the impact of liberalization measures on savings, investment, and economic growth.
- Evaluation of the influence of financial reform on industrial development and resource allocation efficiency.
- Assessment of the effects of financial liberalization on employment opportunities, poverty alleviation, and income distribution.
- Analysis of financial stability and the nexus between financial development and economic growth.
Excerpt from the Book
1.1. Background of the Study
The fragile and inefficient state-dominated and repressed financial sector was the main feature of the Ethiopia economy during the military government (1974-1991) which was a major hindrance to economic growth. Since it took power in 1991, the current government has implemented a number of reforms to the financial system.
Such a move of governments are almost in all cases deliberated with in the two schools of thoughts regarding the possible benefits of financial reform aimed at financial liberalization: The first is the Goldsmith-McKinnon-Shaw school which argues financial liberalization is the only effective means to develop banking intermediation, to start again the capital accumulation and to promote the economic growth in the countries. (McKinnon, 1973) And (Shaw, 1973) come to present the misdeeds of financial repression and to defend the founded good of financial liberalization. The second is Keynes-Tobin-Stieglitz (also called the Structuralism and Neostructuralists School) propagated in favor of certain sort of financial repression due to economic benefits and vulnerability to persistent market failure. (Kahsay, 2014).Using various economic models, each provides background, rationale and intellectual justification for financial liberalization vis a vis financial repression. (Ahmed & Islam, 2010).
Financial liberalization has been proposed as a cure to the ills of repression with a belief that it improves and enhances the efficiency of investment and eventually economic growth. Overall, financial liberalization has been broken down into three major reforms. This is the liberalization of the movement of capital, the opening of financial markets to international operators and deregulation in lending and deposit rates to increase interbank competition. The proliferation of crises in countries such as Mexico (1995), Asian countries (1997), Brazil (1998), and Turkey (2001) opened the debate on the benefits of deregulation of financial activity. (Farhani,et al. 2015)
Summary of Chapters
CHAPTER ONE: Provides an introduction, problem statement, and objectives, establishing the research context regarding financial liberalization in Ethiopia.
CHAPTER TWO: Reviews theoretical and empirical literature on financial liberalization, financial repression, and their impacts on growth, savings, and investment.
CHAPTER THREE: Outlines the research design, methodology, and econometric models used for empirical testing.
CHAPTER FOUR: Presents the analysis and discussion of findings, including the construction of the Financial Liberalization Index and ARDL estimation results.
CHAPTER FIVE: Summarizes the major empirical findings, draws conclusions, provides policy implications, and suggests future research directions.
Keywords
Financial liberalization, Financial liberalization index, Economic development, Ethiopia, ARDL, Financial repression, Banking sector, Economic growth, Investment, Savings, Industrial development, Resource allocation, Financial stability, Monetary policy, Financial reform
Frequently Asked Questions
What is the core subject of this research?
The research focuses on the impact of financial liberalization on various facets of the Ethiopian economy, including economic growth, financial development, and stability, over the period from 1984 to 2014.
What are the primary themes addressed?
The study examines financial sector widening, the efficiency of resource allocation, poverty alleviation, income distribution, and the impact of interest rate changes on savings and investment.
What is the main objective of the paper?
The primary goal is to empirically evaluate how financial liberalization measures have affected the national economy, distribution, and stability, specifically by establishing a Financial Liberalization Index for Ethiopia.
Which scientific methodology is employed?
The study adopts an explanatory, quantitative research approach, utilizing the Autoregressive Distributed Lag (ARDL) model to investigate co-integration and causal relationships between variables.
What topics are discussed in the main body?
The main sections cover the literature review on financial liberalization, methodology and econometric modeling, and the detailed data analysis regarding the impact of financial policies on specific economic indicators.
Which keywords characterize this work?
Key terms include financial liberalization, Financial liberalization index, Ethiopia, ARDL, economic development, financial repression, and financial stability.
How is the Financial Liberalization Index (FLI) calculated?
The FLI is constructed using principal component analysis, incorporating six key measures: interest rate deregulation, removal of entry barriers, reduction in reserve requirements, easing in credit controls, implementation of prudential rules, and external account liberalization.
What is the conclusion regarding the demand-leading hypothesis in Ethiopia?
The study's results indicate that causality runs from economic growth to financial development, thereby supporting the demand-leading hypothesis rather than the supply-leading one during the studied period.
- Arbeit zitieren
- Omer Mohammed (Autor:in), 2016, The Effect of Financial Liberalization on Economic Development in Ethiopia, München, GRIN Verlag, https://www.grin.com/document/377409
