The Effect of Financial Liberalization on Economic Development in Ethiopia

Master's Thesis , 2016 , 171 Pages , Grade: 2

Economics - Finance

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.

Inhaltsverzeichnis (Table of Contents)

• CHAPTER ONE
  • 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
• CHAPTER TWO
  • 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
• CHAPTER THREE
  • 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
• CHAPTER FOUR
  • 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
• CHAPTER FIVE
  • CONCLUSION AND FUTURE RESEARCH DIRECTION
    • 5.1. Empirical finding and Policy implications
    • 5.2 Direction for Future Research

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This research aims to investigate the impact of financial liberalization on economic growth in Ethiopia. The study examines the relationship between financial liberalization and various economic indicators, such as interest rates, saving and investment, industrial development, and employment opportunities. The research also explores the potential consequences of financial liberalization, including financial fragility and its impact on poverty alleviation and income distribution.

• The role of finance in economic growth
• The impact of financial liberalization on economic indicators
• The relationship between financial liberalization and financial fragility
• The potential benefits and risks of financial liberalization
• The implications of financial liberalization for poverty alleviation and income distribution

Zusammenfassung der Kapitel (Chapter Summaries)

Chapter 1 provides an introduction to the study, outlining the background, statement of the problem, objectives, research hypotheses, significance, scope, limitations, and structure of the research. Chapter 2 reviews relevant literature on the role of finance in economic growth, financial repression, financial liberalization, and its impact on interest rates, savings, investment, and credit availability. The chapter also discusses the sequencing of financial liberalization, its potential impact on welfare, and its contribution to allocative efficiency. Chapter 3 presents the research design and methodology, including the data sources, econometric model, and estimation methods. Chapter 4 analyzes the data and discusses the empirical findings, focusing on the impact of financial liberalization on various economic indicators, such as financial sector widening, interest rates, savings and investment, economic growth, industrial development, and employment opportunities.

Schlüsselwörter (Keywords)

This research focuses on the impact of financial liberalization on economic growth in Ethiopia, exploring the relationship between financial liberalization and various economic indicators. Key concepts include financial sector widening, interest rates, savings and investment, industrial development, employment opportunities, financial fragility, poverty alleviation, and income distribution. The study utilizes econometric models and data analysis to examine the impact of financial liberalization on economic growth and its related consequences.

• College: Addis Ababa University (College of Bussiness and Economics)
• Course: Accounting and Finance
• Grade: 2
• Author: Omer Mohammed (Author)
• Publication Year: 2016
• Pages: 171
• Catalog Number: V377409
• ISBN (eBook): 9783668546783
• ISBN (Book): 9783668546790
• Language: English
• Tags: effect, financial, liberalization, economic, development, ethiopia