Gmm estimation of the institutional development-financial deepening relationship: Evidence from mena countries
This paper analyzes the effect of institutional development on financial development for a panel of seventeen MENAcountries, for the period 2000-2017. The econometric approach used is based on the Generalized Method of Moments (GMM), the autocorrelation test of errors of Arellano and Bond (1991), and the over-identification test of Sargan on dynamic panel data. Econometric analysis results indicate that there are a considerable delay in financial development, for the panel as a whole, compared to several other emerging countries in Asia and Latin America. Furthermore, it shows a negative effect of institutional development on financial deepening. 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. These findings underscore not only the need for the countries of the region to adopt new strategies and methods of institutional development and organizational strengthening but also support financial liberalization policies to get rid of financial dualism and fight the informal financial sector.