Financial Liberalization and Finance-Growth Nexus: An Empirical Assessment of the Ethiopian Economy

Abstract

Financial reforms have been part of reform packages in many countries as stabilization or/and growth tools. One of these countries is Ethiopia. The country has been engaged in financial reforms since 1992. They concur with the whole liberalization process in the country in a bid to kickstart the economy. The reforms are characterized by gradualism and domestic capacity building. This study is conducted to gauge the growth corollary of the financial reforms. It uses a multivariate linear regression model into which financial development indicators are plugged as extra explanatory variables. The data are time series data which span over 1980-2006. The result finds a significant progress in financial development following the reforms. The monetary and credit measures have improved since the reforms. The regression test also reveals a positive contribution of financial development to economic growth. More importantly, the result suggests a significant influence of credit intermediation on economic growth. The findings are consistent with much of empirical evidence that financial liberalization leads to stronger financial sector which is critical to economic growth.