Preprint Article Version 1 Preserved in Portico This version is not peer-reviewed

Effect of Poverty on Financial Development in Developing Countries

Version 1 : Received: 30 October 2020 / Approved: 3 November 2020 / Online: 3 November 2020 (09:57:05 CET)

How to cite: Gnangnon, S.K. Effect of Poverty on Financial Development in Developing Countries. Preprints 2020, 2020110144 (doi: 10.20944/preprints202011.0144.v1). Gnangnon, S.K. Effect of Poverty on Financial Development in Developing Countries. Preprints 2020, 2020110144 (doi: 10.20944/preprints202011.0144.v1).

Abstract

Numerous studies in the literature have investigated the effect of financial development on poverty, and tend to report a poverty reduction effect of financial development. The present paper considers the issue in the other way around, by examining the effect of poverty on financial development. In particular, it has investigated the financial development effect of poverty that passes through three main channels, including the education level, the level of trade openness, and the degree of export product concentration. The analysis is carried out using a sample of 97 developing countries over the period 1980-2017, and the two-step Generalized Methods of Moments (GMM). Results have shown that poverty genuinely affects financial development through these three channels. Specially, lower poverty rates induce greater financial development in countries that experience higher education levels. Similarly, a rise in poverty rates in the context of restrictive trade policies (that eventually result in lower levels of trade openness) undermines the development of the financial sector. Finally, higher poverty levels adversely affect financial development in countries that experience an increase in the level of export product concentration.

Subject Areas

Poverty; Financial development; Education; Trade openness; Export product concentration

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