The Impact of Financial Development on Poverty, Growth and Inequality in Ethiopia
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Date
2021-08
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Addis Ababa University
Abstract
In fighting to eradicate poverty from the world, examining the factors that are determining
growth, poverty and inequality is one of critical steps. As a result of this, during the past
decades, the research on the impact of financial development on welfare has got a lot of
attention. Thus, this study deals with assessing the direct and indirect effect of financial
development in reducing poverty by considering the simultaneous effects of economic growth
and inequality in Ethiopia. In order to investigate this, the time series data has been used with
simultaneous equation model for the period of 1991 to 2019. Based on the econometric analysis
results, first, the finding shows that through the direct channel, financial development increases
the proportion of population living below the national poverty line. This is due to the financial
intermediaries are not adequately channeling finance to the pro-poor sectors and SMEs. Second,
financial development enhances poverty reduction and lift up the poor through indirect channels
of economic growth and income distribution. Third, institutional quality plays a crucial role in
poverty reduction. Finally, the inverted āUā shape of Kuznets curve that is explaining the
average income and inequality in the long run is not robust and the model is unverified. In the
addition, another interesting finding is that there is a long run cointegration relationship
between financial development and poverty eradication. Therefore, it is concluded that finance
plays a significant role on poverty reduction, growth and income distribution. So the government
shall design a policy which is pro-poor and SMEs to assure access of financial services to
enhance entrepreneur innovation, productivity, human capital and industrial development.
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Keywords
Financial development, Economic growth, Poverty and Inequality