The objective of this work is to estimate
the long-term effects of governance quality on financial development and the
real sector growth in WAEMU zone covering the period of 1996 to 2018. To this
end, we utilize the Pooled Mean Group (PMG) method to estimate a nonlinear
panel through the ADRL model proposed by Pesaran et al., (1999) and Pesaran and
Smith, (1995). The results show that the quality of certain governance factors
determines the financial system and its capacity to accelerate growth in long
run. The study demonstrates that the marginal effect of financial development
on growth is about 0.69 point for a given threshold of governance quality. This
outcome means that financial development affects positively growth and the
governance level sustains that positive effect despite the poor quality of
governance comprises between -1 and 1. Therefore, an improvement of governance
quality will provide a favourable environment for financial development and
consequently for economic growth. The study finally calls policy maker to more
strengthen democracy and rule of law, this could offer more guarantees to banks
for granting long-term credits.
JEL classification numbers: C23, E44, G21.
Financial development, PMG, MG, WAEMU.