Abstract
Abstract : Schumpeter (1911) was one of the first authors to emphasise the long-term positive effect of a well-developed financial system on economic growth, notably through its ability to allocate capital towards productive investments and to ease economic transactions. Cameroon, one of the sub-Saharan African countries, aims to be an emerging market economy by 2035. In this context, a key policy question is how important Cameroon’s financial system is as a determinant of growth. Some studies find that financial development has a positive effect on growth in Cameroon, but it is not always clear whether the results are interpreted and derived in a robust and rigorous way. This minor dissertation contributes to the literature by using a larger sample and more recent data on financial development indicators, covering the period 1965 to 2014 in a theory-consistent modelling framework. The theoretical framework is based on an augmented Solow model, in which total factor productivity is expressed as a function of financial development indicators and a set of control variables. The autoregressive distributed lag (ARDL) bounds procedure developed by Pesaran, Shin and Smith (2001) is used to test for cointegration among the level variables, and to examine whether the financial development indicators are long-run causal determinants of per capita income. The results show that financial development, as measured by the liquid liabilities-to-GDP ratio, has a positive long-run causal effect on per capita income, suggesting that Cameroon should increase the size of its financial system, notably the level of penetration of financial intermediaries, in order to raise living standards. The second financial development indicator, which measures how efficiently credit is allocated, is only significant in the short run. However, its long-run effect may be captured via the liquid liabilities’ ratio. This interpretation suggests that a more efficient allocation of credit, as measured by the private sector-to-GDP ratio, should be a long-run policy objective. In addition to the importance of financial development, the study also identifies other, significant determinants of per capita income. The results suggest that Cameroon should design export-promoting policies, raise investment in fixed capital, and orientate government spending towards more productive activities.
M.Phil. (Industrial Policy)