Financial development and unemployment
evidence from five middle income countries in West Africa
This research investigates whether financial development can lower unemployment rate in five middle income countries of West Africa: Cape Verde, Cote d’Ivoire, Ghana, Nigeria and Senegal. For this purpose, the causal relationship of Granger is firstly explored to determine whether financial development can cause unemployment rate in these five countries. Then, the impulse response function is applied to identify the positive, negative or null impact from an increase of financial development on future unemployment rate. The method employed in this study is Vector Auto Regression (VAR) using annual time series data over the period 1991-2012 for each respective countries. Domestic credit to private sector by banks as share of GDP and liquid liabilities as share of GDP are the two measures of deepening financial development. Evidence shows that none of these two measures of financial development affect unemployment rate in Senegal. In addition, at the impulse of financial development, any response from unemployment would be recorded in the coming eight years. However, the findings suggest that financial development under the proxy of domestic credit to private sector by banks is monumental to reduce unemployment in Cape Verde and Cote d’Ivoire. Undeniably, this proxy causes unemployment in the above two French colonies. Furthermore, escalating domestic credit to private sector will lower unemployment at the first, second and third year in Cape Verde as well as in Cote d’Ivoire. As of Nigeria and Senegal, the English colonies of this paper, the comprehensive money supply is the key to reach a decline in unemployment level. Indeed, liquid liabilities cause unemployment rate. At that, a one percent increase of liquid liabilities will reduce unemployment rate in Ghana at the third, fourth and sixth years. In the case of Nigeria, a shrinking of unemployment level will come out at the sixth year. Besides this empirical testing, an inquiry of the International Finance Corporation’s enterprise survey has been initiated. The purpose is to discover which of the small, medium or large enterprises profit from banking loans in their daily activities. The findings prove that the share of large firms benefiting from the lending system disproportionately exceeds the share of small and medium firms. The suggestion from this research is to investigate the reasons why small and medium businesses are disadvantaged as compared to large firms. This will give a hand to the financial sector in enhancing the positive effect of loan in countries such as Cape Verde and Cote d’Ivoire. Moreover, in nations such as Ghana, Nigeria and Senegal, the positive impact of loans on underprivileged enterprises will materialize. Consequently, small and medium companies will access loans, ameliorate the running of their businesses and consequently leading to job creation.
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