Financial development, economic growth and extreme poverty in Sub-Saharan Africa

This paper analyses the financial development threshold above (below) which economic growth affects extreme poverty in sub-Saharan Africa (SSA) using a panel of 37 countries over the period 1990-2017. To compute our results, we mobilize a panel smooth transition regression (PSTR) model and the two-step generalized method of moments (GMM) applied to the dynamic panel model. Our findings suggest that growth reduces extreme poverty when the financial development is above the threshold of: (i) 34% for SSA; (ii) 37% for non-fragile countries and (iii) 9% for fragile and post-conflict countries. The GMM results corroborate those of the PSTR by showing that the squared interaction between financial development and growth has a significant and positive effect on poverty reduction in SSA. Furthermore, the thresholds obtained by the GMM method are similar to those of the PSTR. Overall, these results indicate that financial development is a channel through which inclusive growth is achieved, particularly in fragile and post-conflict countries.