Financial Development and Poverty: a Panel Data Analysis

The relationship between financial development and poverty is one that has not been extensively explored in the literature. This is the main objective of this paper. With a panel dataset of 147 countries between 1960 and 2008, and using infant mortality as a proxy indicator of poverty, the results show that the relationship between financial development and infant mortality is negative. This means that higher levels of financial development are associated with lower levels of poverty. The result is important since it already controls for the effect that economic growth has on poverty reduction, given the well documented fact that financial development has a positive effect on economic growth. The results are robust to the use of other variables as indicators of financial development, as the long-run relationship is still negative. The findings in this paper highlight the importance of financial development in poverty reduction, and suggest that future research could try and explain what are the mechanisms behind this relationship.