Financial Development and Poverty: What Role for Growth and Inequality?

The paper assesses the effect of financial development on poverty reduction. To do this, we are going to build a model of simultaneous equations on a sample composed of 89 countries over the period 1990-2011. The model is based on a trilateral relationship connecting growth, inequalities and poverty. In order to do so, we suppose that financial development effects on poverty reduction can be decomposed into two opposite effects: a growth effect and a disparity one. Econometric analysis allowed us to highlight three things: first, findings support that while the indirect effect of financial development on poverty is not robust and ambiguous, the direct effect of financial development, through the channels of insurance, access to credit services and savings, is robust to reducing poverty. Second, we note that this effect depends on the magnitude and sign of the effects of financial development on inequality and growth. Third, institutional quality is an important determinant of the relationship between financial development and poverty.