The introduction chapter of this dissertation provides the justification and purpose of the study, explains the research problem itself, defines the research objectives and highlights the scope of the study.
- Background to the research
Policymakers and financial experts usually acknowledge that financial development- that is, a well-functioning financial system contributes to economic growth. A well-organised financial system can encourage economic growth through several channels by providing effective financial institutions and markets that help to overcome market resistance introduced by information asymmetries and transaction costs.
Empirical studies on the link between financial development and economic growth have been analysed mostly by cross country cases until lately because of lack of enough time series data for developing countries. These researches have shown regularly that financial development is an important determinant of economic growth. However, even though the conclusion of these studies provides an appropriate guideline for the finance-growth nexus, it cannot be applied to all economies, as each specific country is regulated by its own financial institutions and policies. In this dissertation we are going to analyse the finance-growth relationship for one country only, Mauritius).
If you need assistance with writing your essay, our professional essay writing service is here to help!
The island of Mauritius is a fascinating country to study, because Mauritius over the past four decades have evolved from a mono-crop economy, depending on the production of sugar-cane to a mixed economy, pushed by export-oriented manufacturing, tourism and hospitality and the more recent developing sectors – financial services and Information Communication and Technology. Mauritius is considered an upper middle income group in the Sub-Saharan Africa (developing only). It has been upgrading its position in international indexes for the rule of law (first in the Sub-Sahara Africa on rule of law index), investment (14th worldwide on the ease of starting a business and the strength of investor protection) and ease of doing business (ranking 19th of 183 countries on the 2012 Doing Business Index).
Since the late 1980s, the financial sector has been transformed to become the fourth pillar of the Mauritian economy, with the set up of the Stock Exchange in 1989 and the Financial Services Commission in 2001. Mauritius has created various bodies to regulate the financial sector in its various aspects and substantial efforts have been made to revamp the legislative framework in the non-banking financial services sector by introducing amendments and new pieces of legislation. On a macroeconomic level Mauritius has also been doing well in the light of the world crisis in recent years. The government of Mauritius has attempted to mitigate the negative consequences of the global economic crisis through an appropriate policy mix. Thus, as the financial sector has a very important role to play in the development of the economy, this means that we have a good database for sufficient number of years to tackle this study.
- Purpose of the study
Researches in the finance-growth nexus have been mainly on whether financial development has a positive effect on economic growth in Mauritius. In this context, we have tried to go deeper in this study by empirically analysing the co integration and causal link between financial development and economic growth in Mauritius and determining the effect of financial development and economic growth on each other by applying impulse response functions and variance decomposition techniques.
The study analyses the effect of financial development on economic growth in Mauritius and covers the period 1981 to 2012. The period coincides with the rapid growth of the financial services sector in Mauritius in the 1980s, and is sufficiently long and allows comparison with other studies.
- Aims, Objectives, Research Questions and hypotheses
- Research objectives
The main aim of this study is to determine the effect of financial development on economic growth for Mauritius. The following specific objectives will be answered:
- To investigate whether the increase in domestic credit to the private sector to Gross Domestic Product (GDP) has led to improvement in GDP per capita.
- To investigate whether the increase in GDP per capital has led to the increase in domestic credit to the private sector to GDP.
- The long run and short run relationship between economic growth and financial development.
- The response of domestic credit to the private sector to GDP to shocks from the different variables used in the study
- The response of GDP to shocks from the different variables used in the study.
Throughout this study we will try to find solutions to the following questions:
- Does financial development lead to economic growth in Mauritius or does economic growth lead to financial development?
- Is there a bi-directional causality between financial development and economic growth in the short-run and long-run?
Research Hypotheses considered in the study:
- H0: The financial development and economic growth indicators are not stationary
H1: The financial development and economic growth indicators are stationary
- H0: There is no co integration equation among the variables used in the study
H1: There is co integration equation among the variables used in the study
- H0: There is short run causality running from independent variables to dependent variables
H1: There is no short run causality running from independent variables to dependent variables, which means that there is long run causality.
- Scope of the study
The study examines the relationship between financial development and economic growth in Mauritius and covers the period 1981 to 2012. The period starts almost in the same time that the economy of Mauritius was undergoing reforms in the financial sector with the creation of the Stock Exchange of Mauritius and later on the creation of the Financial Services Commission.
- Overall structure of the dissertation
This dissertation has been organized into five chapters. The first chapter was an introduction to the proposed research. The second chapter will provide some relevant details on the financial development and economic growth in Mauritius. The third chapter will perform a review of theoretical concepts and empirical tests conducted worldwide concerning the financial development and economic growth with special attention to developing countries. The fourth chapter will describe the methodology to be used for the proposed study, the data gathering process together with analysis performed on same and the results will be interpreted graphically with discussions. The fifth and final chapter will draw conclusions from the study with some practical recommendations.
Akinboade, O. A. (1998), ‘Financial Development and Economic Growth in Botswana: A Test for Causality’, Savings and Development, 22(3), 331-348.
Allen, D.S and L. Ndikumana (2000), ‘Financial Intermediation and Economic Growth in
Southern Africa’, Journal of African Economies, vol.9, no 2, pp. 132-160.
Arestis, P. and Demetriades, P. O. (1997), ‘Financial development and economic growth: Assessing the evidence’, Economic Journal 107(442), 783–99.
Blackburn K., and V.T.Y. Hung (1996), ‘A Theory of Growth, Financial Development and Trade’, Economica, vol. 65, pp. 107-124.
Christopoulos, D.K. and Tsionas, E.G. (2004). ‘Financial development and economic growth: evidence from panel unit root and cointegration tests’, Journal of Development Economics,Vol. 73 No. 1, pp. 55-74.
Choe, C. and I. A. Moosa (1999), ‘The Financial System and Economic Growth: The Korean Experience’, World Development, vol. 27, no.6, pp. 1069-1082.
De Gregorio, J. and Guidotti, P. (1995), ‘Financial Development and Economic Growth’, World Development, 23, 434-48
Demetriades, P. and Hussein K. A. (1996), ‘Does Financial Development Cause Economic Growth’, Journal of Development Economies, vol. 51, pp. 387-411.
Demetriades, P.O., Andrianova, (2004), ‘Finance and Growth: What We Know and What We Need to Know. In: Financial Development and Growth: Explaining the Links’. C. A. E. Goodhart (Eds). Palgrave Macmillan: Basingstoke, pp. 38-65.
Goldsmith, R. (1969), Financial Structure and Development, Yale University Press, New Haven, CT.
Greenwood, J. and Jovanovic B. (1990), ‘Financial Development, Growth and the Distribution of Income’, Journal of Political Economy, vol.34, pp. 1076-1107.
Johannes, T. and Cletus, A. (2011). ‘ Financial Development and Ecxonomic Growth in Cameroon, 1970-2005’, Journal of Economics and International Finance Vol.3(6), pp.367-375, June 2011.
Jordan, S. and Qi J.(2006),’Does Financial Development ‘Lead’ Economic Growth? The Case of China’, Annals of Economics and Finance 1,197-216.
Jung, W. S. (1986), ‘Financial Development and Economic Growth: International Evidence’,
Economic Development and Cultural Change, vol. 34, pp. 333-346.
King, R. and Levine, R. (1993b), ‘Finance and growth: Schumpeter might be right’, Quarterly Journal of Economics, Vol. 108 No. 3, pp. 717-37.
Levine, R., 1997, ‘Financial Development and Economic Growth: Views and Agenda’, Journal of Economic Literature, 32(2).
Levine, R., Loayza, N. and Beck, T. (2000a), ‘Financial intermediation and growth: causality and causes’, Journal of Monetary Economics, Vol. 46, pp. 31-77.
Levine, R., Loayza, N. and Beck, T. (2000b), ‘Finance and the sources of growth’, Journal of
Financial Economics, Vol. 58, pp. 261-300.
Lucas, R.E. (1988), ‘On the Mechanics of Economic Development’, Journal of Monetary
Mankiw N.G, D. Romer, & D.H. Weil (1992), ‘A Contribution to the Empirics of Economic
Growth’, The Quarterly Journal of Economics, vol. 107.
McKinnon, R.I. (1973), Money and Capital in Economic Development, Washington DC: The
McKinnon, R. (1991), The Order of Economic Liberalization: Financial Control in the
Transition to a Market Economy, Baltimore: Johns Hopkins University Press.Economics, vol. 22, pp. 3-42.
Meier, G. M. (1991), ‘Leading Issues in Economic Development’, 4th edition, Oxford: Oxford University Press.
Nowbutsing, B., Ramsohok, S. and Ramsohok, K. (2010),’A Multivariate Analysis of Financial Development and Growth in Mauritius: New Evidence’, Global Journal of Human Social Science, Vol.10 issue 1 (Ver 1.0)
Pack, H. (1994), ‘Endogenous Growth Theory: Intellectual Appeal and Empirical Shortcomings’, Journal of Economic Perspectives, vol.8, no1
Patrick, H. (1966), ‘Financial Development and Economic Growth’, Economic Development
and Cultural Change, vol.XIV, pp.451-65.
Romer, P.M. (1986), ‘Increasing Returns and Long-run Growth’, Journal of Political Economy, vol. 94, pp.1002-1037.
Romer, D. (1996), Advanced Macroeconomics, Berkeley: University of California.
Rousseau, P.L. and P. Wachtel (1998), ‘Financial Intermediation and Economic Performance:
Historical Evidence from Unobservable Components Models’, Journal of Monetary
Economics, vol. 42, pp.387-425.
Seetanah, B. (2007), ‘Financial development and economic growth: a VECM approach’, The Icfai Journal of Bank Management, Vol. 6 No. 4, pp. 7-16.
Seetanah, B., Ramessur, T. S. and Rojid, S. (2008), ‘Financial development and economic growth: New evidence from sample of island economies’, Journal of Economic Studies, Vol.36 No2,2009, pp124-134.
Seetanah, B. (2010), ‘Stock Market Development and Economic Growth in Developing countries: Evidence from Panel VAR framework’.
Schumpeter, J. A. (1934), ‘The Theory of Economic Development’, Cambridge: Harvard
University Press. First published in Germany, 1912.
Shaw, E. S. (1973), Financial Deepening in Economic Development, New York: Oxford
Solow, R.M. (1956), ‘A Contribution to the Theory of Economic Growth’, Quarterly Journal of Economics, vol. 70, no. 1.
Swan, T.W. (1956), ‘Economic Growth and Capital Accumulation’, Economic Record, vol.32, no. 2.
Wachtel, P. (2001), ‘Growth and Finance –What do We Know and How do We Know it?’ In International Finance.
World Bank (2012). ‘Global Financial Development Report 2013: Rethinking the Role of the State in Finance.’ World Bank, Washington, DC (http://www.worldbank.org/financialdevelopment).
Xu, Z. (2000), ‘Financial development, investment and growth’, Economic Inquiry, Vol. 38, pp. 331-44.
Definition of Endogenous Growth Theory (2014).[Internet] Available from
[Accessed 21 June 2014]
Definition of Financial Intermediary (2014).[Internet] Available from [Accessed 22 June 2014]
Definition of Solow-Swan Model (2014).[Internet] Available from [Accessed 1 July 2014]
Fact sheet on Mauritius (2012). [Internet] Available from http://www.ninetyeastfinancial.com/articles/page.php?id=1022 [Accessed 1 July 2014]
Mauritius Transformation Profile (2014). [Internet] Available from
http://africantransformation.org/2014/02/07/mauritius/ [Accessed 21 September 2014]
Mauritius: the Global Business Sector (2010). [Internet] Available from
http://www.ifcreview.com/restricted.aspx?articleId=992&areaId=32# [Accessed 21 September 2014]