Abstract

This study examines empirically the relationship between financial development and economic growth in the West African Economic and Monetary Union (WAEMU) for the period 1981-2010. Using the General Moment Method (GMM), the study found a positively and statistically significant effect of financial development on economic growth and the causality was bidirectional. In addition, the variable primary completion rate, foreign direct investment and real exchange rate contribute positively to economic growth in the region while inflation and openness discourage the economic growth in the region. In order to maintain a sustainable economic growth in those countries under study, the reforms for financial system improvement and education sector should be implemented. The policy makers should pursue target macroeconomic policies that may attract foreign direct investment while controlling for inflation and trade openness.

Key words: Financial development, economic growth, WAEMU, devaluation, franc-CFA.