Financial liberalisation in the Mediterranean region

This dissertation addresses the empirical relationship between financial liberalisation, financial development, and economic growth for six countries in the Mediterranean region (Cyprus, Egypt, Israel, Jordan, Morocco and Turkey). We attempt to (1) investigate the structure of the financial sector; (2) address the strength and significance of the correlation between the development of the financial sector and economic growth; and (3) attend to the issue of the direction of the Granger causality. The theoretical argument predicts that the removal of interest rate ceilings, high reserve requirements, direct credit programmes, and an inequitable direct taxation on financial intermediaries can facilitate a more efficient allocation of resources, increasing economic growth. Our econometric analysis yields several observations concerning the financialliberalisation thesis: (i) financialliberalisation does help develop the financial sector; (ii) a relationship between financial development and economic does exist, (iii) the direction of this relationship can run in both directions; (iv) the correlation between financial development and economic growth is more positive when the direction of causality runs from financial development to economic growth; and (v) the question of whether the relationship between financial development an? economic growth is demand-following or supply-leading cannot be universally applied to all countries; rather we must evaluate each economy on a separate basis, which would explain why the issue of causality has been a divided subject.