BARBADOS SHOULD CONCENTRATE on growing its economy first if it wants to achieve higher levels of financial development.
That’s the conclusion of a study done by Alton Best and Dr Brian Francis of the Department of Economics, University of the West Indies, Cave Hill Campus.
Is Financial Development Supply Leading Or Demand Following? Time Series Evidence From Barbados is the title of their research, which “empirically examines the question” in the Barbados context.
Using annual data from 1980 to 2014, they found that “Barbados should first concentrate on developing its real sector in order to stimulate higher levels of financial development”.
The report noted that “the direction of causality between financial development and economic growth has been an issue of contentious debate, among academics as well as policymakers”.
“The thrust of this debate has been whether the policymakers should first pursue financial development in order to induce higher levels of economic growth or whether they should first concentrate on the development of the real sector in order to stimulate higher levels of financial development,” said Best and Francis.
“The empirical results for Barbados support the demand following hypothesis in the short run. The analysis suggests that the relationship between financial development and economic growth is unidirectional in the short run. Moreover, there is no long run relationship.
“It should be noted that the short run causality runs from economic growth to financial development when the financial development proxies – ratio of bank liquid reserves and domestic credit to private sector as a percentage of GDP – are used. Hence, according to the results, in the short run a distinct demand following hypothesis exists for Barbados.”
They added: “The results indicate that the variables all respond positively to themselves and that economic growth had greater impact on financial development variables. Thus, from the foregoing results, one may suggest that Barbados should first concentrate on developing its real sector in order to stimulate higher levels of financial development.”
They cautioned, however, against reaching similar conclusions for other Caribbean economies. (SC)
