Financial development, institutional improvement, poverty reduction: The multiple challenges in West Africa

Abstract

Poverty continues to be one of the biggest difficulties confronting humanity today, and eradicating poverty has become one of the most difficult tasks facing developing countries in their drive for long-term development. Accordingly, this study assesses the moderating role of institutional quality (measured by rule of law, regulation quality, control of corruption, government effectiveness, political stability, and voice and accountability) in the finance-poverty nexus for a sample of 16 West African countries spanning 2002–2019. The findings show that finance (represented by domestic credit, and money supply) reduces poverty; however, the weak institutional quality reduces the positive effect of finance on poverty reduction. The study establishes that the institutional quality thresholds at which domestic credit could reduce poverty are: rule of law (0.6), regulation quality (0.1), control of corruption (1.6), government effectiveness (0.1), and political stability (0.3) on the scale of −2.5–2.5. Finally, the institutional quality thresholds at which money supply could reduce poverty are: rule of law (2.5), regulation quality (0.3), control of corruption (2.0), government effectiveness (1.5), and political stability (1.4) on the scale of −2.5–2.5, whilst the interaction effect of domestic credit, money supply, and voice and accountability were insignificant. The study concludes that policymakers must enhance the institutional environment in West Africa to boost financial development to reduce poverty.