Gender-based Financial Discrimination and Economic Growth in Developing Countries

Konte, Maty (2016). 'Gender-based Financial Discrimination and Economic Growth in Developing Countries' Paper presented at the annual conference of the HDCA, Tokyo 2016.

abstract A number of scholars have investigated the effects of different forms of gender inequality on economic performance. Related pieces of evidences have supported a negative association between gender inequality in access to education and in the labor market, and the growth rate of GDP (see for instance Lagerof (2003), Klasen (2002) and Klasen and Lamanna (2009)). In many developing countries, gender inequality in access to finance coexists with these different forms of gender inequality (Hallward-Driemeier (2013)), and may also have similar negative repercussions on the economic growth of countries. While finance may boost the growth rate, thereby promoting investment and innovative activities, in contrast, discrimination in access to finance may depress the growth rate by creating inefficiency in the allocation of capital, increasing income inequality.  As far as we know, despite anecdotal evidence on negative effect of gender gap in access to finance on the economic performance, there is no empirical study that analyzes this correlation in a cross-country setting.   This paper takes one step further and provides an empirical framework that enables us first to test whether gender-based financial exclusion depresses the growth rate in a cross country analysis using a sample of developing countries across different regions; second, it allows us to test whether the negative correlation between gender-based financial exclusion and the economic growth rate can be mediated through more financial development. Different plausible mechanisms may explain the connection between gender discrimination in access to finance and economic growth, and the possible role that better financial development may play in mediating this relationship. On the one hand, gender discrimination in access to finance reduces women's economic opportunities inside and outside the home, and as such reduces their bargaining power (Amartya(1990)). This may negatively affect education, health, fertility, and hence economic performance. In addition, we argue that, in the presence of gender-based financial discrimination, men with lower entrepreneurial and innovative ability have higher chances to get access to credits and loans than women with better entrepreneurial and innovative ability that can generate higher productivity, and sustain long-lasting businesses. It is well established that exclusion from access to financial services may engender inefficiency in the allocation of available capital (Beck and Demirguc-Kunt (2007)). Such an inefficiency results in an increase in income equality (Aghion and Bolton (1997); Beck and Demirguc-Kunt (2007)), and consequently a decline in the economic growth rate (Barro (2000); Banerjee and Duo (2003)). Our first goal in this paper is to assess the direct effect of gender-based financial exclusion on economic growth, focusing on developing countries.   One the other hand, in many developing countries entrepreneurs by opportunity coexist with entrepreneurs by necessity (e.g., Vivarelli (2013); Quatraro and Vivarelli (2014)). This is particularly accentuated in the group of women entrepreneurs who are more likely to operate by necessity, due to the high discrimination in access to wage employment (Naude and Minniti(2010)). These entrepreneurs would not necessarily gain much from more access to finance due to their lack of sufficient managerial skills and entrepreneurial ability, and thus may not contribute to economic growth (Vivarelli (2013)) in their home country. We believe that some of these women may prefer to switch from self-employed by necessity to being employed if they have easy access to decent wage employment. At the same time, recent investigations have shown that finance generates more and better wage employment (Aterido et al. (2011); Pagano and Pica (2012)), which we believe is highly beneficial for many women who face different barriers in the labor market, including those entrepreneurs by necessity . Our second goal in this paper is to explore the extent to which more financial development may reduce the negative effect of gender-based financial development on economic growth, bearing in mind that financial development may create more wage employment, which may be beneficial for many women entrepreneurs by necessity who face entry barriers in the labor market, and who may not be successful in their business, with more access to finance.   For our analysis, we use a cross-sectional data that includes more than hundreds of developing countries covering the period 1980-2010. We employ the unique indicator of gender-based financial discrimination recently launched by the OECD. This variable informs us whether men and women in a society have equal access to financial services. It captures formal and informal laws and practices that constrain women's access to financial services in formal institutions, including opening a bank account and obtaining loans or credit. We find that the higher the level of gender-based financial discrimination, the lower the economic growth rate. Our term of interaction between gender discrimination in access to finance and financial development has a positive and significant sign. This provides evidence that financial development tends to reduce significantly the negative effect of higher gender discrimination in access to finance on economic growth. Results are robust to different specifications, and to different sample size. Our results are also robust to the correction of endogeneity issues. In fact, endogeneity bias may occur because of omitted variables and also because of reverse causality. For the former we add control variables to our model, and for the latter we provide some instruments for the indicators of financial development. However, we have not used instruments for the measure of gender discrimination in access to finance, leaving the door open for deeper research on this issue.    The total effect of gender discrimination in access to finance on economic growth takes a value of zero if the ratio of domestic credit to GDP is higher than 131%. This value goes down to 72% if we consider the indicator of liquid liability and to 100% for the indicator of broad money. The latter values decrease to 58% and 61% if we consider the short-run growth analysis using the 5-years panel data.

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