Financial Deepening, Property Rights, and Poverty: Evidence from Transition Countries

Abstract

Researchers argue that financial development indirectly helps reduce poverty by improving growth, allowing the poor to benefit from financial services. Other researchers however, claim that the financial development challenges poverty reduction because the poor are generally more vulnerable to underdeveloped financial institutions. Therefore, this research investigates the relationship between poverty, financial deepening and particularly examines the role of property rights in 22 transition countries from 1999 through 2013. Financial deepening as the ratio of private credits to GDP was used as an estimate for financial development in this research. To estimate the relationship, the Generalized Least Squares (GLS) estimation technique was employed. Results of estimation showed that financial deepening has a big contribution in alleviating poverty in transition countries. As well, the results showed that strong property rights in interaction term with financial deepening significantly reduces poverty in the sample countries.