Influence of Conditional Factors on the Financial Liberalization and Economic Growth Nexus in Tanzania

Abstract

The current study analyzes the influence of conditional factors on the relationship between financial liberalization and economic growth in Tanzania. The motivation of the study is based on the inability of the developing countries to attain the targeted growth of their economies and the divided findings and conclusions of the existing studies on the topic. The study employed time series data spanning from 1970 to 2017 to examine the topic. Data was collected from the Bank of Tanzania and the United Nations Conference on Trade and Development. The Augmented Dicky-Fuller and Phillips-Perron were used for unit root tests, the Bounds Approach for co-integration tests, and PROCESS Macro for estimation. The study contributes to the literature by analyzing conditional factors on the relationship between financial liberalization and economic growth in Tanzania. The study reveals that out of the four conditioning factors (financial development, trade openness, government size, and inflation), only government size (captured by government expenditure) was found positive and statistically significant. The findings imply that financial liberalization enhances economic growth in Tanzania, subject to the level of government size. The study concludes that the relationship between financial liberalization and economic growth lacks support from a sufficient number of macroeconomic conditioning factors in spurring the economic growth of Tanzania. This scenario might contribute to the sluggish growth of the economy of Tanzania, which is below the target. Therefore, the study suggests a review of policy on the government size conditional factor so as to enhance more economic growth in Tanzania.