Financial Development and Armed Conflict A Cross-country Analysis

In this paper we have examined how armed conflict and financial development is associated using a panel of 66 developing countries for the period 1985-2010. Financial development has been measured by two proxy indicators: M2 as a share of GDP and credit allocated to private sector by banks as a share of GDP. Our findings suggest that armed conflict has significant adverse effect on financial development. In addition, quality of governance is found highly significant and conducive to the financial development. In one hand, govern-ance quality appears with greater impact towards credit allocated to private sec-tor as the effect of armed conflict seems insignificant. On the other hand, ef-fect of armed conflict towards M2 as a percentage of GDP gets smaller; however, significant in the presence of governance quality. This paper also ex-plores that the negative effect of armed conflict increases as armed conflict intensifies. However, governance performances seem trading off with low and medium intensity of armed conflict. That implies governance quality does mat-ter but cannot offset entirely the effect of high intensity armed conflict and its effect by retarding M2 as a share of GDP.