Global Journal of Management and Business Research, B: Economics and Commerce, Volume 20 Issue 1

fails to explain the failure of development policies derived from its theoretical corpus. By exploring this new path of research, it becomes possible to explain to some extent the economic and especially financial difficulties of developing countries. In this perspective, an adequate institutional framework would contribute to financial development and increase the effect of the latter on growth. Conversely, a deficient institutional system, introduces distortions in the functioning of markets and is a hindrance to the development of the economic activity. The hypothesis derived from this reasoning is based on the work of Arestis et al. 2002. It stipulates that financial reform cannot promote the development of the financial sector until the economic system is anchored in a sound, credible, and adequate legal and institutional structure. Since a developed financial system alone can guarantee a substantial effect on the real performance of the economy, institutions' development is vital towards guaranteeing this effect. The objective of this study is to examine the effect of institutional quality on financial development based on panel data analysis across developed and west Africa countries. This study seeks to extend the literature in three dimensions. First, the financial development indicator is built-in using the institutional and financial parameters. Secondly, a linear and nonlinear dynamic panel data models are set up to test the linear and non-linear financial development-institutional quality relationships. This can be considered as one of the pioneer empirical works that used the robust dynamic panel system GMM approach to estimate the nonlinear relationship. Thirdly, the models are estimated based on the newly assembled institutional quality measure developed by Kaufmann et al. (2008) that consists of various sets of institutional quality variables, which can assess what dimensions of the quality of institutions affect financial development. This study seeks to validate this hypothesis by building a new composite indicator of financial development and introducing this new indicator of development in an econometric equation to explain the Financial development in the WAEMU zone between 1996 and 2016. Also, by way of confirmation of our results, the study is remaking the same estimate on a sample of developed countries 25, all Organization for Economic Co-operation and Development (OECD). Furthermore, after obtaining results using one of the most robust methods for estimating dynamic panel data (Generalized Method of Moment System), we realize that the retarded variable of our dependent variable is not significant, and therefore we could settle for static panel estimates (Fixed-effects model or random-effect model).The question underlying this methodological approach concerns the explanatory capacity of our composite financial development indicator to reveal the shortcomings of the WAEMU financial sector. To this end, we proceed to a second econometric estimation (both static and dynamic) on a control sample, made up of countries with different characteristics from those of the WAEMU countries, that is to say, OECD countries. These results will enlighten us on how the quality of institutions contributes to the process of developing the financial sector. And at the same time, the question arises as to whether it is not the shortcomings of the institutions that need to be attributed to the blockages of the growth of the financial sector and, therefore, that of the real increase. In our approach, we first start to create a composite indicator of financial development and then to form our two (2) databases, both for WAEMU countries (sample of 8 countries) and those of the OECD (sample of 25 countries) on the period 1996- 2016. Each of the two (2) databases includes the following variables: The gross domestic product per capita, the consumer price index, an average of the indicators representing the economic institutions, and that of the political indicators, and the indicator of financial development creates. Two methods, namely that of the Generalized Method of Moment (GMM System) on dynamic panel data at first and the estimation of models with fixed effects or random effect, are used in a second time. We decide to adopt a double-estimation approach to ensure the robustness of our econometric conclusions. The first part provides a brief overview of the institutional framework as well as a panorama of empirical studies of the relationship between the institutional framework and the development of the financial sector (and by implication, the growth of economic activity). The second part is devoted to the methodology used. The last part is devoted to the results and discussions. II. L iterature R eview In this literature review, we first highlight the first wave of work that has set out to seek the link between the quality of institutions and economic development. And in a second time, we present our work, which consisted specifically in searching the link between, on the one hand, the institutional quality and, on the other hand, the capacity of the financial system to contribute to the financing of the economy. It should be noted that the analysis for the role of the financial system in the growth process has been enriched by the development of theoretical models of endogenous growth integrating the financial sphere since the work of Schumpeter (1912) and Gurley and Shaw (1955). It is established that capital accumulation and technological change are not the only factors that explain the differences in the level of development © 20 20 Global Journals 24 Global Journal of Management and Business Research Volume XX Issue I Version I Year 2020 ( ) B Institutional Quality and Financial Development in West Africa Economic and Monetary Union