Financial Intermediation and Economic Growth in Saudi Arabia: An Empirical Analysis, 1968-2010

Long-term sustainable economic growth is manifested in high rates of physical and human capital accumulation. It de- pends on the ability of the economy to mobilize financial resources, and to ensure access by people to these productive assets, which should be invested more efficiently. This process summarizes the role that financial institutions have played in financial intermediation and growth, namely to mobilize savings and allocate them to the most productive and growth-promoting activities. The core argument is that greater financial intermediation gives rise to higher productivity and thus higher national and/or per capita income. This paper examined the empirical relationship between economic growth and financial intermediation for Saudi Arabia during the last four decades (1968-2010). To this end, we adopt the autoregressive distributed lag (ARDL) methods to cointegration and the associated error correction model (ECM). Despite the minimal restrictions imposed on the functioning of the domestic financial system with a view to “fighting terrorism”, the results overwhelmingly indicate that financial intermediation has impacted negatively on long-run real GDP. These findings are attributed to two sets of factors relating to the dominance of economic activities by the public sector and the characteristics of the institutional environment surrounding the private sector, as well as to some func- tional and structural characteristics of the financial system that have impeded its development.