Financial Deepening and Inclusive Growth in West Africa: Evidence from Panel Corrected Standard Errors (PCSE) Analysis

This study examines the nexus between financial deepening and inclusive growth in West Africa using balanced annual panel data for 15 countries over the period 2000–2023. Inclusive growth is measured using a composite index generated through Principal Component Analysis (PCA), following the UNCTAD (2022) multidimensional framework that incorporates indicators of economic performance, living conditions, and equality. Financial deepening is also captured through a PCA-based index aggregating credit to the private sector, money supply, gross national savings, and lending rates, reflecting the depth, accessibility, and efficiency of the financial system. The study employs Panel Corrected Standard Errors (PCSE) to address heteroskedasticity and cross-sectional dependence inherent in panel data. The results reveal that financial deepening exert significant positive effect on inclusive growth, supporting the McKinnon–Shaw hypothesis that deeper financial systems enhance broad-based economic participation. Control of corruption also exerts significant positive influence on inclusive growth, underscoring the importance of strong and transparent institutions in ensuring equitable distribution of economic gains. Conversely, foreign direct investment and inflation display negative but statistically insignificant effects on inclusive growth. The study contributes to the literature by adopting a multidimensional approach to inclusive growth and offers policy-relevant insights for promoting inclusive growth in West Africa. JEL Codes: G20; O40; D73; C23; O55