Financial Development and Technical Efficiency in Transitional Economies: Evidence from BLEND Countries

Financial Development and Technical Efficiency in Transitional Economies: Evidence from BLEND Countries

This study investigates the impact of Financial Development components on Technical Efficiency in 11 BLEND countries from 1980 to 2019 using panel data from the Penn World Table and IMF’s Financial Development Index. Employing Stochastic Frontier Analysis (SFA) with a Translog production function and time-varying inefficiency effects (Battese & Coelli, 1995), the results reveal that Financial Institution Depth (FID) significantly reduces inefficiency (δ= -0.79, p < 0.001), while greater Financial Access (FIA) is associated with in¬creased inefficiency (δ= 0.57, p < 0.001). Country-specific analysis reveals notable disparities: Kenya and the Congo Republic demonstrate high average efficiency (97-98%), in contrast to Nigeria (25%), while some island nations experience persistently low efficiency scores (27- 37%), underlying institutional differences and structural vulnerabilities. Fixed-effects robustness tests confirm that these findings remain consistent after controlling for country-specific heterogeneity. These findings suggest that the benefits of financial development are condi¬tional on regulatory effectiveness and institutional capacity, with important implications for SDG 8 (Economic Growth) and development finance policy in transitional economies.