Institutions First: The Conditional Effects of Investment Freedom on Financial Development in MENA (2004–2020)

This study re-examines the developmental promise of financial liberalization in the Middle East and North Africa (MENA), a region characterized by institutional fragility and oil dependence. Using panel data from 11 MENA countries over the period 2004–2020, we construct a composite financial development index and estimate its determinants through fixed-effects regressions with robust Driscoll-Kraay standard errors. The results show that investment freedom significantly reduces financial development (β = -0.0191, p < 0.000). Importantly, the interaction between investment freedom and rule of law is also negative and significant (β = -0.0067, p = 0.0008), suggesting that even in countries with relatively stronger legal institutions – such as the United Arab Emirates and Saudi Arabia – liberalization may enhance elite capture rather than broaden inclusion. In contrast, financial freedom has a positive and significant effect (β = 0.0107, p = 0.002). Financial globalization, whether measured by total capital flows (β = 0.0347, p = 0.122) or by foreign direct investment (β = -0.0054, p = 0.488), shows no statistically significant effect. These findings challenge the assumption that openness automatically enhances financial progress. Instead, it is acknowledged that in rentier and post-authoritarian contexts, institutional preconditions must precede liberalization. Without credible governance, financial openness risks deepening exclusion and systemic fragility rather than providing inclusive growth.