Does financial development drive inclusive human development in East Africa? Evidence from panel dynamics

Despite ongoing financial sector reforms, the extent to which financial development drives inclusive human development in East Africa remains insufficiently understood. This study examines the relationship between financial development and inclusive human development in seven East African countries (Burundi, Ethiopia, Kenya, Rwanda, Sudan, Tanzania, and Uganda) over the period 2010–2023. Using a heterogeneous panel dynamic framework, including panel ARDL-PMG and complementary robustness estimators, the study investigates both long-and short-run dynamics. The results indicate a stable long-run relationship, where financial development has a positive and statistically significant effect on inclusive human development. Government consumption expenditure and unemployment exert negative effects, while capital formation shows mixed and estimator-sensitive effects. Short-run dynamics are weak and heterogeneous across countries, and cointegration tests confirm the existence of a long-run equilibrium relationship. From a policy perspective, the findings suggest prioritizing financial sector deepening through improved financial access, efficiency of intermediation, and broader financial inclusion. Policy efforts should also focus on improving employment conditions and ensuring that public expenditure is more development-oriented. Strengthening the linkage between financial systems and the real sector remains essential for translating financial deepening into inclusive human development in East Africa.