Does financial development and institutional quality matter in South-South Trade? Evidence from Sub-Saharan Africa

Abstract

This study re-evaluates the determinants of international trade in the global south, focusing on intra- and extra-SSA trade while considering financial development and institutional quality as additional predictors. It also examines whether these factors differ for south-south and north–south trade ties. We used a 22-years (ranging from 2000 to 2021) panel of 98 countries (41 from the SSA and the remaining from the ROW). A panel gravity model with Poisson pseudo-maximum likelihood (PPML) estimation is used for the analysis. The results show that financial development in origin and destination countries boosts intra-trade in SSA countries, and the developed financial sector of the destination countries contributes to both intra-bloc and international trade. Financial development of exporting countries also spurs intra-bloc trade in SSA countries and the global south. In addition, apart from common expectations, the institutional quality of exporting countries plays a deterrent role, while the institutional quality of destination countries plays a positive and significant role in trade in the global south. We identified the interaction term for financial development and institutional quality of the exporting countries with a significant and positive coefficient for the global south and the global north, and null for intra-SSA trade. For destination countries, it becomes significantly positive with SSA and the global south but negative with the global north. The findings suggest that as part of the policy measures to boost intra-bloc trade in SSA and the global south, ensuring financial development needs better emphasis.