Does financial globalization contribute to financial development in developing countries? Evidence from Africa

Abstract

This study used panel data from 33 African nations during a period from 2005–2019 to examine the relationship between financial globalization and financial development. Regressions with Driscoll-Kraay and panel-corrected standard errors, which account for cross-sectional dependence, were employed to analyze the link. The main findings of this study reveal the existence of a U-shaped relationship between financial globalization and financial development in Africa, suggesting that a lower level of financial globalization appears to have a negative influence on financial development. However, above a certain point, a growth in financial globalization is accompanied by an increase in financial development. In other words, countries with a lower (higher) level of financial globalization have experienced negative (positive) effects on their financial development. Trade openness, financial freedom, and investment freedom have also been found to be strongly and positively related to financial development in Africa. Based on the findings, African countries are advised to consider the appropriate timing prior to fully opening their capital accounts to international players in order to enjoy the benefits of financial globalization.