Effects of trade and financial integration on structural transformation in Africa: New evidence from a sample splitting approach

Abstract

Improving on structural transformation is one of the major preoccupations of countries in Africa. However, structural transformation process has been unimpressive despite the efforts of countries to promote transformation. While evidence abound on the macroeconomic determinants of structural transformation, issues around whether or not countries in Africa should open their economies to international markets for improved transformation have not received much attention in the literature. This study therefore examines the threshold effects of trade and financial integration on structural transformation in 32 African countries using a sample splitting estimation approach over the period 1985 to 2015. Our evidence suggests that, trade and financial integration effects do not evolve independently but complement each other in explaining cross-country differences in countries’ level of structural transformation in Africa. However, the transformation-inducing effect of trade (financial) openness slows as financial (trade) integration progresses above the estimated optimal threshold levels. To foster deeper integration in Africa, this study recommends that, efforts to address non-tariff bottlenecks should be a major preoccupation of countries.