Export Diversification, Financial Sector Development and Economic Growth: Empirical Evidence from West African Sub-Region

Abstract

In this study, we explored the influence of trade diversification and financial sector development on economic growth of ten West African countries for the period 2007 to 2020. The study employed the panel autoregressive distributed lag (ARDL) model since some of the variables were stationary at level while others were stationary at first difference, fully modified ordinary least squares approach of estimation, and Granger causality test. The findings of the study from the ARDL model indicated that export diversification exerts a negative effect on economic growth both in the short-run and in the long-run, though such effect were insignificant. The effect of financial sector development on growth is observed to be positive and significant in the short-run, and negative and significant in the long-run. From the robustness check, the FMOLS result indicated that export diversification exerted a negative and significant effect on growth; while the effect of financial development is positive but insignificant. The Granger causality test revealed that a unidirectional causality flow between export diversification and economic growth, with the former causing the latter. The implication of this findings is that countries within the West African region should specialize in some export products in order to boost efficiency in production and the resultant effect on greater export and export earnings.