Financial Integration, Trade Integration and Economic Growth in the East African Community

Abstract

This study sought to investigate the influence of macroeconomic volatility and trade integration on the relationship between financial integration and economic growth in the EAC member states. Specifically, the study aimed at determining the influence of trade integration on the relationship between financial integration and economic growth in the EAC. To achieve this objective, the following hypothesis was developed: There is no significant intervening effect of trade integration on the relationship between financial integration and economic growth. The study adopted a positivistic research philosophy and casual research design. Diagnostic tests were carried out to meet the requirements for conducting correlation and regression analysis on panel data. These include; Multicollinearity tests, Im- Pesaran-Shit Test (IPS) panel unit root test and Hausman test for fixed effects and random effects models. Descriptive statistics such as the mean, standard deviation, coefficient of variation as well as correlation analysis were conducted as the preliminary statistical analysis. Generalized-two stage least squares instrumental variable regression model (G2SLSIV) was then conducted to test the hypotheses. The findings of the study showed that: there is no significant intervening effect of trade integration on the relationship between financial integration and economic growth. These findings contribute to knowledge in the sense that, the positive and significant correlation between financial integration and economic growth confirms that, an increase in gross capital flows is accompanied by increase in economic growth. It also contributes to knowledge by revealing that, financial deepening contributes positively to financial integration which further contributes to accelerating economic growth. Therefore, the study is useful to the governments of respective member states in formulating policies aimed at achieving similarity in economic structures and ensuring the quality .....