Financial Proximity and Agricultural Productivity: New Evidence from Sub-Saharan African Countries

Abstract

ABSTRACT: Agriculture plays a vital role in driving economic output and employment in Sub-Saharan African (SSA) countries. Despite some progress, agricultural productivity in SSA still lags behind other regions. Limited access to finance remains a significant impediment to improving agricultural productivity in Sub-Saharan Africa. This paper investigates the effect of financial proximity on agricultural productivity in Sub-Saharan African countries. The study primarily employs the system GMM estimator, chosen to address the endogeneity issue typical in macro panel data. This method is also well-suited to our study because it accommodates a high number of cross-sections relative to the number of periods within each cross-section. Additionally, the IV-2SLS method is employed to check the robustness of the findings. The study uses an unbalanced panel for the 36 African countries with data for the period 2004-2019. Our findings show that increasing the financial proximity favors agricultural productivity in SSA countries. Specifically, the number of commercial bank branches (CBB) and the number of automated teller machines (ATM) per 100 000 adults, as indicators of financial proximity, have positive and significant effects on agricultural value added per worker in SSA. Additionally, our findings show that rainfall, arable land, and institutional quality are robust determinants of agricultural productivity. The positive effects of the number of CBB and the number of ATM are even more pronounced on agricultural productivity when coupled with strong institutional quality. Our findings suggest that improving financial services' accessibility in rural areas, coupled with enhanced institutional quality, regular rainfall, ample arable land, and increased access to water and land, are pivotal steps for achieving sustainable enhancements in labor productivity. This, in turn, leads to increased returns through value-added growth and expanded employment in the agricultural sector.