Institutional Threshold in the Nexus Between Financial Openness and TFP in Africa: A Dynamic Panel Analysis

Abstract

There is a paradigm shift in literature from the analysis of broader output growth towards explaining the effects of macroeconomic policies on the key determinant of long-run growth, namely, Total Factor Productivity (TFP). This study investigated the threshold or sustainable level of institutional development necessary for financial openness to stimulate TFP growth by employing a Dynamic Panel Threshold Model (DPTM) proposed by Seo & Shin (2016) and used by Seo, Kim & Kim (2019) for the panel of 28 selected African countries over the period of 1996 to 2017. The findings showed that there exists a threshold or sustainable level of institutional development (3.61 out of 10 point scale) which African countries must attain to reap the full benefits of financial openness on TFP in Africa because the quality of institutions in most of African countries are pervasively weak and poorly developed to checkmate excesses, corruptions and political interferences in the financial markets. Therefore, the study recommended that there should be a deliberate attempt by relevant authorities to block all inherent loopholes in the institutional settings in African countries which give room for shady dealings in the financial markets to ensure institutional environments (political, legal, regulatory and economic institutions) are healthy enough to absorb the negative influence of financial openness that may hinder growth and development in the long-run by lowering TFP growth.