Integration of financial markets, financial development and growth: Is Africa different?

Abstract

This study uses a dynamic system GMM model and panel data of 30 Sub-Saharan African (SSA) countries from 1976 to 2010 to investigate the impact of international financial integration (IFI) on economic performance. While also examining both the direct and indirect channels through which the effect of financial integration works, our research considers the tripartite relationship between financial openness, financial market development and economic growth. We test the simultaneous openness hypothesis of Rajan and Zingales and examine joint influence of both capital and trade openness on financial development in the region.While using a wide array of measures of financial market development capturing activity and size of financial intermediation and rule-based and quantity-based indicators of IFI, our result shows a negative association between financial integration and economic growth rate in SSA countries, contrary to the theoretical expectation. However, the study identifies a positive and significant association between IFI and financial development, supporting the indirect hypothesis view that IFI may positively influence economic growth through enhancing the depth of the domestic financial system. We observe empirical evidence supporting the simultaneous openness hypothesis in the SSA region. Policy wise, we argue that SSA countries should put in place and strengthen institutions of governance (security of property rights, transparency of legal system and investor-friendly laws) and enhance human capital formation to facilitate technology diffusion and cross-border capital flows.