The Role of Financial Development and Institutional Quality in Economic Growth in Africa in the Era of Globalization

Abstract

This study examines the short and long-run impact of financial development, institutional quality and globalization on economic growth on a sample of 40 Africa countries. It also examines whether the relationships differ across sub-groups of countries namely low-income, lower-middle-income and upper-middle-income over the period 1980–2014. It uses a new technique in macro-econometrics panel estimation to control for dynamic heterogeneity and cross-sectional dependence for an econometric analysis. The findings reveal that the existence of cross-sectional dependence which is non-stationary at their level becomes stationary in their first difference. It also shows the presence of co-integration among the variables showing a long run relationship among the variables. The results from a panel-mean-group model with a correction for common correlated effects show that financial development, institutional quality and globalization have significantly positive effects on long-run economic growth for the entire sample of countries. Further, looking at different income levels the empirical evidence shows that in low-income countries financial development, institutional quality and globalization have a positive impact on long-run economic growth in the entire sample and also in low-income countries. This provides strong evidence that the impact of financial development on economic growth is heterogeneous across income levels. Moreover, the interaction between financial development and institutional quality has a negative and significant effect on economic growth. This implies that either financial development or institutional quality can help boost economic growth.