Dynamic System GMM Estimation Research Articles

The role of energy equity and income inequality in environmental sustainability

Progress in energy equity, income equality, and environmental quality are fundamental to sustainable development. However, studies providing evidence-based recommendations concerning the joint effect of energy equity and income inequality on environmental sustainability in Africa are lacking. This study fills this gap by using a panel dataset covering 41 African countries from 2008 to 2019. Results from the Driscoll-Kraay standard errors and the dynamic system GMM estimators reveal the following: (1) energy equity promotes environmental quality, whereas income inequality hampers it, and (2) income inequality nullifies the favourable environmental gains of energy equity. These findings remain consistent when we use the ecological footprint as an alternative measure of environmental quality. We conclude that addressing income inequality is essential for ensuring that energy equity enhances environmental quality. Policymakers should prioritise energy equity and fairer income distribution initiatives to achieve sustainable development goals.

Development effects of industrialization, labor force participation and electrification on productive capacity in Africa: A panel data investigation

In our study spanning 2010–2022 across 50 African economies, we investigated the effects of industrialization, labor force participation, and electrification on Africa’s productive capacity. We also examined how electrification moderates the effect of industrialization and labor force participation on productive capacity. We adopted the pooled OLS, the fixed effect estimator, and the dynamic system GMM estimation technique for our analysis. Our findings indicate industrialization, labor force participation, and electrification as potent channels for enhancing Africa's productive capacity. In tandem with Africa’s reality, we find that electrification isn’t moderating the positive impact of industrialization and labor force participation on productivity. Our findings also revealed human capital development, government health expenditure, and institutional quality as pivotal drivers of productive capacity in Africa, while factors like global economic policy uncertainty and natural resource endowment exhibit predominantly negative roles. These results underscore the need for African policymakers and leaders to foster an enabling environment that facilitates industrialization, increased labor force participation, and improved electricity access to promote economic performance and productivity.

Global Perspective on Tourism-Economic Growth Nexus: The Role of Tourism Market Diversification

ABSTRACT The tourism industry is well-known as a powerful driver of the economic growth of destinations. However, socio-political and financial fluctuations in the countries of origin and destination make the tourism industry more volatile and less beneficial to economic growth. The tourism market diversification (TMD) strategy supports the stabilizing of the industry and spurs the economic growth of destinations via several channels, e.g. minimizing the risk of over-dependence on one market and stabilization the number of foreign tourists and tourism receipts. We analyzed the effects of the TMD strategy on the economic growth of 75 destinations over the period 1995-2018. By applying the dynamic system GMM estimator, we found that the TMD strategy accelerates the economic growth of destinations. Our results are robust regarding different samples of countries. The growth effect of the TMD on the low and lower-middle-income groups is significantly higher than on the high and upper-middle groups.

Financial sector development and natural resource rents: the role of institutions in Sub-Saharan Africa.

Institutions are important in analyzing the relationship between natural resource rents and financial sector development. The existing research has not unanimously established the role played by the quality of institutions on the impact of natural resource rents on financial sector development. The financial-resource nexus literature has largely ignored the role of institutions and the sensitivity of the relationship to the choice of proxies for financial sector development. This study provides new empirical evidence on the interactive role of institutions in the relationship between natural resource rents and financial sector development for 25 Sub-Saharan African countries from 1996 to 2017. To that end, we employ a dynamic system GMM estimator with endogeneity-purging efficiency. Our results show that a huge improvement in legal and political institutions is required to boost the impact of natural resource rents on Sub-Saharan Africa's financial sector development. Our results are robust to the use of alternative measures of institutions. We also found that the impact of natural resource rents on financial sector development is unclear as this depends on how financial sector development is measured. Implications of the findings for academics, policymakers and regulators are provided.

ICT Diffusion, Foreign Direct Investment and Inclusive Growth in Sub-Saharan Africa

This study examines the joint effects of ICT diffusion (composed of access, usage and skills), and foreign direct investment (FDI) on inclusive growth in sub-Saharan Africa (SSA). The study draws on data from the World Bank’s World Development Indicators, and the Global Consumption and Income Project for the period 1980–2019 for the analysis. The study provides evidence robust to several specifications from the ordinary least squares and dynamic system GMM estimation techniques to show that: (1) unconditionally, both FDI and ICT diffusion induce inclusive growth in SSA; (2) compared to its direct effect, ICT diffusion is remarkable in fostering shared growth in SSA in the presence of FDI, and (3) relative to ICT access and ICT usage, ICT skills is more effective for enhancing inclusive growth in SSA. Overall, FDI modulates our ICT dynamics to engender positive synergy effects on inclusive growth. Policy recommendations are provided in line with the implementation of the African Continental Free Trade Area (AfCFTA) Agreement and the projected rise in FDI to SSA from 2022.

Financial Performance in Islamic Banking and Shari’ah Supervision under Interventionist Regulatory Approach: A System-GMM Dynamic Panel Analysis

The relationship between Shari’ah supervision and Islamic banks’ (IBs) performance is still ambiguous particularly for banks across countries that have different regulatory environments. Pakistan adopts an interventionist regulatory approach which is exclusive to Shari’ah governance (SG) system in Pakistan. This approach differs from the other adopted approaches in countries that have either high or low degree of regulatory interference. Thus, this study examines how Shari’ah supervision mechanism, as represented by the Shari’ah supervisory board, and its characteristics, can influence the performance of IBs in Pakistan. The sample comprises 67 Islamic bank-year observations for the period from 2007 to 2015. The performance-governance relationship is estimated using a range of econometric techniques including the dynamic system-GMM estimator. The results reveal modest support for a positive association between Shari’ah supervision and performance. The study concludes that SG practices in the Pakistani IBs still suffer from some drawbacks which require more improvements by the respective regulators. Most of these drawbacks are related to the SG regulatory frameworks which are related to the SSBs’ roles and characteristics.

ICT Diffusion, Foreign Direct Investment and Inclusive Growth in Sub-Saharan Africa

This study examines the joint effects of ICT diffusion (composed of access, usage and skills), and foreign direct investment (FDI) on inclusive growth in sub-Saharan Africa (SSA). The study draws on data from the World Bank’s World Development Indicators, and the Global Consumption and Income Project for the period 1980–2019 for the analysis. The study provides evidence robust to several specifications from ordinary least squares and dynamic system GMM estimation techniques to show that: (1) FDI and ICT diffusion and corresponding components (ICT access, usage, skills) induce inclusive growth in SSA; (2) compared to its direct effect, FDI is remarkable in fostering shared growth in SSA in the presence of greater ICT diffusion, and (3) compared to ICT access and usage, ICT skills are more effective in driving inclusive growth in SSA. Overall FDI modulates ICT dynamics to engender positive synergy effects on inclusive growth. Policy recommendations are provided in line with the implementation of the African Continental Free Trade Area (AfCFTA) Agreement and the projected rise in FDI in SSA from 2022.

Electoral cycles, stock market volatility and exchange rate: The indissoluble trivet

This paper seeks to unravel the connectivity between stock market volatility and exchange rate within the political cycles of sovereign states presidential election years between 2000-2016 using the dynamic system GMM estimation and VECH technique data source from Morgan Stanley Capital International (MSCI). A significant positive relationship between market volatility and exchange rate manifests in the studied countries, more in Nigeria and South Africa. A significant shift in a conditional correlation of the variances of most markets exists except for Kenya, Japan, and Hong Kong. This perhaps is indicative of weak institutional and democratic culture within the financial system; hence independence of public institutions would guarantee non-interference that ensures policy consistency. Financial, economic and behavioral finance barometers need to integrate both local and international political development for effective and result-driven investment. As a result of the significant opportunistic business cycle effect that manifested with a significant shift in the conditional correlations of the variances of some of the markets we strongly believe that a truly independent central bank would not only guarantee political non-interference but also will ensure policy consistency.

The relationship between Corporate Governance and Firm Financial Performance: An Empirical Investigation of an emerging market

We investigate whether the distinct nature of multinational firms (MNC) differently influence the governance-performance relationship compared to the local firms in Pakistan. We used a dynamic system GMM estimator that produces consistent and efficient estimation after controlling for dynamic endogeneity and simultaneity. Our results demonstrate that corporate governance (CG) has a significant positive impact on firm financial performance whilst CG practice of MNC firms is more effective than local firms in Pakistan. We observed two distinct financing behaviours, i.e., 'pro-active investment behaviour' of MNC firms and 'conservative investment behaviour' of local firms. We conclude that a well-established corporate culture, significant financial worth and firms' higher growth rate are key determinants of better CG practice.

Too Small to Succeed versus Too Big to Fail: How Much Does Size Matter in Banking?

ABSTRACTEven though large banks could imply large risks and heightened vulnerability for a country’s macroeconomy, the presence of many small banks with similar behavior such as Islamic banks could also cause systemic risks. This article makes an initial attempt to investigate the impact of bank size on banking performance. Our study spans 12 emerging countries with dual banking systems and applies two-step dynamic system GMM estimator. The results show that size really does matter in the banking industry, and its impact on performance tends to be non-linear with a trade-off between profitability and efficiency. Comparing conventional with Islamic banks, we find that bank size has almost the same impact on the performance of both types of banks.

Investigating the Banking Sector Development Transmission Mechanism of Financial Development to Growth: Evidence from Sub-Saharan Africa (SSA)

The search for financial development’s transmission channel to growth has always been updated in the literature. While there has not been a consensus on this matter, empirical findings on finance-growth nexus have been ambiguous. Relying on this, we investigate its bank development transmission channel to growth in a panel of twenty-eight Sub-Saharan Africa (SSA) countries from 2000-2016. Having adopted the augmented Solow (1956) and Mankiw et al. (1992) growth model, the fixed effect and dynamic system GMM estimation techniques reveals a negative non-significant and positive significant direct impact of finance on growth in the static and dynamic models respectively, thereby suggesting institutional (dynamic) factors that can spur finance. Secondly, the non-linear effects of bank development had a direct positive significant impact on growth and its marginal-effects before and after the financial crisis of 2007/08 were relatively stable. This implies that banks in SSA were relatively stable in financial intermediation; therefore SSA countries need to reinforce and improve its banking policy through FinTechs adoption. Finally, the interaction between bank development and financial development significantly increase steady-state growth. This implies that SSA economies can promote steady-state growth from financial development only when a threshold of bank development is reached.

Accounting for endogeneity and the dynamics of corporate social – Corporate financial performance relationship

This paper examines the endogeneity problem in studies dealing with corporate social performance and financial performance relationship. Since randomized controlled experiments in the “Business-Research” field are often unfeasible, researchers rely mostly on observational data to make claims about “doing good – doing well” arguments. In response to several strong calls for additional well-crafted empirical research that address endogeneity, we revisit the CSP – CFP relationship, in the airline industry, to understand how endogeneity arises and how to control for it in studies based on observational panel data. We exploit various approaches such as OLS, fixed-effects, fixed-effects IV/2SLS, dynamic system GMM, and GLS estimators. We show the appropriateness behind the use of the dynamic system GMM estimator and its benefits over the fixed-effects estimator. In addition, we demonstrate that results in models that do not account for endogeneity lead to inflated estimations, misleading interpretations and wrong theoretical propositions about the dynamic nature of CSP-CFP relationship.

Exchange rate volatility and capital inflows: role of financial development

There is vast literature examining the impact of exchange rate volatility on various macroeconomic aggregates such as economic growth, trade flows, domestic investment, and more recently capital flows. However, these studies have ignored the role of financial development while examining the impact of exchange rate volatility on capital flows. This study aims to analyze the impact of exchange rate volatility on capital inflows towards developing countries by incorporating the role of financial development over the time period 1980–2013. In this regard, the behavior of two types of capital flows is examined: physical capital inflows measured as foreign direct investment, and financial inflows quantified through remittance inflows. The empirical investigation comprises the direct as well as indirect effect of exchange rate volatility on capital inflows. The study employs dynamic system GMM estimation technique to empirically estimate the effect of exchange rate volatility on capital inflows. The empirical results of the study identify that exchange rate volatility dampens both physical and financial inflows towards developing countries. The indirect impact of exchange rate volatility through financial development, however, turns out positive and statistically significant. This finding reflects that financial development helps in reducing the harmful impact of exchange rate volatility on capital inflows. Hence, the study concludes that a developed financial system is an important channel through which developing countries may improve capital inflows in the long run.

The Effects of Trade and Trade Facilitation on Economic Growth in Africa

AbstractThis study investigates the effects of trade and trade facilitation on economic growth in Africa. To do so, we measure trade facilitation by means of three indicators, namely trade, export and import related costs, constructed by using principal component analysis. These indicators, in addition to several policy‐relevant variables, are used as exogenous variables to estimate an augmented growth model which, with the aid of a dynamic system GMM estimation technique, properly addresses potential endogeneity concerns. The findings suggest that trade facilitation serves as an important channel through which trade affects economic growth.

Risk-Taking Behavior and Capital Adequacy in a Mixed Banking System: New Evidence from Malaysia Using Dynamic OLS and Two-Step Dynamic System GMM Estimators

ABSTRACTThis study is the first attempt to investigate the relationship between the level of risky assets and capital level in a mixed Malaysian banking system covering 83 months starting December 2006. The results of dynamic ordinary least squares indicate positive relationship between capital ratio (CAR) and risk-weighted asset ratio (RWA) in the long run. Furthermore, the causality analysis based on panel vector error correction model (VECM) and two-step dynamic system generalized method of moments indicates unidirectional causality from CAR to RWA. Our results further suggest that higher capital growth and capital buffer provide an extra cushion for the Malaysian banks to pursue relatively riskier financial activities, and the nature of risk-taking behavior of Islamic banks follows that of the conventional banks.

Empirical Analysis of the Key Drivers of Income Inequality in West Africa

This paper extends and contributes to the literature on the drivers of income inequality in West Africa. Principally, it empirically assesses the impact of key domestic and external drivers of income inequality with a view to drawing key lessons for West African countries. Using the dynamic system GMM estimation procedure, the authors analyze an unbalanced pooled time series data set of income distribution in 17 West African countries from 1970 to 2011. Our inequality measures, the market (gross) and net income inequality coefficients, are from a global inequality dataset, which ensures data comparability both through time and across countries. Our novel finding shows strong support for a dynamic, non-monotonic, inverted U-shaped, effect of inequality in the model (as expressed by the lagged values of income inequality). We find evidence of existence of the Kuznets curve in the sub-region, which proposed that inequality may rise with the initial increase in per capita income but will decline subsequently. A non-monotonic, Kuznets-type effect is found for political globalization. Our results also show that access to secondary education (skill premium) social globalization, age dependency (for net income inequality) and democracy strongly and significantly equalize income in West Africa. The authors find that population density, natural resources dependence, domestic investment rate, government consumption expenditure, trade openness, inward foreign direct investment, international remittances, and civil conflicts appear to be income disequalizing in the sub-region. The policy lessons and implications are discussed.

Do Firms Benefit From Agglomeration? A Productivity Analysis For Turkish Manufacturing Industry

The link between productivity and agglomeration is important to answer the question ‘Do firms benefit from agglomeration?’ This study aims to investigate such link using proper proxies and econometric methods. This study employs the Ellison and Glaeser index and Total Factor Productivity to represent agglomeration economies and productivity levels in Turkish manufacturing industries, using 1980-2001 panel data. TFP is measured using SFA and then regressed along agglomeration and other control variables using a dynamic system GMM estimation method. This estimation method allows to account for the dynamic nature of TFP and also the possible endogeneitiy between productivity and agglomeration. The results indicate that Turkish manufacturing industries stand as an example to negative externalities.

HIV/AIDS and Economic Growth: Empirical Evidence from Sub-Saharan Africa

<p>This study investigates the effects of the HIV and AIDS epidemic on economic growth in 42<br />sub-Saharan African countries using data spanning from 1990-2013. Unlike previous studies,<br />we use a longer data horizon and take the time lag effect of the epidemic’s incubation period<br />that is, after it might have developed to AIDS into consideration in our estimations. We<br />estimated an empirical growth equation within an augmented Solow model and applied the<br />dynamic system GMM estimator. The results suggest that current HIV prevalence rate –<br />associated with rising morbidity, has a negative effect on GDP per capita growth, conversely<br />AIDS – associated with higher mortality in addition to morbidity, increases per capita GDP<br />growth.</p>

Chinese firm and industry reactions to antidumping initiations and measures

China has been the subject of large numbers of both antidumping initiations and measures. This article explores the reactions of Chinese firms and industries to these actions by using dynamic system GMM estimator and industrial panel data on all Chinese firms in the industry, foreign firms operating within China and state-owned enterprises (SOEs) for aggregated firms group between 1997 and 2007. We find that antidumping actions by developed and developing countries negatively impact industrial profits and employee and firm numbers and also exports, but improve labour productivity. We also find that different kinds of firms show different responses. All firms together in an industry react to antidumping the most, and foreign and SOE firms show a much smaller response. Further, antidumping effects from different countries are different. Developed countries’ antidumping actions have more negative impact than developing countries’ actions; the effects of US actions are different from the European Union’s.

Bundling Governance: Finance Versus Institutions in Private Investment Promotion

Purpose – The study extends the debate on finance versus institutions in the promotion of investment documented by Acemoglu and Johnson (2005), Ali (2013) and Asongu (2014). We assess the effects of various components of governance on private investment, notably: political, economic and institutional governances. Financial indicators of depth, allocation efficiency, activity and size are used.Design/methodology/approach – An endogeneity robust dynamic system GMM estimation technique is employed. Principal component analysis is also employed to reduce the dimensions of governance variables. The empirical evidence is based on 53 African countries for the period 1996-2010. Findings – The findings provide support for the quality of governance as a better determinant of private investment than financial intermediary development. Moreover, the evidence of finance and governance as substitutes in their impact on investment implies that good governance fuels private investment and this positive impact is stronger in nations with less developed financial systems. This finding is consistent with Ali (2013) and contrary to the results of Asongu (2014c).Practical implication – Policy measures for fighting involuntary and voluntary surplus liquidities are discussed. The paper provides additional support for the need of strengthening governance institutions to promote investment on the one hand and fighting financial allocation inefficiency by mitigating surplus liquidity issues on the other hand. Originality/value – The paper extends the debate on the substitution of finance and institutions in the promotion of private investment.