Does Openness Matter for Financial Development in Africa?

39 Pages Posted: 18 Jul 2014

See all articles by Antonio C. David

Antonio C. David

World Bank - Policy Research Department; International Monetary Fund (IMF)

Montfort Mlachila

International Monetary Fund (IMF)

Ashwin Moheeput

International Monetary Fund (IMF)

Date Written: June 2014

Abstract

This paper analyzes the links between financial and trade openness and financial development in Sub-Saharan African (SSA) countries. It is based on a panel dataset using methods that tackle slope heterogeneity, cross-sectional dependence and non-stationarity, important econometric problems that are often ignored in the literature. The results do not point to a general direct robust link between trade and capital account openness and financial development in SSA, once we control for other factors such as GDP per capita and inflation. But there is some indication that trade openness is more important for financial development in countries with better institutional quality. The findings might be due to a number of factors including distortions in domestic financial markets, relatively weak institutions and/or poor financial sector supervision. Thus, African policy makers should be cautious about expectations regarding immediate gains for financial development from greater international integration. Such gains are more likely to occur through indirect channels.

Keywords: Development, Sub-Saharan Africa, Trade liberalization, Capital account liberalization, Economic integration, Econometric models, Financial Development, Trade Openness, International Financial Integration, capital account, capital account openness, financial sector, bond, financial reforms, financial sector development, financial markets, financial services, financial reform, domestic financial markets, financial systems, financial institutions, capital accounts, financial system, financial liberalization, financial structure, deposit money banks, liquid liabilities, stock market, deposit money, financial globalization, international country risk guide, interest rate controls, stock market de

JEL Classification: F36, F43, O16

Suggested Citation

David, Antonio C. and Mlachila, Montfort and Moheeput, Ashwin, Does Openness Matter for Financial Development in Africa? (June 2014). IMF Working Paper No. 14/94, Available at SSRN: https://ssrn.com/abstract=2468022

Antonio C. David

World Bank - Policy Research Department ( email )

1818 H Street
Washington, DC 20433
United States

International Monetary Fund (IMF) ( email )

700 19th Street N.W.
Washington, DC 20431
United States

Montfort Mlachila

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Ashwin Moheeput

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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