Does Openness Matter for Financial Development in Africa?
39 Pages Posted: 18 Jul 2014
Date Written: June 2014
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: Suggested Citation