Decomposing the impact of financial openness on finance and income inequality: principle vs. outcome-based approaches from Africa

Biruk Ashenafi and Yan Dong
Additional contact information
Yan Dong: Southwestern University of Finance and Economics

Economic Change and Restructuring, 2024, vol. 57, issue 2, No 18, 32 pages

Abstract: Abstract This paper investigates the impact of financial openness on financial sector development and income inequality. We use two approaches to capture financial openness for a panel dataset of 52 African countries from 1980–2019 and find that: (1) Principle-based financial openness policy negatively affects financial sector development and widens income inequality. In contrast, the outcome-based measures positively affect banking sector development and narrow income inequality. (2) Capital inflow to African countries is not merely pulled a vibrant macroeconomic fundamental. Only schooling and governance factors facilitate the impact of financial openness on financial sector development. (3) Adverse non-policy factors play an insignificant role in moderating the impact of financial openness. This implies that the impact of financial openness on financial sector development and income inequality is weak in countries experiencing a banking crisis or passing through a lengthy conflict. Our finding is consistent with the institutional quality theory, which claims robust institutions are needed. We underline that countries should take caution in implementing principle-based reforms. Particularly, there is an alternative policy path for African countries to optimize the benefit by pursuing outcome-based financial openness measures.

Keywords: Financial openness; Financial development; Income inequality; Kaopen; De facto; Africa (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10644-024-09638-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:ecopln:v:57:y:2024:i:2:d:10.1007_s10644-024-09638-5

Ordering information: This journal article can be ordered from
http://www.springer. ... nt/journal/10644/PS2

DOI: 10.1007/s10644-024-09638-5

Access Statistics for this article

Economic Change and Restructuring is currently edited by George Hondroyiannis

More articles in Economic Change and Restructuring from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().