Is Manufacturing in Africa Constrained by Finance? An Empirical Analysis of the Finance Manufacturing Nexus

Richard Itaman ()
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Richard Itaman: Jesus College, University of Cambridge, United Kingdom.

No 2022-06, SARChI-ID Working Papers from SARChI Industrial Development (SARChI-ID), University of Johannesburg (UJ)

Abstract: Financial development has often been seen as enhancing the growth of, yet having little effect on, the structural transformation of developing countries. We argue that financial development in African countries ought to be linked to the continent’s most pressing need, which is its structural transformation, measured by growth in manufacturing. Given the divergence of finance from the manufacturing sector, we show that financial deepening in Africa exhibits weak linkages with productive activities. This weak linkage between the financial sector and productive investment is evident in the disproportionate flow of credit to households, services and the extractive sectors as finance expands. The consequence is financial fragility, as African countries are increasingly integrated into the global financial system, thereby exerting a negative effect on the structural transformation efforts of the continent. Using a group of 35 countries in the period 1960 to 2020, we employ the general method of moments (GMM) for panel data to examine the influence of finance on manufacturing in Africa. We estimate the non-monotonic relationship between finance and manufacturing and find a negative influence of finance at initial levels of development. At 55% of GDP, credit to the private sector starts to exert a positive effect on manufacturing in Africa. Therefore, our findings show that more directed finance is required for manufacturing growth in Africa.

Keywords: Industrial policy; Africa; Finance; Manufacturing (search for similar items in EconPapers)
JEL-codes: E24 I3 J18 L52 Q54 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2022-05, Revised 2022-05
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