Does Openness Matter for Financial Development in Africa?

Antonio David, Montfort Mlachila and Ashwin Moheeput

No 2014/094, IMF Working Papers from International Monetary Fund

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: WP; trade openness; coefficient estimate; SSA country; terms of trade; Financial Development; International Financial Integration; sub-Saharan Africa; CCEMG estimator; group estimator; autoregressive coefficient; time series; panel estimator; cost of capital; slope coefficient; per capita income; institutional quality; Financial sector development; Capital account; Credit; Capital account liberalization; Estimation techniques; Africa (search for similar items in EconPapers)
Pages: 38
Date: 2014-06-09
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Citations: View citations in EconPapers (28)

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