Financial development, sectoral effects, and international trade in Africa: An application of pooled mean group (PMG) estimation approach

Abstract

Existing studies on financial development–international trade nexus have centred on the implications of finance for trade without investigating the transmission channels of finance on trade. More importantly, how financial sector development mediates the relationship between sectoral value additions and trade remains an unexplored area. This study addresses these gaps in the literature relying on panel data from 46 countries in Africa spanning 1980–2016. Our evidence based on the pooled mean group estimations suggest that, for both the long and short run, although the impact of sectoral value additions is contingent on the proxy of trade, financial sector development does not have a significant effect on international trade. This holds irrespective of the measure of finance and international trade. However, after controlling for the transmission channels, a coexistence of a negative long run substitutionarity between finance and trade is found, and this is invariant of the indicator of finance and trade. On the mediation role, we find that higher sectoral value additions dampen the deleterious effect of finance on trade with huge impact emanating from the service sector. We discuss some key implications for policy.