International Trade and Inclusive Growth in Sub Saharan Africa: Role of the Local Financial Market

Abstract

Since the days of the mercantilists, trade has been recognized by some as a tool for creating wealth for nations. Others refer to it as a living standard improvement tool. Trade’s positive significant impact on growth has considerable support in literature, but it is yet to garner the same support for its impact on living standard. This is because trade-induced growth is said to be significantly impactful when it leads to a reduction in poverty and closes inequality gap. With the valuable role played by finance in resourcing individuals to participate in economic activities, this study explored the significance of the local financial markets’ moderating role in the relationship between international trade and inclusive growth in sub-Saharan Africa, a subregion that is exposed, like the rest of the world, to the fast-developing global financial market. The study employed the Two-Step System General Method of Moment estimating technique to analyze panel data sourced from twenty-seven (27) sub-Saharan African countries covering the period of 14 years (2008-2021). The result of the study generally revealed a negative but insignificant impact of domestic credit to the private sector on export and trade. It has also been revealed that the composition of trade on the continent was a contributing factor to the inclusivity of growth, which is based on the fact that sub-Saharan Africa’s export was largely in raw material forms (agrarian), thus employing many unskilled laborers. Interestingly, the results also showed that advancing domestic credit to the private sector without proper regulations would have no significant effect on well-being or inclusive growth. Finally, the moderating role of the local financial market has a significant impact on the relationship between international trade and inclusive growth. We therefore recommend that African economies take full advantage of AfCFTA to trade more, and also undertake reforms that build strong local financial markets and well-regulated, less complex, and easily accessible cross border platforms for seamless transfers of funds for trade purposes.