Financial Integration and Economic Growth: A Case Study of Sub-Saharan Africa

Abstract

The study investigates the relationship between financial integration, proxy by portfolio equity flows, and economic growth in Sub-Saharan Africa. To achieve the set objective, we first estimate the baseline growth regression using the Generalized Methods of Moment (GMM) dynamic panel estimation framework, while controlling for initial income, human capital and other factors. The results suggest that portfolio equity flows have a significant positive relationship with economic growth in SSA. As a robust check of the system GMM results, the results of the Random effects-GLS (EGLS) model suggest a negative insignificant relationship between portfolio equity flows and economic growth. However, the EGLS estimator confirms that there exists a significant positive relationship between financial development and economic growth. The inconsistency in the results of the two estimation models leads us to the conclusion that, there is no definite or robust link in the IFI-growth relationship in SSA. The study also investigates the determinants of portfolio equity flows to the Sub-Saharan African region over the period 1996-2010. Relying on the Generalized Methods of Moment (GMM) dynamic panel estimation framework, the study finds a significant positive relationship between financial development and portfolio equity flows. The results also suggests that trade openness and political stability have a significant negative relationship with portfolio equity flows in SSA. As a robust check, the EGLS estimator confirms that there is a robust positive relationship between financial development and portfolio equity flows to SSA. However, neither trade openness nor political stability is a robust determinant of portfolio equity flows to the sub-region. On the basis of the outcome, the study recommends that policymakers in SSA should adopt a cautious approach to the financial integration process by specifically adopting policies aimed at regulating the activities of foreign banks and their receipts of portfolio equity inflows. Other policies should aim at enhancing financial sector development, export promotion and ensure stable democratic governance.