IMF Working Papers

Does Openness Matter for Financial Development in Africa?

Author/Editor:

Antonio David ; Montfort Mlachila ; Ashwin Moheeput

Publication Date:

June 9, 2014

Electronic Access:

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Summary:

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.

Series:

Working Paper No. 14/94

Subject:

Angola Benin Botswana Burkina Faso Burundi Cameroon Capital account liberalization Central African Republic Chad Comoros Congo, Democratic Republic of the Congo, Republic of Development Djibouti Econometric models Economic integration Equatorial Guinea Eritrea Ethiopia Gabon Gambia, The Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Madagascar Malawi Mali Mauritania Mauritius Mozambique Namibia Niger Nigeria Rwanda Senegal Seychelles Sierra Leone South Africa Sub-Saharan Africa Sudan Swaziland Tanzania Togo Trade liberalization Uganda Zambia Zimbabwe