Short- and Long-term Impact of Trade Openness on Financial Development in Sub-Saharan Africa

We extend a recently proposed index of trade openness to a panel data setting in order to investigate the short- and long-term impact of trade openness on financial development for a panel of 43 Sub-Saharan African (SSA) countries over the period 1996–2014. We found trade openness to enhance financial development in the long term. In the short term, the effect of openness is not clear but points to a negative one. When we divided the sample into low- and middle-income groups, we found that openness enhances financial development in the former group but hurts it in the latter group. This suggests a nonlinear relationship between financial development and openness. Among other factors that may be relevant in explaining the trade openness-financial development nexus, we examined the role of governance, human capital development, and infrastructural development. We found that governance, human capital and infrastructure development are critical to financial development, particularly in the long-term. Our findings have relevant policy implications, which we elaborate.