IDEAS home Printed from https://ideas.repec.org/a/eme/sefpps/v27y2010i4p314-339.html
   My bibliography  Save this article

Financial liberalization, financial development and growth linkages in Sub‐Saharan African countries

Author

Listed:
  • Abdullahi D. Ahmed

Abstract

Purpose - The purpose of this paper is to use the recent development in unit root tests and cointegration as applied to panel data and dynamic time series, to estimate the relationship between financial liberalization, financial development and growth. Design/methodology/approach - The paper assesses the dynamics of the relationship between financial development, financial liberalization and growth using the latest dynamic panel data framework and time series analyses comprising up to 15 Sub‐Saharan African countries with annual observations over the period of 1976‐2005. The research uses various measures of, or proxies for, financial intermediary development, including ratio of private sector credit and share of domestic credit to income. Findings - The results obtained from a heterogenous panel investigation and time series methodology such as Granger causality, indicate a long‐run equilibrium relationship between financial development and economic growth. This is consistent with the view that financial development can act as an “engine of growth” and plays a crucial role in the process of economic development. However, there is little evidence to support the hypothesis that financial liberalization directly “leads” growth. Originality/value - Group mean panel fully modified ordinary least squares (FMOLS) and country‐by‐country time series investigations show evidence of causality running from financial development to growth. The analysis yielded limited evidence of financial liberalization Granger‐causing economic growth. However, this is not to say that financial liberalization does not promote growth, as it could do so indirectly through fostering financial development.

Suggested Citation

  • Abdullahi D. Ahmed, 2010. "Financial liberalization, financial development and growth linkages in Sub‐Saharan African countries," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 27(4), pages 314-339, October.
  • Handle: RePEc:eme:sefpps:v:27:y:2010:i:4:p:314-339
    DOI: 10.1108/10867371011085156
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/10867371011085156/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://www.emerald.com/insight/content/doi/10.1108/10867371011085156/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers

    File URL: https://libkey.io/10.1108/10867371011085156?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Carmen M. Reinhart & Ioannis Tokatlidis, 2003. "Financial Liberalisation: The African Experience," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(Supplemen), pages 53-88, September.
    2. Pagan, Adrian R & Wickens, M R, 1989. "A Survey of Some Recent Econometric Methods," Economic Journal, Royal Economic Society, vol. 99(398), pages 962-1025, December.
    3. Asteriou, Dimitrios, 2005. "The Linkage between Financial Liberalization and Economic Development: Empirical Evidence from Poland," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 20, pages 383-399.
    4. Harb, Nasri & Al-Awad, Mouawiya, 2005. "Financial Development and Economic Growth in the Middle East," MPRA Paper 13605, University Library of Munich, Germany.
    5. Berthelemy, Jean-Claude & Varoudakis, Aristomene, 1996. "Economic Growth, Convergence Clubs, and the Role of Financial Development," Oxford Economic Papers, Oxford University Press, vol. 48(2), pages 300-328, April.
    6. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522543, December.
    7. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084, Central Bank of Chile.
    8. Ranciere, Romain & Tornell, Aaron & Westermann, Frank, 2006. "Decomposing the effects of financial liberalization: Crises vs. growth," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3331-3348, December.
    9. Thomas Barnebeck Andersen & Finn Tarp, 2003. "Financial liberalization, financial development and economic growth in LDCs," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(2), pages 189-209.
    10. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    11. Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
    12. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    13. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
    14. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    15. Teame Ghirmay, 2004. "Financial Development and Economic Growth in Sub‐Saharan African Countries: Evidence from Time Series Analysis," African Development Review, African Development Bank, vol. 16(3), pages 415-432.
    16. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    17. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
    18. Vittorio Grilli & Gian Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 42(3), pages 517-551, September.
    19. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
    20. Michael W. Klein & Giovanni Olivei, 1999. "Capital Account Liberalization, Financial Depth and Economic Growth," NBER Working Papers 7384, National Bureau of Economic Research, Inc.
    21. Shan, Jordan Z & Morris, Alan G & Sun, Fiona, 2001. "Financial Development and Economic Growth: An Egg-and-Chicken Problem?," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 443-454, August.
    22. Nieh, Chien-Chung & Ho, Tsung-wu, 2006. "Does the expansionary government spending crowd out the private consumption?: Cointegration analysis in panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(1), pages 133-148, February.
    23. Nazmi, Nader, 2005. "Deregulation, financial deepening and economic growth: The case of Latin America," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(2-3), pages 447-459, May.
    24. Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November.
    25. Rioja, Felix & Valev, Neven, 2004. "Does one size fit all?: a reexamination of the finance and growth relationship," Journal of Development Economics, Elsevier, vol. 74(2), pages 429-447, August.
    26. Rajmund Mirdala, 2006. "Macroeconomic aspects of financial liberalization," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 53(4), pages 439-456, December.
    27. Barry Eichengreen & David Leblang, 2003. "Capital account liberalization and growth: was Mr. Mahathir right?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 205-224.
    28. Nelson C. Mark & Donggyu Sul, 2003. "Cointegration Vector Estimation by Panel DOLS and Long‐run Money Demand," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 655-680, December.
    29. Khalifa Al-Yousif, Yousif, 2002. "Financial development and economic growth: Another look at the evidence from developing countries," Review of Financial Economics, Elsevier, vol. 11(2), pages 131-150.
    30. Mr. Calvin A McDonald & Miss Liliana B Schumacher, 2007. "Financial Deepening in Sub-Saharan Africa: Empirical Evidence on the Role of Creditor Rights Protection and Information Sharing," IMF Working Papers 2007/203, International Monetary Fund.
    31. Bhaskara Rao & Maheshwar Rao, 2005. "Determinants Of Growth Rate: Some Methodological Issues With Data From Fiji," Macroeconomics 0509003, University Library of Munich, Germany.
    32. Demetriades, Panicos O. & Hussein, Khaled A., 1996. "Does financial development cause economic growth? Time-series evidence from 16 countries," Journal of Development Economics, Elsevier, vol. 51(2), pages 387-411, December.
    33. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 653-670, November.
    34. Arestis, Philip & Demetriades, Panicos O, 1997. "Financial Development and Economic Growth: Assessing the Evidence," Economic Journal, Royal Economic Society, vol. 107(442), pages 783-799, May.
    35. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    36. J. Shan & A. Morris & F. Sun, 1999. "Financial development and economic growth: An egg-and-chicken problem?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 5(4), pages 514-514, November.
    37. Benhabib, Jess & Spiegel, Mark M, 2000. "The Role of Financial Development in Growth and Investment," Journal of Economic Growth, Springer, vol. 5(4), pages 341-360, December.
    38. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    39. Unknown, 2004. "The Importance Of Financial Sector Development For Growth And Poverty Reduction," Policy Division Working Papers 12886, Department for International Development (DFID) (UK).
    40. A.R. Kemal & Abdul Qayyum & Muhammad Nadim Hanif, 2007. "Financial Development and Economic Growth: Evidence from a Heterogeneous Panel of High Income Countries," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 12(1), pages 1-34, Jan-Jun.
    41. Ang, James B. & McKibbin, Warwick J., 2007. "Financial liberalization, financial sector development and growth: Evidence from Malaysia," Journal of Development Economics, Elsevier, vol. 84(1), pages 215-233, September.
    42. Pedroni, Peter, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-670, Special I.
    43. James Laurenceson & Joseph C.H. Chai, 2003. "Financial Reform and Economic Development in China," Books, Edward Elgar Publishing, number 2714.
    44. Luintel, Kul B. & Khan, Mosahid, 1999. "A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR," Journal of Development Economics, Elsevier, vol. 60(2), pages 381-405, December.
    45. Ross Levine, 1999. "Financial development and growth: where do we stand?," Estudios de Economia, University of Chile, Department of Economics, vol. 26(2 Year 19), pages 113-136, December.
    46. Beck, Thorsten, 2002. "Financial development and international trade: Is there a link?," Journal of International Economics, Elsevier, vol. 57(1), pages 107-131, June.
    47. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    48. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    49. Mohsin S. Khan & Abdelhak S. Senhadji, 2003. "Financial Development and Economic Growth: A Review and New Evidence," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(Supplemen), pages 89-110, September.
    50. Asli Demirgüç-Kunt & Enrica Detragiache, 1998. "The Determinants of Banking Crises in Developing and Developed Countries," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 81-109, March.
    51. Philip Arestis & Asena Caner, 2004. "Financial Liberalization and Poverty: Channels of Influence," Economics Working Paper Archive wp_411, Levy Economics Institute.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yabibal M. Walle, 2014. "Revisiting the Finance–Growth Nexus in Sub‐Saharan Africa: Results from Error Correction‐based Panel Cointegration Tests," African Development Review, African Development Bank, vol. 26(2), pages 310-321, June.
    2. Sheilla Nyasha & Nicholas M. Odhiambo, 2015. "The Impact of Banks and Stock Market Development on Economic Growth in South Africa: an ARDL-bounds Testing Approach," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 9(1), March.
    3. Inoue, Takeshi & Hamori, Shigeyuki, 2013. "Financial Permeation and Economic Growth: Evidence from Sub-Saharan Africa," MPRA Paper 53417, University Library of Munich, Germany.
    4. Madhu Sehrawat & A. Giri, 2016. "Financial development, poverty and rural-urban income inequality: evidence from South Asian countries," Quality & Quantity: International Journal of Methodology, Springer, vol. 50(2), pages 577-590, March.
    5. Dakhlia, Sami & Diallo, Boubacar & Temimi, Akram, 2021. "Financial inclusion and ethnic development: Evidence from satellite light density at night," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).
    6. Madhu Sehrawat & A. K. Giri, 2017. "Financial Structure, Interest Rate, Trade Openness and Growth: Time Series Analysis of Indian Economy," Global Business Review, International Management Institute, vol. 18(5), pages 1278-1290, October.
    7. Tehmina Fiaz Qazi & Abdul Aziz Khan Niazi & Abdul Basit & Abdul Rehman & Aysha Nazir, 2019. "The Jostle of Workplace Pressures on Credit Managers: Interpretive Structural Modeling to Underpin the Severity," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 8(3), pages 155-163, September.
    8. Ali, Amjad, 2022. "Financial Liberalization, Institutional Quality and Economic Growth Nexus: Panel Analysis of African Countries," MPRA Paper 116101, University Library of Munich, Germany.
    9. Emenalo, Chukwunonye O. & Gagliardi, Francesca, 2020. "Is current institutional quality linked to legal origins and disease endowments? Evidence from Africa," Research in International Business and Finance, Elsevier, vol. 52(C).
    10. Zhang, Yu Yvette & Boadu, Frederick O., 2012. "Stock Exchange Development and Economic Growth in Sub-Saharan Africa (SSA)," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124608, Agricultural and Applied Economics Association.
    11. repec:asi:ajoerj:2013:p:752-762 is not listed on IDEAS
    12. Nianyong Wang & Muhammad Haroon Shah & Kishwar Ali & Shah Abbas & Sami Ullah, 2019. "Financial Structure, Misery Index, and Economic Growth: Time Series Empirics from Pakistan," JRFM, MDPI, vol. 12(2), pages 1-15, June.
    13. Wakilat BALOGUN & Jauhari. DAHALAN & Sallahuddin. HASSAN, 2016. "Stock Market Development, Liberalization And Financial Development In The Selected Sub-Saharan African Countries," Romanian Economic Business Review, Romanian-American University, vol. 11(2), pages 52-65, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Uslu, Çağrı Levent & Aydoğan, Ebru Tomris & Ketenci, Natalya, 2015. "Economic Growth, Financial Development, and Trade Openness in Emerging Markets: Panel Approach," MPRA Paper 64722, University Library of Munich, Germany.
    2. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    3. Rudra P. Pradhan & Mak B. Arvin & John H. Hall & Sahar Bahmani, 2014. "Causal nexus between economic growth, banking sector development, stock market development, and other macroeconomic variables: The case of ASEAN countries," Review of Financial Economics, John Wiley & Sons, vol. 23(4), pages 155-173, November.
    4. Loayza,Norman V. & Ouazad,Amine & Ranciere,Romain, 2017. "Financial development, growth, and crisis: is there a trade-off ?," Policy Research Working Paper Series 8237, The World Bank.
    5. Akinci, Gönül Yüce & Akinci, Merter & Yilmaz, Ömer, 2014. "Financial Development-Economic Growth Nexus : A Panel Data Analysis Upon Oecd Countries," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 55(1), pages 33-50, June.
    6. Rudra P. Pradhan & Mak B. Arvin & Neville R. Norman & John H. Hall, 2014. "The dynamics of banking sector and stock market maturity and the performance of Asian economies," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 30(1), pages 16-44, May.
    7. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.
    8. Ismail Senturk & Fiaz Ahmad Sulehri & Syeda Mehak Ali, 2022. "Financial Development and Innovation Led-Growth: A Case of Selected Developing Countries," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 8(3), pages 81-97, September.
    9. OZTURK, Ilhan, 2008. "Financial Development And Economic Growth: Evidence From Turkey," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 8(1), pages 85-98.
    10. M. Kabir Hassan & Benito Sanchez & Jung-Suk Yu, 2011. "Financial Development and Economic Growth in the Organization of Islamic Conference Countries التطور المالي والنمو الاقتصادي في دول منظمة المؤتمر الإسلامي," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 24(1), pages 145-172, January.
    11. Hyunjoo Kim Karlsson & Kristofer Månsson & Scott Hacker, 2021. "Revisiting the nexus of the financial development and economic development: new international evidence using a wavelet approach," Empirical Economics, Springer, vol. 60(5), pages 2323-2350, May.
    12. A�a�Yrı Levent Uslu & Ebru Tomris Aydo�Yan & Natalya Ketenci, 2016. "Impact Of Structural Breaks Presence On Economic Development Of Emerging Countries," Journal Articles, Center For Economic Analyses, pages 5-21, December.
    13. Alessandra Bonfiglioli & Caterina Mendicino, 2004. "Financial liberalization, bank crises and growth: Assessing the links," Economics Working Papers 946, Department of Economics and Business, Universitat Pompeu Fabra.
    14. Edoardo Gaffeo & Petya Garalova, 2014. "On the finance-growth nexus: additional evidence from Central and Eastern Europe countries," Economic Change and Restructuring, Springer, vol. 47(2), pages 89-115, May.
    15. Ilhan Ozturk, 2007. "Finance–Growth Nexus: Empirical Evidence from South Africa," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 3-17.
    16. Rajesh Sharma & Samaresh Bardhan, 2017. "Finance growth nexus across Indian states: evidences from panel cointegration and causality tests," Economic Change and Restructuring, Springer, vol. 50(1), pages 1-20, February.
    17. Alessio Ciarlone, 2019. "The relationship between financial development and growth: the case of emerging Europe," Questioni di Economia e Finanza (Occasional Papers) 521, Bank of Italy, Economic Research and International Relations Area.
    18. Swamy, Vighneswara & Dharani, Munusamy, 2019. "The dynamics of finance-growth nexus in advanced economies," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 122-146.
    19. Malebogo Bakwena & Philip Bodman & Sandy Suardi, "undated". "Making Abundant Natural Resources Work for Developing Economies: The Role of Financial Institutions," MRG Discussion Paper Series 2108, School of Economics, University of Queensland, Australia.
    20. Ang, James B. & McKibbin, Warwick J., 2007. "Financial liberalization, financial sector development and growth: Evidence from Malaysia," Journal of Development Economics, Elsevier, vol. 84(1), pages 215-233, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:sefpps:v:27:y:2010:i:4:p:314-339. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.