Does Financial Market Liberalization Promote Financial Development?: Evidence from Sub-Saharan Africa

Since 1990s, many Sub-Saharan African economies have liberalized their financial sectors in the expectation that liberalized financial markets will promote financial development and spur economic growth. In this respect the African economies followed the footstep of their Latin American counterparts who began to liberalize their financial markets in the 1980s, following a period characterized by hyperinflation, stagnant growth, and debt crisis. While the influential papers of Mckinnon (1973) and Shaw (1973) provided theoretical justification for financial liberalization, it was the thrust for broader market-based reforms that promoted wholesale liberalization and privatization and triggered rapid financial market liberalization in the continent. Ignoring both the more nuanced theoretical work2 and the growing body of empirical evidence on why and when financial liberalization may not promote financial development, Levine (1997) and King and Levine (1997) claimed a positive, first-order relationship between financial development and economic growth. This strand of literature made emphatic claims, albeit not necessarily supported by robust empirical evidence, that the development of financial markets and institutions is a critical and inextricable part of the growth process. They went further to that “the level of financial development is a good predictor of future rates of economic growth, capital accumulation, and technological change” (Levine, 1997), without addressing the more critical issue as to whether financial market liberalization was necessary to promote financial development, with the latter touted as a sine qua non for economic growth.