Working Paper 291 - Regional Financial Integration and Economic Activity in Africa

Unlike in Asia and Europe, it is not clear what the pattern and impact of financial integration have been in Africa. This paper addresses three main issues: the progress and experience towards financial integration in Africa, the degree and timing of the integration process in selected African stock markets, and the effect of financial integration on economic activity. First, using time-varying parameters from a state-space model, we assess the degree and timing of financial integration in Africa and find results that indicate contemporary patterns toward increasing financial globalisation relative to regionalization. Second, using carefully specified parametric and nonparametric regression analyses, we find that higher levels of financial integration are associated with higher levels of growth and investment, but not necessarily total factor productivity. The relationships become even clearer when we zoom in on the nonparametric iso-growth surface plots, which show that there is a threshold level of financial development that is consistent with growth in a financially segmented economy. Finally, some policy implications are gleaned from the results and the experiences in Asia and Europe.