Domestic Credit and Export Diversification: Africa from a Global Perspective

As open economies, African countries need to diversify their exports for economic transformation, sustained growth, and development. Meanwhile, there has been increasing importance of development financing. Following the discussion of theoretical issues on the importance of domestic credit as a potential instrument for overcoming the liquidity constraint of developing countries, as in the case of Africa, this paper empirically explores the determinants of export diversification, with particular attention to domestic credit. The estimation is based on a five-year panel regression analysis for the 1962-2010 period involving 80 countries around the world, of which 62 are developing and 29 African countries, using as covariates variables that are traditionally viewed as affecting export diversification. System GMM estimates provide robust evidence supporting the importance of domestic credit for African countries, while its role in other countries seems rather marginal. In addition, human capital in the form of schooling, governance as measured by constraint on the chief executive of government, and being land-locked, all exert significant effects, as anticipated, on export diversification among African countries. However, except for governance, appropriately controlling for the interactive effect of domestic credit with ‘Africa’ yields generally insignificant impacts of these variables, together with domestic credit, on export diversification in non-African countries. These results point to the dominant role of domestic credit in Africa vis-à-vis other countries globally.