Growth Effects of Financial Integration and Financial Deepening in Selected Sub-Saharan African Economies: a Panel-Data Approach

This paper investigates the growth effects of financial integration and financial deepening in selected SSA economies, using a panel dataset of 10 SSA countries from 1970-2012. We use ratio of net FDI inflow to GDP (proxy for financial integration), ratio of gross capital formation to GDP (proxy for investment) and ratio of domestic credit to GDP (proxy for level of financial deepening) as documented in Gregorio (1998). We also incorporated the random effects and Wald tests. The study finds that financial integration and financial deepening play positive and significant roles in boosting the economic growth of SSA countries. It also emphasizes that these countries have been relatively successful over the last decade in attracting international capital inflows which have been crowding out domestic investment. This fact reinforces the fact that SSA economies which open themselves to the world economy need at first abolish domestic distortions to reap the benefits of globalization. It is even more imperative to upgrade the essential frameworks for sound, efficient, and inclusive financial systems. It is up to SSA’s financial sector stakeholders – bankers, donors, and policymakers – to pilot financial sector reforms in a way that amplifies SSA’s opportunities, learning both from their own experience over the past 50 years and the experience in other emerging and developed economies.