Regional Financial Integration and Economic Activity in Africa

Abstract

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 is 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. Rights and Permissions All rights reserved. The text and data in this publication may be reproduced as long as the source is cited. Reproduction for commercial purposes is forbidden. The WPS disseminates the findings of work in progress, preliminary research results, and development experience and lessons, to encourage the exchange of ideas and innovative thinking among researchers, development practitioners, policy makers, and donors. The findings, interpretations, and conclusions expressed in the Bank's WPS are entirely those of the author(s) and do not necessarily represent the view of the African Development Bank Group, its Board of Directors, or the countries they represent.

Catalysing regional integration in Africa: The role of infrastructure

“…Primary education enrollment, trade openness and FDI to GDP is positive in all regressions, although they are not always statistically significant. Financial depth has a negative effect in all regressions, supporting the hypothesis of finance‐following (and not leading) growth in Africa (Ekpo & Chuku, 2017).…”

“…In columns 1–5 of Table 4, we use the aggregate composite infrastructure and incrementally introduce the four different sectors of infrastructure. Note that initial per capita GDP growth is negative in all regressions but not significant in the water composite regression (column 5), which suggests the presence of conditional convergence in many SSA countries (also see Ekpo & Chuku, 2017). All of the different measures of infrastructure have a positive and statistically significant impact on GDP per capita growth.…”

Financial Integration and Capital Accumulation in the Franc Zone

“…On the basis of the estimates, the FI variables are positively and significantly related to capital accumulation. This result supports the idea that FIs stimulate capital accumulation in developing countries and corroborates the results of Ekpo and Chuku (2017) but contrasts with the work of Bonfiglioli (2008) who finds a negative impact of financial integration on capital accumulation in Africa, particularly using the IFI index. Regarding the effect of other variables capturing the IF, we find that the coefficients associated with net FDI inflows and remittances are positive and significant but lower than the IFI coefficient.…”

“…These authors generally use the index of Milesi-Feretti (2007, 2017) as a measure of the FI. However, a new lease of life will come with the study by Ekpo and Chuku (2017) who will in turn show that the interconnection of regional financial markets improves capital accumulation and de facto economic activity growth in Africa.…”

Economic Integration in West Africa: A Reconsideration of the Evidence

“…• The financial system in the sub-region is yet to be integrated. A recent study [8] clearly discusses the implications of non-integration of the financial system.…”