Does Openness Matter for Financial Development in Africa?

Author/Editor: Antonio David ; Montfort Mlachila ; Ashwin Moheeput
Publication Date: June 09, 2014
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: This paper analyzes the links between financial and trade openness and financial development in Sub-Saharan African (SSA) countries. It is based on a panel dataset using methods that tackle slope heterogeneity, cross-sectional dependence and non-stationarity, important econometric problems that are often ignored in the literature. The results do not point to a general direct robust link between trade and capital account openness and financial development in SSA, once we control for other factors such as GDP per capita and inflation. But there is some indication that trade openness is more important for financial development in countries with better institutional quality. The findings might be due to a number of factors including distortions in domestic financial markets, relatively weak institutions and/or poor financial sector supervision. Thus, African policy makers should be cautious about expectations regarding immediate gains for financial development from greater international integration. Such gains are more likely to occur through indirect channels.
Series: Working Paper No. 14/94
Subject(s): Development | Sub-Saharan Africa | Trade liberalization | Capital account liberalization | Economic integration | Econometric models

Publication Date: June 09, 2014
ISBN/ISSN: 9781498359290/1018-5941 Format: Paper
Stock No: WPIEA2014094 Pages: 38
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