The Role of Financial Development and Institutional Quality in Economic Growth in Africa in the Era of Globalization

  • Kahsay Berhane
Chapter

Abstract

This study examines the short and long-run impact of financial development, institutional quality and globalization on economic growth on a sample of 40 Africa countries. It also examines whether the relationships differ across sub-groups of countries namely low-income, lower-middle-income and upper-middle-income over the period 1980–2014. It uses a new technique in macro-econometrics panel estimation to control for dynamic heterogeneity and cross-sectional dependence for an econometric analysis. The findings reveal that the existence of cross-sectional dependence which is non-stationary at their level becomes stationary in their first difference. It also shows the presence of co-integration among the variables showing a long run relationship among the variables. The results from a panel-mean-group model with a correction for common correlated effects show that financial development, institutional quality and globalization have significantly positive effects on long-run economic growth for the entire sample of countries. Further, looking at different income levels the empirical evidence shows that in low-income countries financial development, institutional quality and globalization have a positive impact on long-run economic growth in the entire sample and also in low-income countries. This provides strong evidence that the impact of financial development on economic growth is heterogeneous across income levels. Moreover, the interaction between financial development and institutional quality has a negative and significant effect on economic growth. This implies that either financial development or institutional quality can help boost economic growth.

Keywords

Financial development Institutional quality Globalization Economic growth Dynamic common correlated effect 

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Authors and Affiliations

  • Kahsay Berhane
    • 1
  1. 1.Department of EconomicsAddis Ababa UniversityAddis AbabaEthiopia

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