Unlocking Africa's potential: Exploring the synergistic link between financial development and economic growth

Abstract

Financial development is an adequate strategy for sustainable economic growth.  Based on data from 10 high-GDP African countries over the period 2000-2020. This paper assesses the relationship between financial development and economic growth on one hand, and their causality link on the other hand. For this purpose, an advanced econometric approach, namely Cross-Sectional Augmented Autoregressive distributed lag, known as CS-ARDL, is employed. We find that economic growth is a direct result from high financial development, with its effects in the most part are favorable. In fact, the results show that in the short run, all the explanatory variables of financial development are positively correlated with economic growth, with different degrees of influence from one to another. However, in the long run, the same results are observed for domestic credit provided to the private sector by banks, domestic credit provided to the private sector and claims on the private sector, while the money supply tends to have a negative impact on growth, which seems interesting. Moreover, we show that the relationship between financial development and economic growth run both ways, meaning that, more finance will not only increase the level of economic growth, but it will also affect itself indirectly.

This being said, our study suffers from certain limitations which are mainly due to the lack of data on countries, which is why only 10 countries are taken into account, and on indicators, which limits our choice of indicators to those we have used. 

Keywords: Finance, Financial development, Economic growth, African continent, CS-ARDL Model.

JEL Classification: C1, O1, O16

Paper type: Empirical research.