The role of institutional transaction costs in the transmission of financial development’s effects on inclusive growth in Africa

Abstract

While existing literature has extensively documented the direct effects of financial development on inclusive growth, the mediating and moderating roles of institutional transaction costs remain largely unexplored within the African context. This study examines the role of institutional transaction costs in transmitting the effects of financial development to inclusive growth in Africa. Using a panel data model covering 53 African countries over the period 2003–2021, the results, obtained through various econometric techniques and robustness tests to address potential endogeneity, reveal that financial development positively and significantly influences inclusive growth, with a GMM coefficient of 0.2727. However, this relationship remains fragile in the African context. The analysis of indirect effects demonstrates that institutional transaction costs serve not only as a transmission channel (mediator), as the Sobel test yields a positive and significant mediation coefficient of 0.009, representing 14% of the total effect, supported by the bootstrap result showing a robust bias-corrected confidence interval (BC) with positive values ​​ranging from 0.0003 to 0.1253, but also as an amplifier (moderator) of the impact of financial development on inclusive growth. Although the Driscoll-Kraay estimation for moderation shows a positive and significant coefficient of 0.6213, it lacks the robustness required to produce a uniform effect across all African countries. Consequently, African governments should implement policies aimed at reducing institutional transaction costs to ensure more effective and inclusive growth.

Classification JEL : D23, O16, G20, O43

Paper type: Empirical Research