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Governance, Financial Liberalization, and Financial Development in Sub- Saharan Africa
John A Karikari * Assistant Director Center for Economics
US Government Accountability Office (GAO) Washington, DC, USA
African Finance & Economics Association (AFEA) President-Elect
www.afea.info www.afea.net
*The opinions expressed herein are those of the author and do not necessarily reflect those of the GAO or the US federal government.
Overview
Motivation
Literature Review
Methodology
• Model
• Data
Results
Discussion & Conclusion
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Motivation
SSA has shallow financial markets & face the challenge of deepening & strengthening them
Attempts have been made to liberalize financial markets
But, low quality of institutions & governance could be limiting the impact of financial
liberalization
o
SSA lag substantially in quality of governance &
costs of doing business
What are the roles of financial liberalization &
governance in financial development?
Motivation (contd)
Consequences of the low financial development
o
Limited & inadequate access to capital has varied effects on the economy (AfDB, 2010)
Low productivity in agric in rural areas
Limits contributions of SMEs to private dev
Slows financial dev in oil-exporting countries with a huge capital assets tied to oil prices
o
Countries successful in attracting private capital
inflows have better financial markets, institutional
quality, and more integrated globally in financial
and trade flows (IMF, 2010)
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Literature Review
Methodology
Model:
o
FDEV: Private credit by deposit banks (Beck et al., 2000)
oFLIB: Financial liberalization (Chinn-Itoh index, 2008)
o
GOVN: World Bank’s World Governance Indicators (WGI)
oLGO: Legal origins by World Legal Systems Research Group
o Common law (CMN), civil law (CVL), or mixed system (MXD)
o
X: Other factors
o Macroeconomic factors (World Bank’s WDI)
GDP, Inflation rate, Govt expenditure, Aid
o BCRISIS in late 1980s/early 1990s (IMF, 2006)
o OILEXPORTR: Oil-exporting countries (IMF, 2006)
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Methodology (contd)
Methodology (contd)
Financial Development in SSA, 1996-2008
Data are averages for 1996-2002 and 2003-2008
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Methodology (contd)
Methodology (contd)
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Estimation Results
Estimation Results (contd)
Table 3, col. 2:
Impact of financial liberalization reduced with high governance, in 1996-2002
and
Impact of financial liberalization enhanced with high governance, in 2003-2008
Why?
•
A certain threshold of governance required for liberalization to be effective
•
Government forbearance of weak, mostly state-owned
banks in earlier period
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Estimation Results (contd)
Estimation Results (contd)
Table 4:
Financial liberalization, by itself, was associated with lower financial development, particularly, in 1996- 2002, contrary to McDonald & Schumacher (2007)
Governance has negative impact in 1996-2002 that was offset by a positive impact in 2003-2008
Implication:
o
SSA require higher levels of good governance to fully benefit from financial liberalization
Mixed legal systems, compared to civil laws favored
financial development
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Estimation Results (contd)
Other results (Table 3)
Macroeconomic effects:
o Economic growth: Inconclusive
o Inflation: Negative
o Govt expenditure: Positive
o Aid: Positive
Banking crisis: Negative
Oil exporter: Negative Robustness checks
Excluded South Africa (Table 3, col 3)
Endogeneity of financial liberalization
Dependent variable: Liquid liabilities (Table 3, col 4)
Individual dimensions of governance (Table 5)
Estimation Results (contd)
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Discussion & Conclusion
Key Results/Policy Implications:
o Financial liberalization, by itself, did not improve financial development, contrary to previous studies
o The impact of governance, by itself, improved fin dev in 2003-2008
o Governance improved impact of financial liberalization in 2003-2008, but worsened it in 1996-2002
o Civil laws systems are less favorable to financial development, compared to mixed systems with common laws, consistent with previous studies
o Political instability is more powerful for financial development than rule of law, contrary to previous studies
o Banking crisis in the late 1980s/early 1990s has adverse effects on liquid liabilities
Further Research/Discussion:
o What is the appropriate definition of financial liberalization when explaining financial development?
