Studies On Financial Sector Development And International Trade In Africa

ABSTRACT This thesis examines the relationship between financial sector development and international trade in Africa. Specifically, the study investigates (i) the direct and indirect effects of finance on trade via economic growth (ii) threshold effects of finance–trade nexus mediated by the levels of finance as well as (iii) sectoral effects and transmission channels of finance on international trade. It employs standard approaches namely the generalized method of moments (GMM), threshold and sample splitting; and a pooled mean group (PMG) to examine the linkages. The thesis documents the following three important findings: First, there are differential effects of finance on international trade. Specifically, improving the level of private (domestic) credit dampens (amplifies) exports and trade openness. However, there also exists a U–shaped relationship between private credit and trade measures at 5% level of significance suggesting that financial sector development may be detrimental (helpful) to trade for economies with low (high) level of private credit. Second, there is evidence of threshold effects suggesting that the precise impact of financial development on international trade is threshold–specific given the various indicators of finance. Thus, whether finance supports or limits international trade crucially depends on the attainment of a certain threshold which is both country and indicator–specific. Finally, a co–existence of a negative long run substitutability between finance and trade is found. However, higher sectoral value additions dampen the deleterious effect of finance on trade with huge impact emanating from the service sector. This thesis makes important contributions to knowledge. Empirically, it provides evidence on how different measures of finance and sectoral value additions influence trade. It also presents new evidence on the threshold effects of finance on trade in Africa. Apart from establishing the unique optimal level of finance for each country, this thesis also brought to  bear how finance affects international trade in countries when their domestic level of financial sector development is below or above the threshold. To the best of the author’s knowledge, this is a pioneering work on finance–trade nexus in Africa. Methodology-wise, this thesis models the thresholds of finance without assuming any a prior form in a way that does not only reveal the precise optimal value of finance but also how finance–trade plays out below and above the threshold. Based on the findings of the study, this thesis makes key recommendations for policy. It is imperative for Central Banks in Africa to move their financial sectors towards an optimal level. In doing so, it is important for Central Banks to maintain a sound supervision of the financial markets with the aim of improving financial intermediation in supplying the right quality and quantity of finance that will enhance trading with the international markets. Lastly, to improved international trade in Africa, it is imperative for policy makers to tailor policies that aim to build complementarities that braces input–output and linkages among the industrial, agricultural, services and financial sectors.