Financial deepening, economic growth and development: evidence from selected sub-Saharan African countries

Abstract

Lack of or stagnant growth of output of any country is often caused by "shallow - finance". A shallow financial depth (FD) means that the range of financial assets for that country is narrow. It is a scenario that goes far in explaining why most SSA countries have low or negative per capita growth rates. This study identifies the range of financial assets that can adequately approximate financial deepening, which simply means an increase in the supply of financial assets in the economy. FD is represented by two variables, the degree of financial intermediation/development (M2/Y) and the growth rate in per capita real money balances (GPRMB). Because of lack of data on other measures of financial assets in most SSA countries, broad money (M2) was used as numerator for both variables. Estimations depending on the two measures of FD and other explanatory variables of interest were done with an ordinary least squares (OLS) multiple regression procedure. Three modelled equations, with justifications for each, were estimated and analysed. A cross-country regression was used for 34 SSA countries. To even out year-to-year fluctuations as well as reflect underlying structural changes, the variables were calculated on a decade average basis. Two policy implications derive from the study: that SSA countries should strive hard to make real money balances grow, and that these countries should also come up with policies to improve financial development/intermediation. Given such factors as price stabilization, elimination of fiscal deficit and removal of various restrictions on financial institutions, real money balances could be made to grow. Financial intermediation/ development could positively affect output growth if, among other suggested ways, the volume of investment is raised.

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