Working Paper 144 - An Analysis of the Impact of Financial Integration on Economic Activity and Macroeconomic Volatility in Africa within the Financial Globalization Context

Abstract

The purpose of this study is to provide an empirical analysis of some of the impacts of international financial integration on economic activity and macro-economic volatility in African countries. It is acknowledged that financial integration affect several aspects of economic performance, particularly increases investment rates, technology transfers, trade openness, stimulates the development of domestic financial system and economic growth. Similarly, financial integration is recognized as a potential source of macroeconomic instability. The results of empirical analysis show that the impact of external capital flows on growth seems to depend mainly on the initial conditions and policies implemented to stabilize foreign investment, increase domestic investment, productivity and trade, develop the domestic financial system, expand trade openness and other actions aimed at stimulating growth and reducing poverty. The analysis also shows that financial instability was particularly severe as from the nineties. The instability was more pronounced in the case of portfolio investments than in foreign direct investments because of the longer-term relationship established by the latter. Similarly, trends in official capital flows were less unstable than in private capital flows. Lastly, the volatility of capital flows observed in financially “open” and “closed” countries was accompanied by moderate macroeconomic instability.

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