Original Research

Finance-growth nexus in sub-Saharan Africa

Celsa M.D.C. Machado, António F.M.G. Saraiva, Paulo D.D. Vieira
South African Journal of Economic and Management Sciences | Vol 24, No 1 | a3435 | DOI: https://doi.org/10.4102/sajems.v24i1.3435 | © 2021 Celsa Maria Carvalho Machado, António Saraiva, Paulo Vieira | This work is licensed under CC Attribution 4.0
Submitted: 26 October 2019 | Published: 19 February 2021

About the author(s)

Celsa M.D.C. Machado, Department of Economics, Porto Accounting and Business School (ISCAP), Polytechnic Institute of Porto (IPP), Porto, Portugal
António F.M.G. Saraiva, Department of Economics, Porto Accounting and Business School (ISCAP), Polytechnic Institute of Porto (IPP), Porto, Portugal
Paulo D.D. Vieira, Department of Economics, Porto Accounting and Business School (ISCAP), Polytechnic Institute of Porto (IPP), Porto, Portugal


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Abstract

Background: There is now significant empirical literature suggesting that finance is good for growth only up to a threshold level of financial development, becoming harmful after that level, in developed and developing countries.

Aim: This study extends this literature that investigates non-linearities on the finance-growth link, by testing the inverted U-shape hypothesis in sub-Saharan African countries, which are among the least developed ones.

Setting: 36 countries from sub-Saharan Africa over the period 1980–2015.

Method: Estimation of quadratic dynamic panel data models by system-generalised method of moments.

Results: Empirical results show that there is a hump-shaped relationship between financial development and economic growth in sub-Saharan African countries.

Conclusion: Results suggest that the hypothesis of ‘too much finance harms economic growth’ also holds for low-income and less developed countries, but for much lower threshold levels of financial development than those of more developed and higher-income countries. As for policy implications, measures to strengthen finance quality and other growth-enhancing strategies need to be undertaken, rather than increasing finance size.


Keywords

Financial development; economic growth; sub-Saharan Africa; non-linearity; dynamic panel model.

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