Download Governance, Financial Liberalization, and Financial Development in

Governance, Financial Liberalization,
and Financial Development in
SubSaharan 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.
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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?
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Motivation (contd)

Consequences of the low financial
development
o
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
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
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Methodology

Model:
o
o
o
o
FDEV: Private credit by deposit banks (Beck et al., 2000)
FLIB: Financial liberalization (Chinn-Itoh index, 2008)
GOVN: World Bank’s World Governance Indicators (WGI)
LGO: Legal origins by World Legal Systems Research Group
o
o
Common law (CMN), civil law (CVL), or mixed system (MXD)
X: Other factors
o
Macroeconomic factors (World Bank’s WDI)

GDP, Inflation rate, Govt expenditure, Aid
BCRISIS in late 1980s/early 1990s (IMF, 2006)
o OILEXPORTR: Oil-exporting countries (IMF, 2006)
o
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Methodology (contd)
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Methodology (contd)

Financial Development in SSA, 1996-2008

Data are averages for 1996-2002 and 2003-2008
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Methodology (contd)
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Methodology (contd)
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Estimation Results
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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)
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Estimation Results (contd)
Table 4:



Financial liberalization, by itself, was associated with
lower financial development, particularly, in 19962002, 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:
Economic growth: Inconclusive
o Inflation: Negative
o Govt expenditure: Positive
o Aid: Positive
o


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)
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Estimation Results (contd)
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Discussion & Conclusion

Key Results/Policy Implications:
o
o
o
o
o
o

Financial liberalization, by itself, did not improve financial
development, contrary to previous studies
The impact of governance, by itself, improved fin dev in 2003-2008
Governance improved impact of financial liberalization in 20032008, but worsened it in 1996-2002
Civil laws systems are less favorable to financial development,
compared to mixed systems with common laws, consistent with
previous studies
Political instability is more powerful for financial development than
rule of law, contrary to previous studies
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?
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