Effect of financial development on international trade in Africa: Does measure of finance matter?

ABSTRACT

Although improving international trade on the back of financial sector development is one of the preoccupations of countries in Africa, empirical literature on financial development-trade nexus has not been rigorous in examining how finance shapes trade. In this study, we examine the effect of financial development on international trade in Africa relying on data for 46 countries over the period 1980–2015. Results from our system generalized method of moments reveal differential effects of finance on trade. In particular, we notice that, private credit does not promote trade while domestic credit positively affects trade. These effects are robust to measures of trade. Thus, improving the level of private (domestic) credit dampens (amplifies) exports and trade openness. However, we also find a U-shaped relationship between private credit and trade measures suggesting that financial sector development may be detrimental (helpful) to trade for economies with low (high) level of private credit.

KEYWORDS:

• Financial development
• exports
• trade openness
• trade

JEL CLASSIFICATIONS:

• F13
• G21

Acknowledgments

We are very grateful to the editor, prof. David E. A. Giles and Dr. Muazu Ibrahim of UDS for proof reading the manuscript as well as the two anonymous reviewers for all the constructive comments on the earlier manuscript which led to massive improvement of the article. The usual caveats apply.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. UNECA which stands for United Nations Economic Commission for Africa was established in 1958 by the United Nations Economic and Social Council to encourage economic cooperation among member states in Africa.

2. UNCTAD stands for United Nations Conference on Trade and Development and established in 1964 as the principal organ of the United Nations General Assembly dealing with trade, investment and development issues of countries.

3. The countries are Algeria, Angola, Benin, Botswana, Burundi, Burkina Faso, Cabo Verde, Cameroon, Central African Republic, Chad, Congo, Dem. Rep., Congo, Rep., Cote d'Ivoire, Ethiopia, Egypt Arab Rep., Equatorial Guinea, Gabon, Ghana, The Gambia, Guinea-Bissau, Guinea, Kenya, Liberia, Libya, Lesotho, Mali, Malawi, Mauritania, Mauritius, Morocco, Niger, Nigeria, Namibia, Mozambique, Rwanda, Senegal, Sierra Leone, South Africa, Sudan, Swaziland, Tanzania, Togo, Tunisia, Uganda, Zambia and Zimbabwe.

4. By setting the derivative to zero, from equation (2)(2) , the threshold is calculated as: . This corresponds to the threshold as reported in Table 1.

5. By setting the derivative to zero, from equation (2)(2) , the threshold is calculated as: . This corresponds to the threshold as reported in Table 2.