Financial structure and economic performance in selected African countries: time series evidence

Abstract

In this paper, the authors investigate the long-debated question of whether or not a country’s financial structure matters for economic performance and, if so, how exactly it matters. The study uses the Johansen cointegration and vector error correction modelling framework within a country-specific setting to examine empirically the existence of a long-run equilibrium relationship between the financial structure of a country and per capita GDP and the causality thereof. The empirical assessment is based on evidence from selected African countries over the period 1971-2013, notably Egypt, Nigeria and South Africa. Firstly, cointegration test results reported in this paper show that there exists a strong relationship between the financial structure of Egypt and South Africa, and per capita GDP in these countries. However, such a relationship is weak in Nigeria, mainly attributable to its low level of financial development and the possibility of the natural resource curse emanating from the oil industry. Secondly, the evidence also strongly suggests that the nature of the relationship between the financial structure of Egypt and South Africa and per capita GDP is positive, albeit based on different measures of financial structure. In Egypt, financial structure is measured by the S-Size ratio, while, in South Africa, it is proxied by the S-Activity ratio. In Nigeria, there is no evidence suggesting that the country’s financial structure influences per capita GDP. Lastly, coefficients of the error correction term for all three countries are low, suggesting inefficiencies in the financial system and possible rigidities within the economies