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Proceeding - Kuala Lumpur International Business, Economics and Law Conference Vol. 2.

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ISBN 978-967-11350-2-0

AN APPLICATION OF PANEL ARDL IN ANALYSING THE DYNAMICS OF


FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN 38 SUB-SAHARAN
AFRICAN CONTINENTS
Abdulkadir Abdulrashid Rafindadi
Corresponding Author:Aarafindadi@Yahoo.Com
Zarinah Yosuf
Department Of Economics University Of Malaya

______________________________________________________________________________
Abstract: Using Panel ARDL model, this paper address the key question of whether long-run
economic growth of 38 Sub-Saharan African continents can be fostered by the impact of financial
development? In addition to this, what are the possible explanations for such strong impacts of
financial development on economic growth in the selected continents? Similarly, what factors may
impede on the overall growth prospects of this continental bloc in both the long run and the short
run? To ensure this, we measure the short-run and long-run Impact of financial development on
economic growth from 1980-2011. The findings of this study discovered that financial development
has a significant long-run and short-run contributory effect in all the 38 selected Sub Saharan African
continents under the PMG and MG except in the long-run MG model were it was discovered that FD
has no contributory impact. In line with this development, the study further discovered how
Population, M3, fixed capital, and Private impede on the GDP growth prospects of the continents
in the short-run. While in the Long-run the study persistently found Population to have an
insignificant contribution to GDP. By policy implication these continents flares away human
capital skills, innovation, and other productive ingenuities that could have been used in
productive sectors of the economy. In addition to this, unfavourable monetary economic climate,
insignificant private sector contribution, inability of BASSET to pique entrepreneurial prospects
as found in this study may predominate, to warrant prolonged macroeconomic volatilities due
largely to the absence of strong endogenous risk cushioning effects. We recommend the need for
private sector development through massive investment in entrepreneurship, improvement in both
financial and non financial infrastructural facilities that pique production and an opening for the
influx of foreign direct investment among others.
______________________________________________________________________________
Keywords: Panel ARDL, Financial Development, Pooled Mean Group, Dynamic Fixed Effects
JEL Codes: N27, O16, O47, G29

INTRODUCTION:
African countries for indiscernible decades have been in abject economic growth deliria. The
concept of economic growth within the sub-Saharan continents of Africa has been quite epileptic,
unsustainable and even where it exists it is marred by incessant macroeconomic instability and
financial crisis. For instance, Fowowe, (2008) maintained that:
The economic performances of Sub-Saharan African (SSA) countries have attracted
considerable attention in recent years with superlative terms such as tragedy,
mediocre, and dismal used to describe the low rates of economic growth experienced
in these countries from the 1980s to date. SSA has been the only region in the developing
world to stagnate, and growth rates have been by and large, poor. The average GDP
per capita growth rate from 1961 to 2000 was 0.45% for SSA while it was 1.6% for Latin
America and the Caribbean (LAC), 2.3% for South Asia (SA), and 4.9% for East Asia
and the Pacific (EAP).

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The menace of this situation were reechoed in the assertion of Stiglitz (1988) who pointed out that
less developed financial system spills adverse effects to the entire of a nations economic system
and makes the economy crisis prone. He continued to point out that the financial development of
any nation is the brain and master plan of its economy.
Underlying this view, is the supposition of King and Levine (1993a, b), where in their seminal
investigations discovered a statistically significant linkage between financial development and
economic growth. The authors opined that, the intermediationary role of financial institutions and
markets provide the financial wherewithal to a profitable entrepreneurial pursuit, risk
diversification, and the facilitation of efficient resource mobilisation. These circumstances will in
turn enhance the provision of a well-developed financial system that will help in improving not
only the quality of capital formation and the efficiency of resource allocation but will also
facilitate in the promotion of a significant and sustainable long-run economic growth among
continents. It is in view of this, and considering the recent financial crisis that affected most of the
African continents that this study was commission.
From the introduction above, the rest of the paper is organized as follows: Section 2 provides an
overview of the recent empirical investigation linking financial development and economic
growth. On the methodology section which is in section 3, the study introduces the data, the model
specification and the PMG estimator proposed by Pesaran et al. (2001). Section 4 is the results
and discussion. Finally, in Section 5 we present the conclusion and recommendations.
2.1 Empirical Review
The seminal work of King and Levine (1993b) constituted the most pioneering panel data study
that established a milestone in the analysis of financial development and economic growth. In
their cross-sectional study which varies between 1960-89, the authors were able to establish how
the level of financial development attained by a country predicts future economic growth and
future productive efficiencies most likely to accumulate. Complementing this line of the study,
was the seminal finding of Odedokun (1996) where the author used time-series regression analysis
for 71 developing countries from 1960-1980. Surprisingly, the outcome of the research showed
remarkable similarities with the findings of King and Levine (1993b) were he discovered how the
systematic impacts of financial intermediation piques economic growth in 80% of the continents
surveyed.
Neusser and Kugler (1998) justified the above findings and devised a model that helped them to
explore the effect of the influence of finance-growth connection for 13 Organization for Economic
Cooperation and Development (OECD) countries from 1970-1991. In contrast to the findings of
Odedokun (1996), they discovered a digression on the causal structure underlying the relationship
between financial development and economic growth. To confirm these finding Rousseau and
Wachtel (1998) found positive and significant relationship between financial depth and economic
growth in five industrialised countries.
In another dimension, Levine et al. (2000) used the data of 71 countries from the period 1960 to
1995. The finding established significant correlation between the financial system and economic
growth. As a result of this, Khan and Senhadji (2003) in their research, argued that financial
development has a positive and statistically significant effect on economic growth in all the
countries surveyed and also constitute the main factor responsible for the significant realization of
sectorial growth. Chistopoulos and Tsionas (2004); Ndebbio (2004); Apergis et al. (2007); Kiran
et al (2009). Confirmed this finding in their empirical research.

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In contrast to the direction of the above research findings Demetriades and Hussein (1996) in their
research, showed how the causal effect between the defendant variable (FD) and the long run
growth moves in a different direction for the respective countries surveyed. Zang and Kim (2007)
also obtained the same outcome with Demetriades and Hussein (1996) that economic growth
precedes financial development. Other supporters of this line of development using panel data
analysis are Khan (1999); Abu-Bader and Abu-Qarn (2006); Lucas (1988), and Mohamed (2008).
Mixed findings, were also obtained in the empirical research of Esso (2009) who established a
statistically significant long-run connection between financial development and economic growth
in 4 countries among them are Cote dIvoire, Guinea, Niger and Togo while a negative long run
association was discovered in Sierra Leone and Cape Verde. The results of the causality test
showed how financial development causes economic growth only in Cote dIvoire and Guinea.
The author concluded that the relationship between FD and economic growth is not generalisable
considering key elements inherent in individual country. Acaravci et al (2009) on their own part
used panel co-integration and panel GMM, to determine the effectiveness of the association
between FD and economic growth for some selected SSA, from 1975-2005. The outcome of the
research showed a negative long-run connection between financial development and economic
growth. He concluded that the selected SSA countries in his study can enhance their growth
prospects by devising a procedure that can enable them to have an efficient and strong financial
system and vice versa. Ndambiri, et al (2012) using a panel of 19 SSA countries from 1982-2000
investigated the determinants of economic growth in the selected continents. The authors applied
the GMM methodology. The findings of their research established that physical capital formation
and human capital formations are foremost the crucial base line to the economic growth prospects
of Sub-Saharan continents. However, and according to the authors government expenditure,
nominal discount rate and foreign aid significantly lead to negative economic growth.

3.1 Data and Methodology of the study


This study employs annual time series data of the selected macroeconomics indicators of 38
African countries from 1980 to 2011. All the series was procured from the world development
indicator [WDI]. The variable of interest include Gross Domestic Product per capita [GDPC] as
dependent variable, total trade share of GDP [TRD], gross fixed capital formation[FCF], total
population [POP], and financial development[FD] as independent variable. However, this study
has taken the following series as proxies of financial development, (i) The ratio of liquid liabilities
to the nominal GDP[M3], (ii) The ratio of credit to the private sector to nominal GDP [PRIVATE]
and iii) the ratio of commercial bank assets divided by commercial banks plus central bank assets
[BASSET]. In order to unveil the individual effect of each financial development indicator, this
study takes all the individual financial development indicators. Moreover, this study follows the
Ang and McKibbin (2007) in generating a single indicator of financial development through
applying principal component analysis (PCA). This decision would be justified by mainly two
reasons. Firstly, to address the multicollinearity problem as this is very likely to be present in the
high correlation among the financial development series. Secondly, still today the most prominent
researcher did not come into a general consensus about the accurate and appropriate measures of
financial development. Hence this study takes very relevant proxies of financial deepening to
measure the aggregate impact on growth. The converted single indicator of financial development
is denoted by FD.

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3.2 Mean Group


Pesaran, Shin and Smith (1995) suggest Mean Group (MG) model in order to resolve the bias due
to heterogeneous slopes in dynamic panels, the MG estimator on the other hand, provides the
long-run parameters for the panel through making an average of the long-run parameters from
ARDL models for individual countries. For instance, if the ARDL model follows
 =  +  ,
+   + 

Here, i stands the country where i=1, 2, 3,N. then the long run parameter is 

 =
1 
and the MG estimators for the whole panel will be given by


 =

1
 


 =

1
 






The Above equations reveal how the model estimates separate regressions for each country and
calculate the coefficients as unweighted mean of the estimated coefficients for the individual
countries. This does not impose any restriction. It allows for all coefficients to vary and be
heterogeneous in the long-run and short-run. However, the necessary condition for the consistently
and validity of this approach is to have a sufficiently large time-series dimension of the data. The
Pool Mean Group on the other hand, was applied in order to detect the long and short run
association between financial development and economic growth, and also investigate the possibly
heterogeneous dynamic issue across countries, the appropriate technique to be used to the analysis
of dynamic panels is Autoregressive distributed lag ARDL (p,q) model in the error correction
form and then estimate the model based on the mean group (MG) presented by Pesaran and Smith
(1995) and Pooled mean group (PMG) estimators developed by Pesaran et al. (1999). The ARDL
specification is formulated as follows (Loayza and Ranciere, 2006):
p 1

q 1

Yit = ( yi )t j + y ( X i )t j + i [ yi )t 1 + i + it
j =1

j =0

Where ,  the (k x 1) is vector of explanatory variables for group i and  represents the fixed
effect. In principle, the panel can be unbalanced, and p and q may vary across countries. This
model can be reparametrised as a VECM system:
p 1

q 1

Yit = i (Yi ,t 1 i X i ,t 1 ) + Yi ,t j + y ( X i )t j + i + it
y

j =1

j =0

Where the  are the long-run parameters and ; are the equilibrium (or error)-correction
parameters. The pooled mean group restriction is that the elements of are common across
countries:
p 1

q 1

yit = i (Yi ,t 1 i X i ,t 1 ) + (Yi )t j + y ( X i )t j + i + it


j =1

j =0

Where, y is GDP per capita, X is a set of independent variables including the financial
development indicator,  and  represent the short-run coefficients of dependent and independent
variables respectively, are the long-run coefficients,  the coefficient of speed of adjustment to
the long run status, while the subscripts i and t represent the country and time, respectively. The
term in the square brackets contains the long- run growth regression. Equation (2) can be

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estimated by either PMG or MG or even DFE estimators where all the three models consider the
long-run equilibrium and the heterogeneity of dynamic adjustment process (Demetriades and Law,
2006). Also, these estimators are computed by maximum likelihood estimations. The main
characteristic of the first estimator (PMG) is that it allows short-run coefficients, including the
intercepts, the speed of adjustment to the long run equilibrium values, and error variances to be
heterogeneous country by country while the long-run slop coefficients are restricted to be
homogeneous across countries.
The main requirements for the validity, consistency and efficiency of this methodology are first,
the existence of a long-run relationship among the variables of interest, this requires the
coefficient on the error correction term to be negative and not lower than -2. Second, an important
assumption for the consistency of the PMG estimates is that, the resulting residual of the errorcorrection model must be serially uncorrelated and the explanatory variables can be treated as
exogenous. We fulfill these conditions by including the ARDL (p,q) lags for the dependent (p) and
independent variables (q) in the error-correction form. Third, the relative size of T and N are
crucial since when both of them are large this allow us to work on dynamic panel technique, this
helps to avoid the bias in the average estimators and resolve the issue of heterogeneity. In this
case, as Eberhardt and Teal (2010) argue that the treatment of heterogeneity is central to
understanding the growth process. Additionally, for small N the average estimators in this
approach are quite sensitive to outliers and small model permutations (see Favara, 2003). Finally,
and most importantly, is that this estimator is particularly useful when there are reasons to expect
that the long-run equilibrium relationships between variables to be similar across Sub-Saharan
countries because they might have similar levels of income, similar financial development or
monetary structures, common technologies, and the openness of the economies with a tendency
toward convergence. While the short-run adjustment relationships and the slope coefficients
among individual country are allowed to be country-specific, due to the widely different impact of
vulnerability to financial crises and external shocks, stabilization policies, monetary and over
lending on the country by county. Thus, if we fail to fulfill this condition then the PMG estimator
is inconsistent.
3.3 Dynamic Fixed Effect
The dynamic FE estimator is remarkably similar to PMG estimator, however; it confines the
coefficient of the co-integrating vector to be equal across all panels in the long run. The FE model
further restricts the speed of adjustment coefficient and the short-run coefficient to be equal.
Dynamic fixed effect model allows panel-specific intercepts. DFE also calculate the standard error
while making allowance of intragroup correlation. As discussed in Baltagi, Grin, and Xiong
(2000), FE models are subject to a simultaneous equation bias from the endogeneity between the
error term and the lagged dependent variable. The Hausman test can be easily performed to
measure the extent of this endogeneity.
3.4 MG or PMG or DFE?
For our purposes under the assumption of long-run slope homogeneity, the PMG estimator offers
an increase in the efficiency of the estimates with respect to mean group estimators (Pesaranet al.,
1999). This is because a homogeneous nature exists in studied countries in terms of economic
growth and financial development for being all Sub-Saharan countries. We therefore, assume that
the long-term relationship between financial development and economic development would be
more homogenous across the Sub-Saharan countries. However, short-run impacts of financial
development on economic activity are affected by local laws, regulations, and over lending hence

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it is reasonable to argue that country heterogeneity is particularly relevant in the short-run.


Moreover, as the time span in this study is only 31 years, the MG estimator has no enough degrees
of freedom. Therefore, PMG estimations are more relevant for our analysis.
However, Hausman test can be used to test whether there is a significant difference between the
PMG and MG. The null hypothesis of this test is that the difference between PMG and MG
estimations is not significant. If the null is not rejected, then they are not significantly different; in
this respect we use the PMG estimator since it is efficient. The alternative hypothesis here is that
there is a significant difference between PMG and MG. As a result of this if the null hypothesis is
rejected, it means there is significant difference between the PMG and the MG, following to this,
we use the average estimator.
4.1 Result and Discussion
The model shown in this research was estimated using Ordinary Least Squares (OLS) method
using Stata. The estimated result would be used to provide answers to the following specific
research questions: (i) whether long-run economic growth can be fostered by the impact of
financial development in 38 Sub-Saharan African continents? (ii) If this holds true, the question
arises as to, what are the possible explanations for such strong impacts of financial development
on economic growth in the selected continents? (iii) From the empirical findings obtained what
factors may impede on the growth prospects of these continents in both the long run and the short
run? To ensure this, we first employ three different types of panel unit root tests; Im, Pesaran and
Shin, Breitung and Levin Lin Chu, (1995) tests in order to determine the order of integration
between all the series in our dataset. Noting that the order of integration of the variables is not
essential for applying ARDL model as long as the variable of interest are I(0) and (1), (Pesaran
and Smith (1995); Pesaran (1997); Pesaran et al (1999)), we introduce these tests just to make
sure that no series exceeds the integration of order I(1)1

Asteriou and Monastiriotis(2004) indicate that when some variables are I(2) the estimations are not consistent.

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Table 1: Unit root Test


1st Difference

Level
Breitung

Levin, Lin, Im, Pesaran and


Chu
Shin

Breitung

Levin, Lin
& Chu

LGDP

Im,
Pesaran
and Shin
-0.60

4.63

-3.05***

-18.74***

-11.46***

-17.97***

LFCF

-4.67***

3.97***

-5.59***

-28.16***

-6.48***

-31.35***

POP

-2.07

1.18

1.37

-2.63***

2.09

24.09

TRD

-4.99***

-2.02**

-5.02***

-27.99***

-17.61***

-25.69***

FD

2.49

4.18

0.99

-19.18***

-7.13***

-17.31***

PRIVATE -0.44

1.16

0.02

-15.26***

-8.76***

-14.77***

BASSET

0.95

4.46

0.02

-23.22***

-16.48***

-21.12***

M3

-1.06

3.08

-0.70

-17.97***

-10.08***

-17.47***

Table1 report the results of unit root tests which indicate that all the variables in our study are
stationary at level with constant and trend except financial development (FD), the ratio of liquid
liabilities to nominal GDP (M3), the ratio of commercial bank assets to the sum of commercial
bank assets and central bank assets (BASSET), and the ratio of credit issued to the private sector
by the banks to GDP (PRIVATE). Due to the existence of mixed levels of integration among
series we proceed to apply the Panel ARDL approach rather than traditional static or panel
cointegration test (Asteriou and Monastiriotis, 2004). Panel ARDL approach is characterized by
multiplicities of advantages of which it emphasize and allow for the possibilities of estimating
different variables with different order of stationarity similar as in our case of table 1. We have
equally noticed that our data suffers from either I(0) and I(1). On top of that these estimators allow
us to estimate both short run and long run relationship along with error correction coefficient.

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Table 2: Panel ARDL Estimation of 38 Sub-Saharan African continents

VARIABLES

Pooled Mean Group

Mean Group

Long Run

Long Run

Error Correction

Short Run

Dynamic Fixed Effect


Short Run

Long Run

Short Run

-0.0817***

-0.337***

-0.0815***

(0.0142)

(0.0324)

(0.0104)

-0.000134

0.000195

-0.000253

(0.000329)

(0.000325)

(0.000170)

Fixed Capital

0.000387***

0.000365***

0.000167***

(8.77e-05)

(7.91e-05)

(2.42e-05)

Population

0.397

0.132

0.785***

(0.437)

(0.283)

(0.120)

-0.00570

-0.00145

0.00152

(0.00638)

(0.00773)

Trade

Financial
Development

(0.00683)

Hausman Test2

3.87(0.42)

Hausman Test3

0.01(1.00)

Trade
Fixed Capital
Population
Financial
Development

0.00138*

0.00257**

0.00331**

(0.000756)

(0.00121)

(0.00143)

0.000793***

0.000984***

0.00122***

(0.000142)

(0.000358)

(0.000228)

0.749***

0.493**

0.410***

(0.0855)

(0.230)

(0.131)

0.0754***

0.0279

0.0501

(0.0121)

(0.0512)

(0.0314)

Constant

Observations

1,160

-0.503***

0.184

-0.0771

(0.101)

(0.858)

(0.158)

1,160

1,160

1,160

1,160

1,160

Note:*, **, and *** indicate significance at 10 %, ** at 5 % and *** at 1 %. Estimations are done by using (xtpmg) routine in
Stata. Pooled mean group, mean group, and dynamic fixed effects, all controlling for the country and time effects. While the first
panel (LR) shows long-run effects. The second panel reports both short-run effects (SR) and the speed of adjustment (ec). Hausman
test is indicating that PMG is consistent and efficient estimation than MG and DFE estimation. The lag structure is ARDL (1, 1, 1,
1, 1, 1), and the order of variables is GDP Growth, Trade, Fixed Capital, Government Expenditure, Population and Financial
Development. All the Sub-Saharan countries, annual data 19802011. Source: Authors estimations.

4.2 Can long-run economic growth be fostered by the impact of financial development in the 38 SubSaharan African continents? Table 2 reports the estimation results of MG, PMG and DFE models.
The results of these models provide the short-run and long-run impacts of financial development on
2
3

PMG is efficient estimation than MG under null Hypothesis


PMG is efficient estimation than DFE under null Hypothesis

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economic growth. The direction of the estimated result emphasised more on PMG where the Hausman
test confirm its efficient and consistent performance over MG and DFE models.
In line with this argument, the study discovered that financial development has a significant short-run
contributory effect in all the 38 selected Sub Saharan African continents. In a close analysis to this
fact the study examined the contributory impacts of each variable to the GDP, under the short-run
PMG, MG and DFE models. The finding showed that it is only FD and Trade that has a short-run
impact to the GDP while FC and POP have an insignificant contribution in fostering the GDP of the 38
SSA continents in the short-run. Meaning that, fixed capital formation, and the vast population of
these continents have no short-run contributory impacts in fostering economic growth. This fact may
be attributable, to the high level of illiteracy militating against the majority of the labour force in those
continents, poor and skewed entrepreneurial spreads which in turn breads high unemployment,
absence of technological knowhow, inefficient bank lending that could stimulate investment prospects
and development this situation may further be aggravated by rapid change in government policies due
largely from rampant change in government as a result of coup-dtat, and also poor government
commitment to technological embarkation. In addition to this, lack of evenly distribution of economic
resources in these continents may also be said to have significant contribution. Similarly, the incessant
financial crisis witnessed world over could also be another factor that could contribute to the
dereliction of the continental economic powers and the destruction of economic plans.
The long-run analysis of the PMG, MG and DFE on the other hand reveals a better outcome in
comparison to the short-run evidence. In that analysis, Trade showed a significant contribution to the
GDP and surprisingly, FC showed a significant long-run contribution to the GDP as well. However,
the Population variable of the continents still have an insignificant impact in the long-run, in addition
to this; FD was discovered to have an insignificant contribution under the long-run model of MG
which is in contrast to the short-run finding. This result signifies that it is not all the continents that
justifies the supply leading hypotheses, rather continents like Kenya, and many more others have
clearly, blossomed to underscore their long existing demand following hypotheses. The validity of
this finding was supported by the error correction coefficient which is negative and significant under
all the three short-run models, except in the case of the long-run model where only PMG and DFE
have a negative but insignificant coefficient of the error correction model.
This finding is in contrast with the research findings of Loyza and Rancier (2006) and Lin Wu et al
(2010) where they discovered positive long-run homogenous association between financial
intermediation and economic growth, and a heterogeneous negative impact in short-run. Surprisingly
In this research we found converse to be the case in Sub-Saharan African continents

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Table 3: Panel ARDL Estimation


Pooled Mean Group
VARIABLES Long Run
Short Run
Error
Correction
Trade
Fixed
Capital
Population
Bank Asset
M3
Private

Mean Group
Long Run Short Run

-0.0832***

-0.451***

-0.0801***

(0.0201)
-0.000132
(0.000321)
0.000384***

(0.0460)
2.79e-05
(0.000348)
0.000335***

(0.0105)
-0.000245
(0.000171)
0.000166***

(9.45e-05)
0.246
(0.405)
-0.00122
(0.0260)
0.0463
(0.0705)
-0.0780
(0.188)

(8.32e-05)
0.164
(0.273)
-0.0567
(0.0370)
0.220
(0.206)
0.108
(0.167)

(2.43e-05)
0.781***
(0.121)
0.0134
(0.0248)
-0.00143
(0.0420)
-0.0176
(0.0912)

Hausman
Test4
Hausman
Test5
Trade
Fixed Capital
Population
Bank Asset
M3
Private

2.69(0.74)
0.15(0.99)

0.000996**
(0.000499)
0.000579***
(6.90e-05)
0.807***
(0.0630)
0.348***
(0.0427)
0.165***
(0.0311)
-1.416***
(0.174)

Constant

Observations

Dynamic Fixed Effect


Long Run
Short Run

0.00107
(0.00107)
0.000519
(0.000370)
0.502**
(0.196)
-0.0958
(0.197)
4.777
(4.089)
-1.161
(0.761)
-0.585***
(0.144)

1,160

1,160

0.00358**
(0.00150)
0.00120***
(0.000235)
0.434***
(0.139)
0.0694
(0.165)
-0.0318
(0.270)
0.605
(0.425)
0.498
(1.170)

1,160

1,160

-0.117
(0.163)
1,160

1,160

Note:*, **, and *** indicate significance at 10 %, ** at 5 % and *** at 1 %. Estimations are done by using (xtpmg) routine in Stata. Pooled mean group, mean group,
and dynamic fixed effects, all controlling for the country and time effects. While the first panel (LR) shows long-run effects. The second panel reports both short-run
effects (SR) and the speed of adjustment (ec). Hausman test is indicating that PMG is consistent and efficient estimation than MG and DFE estimation. The lag structure
is ARDL (1, 1, 1, 1, 1, 1), and the order of variables is GDP Growth, Trade, Fixed Capital, Government Expenditure, Population and Financial Development. All the
Sub-Saharan countries, annual data 19802011. Source: Authors estimations.

4
5

PMG is efficient estimation than MG under null Hypothesis


PMG is efficient estimation than DFE under null Hypothesis

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4.3 What are the possible explanations for such strong impacts of financial development on
economic growth in the selected continents? The results in table 3 show trade and bank Asset to
have short-run significant impact under both the PMG, MG and DFE models. Surprisingly, in this
table M3 was found to have a significant short-run contribution to the GDP in both PMG and DFE
while in MG model; M3 was found to have an insignificant contribution to the GDP, the
conspicuous outcome of this result clearly shows that it is not all the selected 38 SSA continents
that have a homogenous trend in the respective continents surveyed, and this is one of the
advantage of MG in dichotomizing and segregating continents with non uniform trend, similarly,
the robustness of the model enables a clear configuration of the strength of continental economic
wherewithals and economic performances. Apart from this, the study also discovered Private to
have an insignificant contribution in the short-run particularly under the PMG and MG while
under the short-run model of DFE, Private was discovered to have a significant impact on GDP.
This clearly shows that continents that were highly industerialised such as South Africa, Nigeria,
and Kenya etc exhibited a formidable impact and cumulative dominance among the group by
waxing the potency of the trending mechanism of the model to poster the continental GDP growth.
The long run findings of the PMG, MG and DFE on the other hand, showed trade in the 38 SSA to
have a persistent positive impact on the GDP in both the 3 models. In contrast to this, fixed
capital has a strong but insignificant impact under the PMG but with positive impact under the
MG and DFE. Similar in line to this finding is the long-run result of BASSET which also
exhibited the same behaviour with FC but this time having an insignificant impact under the MG
and DFE; M3 was also found to follow suit, while Private and Population were discovered to have
an insignificant long-run contribution to the GDP of the 38 SSA continents in both the three
models. The reason behind the persistent insignificant contribution of Private to economic growth
in SSA is evidenced by the fact that in SSA, the private sector is still under developed (see also
Fowowe 2008) in addition to this; the credit that goes to the private sector does not accrue the
expected growth potentials. Compounding this situation also are the poor infrastructural facilities
in SSA which contributes significantly in hindering the efficient and effective functioning of the
private sector to the fullest capacity and with insufficient economies of scale to warrant them the
opportunity to drive the economic growth prospects of the continents to the expected echelon. To
support this view, Sahu (2009) asserted that Africa has 9.5% of the total global crude oil reserves
and 8% of gas reserves. In spite of this huge potential, it was discovered that the energy
consumption of these continents is only 3.4 % of the total global crude oil. These are a clear
indication that infrastructural facilities and massive industrial growth are quite negligible in SSA
continents.
The persistent insignificant contribution of the SSAs Population to economic growth on the other
hand can be traced to the high level of unemployment, illiteracy, poor entrepreneurial commitment
by both the government and the individuals, chaotic macroeconomic conditions, high costs of
doing business, poor risk management and risk taking and of course the inability of economic
expansion by majority of the economic sectors which cannot absorb the teeming populace, this can
also be traced to the historical mono economic dependence of most continents (e.g. Nigeria,
which depend only on oil as major sources of revenue and many more other countries).
4.4 From the findings established in 4.2 and 4.3 what are the factors that impede on the growth
prospects of these continents in both the long run and the short run? And what are their policy
implications?
From table 2 and 3 this paper was able to discover Population, M3, Fixed
capital, and Private as the short-run impediment to the GDP growth prospects
of the continents. While in the long-run the study persistently found
Population to have an insignificant contribution to GDP. Others are M3,

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BASSET, and PRIVATE that also constitute another dominant factor


responsible for the impediments of the continents formidable economic
growth prospects in the long run. As a result of this development, and going
by policy implication, it is most likely that these continents face poor
exploitation of human resources endowment thereby, flaring away skill,
innovation and creativity which may otherwise be exploited for national and
continental advantages. Akin to this, the persistent insignificant contribution
of M3 may lead to unfavourable monetary economic climate which may in
turn lead to poor fiscal stance, thus warranting prolonged macroeconomic
volatilities due to the absence of strong endogenous risk cushioning effects.
This situation is also augmented by the inefficiency in the private sector. This
means that there are existing possibilities of all elements to halt down
productivity particularly when the BASSET have no long-run impacts in
financing productive activities ( as seen in the result of table 2 and 3). The
combined implications of these situation can be seen from the invocation of
the theorisation of the first, second and third theories of currency crises. This
means that the 38 SSA continents under survey may most likely be in a state
of currency crises which in any eventual case of financial crisis, a grievous
economic destruction may affect the efficient and effective functioning of
economic system and subsystems. Thus yielding a costly, chaotic and
unfavourable investment climate that will deter international capital inflows
and other international investment opportunities etc. this is as rightly asserted
by Stiglitz (1988) who pointed out that less developed financial system spills
adverse effects to the entire of a nations economic system and makes the
economy crisis prone.
5.1 Conclusion and Recommendation
Financial development and economic growth have been a puzzle association as many theoretical
and empirical literature suggest. To overcome this ambiguity, this study applied a superior
methodology which yielded robust result. The findings of this study showed that FD strengthen
the long run economic growth of the 38 Sub-Saharan African continents surveyed. From this
finding, the research proceeds to clarify the impact of each indicator on GDP. The finding of this
later investigation as shown in table 2 and 3 indicate that Population, M3, Fixed capital, and
Private impede the GDP growth prospects of the continents in the short-run. While in the Longrun the study persistently found Population to have an insignificant contribution to GDP. Others
are M3, BASSET, and PRIVATE that also constitute another dominant factor responsible for the
impediments of the continents formidable economic growth prospects in the long run in addition
to these findings our analysis was able to discover low adjustment profile of the error correction
model after economic shock. Notwithstanding this, yet we found FD in both the short-run and
long-run except und the DFE model to have a significant contributory impact in promoting
economic growth of the continents. This finding contradicts with Arcand et al. (2012) where the
authors established that too much finance adversely affect economic growth. However, contrary to
his finding, our results in table 2 and table 3 indicated that the relationship between finance and
economic growth is quite positive and significant and as long as the SSA countries are concerned
FD is crucial for their economic growth prospects. This startling finding also contradict with the
empirical findings of Demetriades and Hussein (1996); Zang and Kim (2007); Esso (2009) and
Acaravci (2009). This may be due to the robust and efficient methodology applied as against the
GMM model used by some of these eminent researchers.

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Despite the poor performance of some respective variables as used in this study, yet the Economic
Watch (2013) argue that African economy grew to an unprecedented level of 4.7% in 2012 which
is twice when compared to the global economic growth rate of less than 2.4% in 2012. Similarly
while, the global economy will continue to sluggish in the decade onward, Africas economy will
continue to accelerate from 4.7%, to 4.9, 5.1, and 5.2 percent in 2013, 2014 and 2015 respectively.
This is in contrast to the global economy that will sluggishly galvanise to rise to 3, and 3.3 percent
in 2014 and 2015 respectively. In view of this, and for sustainable economic growth prospects of
these continents, we recommend proper private sector development through public and private
sector partnership, improvement in both financial and non financial infrastructural facilities that
pique production and providing an enabling investment environment for the thriving of indigenous
entities and the influx of foreign direct investment. Similarly, the respective governments in SSA
continents need to invest in education and curve financial malpractices that could be strong
opening to financial leakages which aid in capital flight. To ensure this, we emphasise for the
need for complementary policies, institutional qualities, strengthening of the rule of law and
extensive technological acquisition. Finally, it should be noted that financial development alone is
unlikely to promote a continued and sustainable economic growth amidst macroeconomic
instability and lack of policy credibility particularly in those continents were these factors remain
a crucial challenge.

Appendix 1: Table Descriptive Statistic


GDP

FCF

M3

POP

BASSET

TRADE

PRIVATE

Mean

7.96E+09

6.21E+09

0.258289

13537434

0.634536

71.79452

0.140514

Median

2.58E+09

4.54E+08

0.220719

6818495.

0.700190

62.87494

0.117499

Maximum

1.93E+11

5.61E+11

1.279547

1.62E+08

1.155903

245.3525

0.810121

Minimum
Std. Dev.

1.14E+08

3434444.

-0.273748

64400.00

-0.062054

6.320343

0.004813

2.19E+10

3.67E+10

0.173249

21375054

0.268835

37.99010

0.118730

Skewness

5.536058

10.09268

1.753937

3.682822

-0.662126

0.980904

2.161261

Kurtosis

36.21233

122.7973

8.188600

19.45350

2.472738

3.659479

9.370441

Jarque-Bera

61231.47

737327.0

1959.703

16234.98

101.4977

214.0016

2960.866

Probability

0.000000

0.000000

0.000000

0.000000

0.000000

0.000000

0.000000

Sum

9.54E+12

7.44E+12

309.6883

1.62E+10

760.8090

86081.62

168.4764

Sum Sq. Dev.

5.76E+23

1.62E+24

35.95841

5.47E+17

86.58222

1729010.

16.88796

Observations

1199

1199

1199

1199

1199

1199

1199

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Appendix 2: Panel Static Models


VARIABLES
TRADE SHARE GDP
LPOP
LFCF
FD
Constant

Observations
Number of country
R-squared
H-TEST

Fixed Effect
LGDP

Random Effect
LGDP

0.000634**
(0.000318)
1.024***
(0.0268)
0.000609***
(4.75e-05)
0.110***
(0.00720)
5.413***
(0.401)

0.00101***
(0.000329)
0.910***
(0.0252)
0.000723***
(4.87e-05)
0.110***
(0.00751)
7.096***
(0.384)

1,203
38
0.781
121.28(0.00)

1,203
38
0.78

Regressions are the fixed effects and random model. All regressions include a constant term. Robust standard errors
are reported in brackets. ***, **, and * denote significance at the 1%, 5%, and 10% level, respectively.

Appendix 3: Panel Static Models


VARIABLES
TRADE SHARE GDP
LPOP
LFCF
M3
BASSET
PRIVATE
COSTANT

OBSERVATIONS
NUMBER OF COUNTRY
R-SQUARED
H-TEST

Fixed Effect
LGDP

Random Effect
LGDP

0.000516
(0.000318)
1.005***
(0.0269)
0.000608***
(4.74e-05)
0.445***
(0.0585)
0.386***
(0.0355)
0.114
(0.0951)
5.337***
(0.405)

0.000867***
(0.000331)
0.888***
(0.0251)
0.000729***
(4.87e-05)
0.474***
(0.0613)
0.385***
(0.0373)
0.0791
(0.0995)
7.075***
(0.384)

1,203
38
0.788
110.32 (0.00)

1,203
38
0.788

Regressions are the fixed effects and random model. All regressions include a constant term. Robust standard errors
are reported in brackets. ***, **, and * denote significance at the 1%, 5%, and 10% level, respectively.

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Appendix 4: Definitions of the variables and sources


VARIABLES

LABEL

DEFINITIONS

SOURCE

GDP

GDP
($)Constant
2000

World
Bank
Indicators
(WBI)

POP

Population

Annual percentage growth rate of GDP at market prices based on


constant local currency. Aggregates are based on constant 2000
U.S. dollars. GDP is the sum of gross value added by all resident
producers in the economy plus any product taxes and minus any
subsidies not included in the value of the products.
Number of the total population

TRADE

The ratio of
exports plus
imports to
GDP

Trade is the sum of exports and imports of goods and services


measured as a share of gross domestic product.

WBI

LFCF

Gross fixed
capital
formation (%
of GDP)

WBI

M3

Liquid
liabilities

BASSET

Bank assets

Gross fixed capital formation includes land improvements (fences,


ditches, drains, and so on); plant, machinery, and equipment
purchases; and the construction of roads, railways, and the like,
including schools, offices, hospitals, private residential dwellings,
and commercial and industrial buildings.
Liquid liabilities are also known as broad money. They are the sum
of currency and deposits in the central bank (M0), plus transferable
deposits and electronic currency (M1), plus time and savings
deposits, foreign currency transferable deposits, certificates of
deposit, and securities repurchase agreements (M2), plus travelers
checks, foreign currency time deposits, commercial paper, and
shares of mutual funds or market funds held by residents.
The ratio of commercial bank assets divided by a commercial bank
plus central bank assets

PRIVATE

Private credit

Private credit by deposit money banks to GDP.

Thorsten

Appendix 5: List of Countries used in this study


Country Name
Benin
Botswana
Burkina Faso
Burundi
Cameroon
Cape Verde
Central African Republic
Chad
Comoros
Congo, Rep.
Cote d'Ivoire
Equatorial Guinea
Eritrea
Ethiopia
Gambia, The
Ghana

WBI

Thorsten

Thorsten

Country Name
Malawi
Mali
Mauritania
Mauritius
Mozambique
Namibia
Niger
Nigeria
Rwanda
Sao Tome and Principe
Senegal
Sierra Leone
Somalia
South Africa
Sudan
Swaziland

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Guinea-Bissau
Kenya
Lesotho
Madagascar

Tanzania
Togo
Uganda
Zambia

Appendix 6: Figure 2

1
0

.5

Eigenvalues

1.5

Scree plot of eigenvalues after pca

1.5

2
Number

2.5

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