External Financing and Financial Development in Developing Countries: Aggregate and Disaggregate Empirical Evidence from West Africa
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Published:
Dec 19, 2023
Keywords:
External Financing, Financial Development, Remittances, FDI, ODA, #SDG8
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Abstract
External financing as one of the drivers of financial development remains a subject of ongoing debate. While some studies assert a positive influence, others dispute this claim. This study contributes to the existing studies on the subject matter, with the primary objective of examining the overall or aggregate effects of external financing on financial development. Specifically, the study examines the individual effects of external financing factors (FDI, ODA, and remittances) on financial development, both in the short and long run, by employing annual panel data spanning from 1980 to 2021 for the selected West African countries. To achieve this, the study employs the panel autoregressive distributed lag (PARDL) variants (mean group - MG, dynamic fixed effect - DFE, and pooled mean group - PMG) techniques. The results from the PMG and DFE estimations reveal that external financing as a whole has an impact on financial development in West African countries both in the long and short run. Remittance, economic growth, and inflation rate also have a significant influence on financial development both in the long and short run. While ODA is detrimental to financial development in the long run, FDI does not influence financial development. It is therefore imperative for stakeholders within the sub-region to encourage and facilitate the use of remittances, economic growth, and inflation rate as means of promoting financial development in West Africa, while simultaneously ensuring that FDI and ODA are used to promote self-sufficiency and financial stability and align with the region’s developmental goals.
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Noah, Afees Oluwashina, Maryam Jumai Abdulmumini, Ibrahim Ohize Rahji, and Oladipo Olalekan David. 2023. “External Financing and Financial Development in Developing Countries: Aggregate and Disaggregate Empirical Evidence from West Africa”. ABUAD Journal of Social and Management Sciences 4 (2), 172-94. https://doi.org/10.53982/ajsms.2023.0402.01-j.
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References
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Abdulraheem, A., Ogbeide, F., Adeboje, O. & Musa, M. (2019). Determinants of financial development in Nigeria. Nigerian Deposit Insurance Company Quarterly, 34(12), 45-68.
Aderemi, T. A., Omitogun, O. & Osisanwo, B. G. (2022). Effect of FDI Inflows on Employment Generation in Selected ECOWAS Countries: Heterogeneous Panel Analysis. CBN Journal of Applied Statistics, 13(1), 241-263. https://www.cbn.gov.ng/Out/2023/STD/A468__241_263.pdf
Appiah-Otoo, I. Chen, X & Ampah, J. D. (2023). Exploring the moderating role of foreign direct investment in the renewable energy and economic growth nexus: Evidence from West Africa. Energy, 281, https://doi.org/10.1016/j.energy.2023.128346
Asratie, T. M. (2021). Determinants of financial development in Ethiopia: ARDL approach. Cogent Economics & Finance, 9(1), 1-15. DOI: 10.1080/23322039.2021.1963063
Azizi, S. S. (2020). Impacts of remittances on financial development. Journal of Economic Studies, 47(3), 467-477. DOI:10.1108/JES-01-2019-0045
Cherif, M. & Dreger, C. (2016). Institutional Determinants of Financial Development in MENA Countries. Review of Development Economics, 20(3), 670-690.
https://doi.org/10.1111/rode.12192
Eregha, P. B. & Oziegbe, T. R. (2016). Official development assistance, volatility and per capita real GDP growth in Sub-Saharan African countries. The Journal of
Developing Areas, 50(4), 363-382.
Fromentin, V. (2017). The long-run and short-run impacts of remittances on financial development in developing countries. The Quarterly Review of Economics and
Finance, 66, 192-201. https://doi.org/10.1016/j.qref.2017.02.006
Gniniguè, M. & Ali, E. (2022). Migrant Remittances and Economic Growth in ECOWAS Countries: Does Digitalization Matter? The European Journal of Development Research, 34, 2517–2542. https://doi.org/10.1057/s41287-021-00461-6
Gravito, L., Haddon, J., Alli, A. & Usanase, A. (2017). Infrastructure financing in SubSaharan Africa: Best practices from ten years in the field, In a Report of Boston
Consulting Group and Africa Finance Corporation.
Harrod, R. F. & Domar, E., (1946). Capital expansion, rate of growth, and employment. Econometrica, 14, 137-47.
Huq, M. & Tribe, M. (2018). External financial flows and debt relief. The Economy of Ghana, 265-276. https://doi.org/10.1057/978-1-137-60243-5_13
Ibrahim, M. & Sare, Y. A. (2018). Determinants of financial development in Africa: How robust is the interactive effect of trade openness and human capital? Economic Analysis and Policy, 60, 18-26. https://doi.org/10.1016/j.eap.2018.09.002
Iheonu, C. O., Asongu, S. A., Odo, K. O. & Ojiem, P. K. (2020). Financial sector development and Investment in selected countries of the Economic Community of West African States: empirical evidence using heterogeneous panel data method. Financial Innovation, 6(29), 1-15, https://doi.org/10.1186/s40854-020-00195-0
International Monetary Fund (2023). The long squeeze: Funding development in an age of austerity, in Regional Economic Outlook: Sub-Saharan Africa—Light in
the Horizon? Washington, DC, October
Jagadish, P. B. (2018). Financial development and economic growth: Evidence from a panel of 16 African and non-African low-income countries. Cogent Economics & Finance, 6(1), 1-17. DOI: 10.1080/23322039.2018.1449780
Keho, Y. (2020). Impact of Remittances on Financial Development: Revisiting the Evidence for ECOWAS Countries. Theoretical Economics Letters, 10, 169-179. https://doi.org/10.4236/tel.2020.101011
Kregel, J. (2004). External financing for development and international financial instability, No 32, G-24 Discussion Papers, United Nations Conference on Trade and Development, available on https://unctad.org/system/files/officialdocument/gdsmdpbg2420055_en.pdf
Kumar, R. R., Stauvermann, P. J., Patel, A., & Prasad, S. (2017). The effect of remittances on economic growth in Kyrgyzstan and Macedonia: Accounting for financial development. International Migration, 56(1), 95–126. doi:10.1111/imig.12372
Kutu, A. A. & Ngalawa, H. (2016). Dynamics of industrial production in BRICS countries. International Journal of Economics and Finance Studies, 8(1), 1-25.
Majeed, A., Jiang, P., Ahmad, M., Khan, M. A., & Olah, J. (2021). The impact of foreign direct investment on financial development: New evidence from panel cointegration and causality analysis. Journal of Competitiveness, 13(1), 95–112. https://doi.org/10.7441/joc.2021.01.06
Maruta, A. A. (2018). Can aid for the financial sector buy financial development? Journal of Macroeconomics, xxx (xxxx), xxx–xxx. https://doi.org/10.1016/j.jmacro.2018.11.003
Nadeem, M. A., Liu, Z., Ali, H. S., Younis, A., Bilal, M., & Xu, Y. (2020). Innovation and Sustainable Development: Does Aid and Political Instability Impede Innovation? SAGE Open, 10(4). https://doi.org/10.1177/2158244020973021
Nguyen, H. P., Huynh, A. N. Q., Reisach, U. & Kim, X. L. T. (2022). How does Japanese ODA contribute to economic growth of ASEAN countries? Journal of International Economics and Management, 22(2), 71–83. https://doi.org/10.38203/jiem.022.2.0049
Noah, A. O. (2021). Effectiveness of external financing on health infrastructure in Sub-Saharan Africa. Al-Hikmah Journal of Economics, 2(1), Al-Hikmah University.
https://alhikmahuniversity.edu.ng/centralJournal/admin/user/event/bookUrl78.pdf
Nwokoye, E. S., Igbanugo, C. I. & Dimnwobi, S. K. (2020). International migrant remittances and labour force participation in Nigeria. African Development Review, 32, 125–137. https://doi.org/10.1111/1467-8268.12421
Odedokun, M. O., (2004). Sustainability of External Development Financing to Developing Countries, World Institute for Development Economic Research (UNU-WIDER), Policy Brief No. 9, United Nations University.
Ogundipe, A. A., Oye, Q. E., Ogundipe, O. M. & Osabohien, R. (2020). Does Infrastructural Absorptive Capacity Stimulate FDI-Growth Nexus in ECOWAS? Cogent Economics & Finance, 8(1), 1-19, DOI: 10.1080/23322039.2020.1751487
Olayungbo, D. O. & Quadri, A. (2019). Remittances, financial development and economic growth in sub-Saharan African countries: evidence from a PMGARDL approach. Financial Innovation, 5(9), 1-25. https://doi.org/10.1186/s40854-019-0122-8
Pesaran, M. H., Shin, Y. and Smith, R. (2001). Bound testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326.
http://doi.org/10.1002/jae.616
Pham, H. T., Gan, C. & Hu, B. (2022). Causality between financial development and foreign direct investment in Asian developing countries. Journal of Risk and
Financial Management, 15(5), 1-26. https://doi.org/10.3390/jrfm15050195
Puatwoe, J. T., Piabuo, S. M. (2017). Financial sector development and economic growth: evidence from Cameroon. Financial Innovation 3(25), 1-18. https://doi.org/10.1186/s40854-017-0073-x
Siraj, T. (2012). Official development assistance (ODA), public spending and economic growth in Ethiopia. Journal of Economics and International Finance, 4(8), 173-191.
Sobiech, I. (2019). Remittances, finance and growth: Does financial development foster the impact of remittances on economic growth? World Development, 113, 44-59. https://doi.org/10.1016/j.worlddev.2018.08.016
The Economic Community of West Africa Commission (2018). ECOWAS investment policy, The ECOWAS Commission, Lagos.
https://wacomp.projects.ecowas.int/wp-content/uploads/2020/03/ECOWASINVESTMENT-POLICY-ENGLISH.pdf
Tran, V. N. A. & Huynh, C. M. (2022). The impact of foreign direct investment on financial development in Asian countries, Munich Personal RePEc Archive Paper No. 114311, https://mpra.ub.uni-muenchen.de/114311/
Tsaurai, K. (2018). Complementarity between foreign aid and financial development as a driver of economic growth in selected emerging markets. Comparative Economic Research, 21(4), DOI: 10.2478/cer-2018-0026
Yusifzada, L. & Mammadova, A. (2015). Financial intermediation and economic growth. William Davidson Institute Working Paper, 1091.
Zardoub, A. & Sboui, F. (2023). Impact of foreign direct investment, remittances and official development assistance on economic growth: Panel data approach. PSU Research Review, 7(2), 73-89. https://doi.org/10.1108/PRR-04-2020-0012