Does trade openness promote financial development in Sub-Saharan Africa?

Abstract

In this paper, we re-examine the effect of trade openness on financial development in Sub-Saharan Africa using new multidimensional measures of trade openness and financial development. We also test the hypothesis that this effect is conditional on high levels of financial openness. We find that the level of financial development is an increasing function of the level of trade openness. Moreover, the positive effect of trade openness on financial development is conditional on very high levels of financial openness. Trade openness also improves the depth, access and efficiency of financial institutions and financial markets. Our results are robust to indicators of trade openness and financial development, alternative specifications, estimation method, endogeneity, and cross-sectional dependence. Thus, contrary to previous studies, our findings suggest that financial development in Sub-Saharan Africa can be enhanced by the simultaneous implementation of policies favoring trade and capital account liberalization.