Financial Flows, Economic Integration and Macroeconomic Convergence in Africa: An Interactive and Threshold Effects

Abstract

This study investigates the impacts of financial flows and economic integration on macroeconomic convergence by analysing 37 African countries over the period 1994 to 2021. The Augmented Neoclassical theory serves as the theoretical foundation of the study. The analysis employs the Fully Modified Ordinary Least Squares (FMOLS) technique along with other non-parametric methods. The findings confirm both beta and sigma-conditional convergence across Africa. Furthermore, financial flows and economic integration exert mixed effects on economic performance while jointly accelerating macroeconomic convergence. The results also suggest that financial flows and economic integration collectively enhance convergence toward the steady-state equilibrium in Africa. The estimated thresholds of foreign direct investment (FDI), official development assistance (ODA), and remittance inflows required to accelerate convergence are 3.44%, 1.43%, and 2.09%, respectively. Given a convergence speed of 5.3% and a time frame of 25 years, Africa is unlikely to achieve Sustainable Development Goal (SDG) 8 within the designated period. However, the African Union Agenda, which prioritises inclusive growth and regional integration, could be achieved by 2045, ceteris paribus. These findings imply that policymakers should intensify efforts to attract more foreign direct investment, as its threshold of 3.44% indicates a greater potential for enhancing convergence relative to ODA and remittances. Therefore, to maximise the benefits of economic integration, which amplifies the impact of financial flow components on macroeconomic convergence, the implementation of comprehensive structural reforms aimed at diversifying intra-African trade away from primary products is crucial.