Financial Markets and Economic Development in Africa
PERI Working Paper No. 17
52 Pages Posted: 12 Feb 2003
Date Written: 2001
Abstract
This paper reviews the theory and evidence on the links between financial development and economic activity in the context of African countries. The paper presents stylized facts on the trends and patterns of financial development in Africa since the 1970s, discusses the size and performance of African stock markets, and summarizes the findings from existing empirical studies on the effects of financial development on economic growth in African economies. The evidence discussed in the paper indicates that financial systems are still relatively underdeveloped in the majority of African countries. Aggregate (traditional) measures of financial intermediation show that credit supply has either stagnated or declined in most of sub-Saharan African countries in the past two decades. However, recent structural and institutional indicators of financial market development show that a number of countries have made significant progress in promoting an environment that is conducive to financial intermediation. Much progress is still needed, however, especially to strengthen the institutional framework for banking regulation, promote monetary policy autonomy, establish government and central bank credibility, develop banking supervision, which will create an environment that is conducive to investment and saving. Progress in those areas will not only promote financial market development but it will also foster economic growth.
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