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30/11/2022
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Alananga, S., & Mutasa, F. (2022). Does proximity matter? The effect of financial sector development on economic growth in the EAC and SADC regional blocs. Journal of International Economics and Management, 22(3), 19-45. https://doi.org/10.38203/jiem.022.3.0052
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Does proximity matter? The effect of financial sector development on economic growth in the EAC and SADC regional blocs
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Abstract
This study examines the finance-growth nexus among countries in the Southern African Development Community and East Africa Community regional blocs. We aim to see if small economies can rely on expansionary monetary policies to stimulate economic growth given the illusive nature of such policies. The panel error correction model is applied to analyze the aggregated data, which were obtained from the World Development Indicators and the Comité Européen d'Etudes des Polyphosphates. The results indicate that proximity to trading giants jeopardizes the freedom to use monetary expansionary policies among relatively small countries. If such policies are adopted, it will be a significant impact on countries located in regions where trading powers are evenly distributed.
Article Details
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Keywords
Geographic proximity, Money, Financial sector development, Domestic credit, Centrality
References
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Alananga, S.S. and Mutasa, F. (2021), “Finance-growth nexus in Eastern and Southern African countries: insights from a panel ARDL analysis”, The Pan-African Journal of Business Management, Vol. 5 No. 2, pp. 31 - 61.
Amidi, S. and Majidi, A.F. (2020), “Geographic proximity, trade and economic growth: a spatial econometrics approach”, Annals of GIS, Vol. 26 No. 1, pp. 49 - 63.
Bangake, C. and Eggoh, J.C. (2012), “Pooled Mean Group estimation on international capital mobility in African countries”, Research in Economics, Vol. 66 No. 1, pp. 7 - 17.
Bara, M. and Pierre, L.R. (2017), “Spatial externalities in financial development in the SADC”, African Review of Economics and Finance, Vol. 9 No. 1, pp. 245 - 271.
Barro, R. and Sala-I-Martin, X. (2003), Economic growth, 2nd Edition, MIT Press, Cambridge.
Beck, T., Demirguc-Kunt, A. and Levine, R. (2009), “Financial institutions and markets across countries and over time data and analysis”, Policy Research Working Paper 4943.
Berthelon, M. and Freund, C.L. (2004), “On the conservation of distance in international trade”, Available at https://papers.ssrn.com/sol3/Delivery.cfm/35468.pdf?abstractid=610338&mirid=1 (Accessed 17 May, 2022).
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Bhupatiraju, S. (2014), The geographic dimensions of growth and development, Maastricht University, Maastricht.
Bloom, D.E., Sachs, J.D., Collier, P. and Udry, C. (1998), “Geography, demography, and economic growth in Africa”, Brookings Papers on Economic Activity, Vol. 2, pp. 207 - 295.
Boulhol, H. and de Serres, A. (2008), “Have developed countries escaped the curse of distance?”, OECD Economics Department Working Papers No. 610.
Boulhol, H., de Serres, A. and Molnar, M. (2008), The contribution of economic geography to GDP per capita, OECD Journal: Economic Studies.
Chen, X. and Kim, H.M. (2021), “Antecedents and consequence of the consumer’s psychic distance in cross-border e-commerce”, International Trade, Politics and Development, Vol. 5 No. 2, pp. 156 - 173.
Chih, Y.Y., Kishan, R.P. and Ojede, A. (2021), “Be good to thy neighbours: a spatial analysis of foreign direct investment and economic growth in sub-Saharan Africa”, World Economy, Vol. 45 No. 3, pp. 657 - 701.
Clark, X., Dollar, D. and Micco, A. (2004), “Port efficiency, maritime transport: costs and bilateral trade”, NBER Working Paper Series, Working Paper 10353.
Diamond, J. (1997), Guns, germs and steel, W.W. Norton & Co. Ltd., New York.
Escoba, J. and Torero, M. (2000), “Does geography explain differences in economic growth in Peru?”, IDB Working Paper No. 128.
Evans, O. (2015), “The effects of economic and financial development on financial inclusion in Africa”, Review of Economic and Development Studies, Vol. 1 No. 1, pp. 17 - 25.
Ezzahid, E. and Elouaourti, Z. (2017), “Financial development and total factors productivity channel: evidence from Africa”, MPRA Working Paper No. 81764 .
Frankel, J. and Romer, D. (1999), “Does trade cause growth?”, American Economic Review, Vol. 89 No. 3, pp. 379 - 399.
Gallup, J.L. and Sachs, J.D. (2001), “The economic burden of malaria”, The Supplement to The American Journal of Tropical Medicine & Hygiene, Vol. 64 No. 1, pp. 85 - 96.
Garru, J.A. and Peter, A. (2016), “Financial deepening and economic growth nexus in Nigeria (1981-2014): a causality analysis”, Lafia Journal of Economics and Management Sciences, Vol. 1 No. 1, pp. 84 - 97.
Gnangnon, S.K. (2021), “Services export diversification and services export revenue stability: does trade openness matter?”, International Trade, Politics and Development, Vol. 5 No. 2, pp. 90 - 113.
Harris, C.D. (1954), “The market as a factor in the localization of industry in the United States”, Annals of the Association of American Geographers, Vol. 44 No. 4, pp. 315 - 348.
Hinz, J. (2012), “The economic geography of Europe and the role of regional policy, economies and finances”, Available at https://dumas.ccsd.cnrs.fr/dumas-00802143 (Accessed 21 November, 2022).
Honohan, P. (2005), “Measuring microfinance access: building on existing cross-country data”, World Bank Policy Research Working Paper No. 3606.
Hummels, D. (2007), “Transportation costs and international trade in the second era of globalization”, Journal of Economic Perspectives, Vol. 21 No. 3, pp. 131 - 154.
Ibrahim, M. (2017), Studies on financial development and economic growth in Sub–Saharan Africa, Wits Business School, Graduate School of Business Administration, University of Witwatersrand, Witwatersrand.
Landes, D.S. (1998), The wealth and poverty of nations: why some countries are so rich and some so poor, W.W. Norton, New York.
Leamer, E. (1997), “Access to Western markets and Eastern effort”, in Zecchini, S. (Ed.), Lessons from the Economic Transition, Central and Eastern Europe in the 1990s, Kluwer Academic Publishers, Dordrecht, pp. 503 - 526.
Levine, R. (1997), “Financial development and economic growth: views and agenda”, Journal of Economic Literature, Vol. 35 No. 2, pp. 688 - 726.
Levine, R. (2003), “More on finance and growth: more finance, more growth”, Reserve Bank of St. Louis Review, Vol. 85, pp. 31 - 46. Limao, N. and Venables, A. (2000), “Infrastructure, geographical disadvantage and transport costs”, The World Bank Economic Review, Vol. 15 No. 3, pp. 451 - 479.
Liu, J., Fang, Y. and Chi, Y. (2022), “Evolution of innovation networks in industrial clusters and multidimensional proximity: a case of Chinese cultural clusters”, Heliyon, Vol. 8 No. 10, e10805.
Mahawiya, S. (2015), Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC, School of Economics, University of Cape Town, Cape Town.
McCann, P. and Oort, F.V. (2019), “Theories of agglomeration and regional economic growth: a historical review”, in Capello, R. and Nijkamp, P. (Eds.), Handbook of Regional Growth and Development Theories, pp. 6 - 23.
Minerva, A.G. and Ottaviano, G.I. (2009), “Endogenous growth theories: agglomeration benefits and transportation costs”, in Handbook of Regional Growth and Development Theories, MPG Books Ltd, Bodmin & Cornwall.
Mossig, I., Windzio, M., Besche-Truthe, F. and Seitzer, H. (2022), “Networks of global social policy diffusion: the effects of culture, economy, colonial legacies, and geographic proximity”, in Windzio, M., Mossig, I., Besche-Truthe, F. and Seitzer, H. (Eds.), Networks and Geographies of Global Social Policy Diffusion: Culture, Economy, and Colonial Legacies, pp. 1 - 37.
Nsiah, C., Fayissa, B. and Wu, C. (2016), “Spatial effect on the rate of economic growth: evidence from sub-Saharan Africa”, Journal of Developing Areas, Vol. 50 No. 1, pp. 275 - 288.
Ottaviano, G. and Pinelli, D. (2006), “Market potential and productivity: evidence from Finnish regions”, Regional Science and Urban Economics, Vol. 36 No. 5, pp. 636 - 657.
Pagano, M. (1993), “Financial markets and growth: an overview”, European Economic Review, Vol. 37 No. 2-3, pp. 613 - 622.
Pesaran, H., Shin, Y. and Smith, R. (1999), “Pooled Mean Group estimation and dynamic heterogeneous panels”, Journal of the American Statistical Association, Vol. 94 No. 446, pp. 621 - 634.
Pirotte, A. (1999), “Convergence of the static estimation toward the long-run effects of dynamic panel data models”, Economics Letters, Vol. 63 No. 2, pp. 151 - 158.
Redding, S. and Scott, P.K. (2003), “Distance, skill deepening and development: will peripheral countries ever get rich?”, Journal of Development Economics, Vol. 72 No. 2. pp. 515 - 541.
Redding, S. and Venables, A.J. (2004), “Economic geography and international inequality”, Journal of International Economics, Vol. 62 No. 1, pp. 53 - 82.
Schumpeter, J. (1911), The theory of economic development, Harvard University Press, Cambridge.
Shabani, Z.D., Akbari, N. and Esfahani, R.D. (2011), “Effect of population density, division and distance on regional economic growth”, Iranian Economic Review, Vol. 16 No. 31, pp. 101 - 121.
Sissoko, Y., Sloboda, B.W. and Kone, S. (2018), “Is it factor accumulation or total factor productivity explaining the economic growth in ECOWAS? An empirical assessment”, African Journal of Economic Review, Vol. 1 No. 2, pp. 30 - 45.
World Bank. (2009), World development report: reshapimg economic geographic, World Bank Press, Washington, D.C.
Yue, L., Huang, C. and Cao, Y. (2022), “The impact of FDI technology spillover on the innovation quality of Chinese enterprises: a microperspective based on geographic proximity”, European Journal of Innovation Management, Ahead-of-Print.
Zerbo, E. (2015), “What determines the long-run growth in sub-Saharan Africa? Exploring the role of energy, trade openness and financial development in six countries”, Laboratoire d’Economie et de Management Nantes-Atlantique, Université de Nantes Working Paper 2015/28.
Acemoglu, D. (2009), Introduction to modern economic growth, Princeton University Press, Princeton.
Alananga, S.S. and Mutasa, F. (2021), “Finance-growth nexus in Eastern and Southern African countries: insights from a panel ARDL analysis”, The Pan-African Journal of Business Management, Vol. 5 No. 2, pp. 31 - 61.
Amidi, S. and Majidi, A.F. (2020), “Geographic proximity, trade and economic growth: a spatial econometrics approach”, Annals of GIS, Vol. 26 No. 1, pp. 49 - 63.
Bangake, C. and Eggoh, J.C. (2012), “Pooled Mean Group estimation on international capital mobility in African countries”, Research in Economics, Vol. 66 No. 1, pp. 7 - 17.
Bara, M. and Pierre, L.R. (2017), “Spatial externalities in financial development in the SADC”, African Review of Economics and Finance, Vol. 9 No. 1, pp. 245 - 271.
Barro, R. and Sala-I-Martin, X. (2003), Economic growth, 2nd Edition, MIT Press, Cambridge.
Beck, T., Demirguc-Kunt, A. and Levine, R. (2009), “Financial institutions and markets across countries and over time data and analysis”, Policy Research Working Paper 4943.
Berthelon, M. and Freund, C.L. (2004), “On the conservation of distance in international trade”, Available at https://papers.ssrn.com/sol3/Delivery.cfm/35468.pdf?abstractid=610338&mirid=1 (Accessed 17 May, 2022).
Bhupatiraju, S. and Verspagen, B. (2013), “Economic development, growth, institutions and geography”, UNU‐MERIT Working Paper Series IPD WP16.
Bhupatiraju, S. (2014), The geographic dimensions of growth and development, Maastricht University, Maastricht.
Bloom, D.E., Sachs, J.D., Collier, P. and Udry, C. (1998), “Geography, demography, and economic growth in Africa”, Brookings Papers on Economic Activity, Vol. 2, pp. 207 - 295.
Boulhol, H. and de Serres, A. (2008), “Have developed countries escaped the curse of distance?”, OECD Economics Department Working Papers No. 610.
Boulhol, H., de Serres, A. and Molnar, M. (2008), The contribution of economic geography to GDP per capita, OECD Journal: Economic Studies.
Chen, X. and Kim, H.M. (2021), “Antecedents and consequence of the consumer’s psychic distance in cross-border e-commerce”, International Trade, Politics and Development, Vol. 5 No. 2, pp. 156 - 173.
Chih, Y.Y., Kishan, R.P. and Ojede, A. (2021), “Be good to thy neighbours: a spatial analysis of foreign direct investment and economic growth in sub-Saharan Africa”, World Economy, Vol. 45 No. 3, pp. 657 - 701.
Clark, X., Dollar, D. and Micco, A. (2004), “Port efficiency, maritime transport: costs and bilateral trade”, NBER Working Paper Series, Working Paper 10353.
Diamond, J. (1997), Guns, germs and steel, W.W. Norton & Co. Ltd., New York.
Escoba, J. and Torero, M. (2000), “Does geography explain differences in economic growth in Peru?”, IDB Working Paper No. 128.
Evans, O. (2015), “The effects of economic and financial development on financial inclusion in Africa”, Review of Economic and Development Studies, Vol. 1 No. 1, pp. 17 - 25.
Ezzahid, E. and Elouaourti, Z. (2017), “Financial development and total factors productivity channel: evidence from Africa”, MPRA Working Paper No. 81764 .
Frankel, J. and Romer, D. (1999), “Does trade cause growth?”, American Economic Review, Vol. 89 No. 3, pp. 379 - 399.
Gallup, J.L. and Sachs, J.D. (2001), “The economic burden of malaria”, The Supplement to The American Journal of Tropical Medicine & Hygiene, Vol. 64 No. 1, pp. 85 - 96.
Garru, J.A. and Peter, A. (2016), “Financial deepening and economic growth nexus in Nigeria (1981-2014): a causality analysis”, Lafia Journal of Economics and Management Sciences, Vol. 1 No. 1, pp. 84 - 97.
Gnangnon, S.K. (2021), “Services export diversification and services export revenue stability: does trade openness matter?”, International Trade, Politics and Development, Vol. 5 No. 2, pp. 90 - 113.
Harris, C.D. (1954), “The market as a factor in the localization of industry in the United States”, Annals of the Association of American Geographers, Vol. 44 No. 4, pp. 315 - 348.
Hinz, J. (2012), “The economic geography of Europe and the role of regional policy, economies and finances”, Available at https://dumas.ccsd.cnrs.fr/dumas-00802143 (Accessed 21 November, 2022).
Honohan, P. (2005), “Measuring microfinance access: building on existing cross-country data”, World Bank Policy Research Working Paper No. 3606.
Hummels, D. (2007), “Transportation costs and international trade in the second era of globalization”, Journal of Economic Perspectives, Vol. 21 No. 3, pp. 131 - 154.
Ibrahim, M. (2017), Studies on financial development and economic growth in Sub–Saharan Africa, Wits Business School, Graduate School of Business Administration, University of Witwatersrand, Witwatersrand.
Landes, D.S. (1998), The wealth and poverty of nations: why some countries are so rich and some so poor, W.W. Norton, New York.
Leamer, E. (1997), “Access to Western markets and Eastern effort”, in Zecchini, S. (Ed.), Lessons from the Economic Transition, Central and Eastern Europe in the 1990s, Kluwer Academic Publishers, Dordrecht, pp. 503 - 526.
Levine, R. (1997), “Financial development and economic growth: views and agenda”, Journal of Economic Literature, Vol. 35 No. 2, pp. 688 - 726.
Levine, R. (2003), “More on finance and growth: more finance, more growth”, Reserve Bank of St. Louis Review, Vol. 85, pp. 31 - 46. Limao, N. and Venables, A. (2000), “Infrastructure, geographical disadvantage and transport costs”, The World Bank Economic Review, Vol. 15 No. 3, pp. 451 - 479.
Liu, J., Fang, Y. and Chi, Y. (2022), “Evolution of innovation networks in industrial clusters and multidimensional proximity: a case of Chinese cultural clusters”, Heliyon, Vol. 8 No. 10, e10805.
Mahawiya, S. (2015), Foreign banking inflows, financial sector development and economic growth in ECOWAS and SADC, School of Economics, University of Cape Town, Cape Town.
McCann, P. and Oort, F.V. (2019), “Theories of agglomeration and regional economic growth: a historical review”, in Capello, R. and Nijkamp, P. (Eds.), Handbook of Regional Growth and Development Theories, pp. 6 - 23.
Minerva, A.G. and Ottaviano, G.I. (2009), “Endogenous growth theories: agglomeration benefits and transportation costs”, in Handbook of Regional Growth and Development Theories, MPG Books Ltd, Bodmin & Cornwall.
Mossig, I., Windzio, M., Besche-Truthe, F. and Seitzer, H. (2022), “Networks of global social policy diffusion: the effects of culture, economy, colonial legacies, and geographic proximity”, in Windzio, M., Mossig, I., Besche-Truthe, F. and Seitzer, H. (Eds.), Networks and Geographies of Global Social Policy Diffusion: Culture, Economy, and Colonial Legacies, pp. 1 - 37.
Nsiah, C., Fayissa, B. and Wu, C. (2016), “Spatial effect on the rate of economic growth: evidence from sub-Saharan Africa”, Journal of Developing Areas, Vol. 50 No. 1, pp. 275 - 288.
Ottaviano, G. and Pinelli, D. (2006), “Market potential and productivity: evidence from Finnish regions”, Regional Science and Urban Economics, Vol. 36 No. 5, pp. 636 - 657.
Pagano, M. (1993), “Financial markets and growth: an overview”, European Economic Review, Vol. 37 No. 2-3, pp. 613 - 622.
Pesaran, H., Shin, Y. and Smith, R. (1999), “Pooled Mean Group estimation and dynamic heterogeneous panels”, Journal of the American Statistical Association, Vol. 94 No. 446, pp. 621 - 634.
Pirotte, A. (1999), “Convergence of the static estimation toward the long-run effects of dynamic panel data models”, Economics Letters, Vol. 63 No. 2, pp. 151 - 158.
Redding, S. and Scott, P.K. (2003), “Distance, skill deepening and development: will peripheral countries ever get rich?”, Journal of Development Economics, Vol. 72 No. 2. pp. 515 - 541.
Redding, S. and Venables, A.J. (2004), “Economic geography and international inequality”, Journal of International Economics, Vol. 62 No. 1, pp. 53 - 82.
Schumpeter, J. (1911), The theory of economic development, Harvard University Press, Cambridge.
Shabani, Z.D., Akbari, N. and Esfahani, R.D. (2011), “Effect of population density, division and distance on regional economic growth”, Iranian Economic Review, Vol. 16 No. 31, pp. 101 - 121.
Sissoko, Y., Sloboda, B.W. and Kone, S. (2018), “Is it factor accumulation or total factor productivity explaining the economic growth in ECOWAS? An empirical assessment”, African Journal of Economic Review, Vol. 1 No. 2, pp. 30 - 45.
World Bank. (2009), World development report: reshapimg economic geographic, World Bank Press, Washington, D.C.
Yue, L., Huang, C. and Cao, Y. (2022), “The impact of FDI technology spillover on the innovation quality of Chinese enterprises: a microperspective based on geographic proximity”, European Journal of Innovation Management, Ahead-of-Print.
Zerbo, E. (2015), “What determines the long-run growth in sub-Saharan Africa? Exploring the role of energy, trade openness and financial development in six countries”, Laboratoire d’Economie et de Management Nantes-Atlantique, Université de Nantes Working Paper 2015/28.