Financial Crisis, Globalisation and Development in Africa

AuthorJoseph Nnanna,Simplice A. Asongu
Publication Date01 Feb 2021
06_FTR961313_ncx.indd Article
Financial Crisis,
Foreign Trade Review
56(1) 89–104, 2021
Globalisation and
© 2020 Indian Institute of
Foreign Trade
Development in Africa
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DOI: 10.1177/0015732520961313
Simplice A. Asongu1 and
Joseph Nnanna2
This study unites two streams of research by simultaneously focusing on the
impact of financial globalisation on financial development and pre- and post-cri-
sis dynamics of the investigated relationship. The empirical evidence is based
on 53 African countries for the period 2004–2011 and Generalised Method of
Moments. The following findings are established. First, whereas marginal effects
from financial globalisation are positive on financial dynamics of activity and
size, corresponding net effects (positive thresholds) are negative (within range).
Second, while decreasing financial globalisation returns are apparent for financial
dynamics of depth and efficiency, corresponding net effects (negative thresholds)
are positive (not within range). Third, financial development dynamics are more
weakly stationary and strongly convergent in the pre-crisis period. Fourth, the
net effect from the: pre-crisis period is lower on money supply and banking
system efficiency; post-crisis period is positive on financial system efficiency and
pre-crisis period is positive on financial size.
JEL Codes: F02, F21, F30, F40, O10
Banking, financial crisis, financial development
1 African Governance and Development Institute, Yaoundé, Cameroon.
2 The Development Bank of Nigeria, The Clan Place, Maitama, Abuja, Nigeria.
Corresponding author:
Simplice A. Asongu, African Governance and Development Institute, P. O. Box 8413, Yaoundé,

Foreign Trade Review 56(1)
There are at least four reasons for assessing pre- and post-crisis dynamics1 of
financial globalisation for financial development in Africa, notably: surplus
liquidity issues; substantial need for foreign investment to finance Africa’s grow-
ing projects; on-going debates on the effect of financial globalisation on develop-
ment and gaps in the literature assessing outcomes of the recent global financial
crisis on the continent’s development.2
First, a major and longstanding financial development concern in Africa has
been the substantially documented issue of surplus liquidity that is inhibiting
financial access to corporations and households (Asongu, 2014a). Second, African
business literature is consistent on the crucial need for foreign investment to
finance the continent’s growing ambitions and projects (Asongu & Odhiambo,
2019). Third, the recent (2007–2008) financial crisis has reignited the debate over
the benefits of regional financial integration and consequences of increasing
financial globalisation in Africa (Asongu & Nnanna, 2020; Motelle & Biekpe,
2015; Price & Elu, 2014). Fourth, as far as we have reviewed, the bulk of litera-
ture assessing the development outcomes of the financial crisis on the continent
has failed to engage pre- and post-crisis effects of financial globalisation on finan-
cial intermediary development.
To the best our knowledge, the extant literature on continental effects of the
financial crisis has for the most part focused on: growth (Brambila-Macias &
Massa, 2010; Chauvin & Geis, 2011; Price & Elu, 2014); financial flows (e.g.,
remittances and foreign direct investment (FDI)) other macroeconomic outcomes
(Allen & Giovannetti, 2010; Arieff et al., 2010; Massa & Te Velde, 2008) and
financial development (Massa & Te Velde, 2008; Motelle & Biekpe, 2015).
Accordingly, some studies have: assessed the impact of the crisis on capital flows
in terms of foreign aid and remittances (e.g., Arieff et al., 2010); used financial
development as a channel through which the financial crises has affected growth
(Price & Elu, 2014); examined the underlying effect on trade (Allen & Giovannetti,
2010); engaged a limited number of countries with well-functioning financial
markets (Massa & Te Velde, 2008) and investigated the relevance of FDI as a
mechanism by which the crisis has affected economic growth (Brambila-Macias
& Massa, 2010).
Noticeably, the above literature leaves room for improvement in four main
areas. First, a direct engagement of financial development externalities from the
crisis is scarce. In essence, whereas Massa and Te Velde (2008) have adopted
selected countries from a stock market perspective, very few African countries
have financial markets that are globally integrated (Alagidede et al., 2011, p. 1333).
Hence, continental policy implications of the underlying study are skewed exclu-
sively towards African countries with well-functioning and internationally inte-
grated stock markets. Moreover, some studies that have engaged the financial
intermediary sector have also been: positioned on selected countries (Motelle &
Biekpe, 2015) and limited to examining financial channels by which the crisis has
affected macroeconomic outcomes like economic growth (Price & Elu, 2014).
Second, with the exception of Massa and Te Velde (2008) that have focused on

Asongu and Nnanna 91
financial globalisation in terms of FDI (albeit on selected countries), scholarly
focus on financial globalisation externalities has been limited. As we have high-
lighted above, the conception of capital flows has been restricted to aid and remit-
tances, for the most part. Even the comprehensive analysis of Arieff et al. (2010)
has stopped short of assessing the effects on financial globalisation, despite
engaging a plethora of macroeconomic and institutional outcomes, notably: trade
and fiscal balances, remittances, foreign aid, poverty reduction, food security and
political stability. The present inquiry which is positioned on ‘effects of’ FDI
steers clear of the highlighted stream on ‘effects on’ FDI. Third, as far as we have
reviewed, extant literature has failed to compare pre- and post-crisis effects to
clearly articulate a ‘crisis impact’. Fourth, the post-crisis literature has not exhaus-
tively engaged the crisis in light of Henry (2007) and Kose et al. (2011) hypoth-
esis within the framework of initial domestic financial development (and financial
globalisation) conditions for the materialisation of financial globalisation rewards
in domestic financial development. Asongu (2014b) and Asongu and De Moor
(2017), in attempting to investigate the underlying hypothesis, have not posi-
tioned their inquiries within the specific context of the crisis notably: in terms of
motivation, sampling and comparative modelling.
The present inquiry contributes to the extant literature by filling identified gaps
above. It employs all dimensions identified by the Financial Development and
Structure Database (FDSD) of the World Bank and interactive Generalised
Method of Moments (GMM) to assess the impact of financial globalisation on
financial development in 53 African countries.3 Hence, the study unites two
streams of research by simultaneously focusing on the: impact of financial
globalisation on financial development and pre- and post-crisis dynamics in the
investigated relationship. These dynamics are articulated with marginal, threshold
and net effects of financial globalisation. This emphasis enables the assessment
of the Henry (2007) and Kose et al. (2011) hypothesis while simultaneously and
comparatively investigating pre- and post-crisis effects of financial globalisation.
The rest of the study is structured as follows. The data and methodology are
covered in the section ‘Data and Methodology’. The section ‘Empirical Results’
discusses empirical results and implications. The section ‘Conclusion and Further
Research’ concludes with future directions.
Data and Methodology
We investigate a panel of 53 African countries with data for the period 2004–2011
from African Development Indicators and the FDSD of the World Bank. Limitation
to the year 2011 is due to data availability constraints. Accordingly, 2011 is the
most recent date in the FDSD. The periodicity is motivated by the need to have
5 years in both the pre-crisis and post-crisis samples. Hence, the two sub-samples
are 2004–2008 and 2007–2011, respectively. The sampling is tailored to nullify
the 2007–2008 crisis period in both sub-samples so that the pre- and post-crisis

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