Abstract
This study examined the financial markets integration and economic growth nexus in the Economic Community of West African States (ECOWAS) covering 1980 to 2018. We employed the Pool Mean Group (PMG) technique for the data analysis. PMG was adopted because it is an Auto Regressive Distributive Lag (ARDL) model and suitable for handling panel data with cross-sectional dependencies and heterogeneities.
The results of the estimated regression revealed that the current degree of financial integration among ECOWAS countries is very low. The evidence shows that only four countries in the sub-region were more integrated when integration is measured as the ratio of a country’s financial assets to the regional pool: Gambia (18.38%), Ghana (22.87%), Guinea (17.94%) and Nigeria (20.22%), at 0.10, 0.05, 0.10 and 0.05 levels of significance respectively. It is noteworthy that three of these countries: Nigeria, Ghana and Gambia are in the WAMZ group, thereby suggesting that a high level of assets-based integration occurs within the WAMZ region. Interestingly, integration measured as interest rate convergence reveals that only Senegal exhibited significant integration level of 29.22 percent, at the 0.05 significance level of the test. The result further shows that financial integration affects economic growth mostly through its impact on financial development, although, in the short run, the effect of financial integration on economic growth is insignificant. But in the long run, it exerts significant positive effect on growth up to a certain threshold, caused by the positive influence on financial development. We found that quality institutions play important role in bringing about the positive and significant impact of financial integration on ECOWAS’ financial development and growth. This implies that the quality of domestic institutions facilitate growth indirectly through the development of the sub-region’s financial sectors.
The study submits that a broad-based and well-encompassing integration policy for ECOWAS region should be pursued and should target improving member countries’ domestic institutions. It recommends for more institutional reforms in the ECOWAS sub-region, particularly with respect to efficient legal processes sequel to implementation of broad-based financial markets integration. Preferred policy instruments should be those that affect interest rates and central bank assets. We also recommend the coordination of these policies in order to avert potential detrimental impacts of financial integration on the domestic financial development and growth.
