MODERATING FINANCIAL DEVELOPMENT EFFECT AND ECONOMIC GROWTH IN WEST AFRICA SUBREGION
MODERATING FINANCIAL DEVELOPMENT EFFECT AND ECONOMIC GROWTH IN WEST AFRICA SUBREGION

Summary/Abstract: This study empirically investigated financial development moderating task on the connection allying various types of financial inflows (foreign direct investment, foreign portfolio investment, foreign debt flows, and remittances) and economic growth in the West Africa sub-region, while accounting for crosssectional dependence existence. The analysis is motivated by the need to understand how financial development level influences financial inflow effectiveness in economic growth promotion, given the interconnectedness and potential spillover effects among countries in the region. Drawing from a panel dataset spanning 1990-2022 for five West African countries, a range of econometric techniques was employed to address cross-sectional dependence and slope heterogeneity, among which includes: slope homogeneity tests, cross-sectional dependence tests, second-generation panel unit root tests, and estimation methods robust to cross-sectional dependence, such as Common Correlated Effects Mean Group (CCEMG) and Augmented Mean Group (AMG) estimators. Using the CCEMG estimator, financial development exerted a positive and significant influence on economic growth, and its interaction with foreign portfolio investment was also positive and significant. The AMG estimator provided additional insights, showing remittances had a positive impact on growth, while foreign portfolio investment negatively affected growth. Notably, the interaction between financial development and remittances was negative and significant under the AMG model. These mixed results suggest that while financial development generally promotes growth, its interactions with different types of capital flows can have varying and even opposing effects depending on the specific combination and empirical approach used. The study concludes that financial development engages in a crucial moderating task in the connection allying financial inflows and economic growth in the West Africa sub-region, with varying effects across different types of financial inflows. The findings underscore the relevance of accounting for cross-sectional dependence and heterogeneity in panel data analysis and have policy implications for harnessing the potential gains of financial inflows while promoting sustainable growth in the West Africa sub-region.

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