Banks,Stock Market Development and Economic Growth in Kenya: An Empirical Investigation

In this paper, we have examined the impact of both bank- and market-based financial development on economic growth in Kenya during the period 1980 to 2012, using the autoregressive distributed lag bounds testing approach. To capture as far as possible the breadth and depth of the Kenyan bank- and market-based financial systems, the study employs the method of means-removed average to construct both bank- and market-based financial development indices from an array of banking sector and stock market variables. The empirical results of this study show that market-based financial development has a positive impact on economic growth in Kenya. However, the results have also shown that bank-based financial development has no impact on economic growth in the study country. These results apply irrespective of whether the regression analysis is conducted in the long run or in the short run. The findings of this study, therefore, lend more support to pro-market-based financial development policies in Kenya.     

An empirical test of the Balassa-Samuelson hypothesis: Evidence from eight middle-income countries in Africa

The paper tests the validity of the Balassa-Samuelson hypothesis (BSH) using the within-effects and the dynamic panel generalised methods of moment (GMM) techniques for a panel of eight middle-income African countries over the period 1960–2009. We selected these countries because they exhibited a mixture of relative productivity growth and real exchange rate misalignment that fits the characterization of the BSH well. The results strongly support the BSH for this group of countries. The results are valid even after we controlled for potentially omitted variables and endogeneity. The implication is that as these countries become more productive, their currencies appreciate in real terms.     

Supply‐leading versus Demand‐following Hypothesis: Empirical Evidence from Three SSA Countries

Abstract: This study investigates empirically the direction of causality between financial development and economic growth in three sub‐Saharan African countries — Kenya, South Africa and Tanzania. The study seeks to answer one critical question: Does financial development in sub‐Saharan African countries exhibit a supply‐leading or demand‐following response? Using three proxies of financial development against real GDP per capita (a proxy for economic growth), the study finds that the direction of causality between financial development and economic growth is sensitive to the choice of measurement for financial development. In addition, the strength and clarity of the causality evidence is found to vary from country to country and over time. On balance, a demand‐following response is found to be stronger in Kenya and South Africa, whilst in Tanzania a supply‐leading response is found to be dominant. The study therefore recommends that for Kenya and South Africa the real sector of the economy should be developed further in order to sustain the development of the financial sector. However, for Tanzania, there is need for further development of the financial sector in order to make the economy more monetized.     

Binding constraints to productive investment in Malawi: A modified HRV framework

The paper applies a modified Hausmann, Rodrik, and Velasco (HRV) growth diagnostics framework to analyse Malawi's growth challenges. The study finds five critical binding constraints affecting productive investment and output growth in Malawi. These include land administration, taxation, customs and trade regulations, political governance, and cost‐of‐finance. Land constraints are evidenced by highly urban and rural population growth, an inverse co‐movement between the rural population and investment per capita, and low land administration indices. Tax constraints are evidenced by the negative growth of investment per capita. Customs and trade regulations constraints are evidenced by nontariff measures, such as high costs and the time it takes to export and import. Political governance constraints are evidenced by rising government debt and the low score on transparency, accountability, and corruption based on the World Bank's Public Transparency Scale. Lastly, high cost‐of‐finance constraints are evidenced by monetary policy challenges, such as high real interest rates, inflation rate, uncompetitive exchange rate, and foreign aid ineffectiveness. Therefore, we recommend that the formulation of crucial policy strategies to alleviate these five significant binding constraints be encouraged. The government should base such an approach to sound growth therapeutics that fully account for each challenge's root causes.     

Challenges of Doing Business in Africa: A Systematic Review

ABSTRACT

This paper provides a systematic review of challenges to doing business in Africa. It complements the extant literature by answering two critical questions: what are the linkages between the ease of doing business and economic development; and what are the challenges to doing business in Africa? In providing answers to these questions, the nexus between the ease of doing business and economic development is discussed in six main strands, namely: wealth creation and sharing; opportunities of employment; balanced regional and economic development; Gross Domestic Product (GDP) and GDP per capita; standards of living and exports. Moreover, challenges to doing business are articulated along the following lines: (i) issues related to the cost of starting a business and doing business; (ii) shortage of energy and electricity; (iii) lack of access to finance; and (v) high taxes and low cross-border trade.     

Interest Rate Liberalization and Economic Growth in Zambia: A Dynamic Linkage

Abstract: This paper examines the dynamic impact of interest rate reforms on economic growth in Zambia—using two models in a stepwise fashion. In the first model, the efficacy of interest rate liberalization is examined by regressing the interest rate on the level of financial deepening. In the second model, the causal relationship between financial depth and economic growth is examined by incorporating savings as an intermittent variable in the bivariate setting, thereby creating a simple trivariate model. Using the cointegration‐based error correction model, the study finds strong support for the positive impact of interest rate liberalization on financial deepening. In addition, the study finds that financial deepening, which results from interest rate liberalization, Granger causes economic growth. The results apply irrespective of whether the causality is estimated in the short run or in the long run. Other results show that: (1) lagged financial depth leads to further financial deepening; (2) savings and economic growth Granger cause each other; and (3) financial development Granger causes savings in the long run.     

Financial Development and Economic Growth Nexus: A Revisionist Approach

In this piece, we highlight some of the salient issues and controversies surrounding the relationship between financial development and economic growth, from both the theoretical and the empirical fronts. We first discuss the controversies on the role of financial development in economic growth; and we then proceed to review the causal relationship between financial development and economic growth. We conclude that the relationship between financial development and economic growth is highly complex, and is dependent on a number of factors. Hence, the argument that financial development always leads to economic growth should be taken with extreme caution.     

Smallholder market participation under transactions costs: Maize supply and fertilizer demand in Kenya

This paper assessed the effects of transactions costs—relative to price and non-price factors—on smallholder marketed surplus and input use in Kenya. A selectivity model was used that accounts for the effects of transactions costs, assets, technology, and support services in promoting input use and generating a marketable surplus. Output supply and input demand responses to changes in transactions costs and price and non-price factors were estimated and decomposed into market entry and intensity. The results showed that while transactions costs indeed have significant negative effects on market participation, institutional innovations—such as group marketing—are also emerging to mitigate the costs of accessing markets. Output price has no effect on output market entry and only provides incentives for increased supply by sellers. On the other hand, both price and non-price factors have significant influence on adoption and intensity of input use. Overall, the findings suggest that policy options are available other than price policies to promote input use and marketed surplus. The paper concludes with implications for policy to induce greater input–output market participation among smallholders in Africa.     

The Role of ICT in Modulating the Effect of Education and Lifelong Learning on Income Inequality and Economic Growth in Africa

This study assesses the role of information and communication technologies (ICT) in modulating the impact of education and lifelong learning on income inequality and economic growth. It focuses on a sample of 48 African countries from 2004 to 2014. The empirical evidence is based on the generalized method of moments. The following findings are established. First, mobile phone and internet each interact with primary school education to decrease income inequality. Second, all ICT indicators interact with secondary school education to exert a negative impact on the Gini index. Third, fixed broadband distinctly interacts with primary school education and lifelong learning to have a positive effect on economic growth. Fourth, ICT indicators do not significantly influence inequality and economic growth through tertiary school education and lifelong learning. These main findings are further substantiated. Policy implications are discussed.     

Financial development and economic growth nexus: A rejoinder to Tsionas

Tsionas has offered a more revisionist approach to the empirics of the nexus between financial development and economic growth following our paper entitled ‘Financial development and economic growth nexus: A revisionist approach’. In the current note, we engage Tsionas’ approach in tandem with our original finance–growth nexus review. We concur with Tsionas’ approach and reiterate that the debate on the relationship between financial development and economic growth remains a complex terrain both on the theoretical and empirical fronts.