The multidimensional effect of financial development on trade in Africa: The role of the digital economy

The issue of how financial development affects international trade has gained much attention in the literature, both theoretical and empirical, without investigating the various transmission channels of financial development on international trade. Significantly, how the digital economy modulates the effects of financial development on trade remains unexplored. Our study addresses these research gaps using panel data from 47 African economies spanning 1990 to 2019. Our findings based on the dynamic system GMM approach show that the direct impacts of financial development and the digital economy have been crucial in driving international trade in Africa in the short and long runs. Second, in the short and long runs, the digital economy serves as a vital channel through which financial development has the most significant impact on trade in Africa. Third, the robustness checks by excluding countries endowed with natural resources in Africa provide robust evidence that digital technology and finance matter for trade. Further, the study discloses an important novelty in that the marginal effects on trade increase when financial development in Africa interacts with the digital economy. In light of these findings, we conclude that policy reforms should focus on policies that encourage the development of the digital economy and its use in the financial sector in Africa.