Institutional threshold in the nexus between financial openness and TFP in Africa: A dynamic panel analysis
Solomon Okunade
Abstract
The challenge of “growth without development” in most developing countries particularly in the African region has brought to fore the discussion of the effects of macroeconomic policies on the key determinants of growth, namely Total Factor Productivity (TFP). This study investigated the threshold or sustainable level of institutional development necessary for financial openness to stimulate TFP growth by employing a Dynamic Panel Threshold Model (DPTM) for the panel of 28 selected African countries from 1996 to 2019. The findings showed that there exists a threshold or sustainable level of institutional development (4.73 out of 10-points scale) which African countries must attain to reap the full benefits of financial openness in terms of TFP growth because the quality of institutions in most African countries are pervasively weak and poorly developed to checkmate excesses, corruptions and political interferences in the financial markets. Therefore, the study recommended that there should be a deliberate attempt by relevant authorities to block all inherent loopholes in the institutional settings of African countries which give room for shady dealings in the financial markets, to ensure institutional environments (political, legal, regulatory, and economic institutions) are healthy enough to absorb the negative influence or the risks associated with financial openness that may hinder growth and development in the long-run by hindering TFP growth.