Challenges in the Era of Globalization - iaabd

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Proceedings of the 12th Annual Conference © 2011 IAABD Bank Efficiency, Capital Account Liberalization and Economic Growth: Evidence from Africa Abstract Emmanuel Mensah , ekbmensah@yahoo.ca University of Ghana Business School, Ghana Joshua Abor Department of Finance, University of Ghana Business School, Ghana A Q Q Aboagye University of Ghana Business School, Ghana Charles Adjasi University of Ghana Business School, Ghana In this study, we test whether bank efficiency used as a measure for the quality of the banking intermediation affects economic growth. Using the semi-parametric Flourier flexible approach and bank level data for 277 banks covering the period, 1999-2008, the study found average cost efficiency levels of banks in Africa to be 75%. Further, by employing the Arellano and Bond GMM estimator, the study found a positive association between cost efficiency scores and economic growth and a negative association between capital account liberalization and economic growth. Among the other determinants of growth, inflation was found to be negatively related to growth whilst governance variables were found to be positively related to growth. Introduction The costs of acquiring information, enforcing contracts and making transactions create incentives for the emergence of financial intermediaries to mitigate the negative repercussions of these market frictions, Levine (2001). Financial intermediaries therefore arise to reduce these market frictions and hence may help the efficient allocation of resources across space and time. This allocation role of financial institutions was first recognized by Schumpeter (1912), who conjectured that bankers help to identify entrepreneurs with good growth prospects, and therefore help to reallocate resources to their most productive uses (Yu and Gan, 2010). Over the past 3 decades there has been an enormous research to establish this finance-growth nexus. In a groundbreaking article by Levine (1997), he establishes that there is a first order relationship between finance and economic growth. Further to this, many studies analyze the finance-growth nexus empirically and explain cross-country growth differentials by the volume of funds relative to economic output, (Levine, 2005). However, a mere expansion of credit need not indicate a qualitative improvement of intermediaries’ abilities to channel scarce funds from savers to borrowers, which is of crucial importance (Romero-Avila, 2007). In this study we test whether bank efficiency estimated at firm level significantly affect economic growth in Africa. We use the efficiency scores as a relative measure of bank performance to gauge the quality of the financial market in these African countries. Basic economic theory also suggests capital account liberalization may benefit a country. Free capital mobility for instance, offers the opportunity to realize the highest return on saving, to borrow at the most favorable rates, and to diversify away country-specific risk (see Edison et al, 2004 and Prasad et al, 2003). A more subtle set of benefits, but ones that have increasingly been the focus of discussion, involve the possibility that capital account liberalization promotes the efficiency and development of financial intermediation, Klein and Olivei (2008). Thus, a country which is more liberalized on the capital account 780
Challenges in the Era of Globalization Edited by Emmanuel Obuah fronts stands to gain in terms of domestic financial markets and hence accelerated economic growth. However, other researchers have also noted that capital account liberalization really does not favour the developing countries due to the contagion effect during the times of economic crisis. Thus we test for empirical evidence on the African continent. To do this we employ the stochastic Fourier flexible specification of bank cost function to estimate the cost efficiency and the generalized methods of moments (GMM) system developed by Arellano and Bond to investigate the relationship between bank efficiency, liberalization and economic growth for 35 African countries over the period 1999-2008. To the best of our knowledge this is the first of such studies on finance and growth dedicated solely to African countries in which the qualitative aspect of the financial sector has been considered as opposed to the traditional volume measures of financial development. In what follows, Section 2 reviews the literature on bank efficiency liberalization and economic growth, Section 3 presents the data and the methodology used in the study, Section 4 presents the analysis and the results of the study and conclusions are presented in Section 5 Literature Review Finance and Growth Ndikumana (2001) asserts that examining the linkages between financial development and economic growth requires addressing the question of whether the overall financial system leads to higher economic growth and to identify the channels through which intermediation affects economic growth. Regarding the channels of transmission, Pagano (1993) shows that financial intermediation can affect real growth by increasing the savings rate, improving the allocational efficiency of investments, and by enhancing the functional efficiency of the banking system. Related to the banking-efficiency channel, Graff and Karmann (2006) argue that financial intermediaries need to allocate scarce resources efficiently when providing their products and services. Because banks in particular employ highly skilled human capital, their inefficient intermediation crowds out the use of productive factors in other sectors that could potentially foster economic growth and development. Levine (2001) outlines extensively the role of the financial system in the economic growth process. He noted that financial intermediaries arise to reduce the costs of acquiring and processing information about firms and managers. The second role of financial intermediaries is that they facilitate risk sharing and pooling by lowering transactional costs. This is made possible through diversification. Moreover, financial intermediaries improve resource allocation by permitting the exploitation of economies of scale, Levine (2001). Bagehot (1873) noted that it was not the national savings rate per se; rather it was the ability to pool society’s resources and allocate those savings toward the most productive ends that drives long-run economic success. A large body of empirical research has tested the relationship between financial intermediaries and economic growth. Among them, Levine (1997) finds a first order positive relationship between financial development and economic growth. Other researchers have tested this relationship at the firm level (see Demircug-Kunt and Maksimovic, 1998) industry level (see Rajan and Zingales, 1998), cross-country studies (see Haber, 1991), and time series studies using traditional econometric models. All these have concluded that there is a positive relationship between financial intermediation and economic growth. In this study we investigate empirically whether bank efficiency is one of the channels by which financial development affects economic growth. Capital account liberalization and economic growth There are a number of channels through which capital account liberalization can contribute to the development of a country’s financial system and hence growth. For example, exposure to international competition may improve the efficiency of the domestic financial system through the introduction of international standards. Subsidiaries or branches of foreign banks may enlarge the absolute size of the national banking system, serve formerly neglected niches of the market, and introduce financial 781
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Table of Contents Challenges in the
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Lennart Bangens, Goteborg, Sweden C
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Local Steering Committee Jacob Musi
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Track 1: Accounting, Finance, and I
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Abstract Challenges in the Era of G
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Abstract Determinants of Bank Lendi
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Empirical Results Challenges in the
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Table 3 Determinants of Competitive
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Research Findings Challenges in the
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Abstract: Study on Africa Governmen
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Abstract Challenges of Oil Revenue
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Abstract Land Based Sources of Poll
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Abstract On the Mitigation of Rever
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Figure 1: Lagos off shore survey po
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Table: Model Fitness Regression Sta
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Conclusion Challenges in the Era of
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37. Provision of sound education fo
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The cost structure Challenges in th
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Empirical Analysis Challenges in th
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Variable Coefficient Std. Error t-S
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Abstract The Changing Requirements
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The Model, Data and Variable Defini
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Empirical results Challenges in the
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Abstract Gender, poverty and sustai
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Figure 1.1: Spread of directorships
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Theoretical Framework Challenges in
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Single 18.1 Masters and above 35.3
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Source: Field survey, 2010 Table 3:
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Conclusions and Implications Challe
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Abstract Exploring Organisational R
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district hospitals: Evidence from N
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Defining the Organisational Culture
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Table 1: A Summary of Operating Ban
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Discussion and Conclusion Challenge
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Abstract What does Globalization me
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Research Methods approach Challenge
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Statement of the Problem Challenges
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Convenient location of banks Challe
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Figure 1.Framework for Bank selecti
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Banks in Ghana Challenges in the Er
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References: Challenges in the Era o
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Figure 5: Causal loop diagram inclu
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The study seeks to: • examine typ
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Figure 2: Customer Perception of MT
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Relationship Commitment Total 1264.
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Abstract Marketing Nigerian medicin
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Conclusion Dissatisfied 6 3.4 3.6 7
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Abstract Customer satisfaction with
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Methodology Challenges in the Era o
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Discussion Challenges in the Era of
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Postgraduate 19 Internet experience
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Average daily Internet hours z P-va
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Conclusion Challenges in the Era of
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