Does Finance Lead to Economic Growth Convergence in Africa?

The literature on the finance-growth nexus predominantly suggests that finance affects growth through capital accumulation in developing countries. The existing literature has also produced conflicting findings on the impact of finance on economic growth. This paper suggests that the infusion of financial technology into Africa can propel the continent to distribute credit into productive sectors that can induce per capita income convergence between the continent and the United State of America, the world's technological leader. The paper also examines whether shocks in the growth of financial resources are responsible for economic growth in Africa. In the first instance, the paper employed contemporaneous cross-sectional analysis using the robust least square tool to ascertain the long-run per capita income convergence between Africa and the United States if financial resources are channeled into productivity growth. In the second instance, a dynamic generalized method of moment tool was employed to implement both symmetry and asymmetry impact of finance on the growth of Africa. The paper's objectives are analyzed based on country-level data obtained from the World Bank, PennWorld Table 9.0, and the Heritage Foundation. The paper also explores the impact of sub-regional economic integration by analyzing the role of the various economic groupings in Africa in channeling financial resources into growth. The contemporaneous analyses suggest that the level of financial development can propel African countries to converge to the per capita income level of the United States of America in the long run provided other growth fundamentals such as human capital, trade openness, and telecommunication infrastructure are present. 13 African countries, given their level of financial development and other policy measures are likely to converge to the per capita income of the USA. In the dynamic analysis, we find that lower growth in financial systems development is detrimental to economic growth. However, the growth in financial development in the various economic groupings in the continent produces divergent responses on economic growth. Whereas financial innovation in COMESA and ECCAS induces economic growth, that of ECOWAS and ARABMAG is detrimental to economic growth. The evidence makes a strong case for measures to promote productivity-oriented financial intermediation in Africa. The African Union should liaise with the financial institutions to encourage them to channel more financial resources to support innovation in the private sector to boost industrialization and therefore aid in the realization of sustainable development. The partnership with the financial sector should be tailored-made to suit the special needs of the various sub-regions of the continent.