Experts Discuss Governance Issues at AEC
“Since 2003 good governance has increased the impact of financial liberalization on financial development”, said John Karikari, Assistant Director of the Centre for Economics of the US Government Accountability Office (GAO). Mr Karikari, whose paper entitled “Governance, Financial Liberalization, and Financial Development in Sub Saharan Africa” was presented and discussed at a seminar on Governance Issues, during the African Economic Conference on Thursday 28th October 2010, in Tunis.
The paper argues that contrary to previous studies, financial liberalization did not have a favorable independent impact on financial development, and that financial liberalization efforts reduced financial development from 1996 to 2002. “But, good governance has improved financial development over time, especially due to reduced political instability” the paper says, especially since 2003. Mr Karikari’s paper points out that the effect of origin of legal systems shows that countries with civil laws were less successful in promoting financial development, compared to mixed legal systems.
The paper further argues that the impact of financial liberalization on financial sector development in Sub Saharan African countries from 1996 to 2008 depended on the quality of institutions. A possible reason, according to Mr Karikari’s analysis, is governments’ forbearance of a large number of weak banks, mostly state-owned, as governance was strengthened. Sub-Saharan African countries lag substantially behind other regions of the world in the quality of their institutions and in measures of the cost of doing business. These challenges may have contributed to small and shallow financial systems with limited outreach and financial intermediation.
A second paper entitled “Official Development Assistance, Governance and Economic Growth: What are the implications for Sub-Saharan Africa?” was presented during the conference. The paper analyzed the effectiveness of foreign aid on economic growth of a sample of Sub-Saharan African Countries. It specifically evaluates governance in its technical and democratic dimension, as a relevant channel through which foreign aid affects growth. The author, Douzounet Mallaye, of the University of Yaounde, showed through the results of his research, that although foreign aid positively impacts growth, only the democratic governance constitutes a valid transmission channel. The paper shows, for example, that a 1% increase in official development assistance translates into 0.43% increase in economic growth. In particular, the effectiveness of aid is more present in a post-conflict African context.
The low-level of financial development in Sub-Saharan Africa is a major factor that affects poverty reduction and growth, especially for the low-income countries. In particular, limited and inadequate access to credit contributes to low productivity in agriculture in rural areas, limits the contributions of small- and medium- enterprises to private sector development, and can slow the deepening of the banking sectors in oil exporting countries since declining export revenues affect their foreign assets.