Spatial Externaltiy, Openness and Financial Development in Sub-Saharan Africa (SSA) Countries

This paper investigates the impact of a spatial variable on financial development in SSA for the period of 1970-2005. It is a dynamic panel data model that uses Arellano and Bond GMM estimation. The spatial variable is the financial development in South Africa interacted with the ratio of distance from the other SSA countries. The paper finds that financial development is geographically sensitive, and thus not immune to spatial externality. The study indicates that there is a spatial benefit (cost) associated with financial development (underdevelopment).To confirm the robustness of our findings, we conduct cointegration test to assess whether or not the spatial variable has any long-run impact on financial development in particular and on economic growth in general. In all, we find statistical evidence that financial development exhibits spatial externality among SSA countries.