The Role of Institutional Quality and Financial Development in Economic Growth in Sub-Saharan Africa- Linear and Non-linear Analysis with Structural Breaks

This paper explores both linear and non-linear impacts that institutional quality and financial development may have on the economic growth process in the sub-Saharan African region. Annual data from 1984 to 2019 from 28 sub-Saharan African countries was used. Established on the Solow neoclassical theory, we employ the Cobb-Douglas production function to assess the linear relationship; and the Constant Elasticity of Substitution (CES) to investigate a possible non-linear relationship. To prevent model misspecification and increase the power of the regressions, we apply panel cointegration tools that build in cross-sectional dependency and structural breaks. Our investigations expose significant positive relationships among economic growth, institutional quality, financial development, and capital for the 28 sub-Saharan African countries in the long run as long as structural breaks and cross-sectional dependence are taken into account. The impact of financial development enhanced by institutional quality on economic growth is positive and significant when structural breaks are considered for the Cobb-Douglas function. In the case of the CES function, the significantly positive impact is only present for financial development. Important policy implications on effective measures that stimulate economic growth in sub-Saharan Africa are derived from this study.