Effect of economic integration on sectorial value added in sub–saharan Africa: does financial development matter?

Abstract

The need for higher sectorial output for enhanced structural transformation has long been acknowledged in the literature, with economic integration touted as one of the ways of spurring sectorial value added. However, recent studies have been less informative in examining how integration influences sectorial output, given the narrow focus of trade and financial integration measures. More tellingly, whether countries domestic financial development mediates the impact of integration on sectorial value added is yet to be explored. This study, therefore, re-engages the literature by investigating the integration–sectorial output linkage using comprehensive measures of integration and financial development. By employing data from 28 sub–Saharan African countries from 1985 to 2015, we find that higher economic integration spurs sectorial value added with robust impact in the industrial sector. This effect holds albeit disproportionately when economic integration is disaggregated into its various forms with the effect of trade integration consistently higher relative to financial integration. Further evidence shows that improved financial development significantly increases the output–enhancing effect in the industrial sector with a weak magnifying role in the agricultural and service sectors.