TESTING THE CAUSAL NATURE OF FINANCIAL INFLOWS, FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN WEST AFRICA

Abstract

West Africa has experienced varying degrees of financial integration with global markets and diverse trajectories in financial sector development over the past three decades. Hence, this study investigates the causal movement and relationships among financial inflows, financial development and economic growth in the sub-region between 1990-2023. Employing second-generation panel data methodologies, including Dumitrescu Hurlin Panel Causality Tests, Cross-Sectional Dependence Tests, Slope Homogeneity as well as second generation Unit root Tests. Descriptive statistics reveal significant variability in economic indicators, with non-normal distributions highlighting the complex economic landscape of the region. The Slope Homogeneity Test conclusively demonstrates heterogeneous economic relationships across West African countries, suggesting that uniform economic models may be inappropriate, while cross-sectional dependence tests confirm substantial interconnectedness among economic variables, indicating that economic dynamics in one country significantly influence others in the sub-region. Data were sourced data World Development Indicator (2024) and was secondary in nature. Therefore, the study employs Dumitrescu Hurlin Panel Causality Tests to achieve the goal.Based on the method, the study uncovers bidirectional relationships between GDP and financial development, remittances, and portfolio investments, underscoring their mutual reinforcement. However, foreign direct investment shows a uni-directional catalyst for both economic growth and financial system development, as all were found to be statistically significant at 5% level. These findings provide an impetus for economic mechanisms of West Africa, emphasizing the need for both holistic and integrated approaches to economic policy-making that recognize the region's dynamics financial as well as economic system.