In African Emerging Economies, Nonlinear Dynamics of the Financial-growth Nexus: The Case of a Macroprudential Policy Regime

Caelum Ember^*
*Correspondence: Caelum Ember, Department of Commerce, University of Zululand, Kwadlangezwa 3886, South Africa, Email:

Keywords

African emerging economies • Nonlinear dynamics • Sustainable development

Introduction

African emerging economies are at the forefront of global attention as they navigate the complexities of sustainable development. The relationship between the financial sector and economic growth is a central aspect of this journey, and understanding the nonlinear dynamics of this connection is crucial for effective policy formulation. This article explores the multifaceted nature of the financial-growth nexus in African emerging economies, shedding light on the impact of a macroprudential policy regime on these dynamics. The conventional wisdom posits a positive linear relationship between financial development and economic growth. However, the reality in African emerging economies suggests a more nuanced picture. The financial sector's role is multifaceted, encompassing not only capital mobilization but also risk management, institutional development, and market stability. This complexity requires a more sophisticated understanding of the interactions between finance and economic growth [1].

Linear models may oversimplify the intricate relationships within African emerging economies. Nonlinear dynamics recognize that the impact of financial development on economic growth is context-dependent and may vary across different levels of financial development. As these economies undergo transitions and face unique challenges, nonlinear models offer a more accurate representation of the complex interplay between financial variables and economic outcomes [2].

Literature Review

In the pursuit of sustainable economic development, African emerging economies are increasingly turning to macroprudential policies. These policies aim to mitigate systemic risks, enhance financial stability, and ensure the resilience of the financial sector. The effectiveness of such policies in shaping the financial-growth nexus requires careful examination, considering the nonlinear nature of the relationship [3]. To substantiate the discussion, this article examines empirical evidence and case studies from selected African emerging economies. By analyzing the impact of macroprudential policies on financial development and economic growth, it seeks to uncover patterns and trends that may not be apparent in linear models. Case-specific nuances and the diverse economic landscapes of these countries contribute to the broader understanding of the financial-growth nexus.

The findings of this study have direct implications for policymakers in African emerging economies. The nonlinear dynamics uncovered in the financial-growth nexus suggest that one-size-fits-all policies may be ineffective. Policymakers need to tailor their strategies, considering the specific characteristics of their financial systems and economic structures. The role of macroprudential policies, in particular, becomes pivotal in managing risks and fostering sustainable growth. The implementation of a macroprudential policy regime in African emerging economies is not without challenges. Institutional capacity, regulatory frameworks, and global economic uncertainties pose hurdles to effective policy execution. However, these challenges also present opportunities for innovation, collaboration, and the development of adaptive policy frameworks that can address the unique dynamics of these economies [4]. The adoption of macroprudential policies in African emerging economies reflects a proactive approach toward mitigating systemic risks within their financial systems. These policies encompass various measures, including capital buffers, loan-to-value ratios, liquidity requirements, and stress testing, aimed at enhancing financial stability. However, the effectiveness of these policies varies depending on the unique economic landscapes and institutional frameworks of each country.

Discussion

A critical aspect of macroprudential policies is their influence on financial stability. In African emerging economies, where vulnerabilities such as liquidity constraints, credit risks, and market fluctuations are prevalent, these policies serve as a safeguard against potential crises. By curbing excessive risk-taking behaviors and bolstering resilience, macroprudential measures contribute to maintaining a stable financial environment conducive to sustainable growth. One of the challenges inherent in implementing macroprudential policies is navigating the trade-offs between promoting economic growth and ensuring financial stability. Striking a balance between these objectives is crucial. While stringent regulatory measures may enhance stability, they could also inadvertently stifle credit access and dampen investment, potentially hampering economic expansion [5]. Policymakers face the delicate task of managing these trade-offs to optimize both growth and stability.

Assessing the effectiveness of macroprudential policies in African emerging economies requires a comprehensive evaluation framework. Metrics such as changes in credit growth, systemic risk indicators, and the resilience of financial institutions serve as crucial benchmarks. However, the dynamic nature of these economies demands continuous monitoring and adaptation of policies to address evolving challenges and ensure policy efficacy. African emerging economies exhibit considerable regional diversity, characterized by differing economic structures, levels of financial development, and institutional capacities. Therefore, implementing macroprudential policies requires an understanding of regional nuances and the customization of strategies to align with specific regional dynamics. This approach acknowledges the heterogeneity among countries and tailors policies accordingly [6].

Conclusion

The successful implementation of macroprudential policies hinges on robust institutional frameworks and effective collaboration among stakeholders. Strengthening regulatory bodies, enhancing supervisory capabilities, and fostering cooperation among financial institutions, government agencies, and international organizations are pivotal for ensuring policy effectiveness. Capacity-building initiatives and knowledge-sharing platforms play a crucial role in this regard. A key consideration for policymakers in African emerging economies is fostering sustainable and inclusive growth. Macroprudential policies, while aimed at maintaining stability, should not neglect the importance of inclusive financial access and sustainable development. Striving for financial inclusion, promoting responsible lending practices, and encouraging investments in sectors that drive long-term growth contribute to a more balanced economic landscape.

In African emerging economies, the implementation of a macroprudential policy regime introduces a layer of complexity to the financial-growth nexus. Recognizing the nonlinear dynamics inherent in these relationships is crucial for effective policymaking. Balancing the imperatives of growth and stability, tailoring policies to regional variations, strengthening institutions, and prioritizing sustainable and inclusive development are pivotal for navigating the complexities of the financial-growth nexus in these economies.

Acknowledgement

None.

Conflict of Interest

None.

References

1. Adeniyi, Oluwatosin, Abimbola Oyinlola, Olusegun Omisakin and Festus O. Egwaikhide. "Financial development and economic growth in Nigeria: Evidence from threshold modelling." Econ Anal Pol 47 (2015): 11-21.

   Google Scholar, Crossref, Indexed at

2. Assefa, Tibebe A. and André Varella Mollick. "Financial development and economic growth in Africa." J African Bus 18 (2017): 320-339.

   Google Scholar, Crossref

3. Keho, Yaya. "The impact of trade openness on economic growth: The case of Cote d’Ivoire." Cogent Econ Finance 5 (2017): 1332820.

   Google Scholar, Crossref, Indexed at

4. Romer, Paul M. "Increasing returns and long-run growth." J Pol Econ 94 (1986): 1002-1037.

   Google Scholar, Crossref, Indexed at

5. Bist, Jagadish Prasad. "Financial development and economic growth: Evidence from a panel of 16 African and non-African low-income countries." Cogent Econ Finance 6 (2018): 1449780.

   Google Scholar, Crossref, Indexed at

6. Eitrheim, Øyvind and Timo Teräsvirta. "Testing the adequacy of smooth transition autoregressive models." J Econom 74 (1996): 59-75.

   Google Scholar, Crossref