Determinants of Economic Growth inAfrica with Emphasis on the Role of Financial Intermediaries Using Bayesian Averaging of Classical Estimates

Abstract

This paper examines variables, which significantly determine longrun growth in Africa. Emphasis is put on financial intermediaries. Thestudy used 37 countries and 14 variables. It employed an approach,which was introduced by Sala-i-Martin and D. Miller (2000) calledBayesian Averaging of Classical Estimates (BACE). This methodconstructs estimates by averaging Ordinary Least Squares (OLS)coefficients across models and weights given to individual regressionshave a Bayesian justification similar to the Schwarz model selectioncriterion. Results vary from period to period but the most recent evidenceshows that determinants of growth in Africa are Foreign DirectInvestment (FDI) and population growth. Of 14 explanatory variables,FDI shows the strongest evidence. Unexpectedly, all used three financialintermediary indicators were not significant except for Liquid liabilities/GDP (llgdp), which was significant from 1992 to 1998.Keywords: Financial intermediaries, economic growth, Bayesian averagingof classical estimates.