Armed Conflicts and Africa’s Financial Sector Development

Abstract

This study examined different aspects of armed conflicts, specifically persistence, intensity, and location, on the financial sector across Africa. Based on Pooled OLS estimation across 51 African states from 1991 to 2020, the study found that persistent armed conflicts during financial reforms are associated with the underdevelopment of the financial sector. This adverse effect is most pronounced in high-intensity (i.e., war) conflicts at the 1% significance level. On the other hand, it was found that conflicts fought over government control have a significant negative effect on financial sector development at the 1% significance level compared to those based on territorial contest, likely owing to their relative proximity to financial hubs/capital cities. Consistent with this logic, the study revealed that low-intensity conflicts produced significant adverse effects at the 5% significance level only when associated with government contest. These baseline estimates are largely consistent with the Huber-Tukey robust regression results and contribute to the literature on conflict economics by highlighting differential effects of various forms of armed conflicts, with the following implications. Firstly, curbing both the outbreak and persistence of armed conflicts can enable African states to benefit from the cumulative gains of financial reforms. This can be achieved through broad-based initiatives that promote both negative and positive peace. Secondly, enhanced state capacity, particularly the ability to contain the diffusion of conflict into critical economic sectors, including financial hubs, can reduce the associated economic cost.Keywords: Armed Conflict, Financial Sector Development, Pooled OLS, Africa