Effects of stock market development on economic growth in ECOWAS: does institutional quality matter?

Abstract

This study aims to establish whether the effect of stock market development on the growth of economies in the Economic Community of West African States (ECOWAS) is conditioned by institutional quality threshold. To this end, we used the Hansen threshold estimation approach to assess any discontinuities in this relationship. Data are sourced from the World Development Indicators of the World Bank and cover the period from 2000–2020. We significantly contribute to the literature by examining the nonlinearities in the stock market development-growth nexus when institutional quality is the mediating variable. We established that, as long as institutional quality is below the threshold level, it serves as an impediment for financial markets to drive growth in the West African sub-region. A key implication is that the relationship between stock market development and economic growth in the West African sub-region is contemporaneous, and that the development of the stock market is relevant in the developmental agenda in the sub-region. Therefore, we recommend that at the policy level, countries in West Africa should design strategies that can improve their institutional structures in the areas of allocation of credit, increasing competition, and the implementation of proper regulations that will make it possible for financial markets to stimulate economic growth, as these seem to be important condition to drive growth in the long run.Improving the financial sector is important to guarantee the sustainability of economic growth. This is not different from the Economic Community of West African States (ECOWAS). Regional blocs seek to accomplish this by developing robust and sound stock markets within a solid and healthy institutional framework. This study examines the effect of stock market developments under a strong institutional framework on the economic output of the ECOWAS region. The results show that a robust stock markets and ensuring more credit to the private sector can only improve the gross domestic product of ECOWAS member countries when there is a good institutional quality structure in place. This is crucial for ECOWAS member countries experiencing low manufacturing sector output. Robust institutional quality structures and enhanced credit to the private sector must be continually pursued by the ECOWAS to engender the growth of member economies.