Journal Article

Revisiting stock market development and growth analysis in ECOWAS: a disaggregated analysis of institutional quality as mediating variable

Tweneboah, George, Eshun, Richard

2024

Overview

This study assessed whether the relationship between stock market development and economic growth in the Economic Community of West African States (ECOWAS) is conditioned by institutional quality. Empirical estimations to substantiate the mediating role of disaggregated institutional quality variables in the stock market development and economic growth relationships are performed using the Hansen threshold regression method and the study period is from 2000 to 2020. The findings revealed that good institutional structures help stock market development to have a greater positive influence on growth in the region. When institutional quality are disaggregated into its various constituents, the study results suggest that when government effectiveness is the threshold variable, stock market development has a positive and significant relationship with growth below the threshold, whereas higher regulatory control has a negative effect on how stock market development influences growth. This finding suggests that excessive government interference hinders the stock markets to have greater influence on growth. Further, the study results suggest that when rule of law, and political stability are above the estimated threshold, stock market development has a positive effect on growth whereas control of corruption, and voice and accountability negatively affect how stock market development influences growth when it is below the estimated threshold level. The findings of the study suggest that policies towards improving corruption control, voice and accountability, rule of law, and an optimum level of regulatory control, such as promoting democratic principles, instituting punitive measures to clamp down corruption, pragmatic measures to entrench rule of law can help stock market development to have a greater positive influence on growth in the ECOWAS region. ECOWAS member states are therefore encouraged to ensure various institutions are adequately resourced to enable the region to achieve the growth-enhancing effect of stock market development. Enhancing the stock market is crucial for economic development. This assertion by the academic community in relation to the stock market development-growth nexus is applicable to the Economic Community of West African States (ECOWAS). The ECOWAS region has nurtured the idea of developing sound financial markets to help realize the introduction of a single currency in the region. The region can achieve this if there is a robust institutional structure. Therefore, this study examines the relationship between stock market development and economic growth when institutional quality is the mediating variable. The results show that when government effectiveness is the threshold variable, stock market development has a positive and significant relationship with growth below that threshold, whereas higher regulatory control has a negative effect on how stock market development influences growth. This finding indicates that excessive government interference inhibits stock market development to have a substantial positive influence on growth. This corroborates McKinnon's ( 1973 ) financial repression and financial liberalization theory. The ECOWAS region should pursue improved institutional quality structures to enable stock markets to have a full impact on economies.

• Publisher: Cogent,Taylor & Francis Ltd,Taylor & Francis Group
• Subject: Accountability / Corruption / Economic conditions / Economic development / Economic growth / Economics and Development; Regional Development; International Relations / ECOW / George Mudimu, Marondera University of Agricultural Sciences and Technology, Development Sciences, Marondera, Zimbabwe / Government / Hansen threshold regression / Influence / institutional quality / Law / Regions / Regulation / Rule of law / Securities markets / Stock exchanges / stock market development / Thresholds