The Impact of Financial Development on Human Well-Being in Sub-Saharan Africa: Does Institutional Quality Matter?

Abstract

This paper investigates the role of institutional quality in the effects of financial development on people's well-being in Sub-Saharan Africa. We use data from 35 countries from 2007 to 2021. The study tests for non-linearity between financial development and well-being by identifying threshold effects of financial development, using the panel smooth transition regression (PSTR) model of Gonzalez et al. (2005) and a quadratic model using the system GMM of Blundell and Bond (1998). The estimation results show that there is a non-linear relationship between financial development and well-being, conditioned by institutional quality and expressed as an inverted U-shape. There are financial development thresholds (40.217% for CRED and 49.038% for M2GDP) beyond which any improvement in the financial system leads to a loss of well-being in Sub-Saharan Africa. We show that low institutional quality reduces the positive effect of financial development on well-being. However, there are thresholds of institutional quality beyond which economic and political institutions reinforce the positive effect of financial development on well-being.