Abstract

Due to a growing interest among economists in financial development as a key driver of economic growth and poverty reduction, the economy of Malawi, just like other developing countries, has taken a number of efforts in trying to improve the performance the financial sector. At the same, efforts to open up the country for trade have not been compromised. This has been due to the belief that outward-oriented trade strategies promote sustainable economic growth in developing countries. However, it is not we known whether these two courses of action are in harmony with each other for Malawi since not much work has been done on the subject. Studies carried out on the subject have had different conclusions. The general conclusion that can be drawn from such studies is that trade openness has different impact on financial sectors of different economies. The study therefore seeks to analyze how the financial sector in Malawi is affected by openness to trade. The study used time series data for Malawi for the period 1970-2005 and Ordinary Least Squares approach to estimate the financial sector development equation. Cointegration and Error correction modeling was adopted to analyze the short and long run impact of trade openness on the financial sector. The results of the two equations support the view that trade openness positively impacts financial development in Malawi. The findings of the study imply that trade openness is compatible with financial sector development and the two courses of action can be taken simultaneously.

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School	: School of Law, Economics and Government
Issued Date	: 2008

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