In the aftermath of the 2008 global financial crisis, the implications of financial liberalisation for stability and economic growth have come under increased scrutiny. One strand of literature posits a positive relationship between financial liberalisation and economic growth and development. However, others emphasise the link between financial liberalisation is intrinsically associated with financial instability which may be harmful to economic growth and development. This study assesses linkages between financial instability, financial liberalisation, financial development and economic growth in 41 African countries for the period 1985–۲۰۱۰٫ The results suggest that financial development and financial liberalisation have positive effects on financial instability. The findings also reveal that economic growth reduces financial instability and the magnitude of reduction is higher in the pre-liberalisation period compared to post-liberalisation period.

Introduction

The financial crisis of 2008 cannot be viewed as a shock that was subsequently followed by struggles from actors that were rational (Asongu, 2015a). On the contrary, it demonstrates the imperative of social norms and conventions like models of management adopted to meet-up the challenges of uncertainty. In essence, the failure of political scientists and economists to forecast the crisis is at the same time embarrassing and very dismal. Accordingly, the crisis has gone a long way to reminding scholars that we are living in a world full of risks and uncertainties, which conventional models of market and human behaviour are unable to effectively predict. Nevertheless, rational economic agents are still assumed to follow instrumental, consistent and rational norms, and this is viewed as rationally logical. However, where the parameters are for the most part not able to predict future events, as is the case in the real world, this conjecture becomes untenable. This situation has allowed market players and policy makers to become dependent on a plethora of social conventions that stabilise uncertain environments (Nelson and Katzenstein, 2011). In the light of the recent financial crisis, the great ambitions of liberalisation policies and their relevance to economic prosperity have increasingly come under scrutiny, particularly in developing countries. According to some experts, the financial meltdown has exposed the shortcomings of liberalisation economic strategies (Kose et al., 2006; Goldberg and Veitch, 2010; Agbloyor et al., 2013; Asongu, 2014; Kose et al., 2011). In essence, emerging economies that experienced considerable inflows of capital during the past decades have been confronted with the challenging task of managing any consequential external shocks, which may be exacerbated by financial liberalisation, when those financial flows contract. Accordingly, the economic downturn has encouraged renewed interest in the theoretical underpinnings of financial liberalisation, especially in terms of how financial liberalisation has affected developing countries.1 Rodrik and Subramanian (2009) take the view that the theoretical underpinnings of financial globalisation are less convincing today. They consider that the global financial meltdown and its consequences, has resulted in the benefits of financial engineering becoming questionable. According to Rodrik and Subramanian (2009), financial liberalisation has substantially failed to address the needs of investment and growth in less developed countries. Thus, nations that have experienced remarkable rates of economic growth have been those that have also been less reliant on international capital flows. They sustain that globalisation has failed to smooth consumption and mitigate volatility. Clearly, in a situation where financial flows in an economy are not able to be quickly moved from one financial centre to another, due to an absence of financial liberalisation, economic volatility could be reduced in the economy. Alternatively, if financial flows are able to move rapidly across international borders, those economies losing the flows may have their banking systems and industrial bases undermined.