Public Education Expenditure, Government Effectiveness, and Financial Development in Sub-Saharan Africa

This paper examines how public education expenditure shapes financial development in Sub-Saharan Africa (SSA) and whether this relationship depends on the quality of public-sector management. Using an unbalanced panel of SSA countries over 2000–2020, financial development is measured by the IMF Financial Development Index, education spending (% of GDP) by the World Bank’s World Development Indicators, and government effectiveness by the Worldwide Governance Indicators. Fixed-effects estimates with country and year controls indicate that higher education expenditure is associated with stronger financial development, while inflation is negatively related to financial development. Interaction results show that the effect of education spending is conditional on government effectiveness: marginal effects are weak or statistically indistinguishable from zero at low levels of government effectiveness but become positive and significant as government effectiveness improves. Dynamic system GMM estimates confirm strong persistence in financial development and suggest that short-run effects of education spending are limited, consistent with lagged human-capital and institutional-transmission channels. The findings imply that education budgets alone are unlikely to deliver sustained financial deepening without improvements in public sector effectiveness and macroeconomic stability. Policies that strengthen budget execution, accountability, and service delivery in education—alongside credible inflation control—can raise the returns of education spending for financial sector development in SSA.