The finance-growth Nexus: lessons from South Africa.
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Date
2016
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Abstract
Recent studies (Allen and Ndikumana, 2000; Odhiambo. 2004; Gondo, 2009; and Sunde, 2011) on the relationship between finance and economic growth in the South African context have produced mixed findings. Given that there is no clear consensus on the finance-growth nexus, this study uses time series data and a set of financial proxies to determine whether there is indeed a causal relationship between finance and economic growth in South Africa for the time period 1965 to 2013. It finds evidence of a long run relationship between the variables through the application of the Johansen cointegration procedure. However, no short run relationship is found between economic growth and finance using three indicators of financial development, while such a relationship is established between growth and domestic credit to the private sector. Overall, the study’s results show that causality is uni-directional. More specifically, the study supports a uni-directional causality going from the use of domestic credit to economic growth and also running from economic growth to financial depth in the use of broad money. However, it also shows that causality between the ratio of bank liquid liabilities and economic growth is two-way. The study recommends that policy makers should implement policies that enhance economic growth as such policies create conducive conditions for a vibrant and revitalised financial sector with fewer information asymmetries. Similarly, policies that aim to improve the performance of the financial sector should also be pursued as the findings show complementarity between financial development and economic growth in the long run.
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Master of Commerce in Economics. University of KwaZulu-Natal. Durban, 2016.
Keywords
Economic development--South Africa., Finance--South Africa., Economic history., Economic development--Finance., Finance., South Africa--Economic conditions., Finance-growth nexus.