Financial systems and economic growth in South Africa: a dynamic complementarity test

Abstract

This study examines the relationship between banks, stock markets and economic growth in South Africa. The study attempts to answer one critical question: are stock markets and banks complementary to one another in the process of enhancing economic growth? The complementarity between the stock markets and banks is examined by including a set of interactive terms in a standard growth model, alongside bank development and stock market development proxies. In order to test the robustness of the results, three proxies of stock market development have been used, namely stock market capitalization, stock market traded value and stock market turnover – against the ratio of bank credit to the private sector, a proxy for bank-based financial development. The economic growth is, however, proxied by real GDP per capita. Using the ARDL-Bounds testing procedure, the study finds that the complementarity between stock market development and bank-based financial development is weak and sensitive to the proxy used to measure stock market development.

Keywords:

• South Africa
• banks
• capital market
• growth

JEL Classifications:

• C10
• E44
• F43
• G21

Acknowledgements

This paper is based on a research project that was partially funded by the African Economic Research Consortium (AERC). The author thanks two AERC Resource Persons for their valuable inputs on an earlier version of this paper. The usual disclaimer applies.

Notes

1. See Murinde (2012) for a detailed survey of some of these studies.