Equity, Bonds, Institutional Debt and Economic Growth: Evidence from South Africa

• Author: Ashenafi Beyene Fanta,Daniel Makina
• Date: 01 March 2017
• DOI: http://doi.org/10.1111/saje.12122
• Published date: 01 March 2017

EQUITY, BONDS, INSTITUTIONAL DEBT AND ECONOMIC

GROWTH: EVIDENCE FROM SOUTH AFRICA

ASHENAFI BEYENE FANTA*AND DANIEL MAKINA

†

Abstract

We examine the finance-growth nexus in South Africa accounting for the role of bond mar-

kets, stock markets, and bank and non-bank financial intermediaries using a vector autoregres-

sive technique. Extant empirical literature has largely accounted for only banks and stock

markets, ignoring bond market and non-bank financial intermediaries. We find that bond

market development affects economic growth in South Africa, and no similar effect is

observed for the bank and non-bank financial intermediaries and the stock market. Our find-

ing shows that examination of individual elements of the financial system is important in

understanding the unique effect of each on growth. The observation that the bond market

rather than stock market, bank and non-bank institutions promote economic growth in South

Africa induces an intriguing question as to what unique roles bond markets play that the

intermediaries and equity market are unable to play.

JEL Classification: G10, G21, O16

Keywords: Finance, growth, stock market, bond market, financial sector, South Africa

1. INTRODUCTION

Economic theory predicts that finance promotes economic growth (Greenwood and

Jovanovic, 1990; Bencivenga and Smith 1991; Blackburn et al., 2005). Although the

finance-growth link is among the most researched areas in development economics, our

understanding of the link between the two is still incomplete. This is caused by, among

others, wrong econometric specifications, using weak proxies of financial development,

and inability to address the endogeniety problem.

Studies on the finance growth link in South Africa show contrasting results. Earlier,

Kularatne (2002) reported that financial development indirectly affects economic growth

in South Africa through investment rate. In contrast, Odhiambo (2004) reported that it

is rather economic growth that drives financial development in South Africa, and con-

firmed this using a different econometric model in his more recent papers (Odhiambo,

2009, 2010). However, the monetary aggregate (i.e. M2) he utilised is considered a weak

proxy for financial development (see Levine and Zervos, 1998). Besides, although

Kularatne (2002) controlled for government size and human capital development and

ignored only trade openness and inflation, Odhiambo did not account for human capital

development, inflation, government size and trade openness that are commonly

* Corresponding author: Post-doctoral fellow, Department of Finance, Risk Management and

Banking, University of South Africa. Preller Street, Muckleneuk, Pretoria, South Africa.

E-mail: ashenafizb@gmail.com.

†

Department of Finance, Risk Management and Banking, University of South Africa.

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C2016 Economic Society of South Africa doi: 10.1111/saje.12122

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South African Journal of Economics Vol. 85:1 March 2017

South African Journal

of Economics