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Finance-institution-growth trilogy: time-series insights from South Africa
Abstract
Purpose
This study examines the moderating effect of institutional quality on the finance-growth nexus in South Africa from 1986 to 2015.
Design/methodology/approach
This study adopts unit root tests, cointegration test and autoregressive distributed lag (ARDL) model.
Findings
The findings reveal that institutional quality constitutes a drain to the growth benefits of financial development (FD) in South Africa in the short-run while FD and institutional quality converge to enhance growth process of the country in the long-run. Also, the threshold of institutional quality beyond which institution stimulates strong positive impact of finance on growth is estimated to be 6.42 on a 10-point scale.
Practical implications
This study, therefore, suggests that institutional quality matters in the way FD influences economic growth in South Africa. Hence, stakeholders are encouraged to trace and block lapses and loopholes in the institutional framework guiding financial system in South Africa so as to maximize growth benefits of FD.
Originality/value
This study contributes to the extant studies by introducing a country-specific analysis into the empirical examination of how institutional quality influences the impact of FD on economic growth. Also, this study deviates from other studies by determining the threshold of institutional quality beyond which FD stimulates strong positive effect on economic growth in South Africa
... Strong institutions promote efficient allocation of resources to innovation and research and development by taming the propensity to corruption, racketeering, rent-seeking, opportunism, and shrewdness (Olaniyi, 2022;Olaniyi & Adedokun, 2022;Olaniyi & Odhiambo, 2023a, 2024bOlaniyi & Oladeji, 2022). This helps create incentives to foster improvements in innovative skills and knowledgebased productive capacities. ...
... To reflect the combined effect of overall institutional development, this study rescales the five metrics to 0-10 and averages them to compute an overall institutional quality index. A value of 10 implies flawless institutional quality, while a value tending towards 0 is an indicator of the weakest quality of institutions (Demetriades & Hook Law, 2006;Gazdar & Cherif, 2015;Olaniyi, 2022;Olaniyi & Adedokun, 2022;Olaniyi, Al-Faryan, & Ogbaro, 2023;Olaniyi & Odhiambo, 2023a, 2024bOlaniyi & Oladeji, 2021Tang et al., 2020). ...
... The first two measures are on the scales of 0-12 and 0-4, respectively, while the last three metrics are on a scale of 0-6. In line with recent trends in modern research(Aluko et al., 2021(Aluko et al., , 2023Law et al., 2013Law et al., , 2018Muye & Muye, 2017;Olaniyi, 2022;Olaniyi & Adedokun, 2022;Olaniyi, Al-Faryan, & Ogbaro, 2023;Olaniyi & Odhiambo, 2023a, 2024bOlaniyi & Oladeji, 2021Tang et al., 2020), this study standardizes all the institutional metrics by rescaling on a 0-10 scale. The rescaling and standardization processes allow uniform interpretations and comparisons. ...
This study offers the first empirical attempt to examine the role of institutional quality in influencing the contribution of economic complexity to evading resource curses and reducing resource dependency in resource-rich countries. We analyze data from 20 resource-rich African countries covering the years 1995-2021, using fully modified ordinary least squares, a Driscoll-Kraay nonparametric covariance matrix, and the method of moments-quantile regression. These countries predominantly suffer from resource curses, resource dependence, weak economic complexity, and deficient institutions. The findings reveal that economic complexity has no direct potency to spur less reliance on natural resources and mitigate resource curses. Institutional quality, on the other hand, creates stimuli and technical support that facilitate less resource dependence and offer countermeasures to evade resource curses in resource-rich African countries. Interestingly, institutional quality strengthens economic complexity by increasing knowledge-based productive capacity, technological innovation, extending non-resource sectors and exports, promoting innovative business opportunities, fostering entrepreneurship, diversifying economies, reducing resource dependence, and mitigating resource curses. The study concludes that institutional quality enables economic complexity to spur less reliance on natural resources and pave the way to evade resource curses in resource-rich African countries. The primary policy implications of the study suggest that the capacity of resource-rich African countries' economic complexity to reduce resource dependence and provide strategies to circumvent the resource curse is contingent upon the efficiency and effectiveness of their institutions. K E Y W O R D S Africa, economic complexity, institutional quality, natural resource Olaniyi Clement Olalekan and Nicholas M. Odhiambo contributed equally to this work.
... This approach is better equipped to handle endogeneity problems when faced with stationarity properties of higher order, as well as longrun relationships among variables, compared to the generalized method of moments (GMM) (Olaniyi and Odhiambo 2024b). Additionally, long-run estimates are more reliable and provide a more comprehensive understanding of policy perspectives and global views (Olaniyi and Adedokun 2022). The FMOLS estimator is also more suitable for cases with small sample sizes (Rahman et al. 2020;Pedroni 2001;Phillips and Hansen 1990). ...
... After confirming mixed orders of integration using the KSUR unit root test, this study examines the possibility of cointegration among the variables using the ARDL bounds testing. We chose this cointegration test as preferable to the Johansen procedure because it performs better when stationarity properties reveal mixed orders of integration zero and one (Olaniyi and Oladeji 2022;Olaniyi and Adedokun 2022). The cointegration test becomes necessary because the unit root test's results suggest that the variables behave divergently in the short run (Xu 2017). ...
... The coefficients are correctly signed and within conventional ranges. These estimates reaffirm the existence of a long-run relationship among the variables in support of the linear and nonlinear ARDL bounds testing presented and explained earlier (Banerjee et al. 1998;Olaniyi and Oladeji 2022;Olaniyi and Adedokun 2022;). These findings attest that variables are liable to converge after a series of distortions, shocks, divergences, and deviations on the pathways to long-run dynamism. ...
Contrary to previous research, this study makes a unique contribution to the global discussion by incorporating asymmetric structure and nonlinearity into the analysis of how changes in natural resource wealth affect economic complexity. To achieve this objective, the study uses a nonlinear autoregressive distributed lag (ARDL) and a fully modified ordinary least squares estimator, utilizing data from Nigeria spanning the period 1984–2021. Unlike earlier studies, this study establishes robust evidence of nonlinearity and asymmetry in the sensitivity of economic complexity to changes in natural resource rents in the short and long run. The cumulative increases (positive shock components) in natural resource wealth provide strong stimuli and incentives that promote economic complexity in the short run, while the cumulative decreases (negative shock components) deteriorate economic complexity upgrades. Meanwhile, long-run estimates indicate that both positive and negative shock components are catalysts that impede Nigeria’s manufacturing structures’ ability to improve technological innovation and knowledge-based productive capacity for producing sophisticated and globally competitive exports. These findings imply that the resource curse phenomenon holds true regarding economic complexity in Nigeria in the long run. In conclusion, this study finds that Nigeria’s natural resource endowments breed complacency, racketeering, shrewdness, corrupt practices, and opportunistic behaviour, which impair innovative initiatives that spur economic complexity. This study outlines the policy implications and insights from the findings.
... Weak institutions, on the other hand, accommodate loopholes and lapses in the financial system that facilitate rent-seeking, corrupt practices, opportunistic behaviour, and sharp practices (Olaniyi, 2022, Olaniyi & Oladeji, 2022Olaniyi & Adedokun, 2022Valentine et al., 2023. As a result, financial sector resources may be diverted to nonproductive activities, undermining financial sector contributions to economic sophistication. ...
... Strong institutions generally facilitate efficient resource allocation (Olaniyi, 2022;Olaniyi & Oladeji, 2022Olaniyi & Adedokun, 2022). Also, existing research has argued that the financial sector's ability to efficiently allocate economic resources to finance productive activities depends on the presence of strong institutions (Avom & Ndoya, 2022). ...
... (Olaniyi & Oladeji, 2021;Olaniyi, 2022) might have constrained their operations to provide sufficient stimulus and finance to enhance the continent's economic complexity. Statistics in recent studies show that SSA's financial system ranks the least developed in the global ranking (Allen et al., 2011(Allen et al., , 2014Demetriades & Fielding, 2012;Andrianaivo & Yartey, 2010;IMF, 2016;Olaniyi & Oladeji, 2022Olaniyi & Adedokun, 2022;Olaniyi, 2022;Tyson, 2016;Kuada, 2016). According to the IM-F's (International Monetary Fund) broad and comprehensive financial development index, African countries' performance between 1995 and 2020 was below average. ...
Purpose This study examines the moderating role of institutional quality and its threshold in the African financial development-economic complexity nexus. This objective follows the argument that institutional quality influences the financial system's efficiency in allocating resources to innovative initiatives and activities that increase productivity knowledge and technical capabilities in an economy's production system to produce complex products and exports. Design/methodology/approach To achieve these objectives, this study adopts novel and robust approaches such as the system generalized method of moments (GMM), the Driscoll-Kraay nonparametric covariance matrix estimator (DK), the method of moments quantile regression, and a dynamic panel threshold to analyze the annual dataset of 29 African countries covering 1995-2020. Findings This study establishes robust and persistent evidence of interdependence, intertwining, and heterogeneity among African countries. Both mean-based (GMM and DK) and quantile regressions consistently demonstrate that financial development and institutional quality separately enhance Africa's economic complexity across quantiles. In contrast, institutional quality drains financial development's contribution to economic complexity when the coefficients are significant. The moment-quantile regression reveals that institutional quality complements financial development to support economic complexity from the 10th to 30th quantiles, but the coefficients are insignificant. The threshold estimation confirms nonlinearity and the institutional quality threshold estimate is 5.73 on the ordinal scale of 10. On average, only six African countries exceed the threshold, while others operate below the benchmark. Research limitations/implications Based on the findings, African financial systems operate within weak institutional frameworks. These phenomena allow rent-seeking, opportunism, corruption, and sharp practices, which divert financial resources from innovative activities and investments in research and development, human capital development, technology, high-tech infrastructure, and entrepreneurial innovation. As a result, Africa's institutional quality impairs the financial sector's ability to spur economic complexity upgrades. African economies need better institutional architectures to maximize financial development's benefits of upgrading economic complexity. The policy implications and recommendations of this study are more relevant to African settings and situations. Thus, other scholars are encouraged to conduct similar research for other continents to enrich the study's outcomes. 3 Originality/value The following are the highlights of this study's novelties: 1.) To the best of the authors' knowledge, this is the first study to examine the moderating role of institutional quality in the financial development-economic complexity nexus in Africa using estimators that account for cross-sectional dependence, distributional effects, and heterogeneous effects (the Driscoll-Kraay nonparametric covariance matrix estimator (DK) and the method of moment quantile regression). 2.) Unlike earlier research, this study establishes a threshold of institutional quality in the financial development-economic complexity nexus. We propose that the institutional structures that govern Africa's financial systems be examined and trimmed. This move helps to phase out the inherent inadequacies that drain financial development's contributions to economic complexity.
... This is concerning, as many economies continue to be financially and economically integrated despite the considerable financial fragmentation caused by the recent global financial crisis (Bekaert et al. 2001;Campos et al. 2019;Hoffman et al. 2020;Masten et al. 2008;Montinari and Stracca 2016). While there is a strand of literature that highlights the prerequisite of a positive finance-growth nexus, such a strong institutional framework and stable macroeconomic environment (Ahmad and Hall 2022;Ahmad and Siong Hook 2022;Aluko and Ibrahim 2020;Olaniyi 2022;Olaniyi and Adedokun 2022;OIaniyi and Oladeji 2021), studies have overlooked the role of financial integration in the finance-institutions-growth nexus. ...
... Our work provides several contributions to the literature on the finance-growth nexus. There is substantial empirical work that examines the conditional impact of finance on growth by examining the level of financial development (Botev et al. 2019;Law and Singh 2014), credit depth (Arcand et al. 2015), financial liberalization (Masten et al. 2008), income levels (Deidda and Fattouh 2002;Rioja and Valev 2004), inflation (Kremer et al. 2013;Rousseau and Wachtel 2002), and institutional quality (Aluko and Ibrahim 2020;Ergungor 2008;Olaniyi 2022;Olaniyi and Adedokun 2022;Olaniyi and Oladeji 2021). We extend and provide new empirical evidence on the effects threshold level of financial integration and identify the marginal effects of finance and institutions above and below this threshold. ...
... For example, Raheem et al. (2021) shows that social capital is an important moderator on the finance-growth nexus, while Dombi and Grigoriadis (2020) show that state history is an important determinant of institutional capacity that has profound effects on the development of finance. Others employ various measures of institutions quality and find that financial development is positively associated with growth when the institutional framework of an economy is at a high level (Aluko and Ibrahim 2020;Olaniyi 2022;Olaniyi and Adedokun 2022;Olaniyi andOladeji 2021, 2022;Song et al. 2021). As such, the following subsection briefly outlines the mechanisms at which institutions affect economic growth. ...
This study examines whether financial integration affects the finance-institutions-growth nexus using a sample of 145 countries from 1995 to 2021. Financial globalization continues to be a dominant phenomenon, despite the concerns on con-tagion and capital flight issues. We argue that financial integration can potentially crowd out the positive growth effects from both financial development and institutions. Using a dynamic panel estimator to control for endogeneity and simultaneity and multidimensional measures of financial development, institutional quality, and financial integration, we find a nonlinear relationship. More specifically, financial integration is growth-enhancing up to a threshold. Additionally, we find the marginal effects of finance and institutions to be insignificant above this threshold.
... To capture the moderating role of institutional quality in the relationship between ME and economic growth, an interactive term of institutional quality and ME is included in equation (2) GDP it = α + βINS it + γME it + ψ(INS*ME) it + δTOP it + θGCF it + ρPOP it + ε it (3) From equation (3), ψ is the coefficient of the interactive term which allows for investigating the moderating impact of institutional quality. Utilizing the approach used by existing studies in the literature Ehigiamusoe et al. 2020;Olaniyi and Adedokun 2022), the marginal effect of ME on economic growth in Africa is obtained through partial derivatives of equation (3) with respect to ME ...
... The institutional quality index (INS) is generated from five indicators (corruption control, law and order, government stability, bureaucracy quality, and democratic accountability). These indicators are rescaled on an ordinary scale of 0-10 to have a uniform weight(Olaniyi and Adedokun 2022;. 1 Other control variables such as trade openness (TOP) (% of GDP), gross capital formation (GCF) (% of GDP), and population growth rate (POP) are added to the model. All the variables are obtained from World Bank Development Indicators except institutional indicators data from the International Country Risk Guide.The descriptive statistics in ...
... For details on how institutional quality index is generated, seeOlaniyi and Adedokun (2022). ...
The purpose of this study is to examine the moderating role and threshold level of institutional quality in the nexus between military expenditure and economic growth for a panel of 31 African nations. The results reveal that military expenditure negatively influences growth, while institutional quality positively affects growth. The interactive term of institutional quality and military expenditure significantly positively influence economic growth. However, the threshold level of institutional quality for military expenditure to translate into economic growth in the region is found to be 4.61 on an ordinary scale of 0–10, although most countries operate below the threshold point of institutional quality. The study concludes that strong institutional quality serves as important absorptive capacity for military expenditure to drive economic growth in the region.
... Second, conflicting evidence raises another round of opinion still focused on Africa. Olaniyi and Adedokun (2020) documented that institutional quality in Africa diminishes and leaks out the growth benefits of financial development in West Africa. This view suggests that countries in the West African region operate below the threshold of institutional quality pegged at 4.7 out of 10 from the empirical analysis conducted. ...
... Furthermore, Olaniyi and Adedokun (2020) described that the existing institutional framework in countries domiciled in Western Africa possesses magnificent loopholes that create a suitable environment for sharp practices related to diverting capital into non-productive activities. Supplementary evidence in the case of sub-Saharan Africa is provided by Kamah et al. (2021) documented that institutional arrangements must be set up to checkmate the activities of economic actors in favor of sustainable and inclusive growth. ...
... Consequently, the data from Sub-Saharan Africa are well-suited to the study's dynamic panel model. This shows evidence of dynamism (Olaniyi and Adedokun, 2020) between past and present that renewable energy consumption and efficiency in the Sub-Saharan African (Chen et al., 2022;Komal and Abbas, 2015;Gaies et al., 2019). This research output is consistent with the large empirical documentations as (Wu and Broadstock, 2015;Sun et al., 2021). ...
The failure of energy economists and planners to comprehend the dynamics and paradigm shift in the finance and institutional quality domain that drive energy use is blamed for the ongoing energy consumption concerns. Consequently, this study revisits and contributes to repositories by examining the relationship between finance-renewable energy consumption and institution-renewable energy consumption. The research question raised is: Do governance indicators moderate the impact of finance on renewable energy consumption? With panel dataset of 46 countries in sub-Saharan Africa spanning from 2010 to 2020 and using political stability, voice and accountability, government effectiveness, and regulatory quality indicators of governance, the research output is as follows: (i) Financial development exerts a significant positive impact on renewable energy consumption and intensity, but the level of impact is weak (i.e., at a 10% level significant). (ii) The governance indicators significantly drag renewable energy consumption and intensity. (iii) The negative interaction between financial development and governance indicators is sufficient to worsen the weak relationship between finance and renewable energy in sub-Saharan Africa. (iv) Governance threshold eroded the weak positive effect of financial development on renewable energy consumption and intensity, leading to negative synergy effect in some cases, and (v) The net effect from the moderating impact of governance indicators on finance is significantly different across model specification. The study demonstrates the undeveloped nature of finance and institutional framework in sub-Saharan Africa, considering the weak association between the key variables.
... Both the theoretical and empirical literature have discussed the crucial role of financial development (FD) in achieving sustainable economic growth and development (Adusei 2019;Olaniyi and Adedokun 2022;Shi et al. 2019). Indeed, the financial sector drives the real sector's activities through the provision and efficient allocation of required resources for the finance of investment and entrepreneurial ventures (Giri and Bansod 2019;Rahman et al. 2020). ...
... Besides the contradictory and ambiguous research findings of studies on the FDgrowth nexus, recent studies have stressed the mediating role of institutions in determining the performance of FD in the economic growth process. Several studies have argued that the nature of the influence that FD wields on economic growth is contingent on the quality of institutions in the country (Demetriades and Law 2006;Gazdar and Cherif 2015;Law et al. 2018;Olaniyi and Adedokun 2022). They argued that high-quality institutions galvanize the financial system towards efficient allocation of resources to growth-stimulating investment, while poor-quality institutions give room for chicanery, opportunistic and rent-seeking tendencies that engender political meddling and corruption which drain away the growthenhancing prospects of FD. ...
... The estimates of their regressions indicated that FD impacts the economy better when the financial system is supported by high-quality institutional structure. Furthermore, Olaniyi and Adedokun (2022) explored the mediating role of institutions in the relationship between finance and growth in South Africa by estimating the autoregressive distributed lag (ARDL) model based on time-series data spanning 1986-2015. Their study revealed that FD and institutional quality complementarily promote economic growth in the long run, though they found that institutional quality diminished the growth-enhancing prospects of FD in the short run. ...
Despite the importance of the financial system and quality of institutions to the attainment of economic development goals, the mediating role of institutions in how finance influences the development of the industrial sector across countries has not been given adequate attention in the literature. Therefore, this study assessed the moderating role of institutions in the relationship between finance and industrial development of South Africa for the period 1984–2021. To evaluate the long-run relationship among the variables, the combined cointegration test of Bayer and Hanck was used, while fully modified least squares, dynamic least squares and canonical cointegrating regression were employed to estimate elasticity relationships. The findings of the study revealed that finance impacts industrial development positively in South Africa, but this positive impact is diminished by the quality of institutions in the country. Therefore, the financial system in South Africa needs to be rooted in a high-quality institutional structure for its beneficial impact on the industrial sector to be reinforced for sustainable development. Moreover, there is a need for more reforms in the financial system to promote efficiency that would translate growth in finance into more inclusive growth gains in the industrial sector.
... It implies that an economy is better financed to ensure more growth only when strong and working institutions complement finance to produce strong positive effect on growth (Tang et al. 2020;Gyamfi et al. 2019). Thus, more finance without a sound institutional environment may not succeed in delivering economic benefits in terms of more growth (Khan et al. 2020;Olaniyi and Oladeji 2020a, b;Olaniyi and Adedokun 2020). It is shown in the subsisting literature that institutional quality is revealed in the financial sector by the extent to which humanly designed rules or constraints ensure efficient allocation of resources to finance entrepreneurial activities and increase the protection of investors so as to build up the productive capacities of the real sector (Aluko and Ajayi 2018;Herger et al. 2008). ...
... Despite the unique institutional and financial development as well as economic performance in Southern Africa, up till date, no known study has examined the moderating role of institutional quality in influencing how financial development impacts on economic growth in the sub-region. The recent literature on sub-Saharan Africa reveals that there are only seven studies on the subject matter (Benayed et al. 2020;Olaniyi and Oladeji 2020a, b;Olaniyi and Adedokun 2020;Aluko and Ibrahim 2020a;Bandura and Dzingirai 2019;Effiong 2015). Olaniyi and Oladeji (2020a, b) focused on 13 West African countries, Benayed et al. (2020) explored the case of 24 sub-Saharan African countries, Aluko and Ibrahim (2020a) and Bandura and Dzingirai (2019) examined randomly selected 28 SSA's countries, while Effiong (2015) also indiscriminately selected and analysed panel of 21 SSA's countries. ...
... It was only Olaniyi and Oladeji (2020a, b) that considered a sub-region (West Africa) of SSA. Olaniyi and Adedokun (2020) and Olaniyi and Oladeji (2020a, b) examined the time-series of South Africa and Kenya, respectively. None of the extant studies makes an attempt to consider the case of Southern African sub-region. ...
Studies have continued to emerge on the transmission channels through which finance influences growth. It has been argued that more finance without efficient institutions may not yield more growth. Meanwhile, studies on sub-Saharan Africa are sparse. None of existing studies have examined the moderating effect of institutions on finance–growth nexus in Southern Africa despite the weak institutions in the sub-region. Deviating from extant studies, this study contributes to general discussion by taking care of cross-sectional dependence among countries within an economic bloc. Driscoll and Kraay’s nonparametric covariance matrix estimator is used to take care of cross-sectional dependence. The research outputs reveal that institutional quality complements and stimulates the growth benefits of financial development in Southern African countries. It is further established that institutional quality has to persistently be above the threshold of 6.08 on the ordinal scale of 10 point before institution can strongly stimulate and complement financial development to impact positively on growth. This study, therefore, recommends that there is an urgent need for Southern African countries to strengthen and improve the quality of institutions so as to maximize the growth benefits of financial development.
... Thus, the null hypothesis of no long-run relationship among the variables is rejected. In a plain language of economics, this suggests that if the variables drift apart and behave differently as a result of factors that causes disequilibrium and divergences in the short-run; the existence of cointegration implies evidence of convergence is guaranteed after a series of distortions and shocks along long-run dynamics (Olaniyi & Adedokun, 2020). It could also be affirmed that long-run estimates are more predictable as indicated by the results of unit root tests and cointegration. ...
... The coefficients of error-correction terms ( ) are negative and statistically significant in both the linear and nonlinear results (see Tables 7 and 8). This confirms the existence of long-run relationship among the variables (Olaniyi & Adedokun, 2020;Ntembe et al., 2018;Banerjee et al., 1998). These results are consistent with the outcomes of ARDL bound tests for linear and nonlinear models as earlier presented in Table 5. ...
... Following the suggestions of extant studies (Olaniyi & Adedokun, 2020;Olaniyi & Oladeji, 2020;Mohanty, 2019;Ntembe et al., 2018), the short and long-run estimates of linear and nonlinear of error-correction version of ARDL are subjected to a series of robustness checks and diagnostic tests so as to ascertain the reliability of the estimates. Thus, the synopsis of residual diagnostics tests of normality, serial correlation, heteroskedascity and the Ramsey reset test for model specification are provided in Table 9. ...
Most of the extant studies on remittance-growth nexus have been limited to symmetric and linear effects of remittance on economic growth. Unlike previous studies, we examine asymmetric and nonlinear association between remittance and economic growth within the framework of nonlinear autoregressive distributed lag (NARDL) model utilizing Nigeria’s data from 1981 to 2018. The study finds the evidence to support that growth responds asymmetrically to remittances only in the long-run. It is established that both positive and negative variations in remittance inflows dampen the productive base of the economy in the long-run while positive and negative changes in remittances are growth-retarding and growth-enhancing respectively in the short-run. The study, therefore, concludes that persistent increase in remittance inflows have not been channeled to productive ventures that are capable of stimulating growth in Nigeria. Thus, consistent with the view of pessimistic theorists, continual inflows of remittances to Nigeria could not be termed brain gains to the economy.
JEL CLASSIFICATION: F24, F43, O11
... The only close studies are that of Ibrahim (2020a, 2020b) and Olaniyi and Oladeji (2020) which examined the threshold of institution in the finance-growth nexus in a panel of 28 sub-Saharan African countries and 13 West African countries, respectively. A recent study by Olaniyi and Adedokun (2020) also examined the threshold of institutional quality in the finance-growth nexus in South Africa. The threshold of institutional quality tends to vary across countries in the region because of peculiar institutional and financial development in each country/subregion of SSA. ...
... Country-specific analysis is more important as the paces of institutional and financial development as well as economic performance in countries are not the same. It shows that cross-sectional and panel studies might not be able to address country-specific matters which are more important for appropriate formulation and implementation of policy guides Aside from the arguments surrounding the moderating role of institution in influencing the impact of financial development on economic growth in the extant studies, it has been argued that institutional quality must attain a certain threshold level before it can stimulate financial development to impact positively on growth (Gazdar & Cherif, 2015;Law et al., 2013;Law et al., 2018;Olaniyi & Adedokun, 2020;Slesman et al., 2019). It is asserted that institutional quality below the threshold level indicating weak institutions which tend to give room for loopholes, lapses, sharp practices, and political interferences in the financial system which may culminate in diverting the credit to unproductive or wasteful activities. ...
... In line with extant studies (Demetriades & Law, 2006;Gazdar & Cherif, 2015;Law et al., 2013Law et al., , 2018Law & Habibullah, 2006;Olaniyi & Adedokun, 2020;Olaniyi & Oladeji, 2020), the following empirical model is adopted as follows ...
In line with the recent assertion that institutional quality matters in the way financial development influences economic growth in financial economics literature, this study examines the moderating role of institutional quality in the finance‐growth nexus in Kenya for the period 1986–2015. A fully modified ordinary least square (FMOLS) estimator is adopted to take care of endogeneity problem inherent in the relationship among the variables while error‐correction version of autoregressive distributed lag (ARDL) technique is adopted to take care of short‐ and long‐run effects. The research outputs reveal that in the short‐run institutions and finance complement and reinforce each other to enhance growth, while institutional framework in Kenya constitutes a drain that leaks out the growth benefits of financial development in the long run. It is also found that the country majorly operates below the threshold level of institutional quality required to maximize the growth benefits of financial development. This study, therefore, concludes that institutional framework guiding the operations of financial system in Kenya should be strengthened so as to block loopholes and lapses that leak out the growth benefits of finance.
JEL CLASSIFICATION
D53; E02; N27; O43
... Evidence of mixed orders of integration from the KSUR unit root test indicates the need for a cointegration test and ARDL bound testing technique is adjudged more appropriate than Johansen cointegration tests (Olaniyi and Adedokun 2020) in this situation. The cointegration test is required because the unit root tests confirm that the variables are liable to diverge in the short-run dynamics. ...
... Coherent with the stance of existing studies such as Olaniyi and Oladeji (2020), Olaniyi and Adedokun (2020), Mohanty (2019) and Ntembe et al. (2018), a battery of diagnostic tests is examined. To ensure reliability and robustness of the linear and nonlinear estimates of the error-correction variant of the autoregressive distributed lag (ARDL) model as presented in Tables 6 and 7, the synopsis of results of the series of diagnostic tests are provided in Table 8. ...
Deviating from previous literature, this study incorporates an asymmetric structure into how poverty reduction responds to changes in financial development. This objective is captured within the context of a nonlinear autoregressive distributed lag estimator using data from Nigeria for the periods 1980–2018. The outcomes of the findings attest to asymmetric structure in the finance-poverty nexus in the long run while the asymmetric effect is found nonexistent in the short run. It is found that expansionary and contractionary policies of the financial sector are catalysts to spur poverty reduction in Nigeria in the long run while only an expansionary policy provides a strong stimulus to accelerate poverty reduction in the short run. This study divulges the need to account for asymmetric structure and nonlinearity in the finance-poverty nexus which previous studies neglected. This study concludes that financial sector development is a panacea to propel poverty reduction in Nigeria. Based on the outcomes of the findings, it is recommended that the financial sector in Nigeria should engage in a persistent increase in the channelization of financial resources to productive and entrepreneurial activities that can spur employment opportunities for the poor. Also, stakeholders should prune the credit facilities to unproductive ventures that do not have poverty-reducing effects in the country.
... The inflation threshold was computed by partially differentiating Eqn. 2 with respect to financial development (FIN) and the result equated to zero. Following Kumar & Stauvermann (2016) andOlaniyi & Adedokun (2022), the estimation of the inflation threshold was done using the long run elasticities. The outcome ( = 242.2887 ...
This paper investigated the inflation threshold that ensures financial development fosters industrial growth for a panel consisting of five (5) West African Monetary Zone (WAMZ) countries. The study examined the inflation threshold in the finance-industrial growth relationship from 1990 to 2022. Through the Pooled Mean Group (PMG), panel unit root and cointegration, the study established that a nonlinear inflation threshold exists in the relationship. The PMG result indicate evidence of an inflation threshold estimated as 21.7451% and beyond which the benefits of higher industrial growth as the financial system develops and become efficient turns negative. By policy implication, this support the perception that financial development only works in generating higher rate of industrial growth only when inflation does not exceed or is below 21.7451%. Furthermore, the study also find that trade openness and natural resource rents does foster industrial growth, as exchange rate depreciation and population growth are harmful to industrial output expansion. The study recommends the pursuant of price stability at a level below 21.7451% by adopting an inflation targeting framework.
... This approach is beneficial to this study in several ways. First, the approach accommodates both I(0) and I(1) series and resolves the issues of endogeneity and asymmetry in the model through the use of appropriate lag length (Akanbi and Dada 2018;Arnaut et al. 2023;Olaniyi and Adedokun 2022;Shin, Yu, and Greenwood-Nimmo 2014). Furthermore, the short-and long-run asymmetric and the error correction terms can be obtained from the single model, while the error term gives information about the long-run steady states. ...
This study aims to investigate the asymmetric effect of military expenditure on economic growth in Nigeria. Furthermore, it determines the threshold level of military expenditure that spurs or hinders economic growth in Nigeria. To achieve the study's objectives, the Nonlinear Autoregressive Distributed Lag (NARDL) and Dynamic Threshold Autoregressive (TAR) techniques are applied as estimation techniques to data from 1981 to 2020. The findings from the study show that (1) positive shocks in military expenditure negatively impact economic growth in the short run, while the effect turns positive in the long run. (2) Negative military expenditure shocks negatively influenced economic growth in Nigeria in both periods. (3) The result from the threshold regression found a threshold value of 0.579 for military expenditure. Based on these findings, policymakers must consider the inherent tendency of asymmetry and nonlinearity in military expenditure when formulating policies related to government spending.
... Remittances (REM) are calculated as a percentage of GDP, which comprises personal transfers and employee compensation. For institutional quality (INS), an index is generated from five indicators (corruption control, law and order, government stability, bureaucracy quality and democratic accountability), which are rescaled on an ordinary scale of 0-10 in line with extant studies (Dada et al., 2023a(Dada et al., , 2023bOlaniyi and Adedokun, 2020). These rescalings are done to provide a uniform interpretation of the indicators. ...
Purpose
The purpose of this study is to examine institutional quality’s absorptive capacity in African countries’ remittances-finance nexus.
Design/methodology/approach
A balanced panel data set of thirty African countries between 2000 and 2022 is used for the study. The study adopts an augmented mean group (AMG), method of moment quantile regression (MMQR) and two-step system generalized method of moment (2SGMM) as the estimation techniques due to the nature of the data set.
Findings
The findings of the direct effect reveal that remittances do not constitute the growth of financial development, while institutional quality promotes the growth of financial development in the long. The moderating effect of institutional quality in the linkages shows that the interactive term of institutional quality and remittances has a significant positive effect on financial development in the region. Hence, institutional quality moderates the impact of remittances. These results are robust to different proxies of financial development and estimates obtained from MMQR and 2SGMM.
Practical implications
This study, therefore, suggests that institutional quality is essential in the linkages between remittances and financial development. Hence, remittances should be seen as one of the instruments that can be used to develop the financial sector rather than survival mechanisms for households.
Originality/value
This study contributes to the literature by unearthing the absorptive capacity of institutional quality in the nexus between remittances and financial development in African countries, which extant studies have neglected.
... This implies that the variables are cointegrated and that there are significant long-run relationships among them. The confirmation of a long-run relationship indicates that, as unit root tests attest to divergence and different behavior of variables in the short run through factors that cause disequilibrium and distortion (Olaniyi and Oladeji, 2022;Olaniyi and Adedokun, 2022). Meanwhile, the confirmation of long-run relationship that the variables are bound to converge and behave in the same direction along the long-run dynamics . ...
Purpose
The paper examines the asymmetric effects of fiscal deficits on selected macroeconomic variables in Nigeria, which include economic growth, exchange rates and inflation. The existing works of literature are premised on symmetry assumptions with dichotomous findings. In such situations, they suggest using a nonlinear approach as an alternative to checkmate the findings premised on linearity. This is critical, considering the perpetual fiscal deficit trends of Nigeria, which are considered a major economic problem in the country.
Design/methodology/approach
The study employs nonlinear autoregressive distributed lag (NARDL) estimator using secondary data collected from the statistical bulletin of the Central Bank of Nigeria (CBN).
Findings
The results show that in the short run, both positive and negative shocks to the fiscal deficit have no effect on Nigeria's economic growth. The same is found on the negative shocks in the long run. However, positive shocks to the fiscal deficit have a long-run positive impact on economic growth. It is further revealed that, in the short run, positive shocks as well as negative shocks to fiscal deficits are positively related to the inflation rate. More so, long-run estimates show that positive shocks to the fiscal deficit have negative impacts on inflation, while negative shocks to the fiscal deficit have positive impacts on inflation.
Originality/value
This study introduces novelties to the understanding of the relationship between fiscal deficits and macroeconomic stability in Nigeria. It accounts for asymmetric and nonlinear features that are more aligned with the socioeconomic realities of real-world phenomena. This study also offers more insightful policy perspectives to enhance the fiscal profile of the country.
... As a result of the insufficient institutional structure, financial markets and institutions function in an environment with inadequate financial reporting and weak governance (Fagbemi et al., 2016). The diversion of funds for improper use in Nigeria is a direct result of the country's weak institutions, which have exacerbated corruption and political intervention in the financial system (Olaniyi et al., 2020). The political climate in Nigeria is unstable because of the lack of commitment by successive governments to enact measures that would improve the country's ability to save money, encourage business creation, and keep its financial markets open and functional. ...
The stock market represents a major source of long-term funds. However, the Nigerian stock market lacks depth due to the weak regulatory system and legal framework. Extant studies have shown that both institutional quality and openness are enablers of the stock market. An analysis of the effects of institutional quality and openness on the development of the Nigerian stock market from 1996 to 2021 is therefore crucial. The Auto Regressive Distributive Lag (ARDL) method is used to analyze data from World Bank databases and the Lane-Milesi Ferreti index, with results showing that institutional quality has a positive and significant impact on stock market development in Nigeria. Meanwhile, development of the stock market, institutional quality, and openness are related over the long term based on the ARDL bounds test. A further finding revealed that the development of Nigeria’s banking sector and the exchange rate had positive (negative) effects on the development of the stock market, respectively. Additionally, stock market liquidity contributed to development of the market. This study came to the conclusion that an enabling stock market in Nigeria could be strengthened by the interaction of institutional quality and openness. The study concludes that strengthening Nigeria’s governance institutions through the creation of an appropriate legal framework is necessary to ensure political stability and the absence of violence in the country’s political system. Besides, the government really needs to grant autonomy to agencies in charge of tackling corruption to enable them to enjoy simultaneous openness. Monetary authorities should also ensure exchange rate stability and improved credit for domestic investment activities.
... 4 | RESEARCH DESIGN 4.1 | Conceptualization of bank performance indicators One of the essential ingredients of extant research on banking operations revolves around the appropriate conceptualization of what bank performance indicators should be. Financial institutions, most especially commercial banks, play crucial roles in the mobilization of financial resources which are meant to spur productive investment, and thereby expansion of economic activity(Olaniyi, 2022;Olaniyi & Adedokun, 2022;Olaniyi & Oladeji, 2021. It implies that real economic performance is strongly influenced by the soundness and health of the financial system(Gržeta et al., 2023;Ojeyinka & Akinlo, 2021;Olaniyi et al., 2023). ...
This study introduces the roles of firms' intertwining and policy variations across firms in the CEO pay–bank performance causal relationships in Nigeria, using the Dumitrescu–Hurlin panel Granger non‐causality test and second‐generation estimators. The findings reveal that banks' interdependence, diverse strategies, and policies vary across banks. In 11 banks, CEO pay is not a reward for bank performance or an incentive to perform. Meanwhile, two banks utilize performance‐based pay for their CEOs, while the remaining two adopt CEO pay as a performance motivator. The study concludes that firms' interdependence and policy variations across firms influence the CEO pay–bank performance nexus.
... There are studies that document the greater vulnerability of financial systems [5,6], while another alternative line of research considers that liberalization and financial reforms improve the competitiveness of the financial sector and the banking subsector. This line of research argues that reforms have a positive impact on the mobilization of savings and allocative efficiency, as well as a positive impact on economic growth [7][8][9][10]. ...
The private sector, in order to function properly, needs financing from the national financial sector, and so the efficiency and competitiveness of said financial sector arouse the interest of many researchers, who perform analyses in order to provide authorities and decision makers with relevant information for the decision-making process and the design of their financial policies. This study contributes to this line of research, analyzing both technical and economic efficiency (allocative and cost efficiency) in the financial sector, focusing on banks, using a sample of Equatorial Guinean firms during the period of 2013–2019. Furthermore, the competitiveness of the financial sector is also analyzed. Knowing how efficient and competitive the financial sector is could answer many of the questions that arise when regulating the national business sector. To carry out this analysis, parametric approaches such as stochastic frontiers and non-parametric techniques such as data envelopment analysis are used, as well as different competitiveness indicators (Boone, Panzar–Rosse). During the research, it is found that the banking sector, which represents the financial sector of the country, operates with low levels of technical efficiency: the Cobb–Douglas production function and the trans-logarithmic production function showed similar average efficiency results. Regarding competitiveness, the financial sector operates under monopolistic competition. Therefore, much remains to be achieved to improve the efficiency and competitiveness of the financial sector for the development of Equatorial Guinea. It is the responsibility of economic agents to provide a good business climate in the country and guarantee perfect competition in the financial market to promote national development.
... Specifically, the economy grew by 3.2%, 5.6%, 1. 41% and 0.15% in year 1994, 2006, 2017 and 2019, respectively. Furthermore, the financial system in South Africa is adjudged as one of the best in the continent despite the deteriorating level of institutions (Odhiambo, 2009, 2010, 2014Adusei, 2019Shahbaz et al., 2013;Olaniyi and Adedokun, 2020). This strong FD with a weak or downward trend of institutional quality tends to make FD exhibit asymmetric in its structure and thus the need to investigate it. ...
Purpose: This paper investigates the (a)symmetric effects of financial development in the presence of economic growth, energy consumption, urbanization and foreign direct investment on environmental quality of South Africa between 1980 and 2017.
Design/methodology/approach: A robust measure of financial development is generated using banking institutions and non-banking institutions market-based financial development indicators, while environmental quality is measured using carbon footprint, non-carbon footprint and ecological footprint. The objectives of the study are captured using linear and non-linear autoregressive distributed lag.
Findings: The result from the symmetric analysis suggests that financial development stimulate carbon footprint and ecological footprint in the short run, however, financial development abate non carbon footprint. In the long run, financial development has significant negative effect on carbon footprint and ecological footprint. However, the asymmetric analysis established strong asymmetric effect in the short run, while no asymmetric is found in the long run. The short run asymmetric reveals that positive shock in financial development increases carbon footprint and ecological footprint, however, positive changes in financial development reduces non-carbon footprint. Negative shocks in financial development, on the other hand, has positive impact carbon footprint, non-carbon footprint and ecological footprint.
Practical Implication: The study's outcome implies that the concept of “more finance, more growth” could also be applied to “more finance, better environment” in South Africa. The study offers vital policy suggestions for the realization of sustainable development in South Africa.
Originality/Value: This empiric adds to the body of knowledge on the influence of financial development on various components of environmental quality (carbon footprint, non-carbon footprint and ecological footprint) in South Africa.
... Also, the existence of a threshold of institutions beyond which CEO pay is appropriately tied to firm performance depends on the statistical significance and different signs of the two parameters (β and ϑ) in Equation 3. In alliance with the position of existing studies (Olaniyi & Adedokun, 2022;Olaniyi & Oladeji, 2020, the institutional threshold in the CEO pay-firm performance nexus is determined by equating Equation 3 to zero and obtaining the value of inst it : ...
This study examines the role of institutional quality and its threshold in the sensitivity of CEO pay to firm performance in an emerging market economy, using a generalized method of moments, Driscoll and Kraay's nonparametric covariance matrix estimator, and robust dynamic panel threshold. Bureaucratic quality and corruption control weaken performance‐based pay for CEOs, while law and order strengthen it. The overall institutions allow boardroom backscratching which biases executive compensation contracts. The study shows that the country operates below the institutional quality threshold values required to spur performance‐based pay for CEOs. The study concludes that institutions matter in CEO pay‐firm performance nexus.
... In relation to exogenous research, Olaniyi et al. [4] used the autoregression distribution lag (ARDL) model to examine South Africa's annual data from 1986 to 2015. Their research found that the quality of institutions is very important in the way that financial development affects South Africa's economic growth; it determines the threshold of system quality. ...
This paper empirically examined relevant data on BRICS CO2 emissions, financial development, and economic growth in the past 40 years, and analyzed the correlation between them. Using the cointegration test, it found that there is a clear correlation between the variables in China and South Africa, which show that there is a two-way relationship between CO2 emissions, financial development, and economic growth in both countries. Using the quantile regression method in the analysis, the results demonstrated that at the 0.6th quartile, South Africa’s financial development had a negative impact on CO2 emissions, while Brazil’s CO2 emissions had a negative impact on financial development. Economic growth was subsequently added as a control variable, and the quantile-on-quantile regression method was used to test the correlation between the financial development of the BRICS countries and their CO2 emissions. Finally, based on empirical conclusions, this paper proposed that BRICS countries should focus on sustainable economic development; when government departments formulate emission-reduction policies, they must reasonably consider the relationship between financial development and emission-reduction policies.
Our study examines the comparative impact of governance quality on the dynamic relationship between monetary policy rate, saving, and economic growth in emerging economies in sub‐Saharan African countries from 2005Q1 to 2022Q4. Using the Toda‐Yamamoto (TY) model, we found that governance quality influence on monetary policy rate is negative with adverse effect on investment‐growth while exerting positive influence on savings‐growth nexus in Nigeria but the contribution is quite appreciative and can be leverage on. Governance quality exert negative influence on monetary policy rate but with positive direction from investment and savings to growth in Egypt. The magnitude of the monetary policy rate, savings, investment is quite negligible in Egypt. For South Africa, governance quality exerts positive influence on monetary policy rate but failed to translate to positive effect on investment, savings to growth in South Africa. Although, the contribution of monetary policy rate, savings, investment to growth is significant in South Africa. Thus, enhancing institutional development to foster a more effective financial incentive system and seamless policy transmission is crucial to address the impact of governance quality on monetary policy outcomes and enable better macroeconomic interactions.
This study aims to bridge the empirical research gap in governance-modulating effects on the link between a country’s productive structure and individuals’ well-being. In doing so, this study utilizes the economic complexity index to quantify a country’s productive structure and the social progress index to measure quality of life. The empirical strategy relies on the system-GMM approach, covering 75 developing countries from 2011 to 2021. The following conclusions were drawn from the empirical analysis. (1) Economic complexity and governance consistently and unconditionally improve quality of life. (2) Governance substantially modulates economic complexity to enhance quality of life, generating an overall positive net effect. (3) The results remain robust and consistent across several GMM specifications, regardless of whether the six governance indicators compiled by the World Bank were clustered using principal component analysis into four categories (i.e., general, political, economic, and institutional) or used individually. (4) Of the six governance indicators, government effectiveness, the rule of law, and control of corruption were found to be particularly significant, as were economic and institutional governance. (5) An additional threshold analysis was implemented to identify the critical governance levels that further improve quality of life. The thresholds for complementary policies are then established as follows: 0.8435, 1.846, and 1.717 for government effectiveness, rule of law, and corruption control, respectively, and 5.59, 3.14, and 3.32 for general, institutional, and economic governance, respectively. Consequently, economic complexity and governance are necessary and sufficient to improve well-being below these thresholds. Complementary policies are, however, necessary to sustain the overall positive impact beyond these thresholds. The findings of this study provide insights into complementary policies for leveraging economic development to improve the well-being of developing countries.
This synopsis empirically showed that the negative relationship between financial development and economic growth can be reversed through consistent policies in Pakistan. To empirically test this argument, the study utilized the data between 1977 and 2022 from the World Bank’s World Development Indicators, the Pakistan Economic Survey, and the Annual Reports of the State Bank of Pakistan. Markov switching methodology was used to capture the regime-specific impact of financial development on economic growth. The novelty of this study lies in the investigation of the role of regime-specific and consistent financial sector policies in recovering the positive finance–growth nexus. Stable and consistent financial sector policies are pivotal to reversing the adverse impact of financial development on economic growth because spurts and reversals in financial and real sector policies hindered the economic growth process in Pakistan. Notably, the findings suggest that the finance–growth relationship depends not only on macroeconomic variables but past performance of the financial sector is an important incentive. Besides, the results reveal that the inflation rate deters economic growth. The study found that the contemporaneous effect of financial development on economic growth is negative and it turns out to be positive after two years. This confirms the nonlinearities between the financial development and economic growth relationship in Pakistan. To this end, policymakers may consider the lag effect while designing financial sector policies.
Transitioning to a carbon-neutral renewable energy (REN) option to decarbonize ecosystems and mitigate carbon dioxide (CO 2) emissions and the negative impacts of climate change is consistent with United Nations Sustainable Development Goals 7 and 13. Scholars have identified natural resource wealth and institutions as critical factors in the REN transition in resource-rich countries. Financial barriers are arguably the most significant impediments to transitioning to REN, as it is more capital-intensive and costly to produce, invest in, and use than traditional fossil fuel-based energy. Meanwhile, weak institutions and corruption in most resource-rich countries culminate in the resource curse phenomenon and the mismanagement of natural resource wealth. It implies that institutions (weak or strong) modify the natural resource rent contribution to the REN transition. Previous research has paid little attention to the impact of the interplay between natural resources and institutional quality on the REN transition in resource-rich African countries. This study examines how institutions moderate the contribution of natural resource wealth to accelerating or inhibiting the REN switch in resource-rich African countries for the period 2000-2021, using fully modified ordinary least squares, a Driscoll-Kraay nonpara-metric covariance matrix, and moments-based quantile
The transition to renewable energy is critical for environmental sustainability, consistent with sustainable development goals (SDGs) 7, 8, 11, 12, and 13 of the United Nations Development Programme (UNDP). Scholars have identified financial development and institutional quality as significant factors determining the renewable energy transition in developing countries. This study opines that the efficiency of the financial system in supporting and providing the substantial financial implications that a switch to renewable energy necessitates depends on the quality of the institutional framework. Weak institutions in developing countries produce loopholes and inherent flaws in the financial system that facilitate corruption and opportunism, ultimately promoting dirty energy usage and technology at the expense of renewable energy. This process suggests that the interaction between financial development and institutions can either accelerate or impede the transition to renewable energy, depending on an economy's institutional architecture. Considering Africa's enormous renewable energy resources, previous research has overlooked the implications of the interplay between institutional quality and financial development in spurring Africa's transition to renewable energy. Thus, this study looks at the role of institutions in moderating the relationship between financial development and renewable energy in Africa from 1990 to 2019, using first-and second-generation estimators to capture econometrics' pitfalls such as endogeneity, cross-sectional dependence, and heterogeneity inherent in the panel dataset. This study departs from previous research in that it uses a dynamic panel threshold to determine the threshold of institutions beyond which financial development is stimulated to spur Africa's transition to renewable energy. The findings show that institutions create loopholes that allow rent-seeking, opportunism, and sharp practices in the African financial system. These inherent flaws divert financial resources to support dirty energy and undermine the financial sector's ability to support a renewable energy transition on the continent. Also, the findings from the threshold of institutions affirm that African countries operate predominantly below the threshold of
This study examines the moderating effect of institutional quality on the finance–growth nexus in the West African region via dynamic panel generalized method of moments. The findings reveal that the linear financial development has a separate positive influence on growth, while the interaction between financial development and institutional quality has a negative effect on growth. It implies that institutional quality constitutes a drag that diminishes and leaks out the growth benefits of financial development in West Africa. The threshold level of institutional quality beyond which financial development accelerates economic growth in the region is found to be 4.77 on the ordinal scale of 10 points. It is, however, evident that most of the countries in West Africa operate below the threshold. Hence, it is concluded that the institutional framework weakens the impact of finance on growth in the subregion of sub-Saharan Africa.
The study aims to determine the relationship between financial development and economic growth with respect to the state of institutional quality on 27 Sub-Saharan Africa countries using a five-year averaged dataset over the period 1982-2016. The findings established evidence of a U-shaped relationship between financial development and growth which entails that more (less) finance drives (retards) growth in the region. The turning point beyond which financial development begins to contribute positively on economic growth ranges between 33% and 37%. Even though the connection is not strong, the selected institutional variables also showed both a direct and an indirect positive impact on economic growth. Financial development is positive and significant when embedded in selected well-developed institutions, which implies a complementary relationship of institutions and financial development on growth. It is therefore recommended that policy makers and responsible authorities take stringent measures to ensure the development of institutions and the financial sector for sustainable economic growth in the region.
This paper investigates the impact of financial development on economic growth in Pakistan using the Markov Switching Model over the period 1980–2017. The results based on two-state Markov switching model confirm the Schumpeter’s view that finance spurs growth. The result reveals that financial development augments economic growth in both high and low economic growth regimes in Pakistan. However, the impact of financial development on economic growth is found to be relatively higher in the high-growth regime. This implies that economic growth responds differently to financial development in low-growth and high-growth regimes. Among the control variables, trade openness and government expenditures impact economic growth positively, while labour force exerts a negative impact on economic growth.
This study investigates the role of financial and institutional development on economic growth in the Association of Southeast Asian Nations (ASEAN) economies from 1995 to 2017 using a dynamic panel estimator. Financial development is instrumental in promoting economic growth; however, the effect of financial institutions and financial markets can differ. In recent years, the ASEAN economies have launched financial and institutional integration initiatives towards the goal of an integrated ASEAN Economic Community, which can have a profound impact on economic growth. The estimated results show that financial institutions are positive and significant towards economic growth, while financial markets are insignificant. Equally important, institutional quality plays a significant and positive role in economic growth. More interestingly, the study finds that institutional development is complementary to financial institutions and markets. Member states should emphasise on further financial integration across the ASEAN economies, allowing for the development of financial institutions and markets alongside improvements in institutional quality to increase the effectiveness of financial development.
We examine the role of energy consumption in moderating the carbon dioxide emissions-income nexus in 64 middle income countries and compute the marginal effects of real GDP per capita on carbon dioxide emissions at various levels of energy consumption. To do so, we employ multiplicative interaction models because the traditional quadratic Environmental Kuznets Curve model cannot capture the marginal effects. We also use empirical techniques that can account for cross-sectional dependence, such as the Westerlund cointegration test and the Augmented Mean Group estimator. While the marginal effects of GDP on carbon dioxide emissions at the minimum, mean and maximum levels of energy consumption are 9.996, 9.210 and 8.452, respectively, we find no significant evidence that energy consumption moderates the relationship between income and carbon emissions in the panel. However, when we focus on specific countries, we find that energy consumption moderates the nexus between carbon emissions and income in roughly one-third of our sample and that the moderating effect is negative in about one fifth of the sample. We conclude with a discussion on why the moderating effect of energy consumption on the carbon emissions-income nexus differs between countries and offer some policy recommendations that are grounded in the main findings.
Purpose
The global financial crisis of 2008 emphasized the need for monetary policy authorities to have a more comprehensive view of the conditions prevailing in the economy before deciding their policy stance. The purpose of this paper is to outline the construction of a financial conditions index (FCI) and investigate the possible co-integrating relationship between the economic growth and FCI.
Design/methodology/approach
The study employs the PCA methodology, with appropriate augmentations to handle the unbalanced panel data-sets and constructs a FCI for India. It tests the growth-predicting power of FCI by applying the auto regressive distributed lags approach to co-integration and verifies if the FCI is co-integrated with real GDP growth. It also discusses construction of a financial development index (FDI) which tracks the financial markets through M3, market capitalization and credit amount to residents.
Findings
The constructed FCI has a quarterly frequency and is available starting 1998q2. The long-run coefficient of FCI while predicting the real GDP growth is significant at 10 percent. The results confirm that a more-broader index FCI outperforms a narrower index FDI in growth prediction.
Research limitations/implications
By showing that FCI is a better growth predictor than FDI, the study establishes the importance of including the foreign exchange markets, bond markets and stock markets while summarizing the conditions in the economy. The authors hope that the FCI would be helpful to the monetary authorities in their policy decisions.
Originality/value
The paper adds to the few existing studies studies dealing with FCI for Indian economy and constructs a more comprehensive index which tracks multiple markets simultaneously. It also fills the gap in literature by evaluating the correlating relationship between FCI and economic growth.
The bounds testing approach to cointegration analysis is employed in this paper to examine whether the risk premium demanded by the banking sector moderates the finance–growth nexus with data (1970–2015) from South Africa. To the extent that the interaction between risk premium and financial development positively affects growth in the long run, we affirm that the risk premium demanded by the banking sector represents a significant channel through which financial development drives growth. The main policy implication of this finding is that financial liberalization that removes interest rates restrictions, allowing the banking sector to adequately price risk, is in the best interest of the South African economy.
The law and finance theory posits that legal institutions are associated with stock market development. We examine the effectiveness of legal institutions in stock market development in 11 countries in sub-Saharan Africa for the period 2000 to 2014. Based on the two-stage least squares estimator, we find that the effectiveness of legal institutions does not promote stock market development in sub-Saharan Africa, after controlling for income, banking sector development, inflation, endowments, capital account liberalization, culture, and democracy. We provide empirical support for the law and finance theory by establishing that legal institutions explain cross-country differences in stock market development in sub-Saharan Africa.
This study examines the moderating effect of inflation on the finance–growth nexus in the West African region during 1980–2014. We find that the linear financial development has a positive impact on economic growth, while the interaction term between financial development and the inflation rate has a negative impact on growth. The marginal effect of financial development evaluated at the minimum level of inflation rate is positive, while that evaluated at the maximum level is negative, suggesting that the impact of finance on growth varies with the level of inflation. The inflation threshold level is found at 5.62%. When inflation rises above this level, the total effect of finance on growth turns negative. We also find that the marginal effects of financial development computed at the maximum level of inflation are negative in the high-inflationary countries but positive in the low-inflationary countries. The implication of these findings is that, in the West African region, an increase in financial development and a decrease in inflation appear to have greater long-run economic benefits than a simultaneous increase in both variables.
A stock market is a financial establishment, which promotes competence in capital formation and allocation. It also enables the government and industries to finance new projects as well as growing and modernizing commercial or industrial concerns through raising long-term capital.The paper will examine the impact of stock market on economic growth in South Africa. Researchers employed the ordinary least squares regression (OLS) using the time series data from 1995-2010, together with Augumented Dickey Fuller (ADF) for testing stationary. The paper concludes that stock market liquidity impact growth in South Africa.
This study scrutinises the role of institutional quality in the linkage of financial development and economic growth in 21 Middle East and North African (MENA) countries. Using the common correlated effect mean pooled approach and annual data for the period 1980–2012, we find that not all measures of financial development promote economic growth in the absence of institutional quality, but they all augment growth in the presence of institutional quality. Furthermore, we find that foreign direct investment enhances the growth of MENA countries by the development of financial markets.
This paper examines the non-linear relationship between financial development and innovation using panel system generalized method of moments (GMM) estimators. The sample countries consist of 75 developed and developing countries and the sample period covers from 1996 through 2010. The empirical results reveal an inverted U-shaped non-linear relationship between finance and innovation. This implies that finance enhances innovation only up to a certain level; beyond that level, further development of finance tends to adversely affect innovation. We incorporate the institution interaction term to examine its role in governing such relationship. The empirical results suggest that the pattern of the finance-innovation curve varies with different settings of institutional quality. Specifically, only countries with high institutional quality follow an inverted U-shape of the finance-innovation curve. Hence, we conclude that sound institutional quality is a prerequisite before financial development has any beneficial impact on innovation.
This paper employs several techniques to study the dynamic effect and causality among globalization, institutions and financial development. Specifically, we use the panel cointegration technique by Pedroni (1999, 2004); the DOLS approach by Kao and Chiang (2000); the FMOLS; the PMG technique of Pesaran et al. (2009) and the panel VECM causality approach. The panel cointegration test shows the existence of cointegration among our dataset. The Granger causality test demonstrates that causality runs from globalization to institutions, and institutions in turn Granger cause financial development specifically in the banking sector in the BRICS and MINT blocs. Globalization is further found to have a causal impact on the stock market, although bypassing the institutions channel. For the PMG, DOLS and FMOLS results, there is evidence of a positive long run relationship among globalization, institutions and financial development.
Linear and non-linear long-run association between tourism and economic growth is examined using the autoregressive distributed lag procedure with Sri Lanka as a reference country over the sample period 1978–2014. Linear estimation results indicate that a 1% increase in tourism receipts result in an increase in the output per worker by 0.10% in the long run. The net effect in the short run is marginally negative and generally mixed. Non-linear relationship explains the effectiveness of the tourism industry depends strongly on public infrastructure which is subject to congestion like the public transport, airports, road system or telecommunications. A long-run U-shape relationship is detected with the minimum necessary tourism receipts of 1.26% of GDP. The causality results indicate that higher tourism receipts causes growth. The method applied here can be used to examine other countries in the similar domain.
This paper seeks to investigate the causal links between remittances, economic freedom, and economic growth on a panel of four North African countries, namely, Tunisia, Morocco, Algeria, and Egypt from 1980 to 2012. Using the system generalized method of moments (GMM) in a panel data analysis, we found strong evidence of a positive relationship between remittances and economic growth. We also found that economic freedom appears to be working as a complement to remittances and, that the effect of remittances is more pronounced in the presence of the economic freedom variable. Thus, to the extent that remittances have become a major source of external development finance, policies promoting greater freedom of economic activities benefit more from the presence of remittances.
The global financial crisis experience shone a spotlight on the dangers of financial systems that have grown too big too fast. This note reexamines financial deepening, focusing on what emerging markets can learn from the advanced economy experience. It finds that gains for growth and stability from financial deepening remain large for most emerging markets, but there are limits on size and speed. When financial deepening outpaces the strength of the supervisory framework, it leads to excessive risk taking and instability. Encouragingly, the set of regulatory reforms that promote financial depth is essentially the same as those that contribute to greater stability. Better regulation—not necessarily more regulation—thus leads to greater possibilities both for development and stability.
The paper examines the effect of financial development on economic growth conditional on institutional quality with a focus on Sub-Saharan Africa.
Purpose
– The purpose of this paper is to examine the relationship between financial development and economic growth in Indian states using annual data from 1993 to 2012.
Design/methodology/approach
– The stationarity properties are checked by Levin-Lin-Chu and Im-Pesaran-Shin panel unit root tests. The study employed the Pedroni’s panel co-integration test to examine the existence of long-run relationship and the coefficients of co-integration are examined by fully modified ordinary least squares. The short term and long-run causality is checked by panel granger causality.
Findings
– The co-integration test confirms a long-run relationship between financial development and economic growth for Indian states. The results support the supply leading hypothesis and highlight the importance of financial development in economic growth in Indian states. The findings also indicate that bank-centric financial sector of India has the potential of economic growth through credit transmission.
Research limitations/implications
– The present study recommends for appropriate reforms in financial market to attain economic growth in India. The findings will be useful for India’s policymakers in order to maintain the parallel expansion of financial development and economic growth.
Originality/value
– Till date, there is no study that includes all 28 states in analyzing the role of financial development in economic growth for Indian economy by applying latest econometric techniques. Further, the study uses gross domestic state product instead of net domestic state product as proxy for economic growth because of the presence of different depreciation rates.
Purpose
– The purpose of this paper is to investigate asymmetric cointegration and causality effects between financial development and economic growth for South African data spanning over the period of 1992-2013.
Design/methodology/approach
– This study makes the use of the momentum threshold autoregressive (M-TAR) approach which allows for threshold error-correction (TEC) modeling and Granger causality analysis between the variables. In carrying out an empirical analysis, the author uses six measures of the financial development variables against gross domestic per capita, that is, three measures which proxy banking activity and another three proxies for stock market development.
Findings
– The empirical results generally indicate an abrupt asymmetric cointegration relationship between banking activity and economic growth, on the one hand, and a smooth cointegration relationship between stock market activity and economic growth, on the other hand. Moreover, causality analysis generally reveals that while banking activity tends to Granger cause economic growth, stock market activity is, however, caused by economic growth increase.
Originality/value
– This study contributes to the literature by examining asymmetries in the cointegration and causality relations by using both banking and stock market proxies against economic growth for the South African economy.
This paper investigates the effects of financial development, institutional quality, and human capital on economic performance from 1984 through 2008 in four South Asian Association for Regional Cooperation (SAARC) countries (Bangladesh, Pakistan, India, and Sri Lanka) using mean group (MG) and pooled mean group (PMG) estimations. The empirical work follows the neo-classical augmented Solow growth model suggesting that sound institutional quality, human capital, and financial development bring improvements in output per capita in the mentioned countries. Financial development has large effects on economic performance, particularly when the financial sector is linked in a stable institutional framework and has adequate human capital.
This paper investigates the effect of institutional quality on the finance-growth nexus. To this end, an empirical model with linear interaction between financial development and institutional quality is estimated. Our main findings show that, while most indicators of financial development have a significantly negative effect on economic growth, the sign of the coefficients of interaction variables are significantly positive. This provides strong evidence that institutional quality mitigates the negative effect of financial development on economic growth. Looking to the subcomponents of our institutional index, our findings show a development of the banking sector in a country with an important score in Law and Order, Bureaucracy and Investment Profile facilitate growth. Also, countries, with an important score of investment profile, can benefit from stock market development in terms of economic growth. These results suggest that, in order to benefit from financial development, financial systems in MENA countries must be embedded within a sound institutional framework.
We examine whether the relationship between financial development and income inequality varies with levels of institutional quality. The empirical evidence based on the threshold regression approach shows that there indeed exists an institutional quality threshold effect in the relationship between financial development and income inequality. Financial development tends to reduce income inequality only after a certain threshold level of institutional quality has been achieved. Until then, the effect of financial development on income inequality is nonexistent. This finding suggests that institutional quality affects the link between financial development and income inequality, reflecting the notion that better quality finance results in more equal income distribution.
The study investigated the nexus between financial sector development and economic growth in South Africa using cointegration and error correction modelling and; the Granger causality tests. The results of the study show that economic growth is explained by the financial sector variables and control variables such as inflation, exchange rate, and real interest rates. The Granger causality test results show that there is generally a bidirectional relationship between economic growth and financial sector development which implies that if the economy grows the financial services sector also grows and vice versa.
The aim of this paper is to investigate the long-run growth effects of financial development in Ghana. We find that the growth effect of financial development is sensitive to the choice of proxy. Both the credit to the private sector as ratios to GDP and total domestic credit are conducive for growth, while broad money stock to GDP ratio is not growth-inducing. The indexes created from principal component analysis confirmed the sensitivity of the effect to the choice of proxy. The findings here suggest that whether financial development is good or bad for growth depends on the indicator used to proxy for financial development.
Using a sample splitting approach that does not impose an exogenous quadratic term, we examine the effect of financial development on economic growth in sub‐Saharan Africa by allowing the link to be mediated by the level of institutions. Our findings reveal a disproportionate growth‐enhancing effect of finance, given countries’ distinct level of institutional quality. More specifically, when the International Country Risk Guide‐based measure of institutions is used as the threshold variable, below the optimal level of institutional quality, financial development does not significantly promote economic growth. For countries with institutional quality above the threshold, higher finance is associated with growth. However, when institutions are measured by World Governance Indicators proxy, we find a significant effect of financial development, irrespective of whether a country is below or above the threshold. Interestingly, the growth‐enhancing effect of finance is greater for low‐institution countries relative to high‐institution countries. Thus, through its ability to provide some crucial roles, the well‐developed financial sector may also perform the function of sound institutions in influencing economic growth.
Earlier studies on institutions and financial sector development are less informative given their failure to examine how the different forms of institutions influence countries' level of domestic financial development. In this study, we reexamine the impact of institutions on financial development in the ECOWAS regional bloc over the period 1995-2015. Employing the Augmented Mean Group (AMG) estimator, we show that overall institutions do not have a significant impact on financial development. However, after disaggregating the level of institutions into market-creating, market-legitimizing, market-stabilizing, and market-regulating, we find that only the effect of market-legitimizing institutions significantly enhances financial sector development. Thus, the impact of institutions on financial development is sensitive to the form of institutions. We discuss key implications for policy.
We examine the negative relationship between the rate of growth in credit and the rate of growth in output per worker. Using a panel of 20 countries over 25 years, we establish that there is a robust correlation: the higher the growth rate of credit, the lower the growth rate of output per worker. We then proceed to build a model in which this relationship arises from the fact that investment projects that are more risky have a higher return. As their borrowing grows more quickly over time, entrepreneurs turn to safer; hence, lower return projects, thereby reducing aggregate productivity growth. We take this theoretical prediction to industry‐level data and find that credit growth disproportionately harms output per worker growth in industries that have either less tangible assets or are more R&D intensive.
This study attempts to investigate the role of institutions in enhancing the effect of tourism and financial development on economic growth in Asia using a panel sample from 1984 to 2016. Our findings reveal that tourism and finance are two important variables accountable for growth in our selected countries. Furthermore, our empirical results suggest that their effects on growth are enhanced by the level of institutional quality. Therefore, institutional reforms should thus precede tourism attraction and financial development policies used in these countries in an effort to enhance the benefits from the tourism and financial sector development on growth.
The empirical evidence predicts that political institutions are the core component of institutional matrix. They set stages for other institutions to be devised and influence the economic growth. Applying Kremer et al.'s (2013) dynamic panel threshold regression to a selected panel of 77 emerging market and developing countries over the period 1976–2010, we provide compelling evidence in favor of a split base on political institutions in the finance-growth nexus. The asymmetric impact of institutions on growth sets in around the optimum threshold level. Minimizing political risks through improvement in the quality of political institutions can improve the growth dividend due to financial development. Our empirical results appear to be robust across a wide range of alternative empirical strategies, several new disaggregate measures of political institutions, and also when addressing the endogeneity issues of the regressors.
The paper empirically examines the relationship between fiscal deficit and current account deficit in India for the period from 1970–1971 to 2013–2014. The Autoregressive Distributed Lag (ARDL) bounds testing approach is employed to analyze the long run and short run relationship between the twin deficits. The results support the validity of twin deficits hypothesis in India, both in the short run and long run. Policy makers should adopt various measures to control fiscal deficit for correcting the current account deficit in India.
This study examines the short and long-run impact of financial development, institutional quality and globalization on economic growth on a sample of 40 Africa countries. It also examines whether the relationships differ across sub-groups of countries namely low-income, lower-middle-income and upper-middle-income over the period 1980–2014. It uses a new technique in macro-econometrics panel estimation to control for dynamic heterogeneity and cross-sectional dependence for an econometric analysis. The findings reveal that the existence of cross-sectional dependence which is non-stationary at their level becomes stationary in their first difference. It also shows the presence of co-integration among the variables showing a long run relationship among the variables. The results from a panel-mean-group model with a correction for common correlated effects show that financial development, institutional quality and globalization have significantly positive effects on long-run economic growth for the entire sample of countries. Further, looking at different income levels the empirical evidence shows that in low-income countries financial development, institutional quality and globalization have a positive impact on long-run economic growth in the entire sample and also in low-income countries. This provides strong evidence that the impact of financial development on economic growth is heterogeneous across income levels. Moreover, the interaction between financial development and institutional quality has a negative and significant effect on economic growth. This implies that either financial development or institutional quality can help boost economic growth.
Historically, the development of the financial sector has been an indispensable driver of economic growth. In the aftermath of the Great Recession there is a pressing need to re-assess the role of the financial sector in the determination of economic growth. Using a dynamic panel framework, our analysis covers 34 European and Commonwealth of Independent States (CIS) economies for the period 1998-2014, and controls for the role of macroeconomic and institutional variables. Our evidence suggests that the potential benefits of the financial sector finance may have dramatically reversed in recent years, resulting in “un-creative destruction”. The results suggest, tentatively, that there has been a severance of the link between the financial sector and the real economy. The results, however, vary according to the level of economic development across the European and CIS economies. In the case of developing market economies, the financial intermediation proxies are not significant in explaining economic growth. The effect of changes in investment expenditure, the money supply, wages, unit labour costs and trade openness is found to be strong and in line with a priori expectations across all country samples. Notably, government consumption is also found to be a significant driver of economic growth, except in the developing market economies in the period following the Great Recession. In line with the growing consensus in other research areas, we provide evidence of a robust role for the institutional framework proxied by the quality of governance in determining economic development.
This study investigates the contribution of public investment to economic growth in Cameroon from 1977 to 2015. It uses the Autoregressive Distributed Lag cointegration (ARDL) approach to estimate a modified version of the production function. The estimates indicate that real gross domestic product, labor force, public investment and private investment are cointegrated. Also based on the estimates, public and private investments have positive and significant effects on real gross domestic product in both the short-run and the long-run. The estimates further show that labor force has a significant long-run relationship with real gross domestic product but found no evidence of a significant short-run relationship. The error correction term is negative and significant suggesting that any deviations of real GDP growth from the long-term value would be corrected subsequently.
This paper investigates the effect of banking sector development on economic growth in a panel of 87 countries, paying particular attention to the role of institutions in reducing the finance curse phenomenon. The dynamic generalized method-of-moments (GMM) results indicate that institutions play an important role in mediating the positive relationship between banking sector development and growth. This suggests that the marginal impact of financial development on growth depends on institutional quality. Using the four-way partition of institutions classified by Rodrik (2005), we also find that resilient market-regulating, market-stabilizing, and market-creating institutions act as mediators to the financial market in facilitating growth. The results are robust to using alternative institutions indicators, estimation strategies, and stopping the sample before the 2007-2008 global financial crisis.
Aim: The aim of the study is to test the validity of Schumpeter’s prediction that finance promotes growth using annual time series data from South Africa. Study Design: Case Study Place and Duration of Study: South Africa. Time series data ranging from 1965 to 2010. Methodology: The study employs unit root testing, co-integration analysis, Fully Modified Ordinary Least Squares (FMOLS) regression, Two-Stage Least Squares (2SLS) regression, Error Correction Model and Pairwise Granger Causality test technique to analyze annual time series data from South Africa. Two measures of financial development are used: domestic credit as a share of GDP measuring the degree of financial intermediary services; and broad money supply as a share of GDP measuring the overall size of the financial intermediary sector. Control variables included in the model are inflation, size of government, openness of the South African economy, and a dummy variable accounting for financial reforms that began in South Africa in the 1980s. Results: Contrary to the prediction of Schumpeter that finance promotes growth, the empirical results suggest that financial development does not promote economic growth both in the short run and in the long run. The Pairwise Granger Causality test result supports the assertion that there is a unidirectional causality from financial development to economic growth in South Africa. Conclusion: The paper concludes that Schumpeter may not be right in theorizing that finance promotes economic growth. Case Study
This paper investigates the asymmetric relationship between energy consumption and economic growth by incorporating financial development, capital and labour into a production function covering the Indian economy from 1960Q1–2015Q4. The nonlinear autoregressive distributed lag bounds testing approach is applied to examine the asymmetric cointegration between the variables. An asymmetric causality test is also employed to examine the causal association between the considered variables. The results indicate cointegration between the variables in the presence of asymmetries. The asymmetric causality results show that only negative shocks to energy consumption have impacts on economic growth. In the same vein, only negative shocks to financial development have impacts on economic growth. By contrast, symmetrically, capital formation causes economic growth. Finally, over the study period, a neutral effect exists between the labour force and economic growth in India. The implications of these results for growth policies in India are also discussed.
This paper presents an integrated overview of the literature linking institutions, financial development, and economic growth. From the large body of research on institutional development, the paper first selects those contributions that make it possible to study the role of institutional arrangements in ameliorating/worsening the information frictions and transaction costs that characterize the development of financial markets. The paper then investigates the theoretical mechanisms by which these specific frictions affect economic growth and presents the stock of empirical evidence quantifying the impact of institutions on growth through financial development.
The purpose of this paper is to test the growing converging views regarding the destabilizing and growth-halting impact of interest-based debt financial system. The views are as advocated by the followers of Keynes and Hyman Minsky and those of Islam. Islam discourages interest rate based debt financing as it considers that it is not conducive to productive activities and to human solidarity. Likewise, since the onset of the crisis of 2007/2008, calls by skeptics of mainstream capitalism has been renewed, to reconsider the dynamics of the prevailing financial system with emphasis on its untamed credit-creating capacity and link (or rather delink) to real sector transactions. The paper applies a threshold regression model to Malaysian data and finds that the relationship between growth and financial development is non-linear. A threshold is estimated, after which credit expansion negatively impacts GDP growth. While the post-threshold negative relationship is found to be statistically significant, the estimated positive relationship at lower levels of financial development is insignificant. The findings are hoped to provide insights to monetary authorities for better growth-promoting policy-making.
Abstract
This paper attempts to examine the dynamic causal relationship between financial development, economic growth and poverty reduction in South Africa—using a trivariate causality model. The study attempts to answer one critical question. Which sector leads in the process of poverty reduction in South Africa—the financial sector or real sector? Using cointegration and error-correction models, the empirical results of the study show that both financial development and economic growth Granger—cause poverty reduction in South Africa. The study also finds that economic growth Granger-causes financial development and, therefore, leads in the process of poverty reduction in South Africa. This applies irrespective of whether the causality test is conducted in the short-run or in the long-run. The study, therefore, recommends that policies geared towards increasing economic growth should be intensified in South Africa in order to make the economy more monetised, and to reduce the high level of poverty currently prevailing in the country.
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.
Using an innovative threshold estimation technique, this study examines whether the growth effect of financial development in countries with distinct levels of institutional development differs. The results demonstrate that there is a threshold effect in the finance-growth relationship. Specifically, we found that the impact of finance on growth is positive and significant only after a certain threshold level of institutional development has been attained. Until then, the effect of finance on growth is nonexistent. This finding suggests that the financial development-growth nexus is contingent on the level of institutional quality, thus supporting the idea that better finance (i.e., financial markets embedded within a sound institutional framework) is potent in delivering long-run economic development