The role of local financial market on economic growth

Abstract

Purpose – Capital market development has been identified as one of the critical underpinnings of economic growth, in the developed but more essentially in the developing economies. Evidence abounds on the virtues of adequately spanned capital markets to provide requisite capital needed to fund investment activities as well as infrastructural developments. Although, foreign capital may be sourced to supplement inadequate local capital base, the associated costs (both logistics and supervisory) are generally daring to consider as convenient alternatives. Various studies have examined the role of local financial market development on economic growth, but none have strictly generated a combined focus on the three major African groupings – the Southern, the Western and the Northern African regions. In addition, there is no documented study that has compared the economic performance of each of these three major economic groupings in Africa. The purpose of this paper is to fill these voids. Design/methodology/approach – Various econometric techniques that include descriptive statistics, unit root tests, dynamic panel estimations and Granger causality tests. Findings – Using data generated from the African development indicators between 1980 and 2012 in contemporary econometric estimations, this study finds that local financial markets play crucial roles in economic development of each of these groupings, albeit in varying magnitude. The study also observes that local financial market plays very little role in the overall economic development of the three groupings when interacted. Research limitations/implications – A limited dataset, which reduces the time span as well as the number of countries covered in the study. A wider coverage may have altered the result generated, especially for the pooled estimation. Practical implications – That African countries should develop local financial markets in order to improve their level of economic growth. Social implications – Low rate of economic development has created a lot of social stress in Africa. Further, the fact that African leaders have largely not been able to grow their national economies in a meaningful and sustainable manner further unnerves skittish entrepreneurial underdevelopment on the continent, thereby exacerbates incidence and prevalence of poverty, and consequent social uprisings on a number of occasions. Originality/value – This study finds that financial market plays an important role on economic growth, whereas the effects are lower in the Southern African region. More specifically, the effects of financial market development on economic growth are stronger in North and West Africa than in Southern African regions. Given that Southern Africa financial market is more developed than the other two regions, this finding buttresses the fact that financial market development is significantly more important as a growth-driver in less developed financial markets than in developed ones.

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