The Role of Financial Development on Economic Growth in South Africa

Abstract

South Africa has long been a prominent example of economic growth, unlike other African countries. Therefore, this study investigates the financial development-economic growth link employing time-series techniques over the period 1990-2022. It also incorporates energy efficiency, trade openness, and government spendings into the economic growth model. The study uses the ARDL bounds test to analyze the cointegration relationship and the FMOLS estimator for long-term coefficient estimates. The estimates suggest that financial development accelerates economic growth. Therefore, the "financial development-driven economic growth" hypothesis is proven for the South African economy. The estimates also suggest that energy efficiency, trade openness, and government spendings support economic growth. These results may offer important recommendations for growth policies in the South African economy.

Keywords

• Financial Development
• Economic Growth
• ARDL
• FMOLS
• South Africa

Güney Afrika’da Finansal Gelişmenin Ekonomik Büyüme Üzerindeki Rolü

Öz

Güney Afrika, uzun süredir diğer Afrika ülkelerinden farklı olarak görece güçlü ekonomik büyüme performansı ile dikkat çekmektedir. Bu çalışmanın amacı, 1990–2022 dönemine ilişkin veriler kullanılarak finansal gelişmenin ekonomik büyüme üzerindeki etkisini zaman serisi yöntemleri aracılığıyla incelemektir. Analize finansal gelişmenin yanı sıra enerji verimliliği, ticari dışa açıklık ve kamu harcamaları da dahil edilmiştir. Eşbütünleşme ilişkisini test etmek amacıyla ARDL sınır testi uygulanmış, uzun dönem katsayılarının tahmininde ise FMOLS yöntemi kullanılmıştır. Ampirik bulgular, finansal gelişmenin ekonomik büyümeyi anlamlı ve pozitif yönde etkilediğini ortaya koymakta; dolayısıyla “finansal gelişme odaklı büyüme” hipotezini Güney Afrika ekonomisi bağlamında doğrulamaktadır. Ayrıca enerji verimliliği, ticari dışa açıklık ve kamu harcamalarının da ekonomik büyümeyi desteklediği sonucuna ulaşılmıştır. Elde edilen bulgular, Güney Afrika ekonomisinin büyüme politikalarına yönelik önemli politika önerileri sunmaktadır.

Anahtar Kelimeler

• Finansal Gelişme
• Ekonomik Büyüme
• ARDL
• FMOLS
• Güney Afrika

References

1. Abiodun, S., & Temidayo, O. (2022). Role of financial sector development in the nexus between inclusive growth and poverty: A regional comparative analysis from Sub-Saharan Africa. Research in Applied Economics, 14(1), 18-9. https://doi.org/10.5296/rae.v14i1.19855
2. Abu-Bader, S., & Abu-Qarn, A. S. (2008). Financial development and economic growth: The Egyptian experience. Journal of Policy Modeling, 30(5), 887-898. https://doi.org/10.1016/j.jpolmod.2007.02.001
3. Adu, G., Marbuah, G., & Mensah, J. T. (2013). Financial development and economic growth in Ghana: Does the measure of financial development matter?. Review of Development Finance, 3(4), 192-203. https://doi.org/10.1016/j.rdf.2013.11.001
4. Anwar, S., & Nguyen, L. P. (2011). Financial development and economic growth in Vietnam. Journal of Economics and Finance, 35(3), 348-360. https://doi.org/10.1007/s12197-009-9106-2
5. Arestis, P., & Demetriades, P. (1997). Financial development and economic growth: Assessing the evidence. The Economic Journal, 107(442), 783-799. https://doi.org/10.1111/j.1468-0297.1997.tb00043.x
6. Asteriou, D., & Spanos, K. (2019). The relationship between financial development and economic growth during the recent crisis: Evidence from the EU. Finance Research Letters, 28, 238-245. https://doi.org/10.1016/j.frl.2018.05.011
7. Ayad, H., & Belmokaddem, M. (2017). Financial development, trade openness and economic growth in MENA countries: TYDL panel causality approach. Theoretical and Applied Economics, 24(1), 233-246. Available at: https://store.ectap.ro/articole/1259.pdf
8. Badeeb, R. A., & Lean, H. H. (2017). Financial development, oil dependence and economic growth: Evidence from the Republic of Yemen. Studies in Economics and Finance, 34(2), 281-298. https://doi.org/10.1108/SEF-07-2014-0137

9. Bayar, Y., & Gavriletea, M. D. (2019). Energy efficiency, renewable energy, economic growth: Evidence from emerging market economies. Quality and Quantity, 53(4), 2221-2234. http://doi.org/10.1007/s11135-019-00867-9
10. Bist, J. P. (2018). Financial development and economic growth: Evidence from a panel of 16 African and non-African low-income countries. Cogent Economics & Finance, 6(1), 1449780. https://doi.org/10.1080/23322039.2018.1449780
11. Calderón, C., & Liu, L. (2003). The direction of causality between financial development and economic growth. Journal of Development Economics, 72(1), 321-334. https://doi.org/10.1016/S0304-3878(03)00079-8
12. Caporale, G. M., Rault, C., Sova, A. D., & Sova, R. (2015). Financial development and economic growth: Evidence from 10 new European Union members. International Journal of Finance & Economics, 20(1), 48-60. https://doi.org/10.1002/ijfe.1498
13. Chang, T., & Caudill*, S. B. (2005). Financial development and economic growth: The case of Taiwan. Applied Economics, 37(12), 1329-1335. https://doi.org/10.1080/0003684042000338702
14. Cheng, C. Y., Chien, M. S., & Lee, C. C. (2021). ICT diffusion, financial development, and economic growth: An international cross-country analysis. Economic Modelling, 94, 662-671. https://doi.org/10.1016/j.econmod.2020.02.008
15. Choong, C. K., & Chan, S. G. (2011). Financial development and economic growth: A review. African Journal of Business Management, 5(6), 2017-2027. https://doi.org/10.5897/AJBM10.772
16. De Gregorio, J., & Guidotti, P. E. (1995). Financial development and economic growth. World Development, 23(3), 433-448. https://doi.org/10.1016/0305-750X(94)00132-I
17. Doğan, M., Tekbaş, M., & Gursoy, S. (2022). The impact of wind and geothermal energy consumption on economic growth and financial development: Evidence on selected countries. Geothermal Energy, 10(1), 19. https://doi.org/10.1186/s40517-022-00230-6
18. Durusu-Ciftci, D., Ispir, M. S., & Yetkiner, H. (2017). Financial development and economic growth: Some theory and more evidence. Journal of Policy Modeling, 39(2), 290-306. https://doi.org/10.1016/j.jpolmod.2016.08.001
19. Elfaki, K. E., Handoyo, R. D., & Ibrahim, K. H. (2021). The impact of industrialization, trade openness, financial development, and energy consumption on economic growth in Indonesia. Economies, 9(4), 174. https://doi.org/10.3390/economies9040174
20. Fraihat, B. A. M., Al-Amarneh, A., Yaseen, H., Samarah, M. R., AlKhawaldeh, B. Y. S., & Buraik, O. (2023). Trade openness, energy consumption, and financial development influence on Jordan's economy: Evidence from ARDL and non-Granger causality test approach. International Journal of Energy Economics and Policy, 13(6), 659-665. https://doi.org/10.32479/ijeep.14975
21. Fung, M. K. (2009). Financial development and economic growth: Convergence or divergence?. Journal of International Money and Finance, 28(1), 56-67. https://doi.org/10.1016/j.jimonfin.2008.08.001
22. Guru, B. K., & Yadav, I. S. (2019). Financial development and economic growth: Panel evidence from BRICS. Journal of Economics, Finance and Administrative Science, 24(47), 113-126. https://doi.org/10.1108/JEFAS-12-2017-0125
23. Hasan, H., Ali, B. J. A., Joseph, N., & Oudat, M. S. (2021). An investigation on financial development, trade openness and economic growth: VAR approach. Journal of Contemporary Issues in Business and Government, 27(2), 4289-4295. https://doi.org/10.47750/cibg.2021.27.02.454
24. Hassan, M. K., Sanchez, B., & Yu, J. S. (2011). Financial development and economic growth: New evidence from panel data. The Quarterly Review of Economics and Finance, 51(1), 88-104. https://doi.org/10.1016/j.qref.2010.09.001
25. Horky, F., & Fidrmuc, J. (2024). Financial development and renewable energy adoption in EU and ASEAN countries. Energy Economics, 131, 107368. https://doi.org/10.1016/j.eneco.2024.107368
26. Ibrahim, M., & Alagidede, P. (2018). Effect of financial development on economic growth in sub-Saharan Africa. Journal of Policy Modeling, 40(6), 1104-1125. https://doi.org/10.1016/j.jpolmod.2018.08.001
27. IMF Report (2022). South Africa: Financial sector assesment program-financial system stability assessment. IMF Staff Country Reports, No. 22/39. Available at: https://www.imf.org/en/Publications/CR/Issues/2022/02/11/South-Africa-Financial-Sector-Assessment-Program-Financial-System-Stability-Assessment-513014
28. Islam, F., Shahbaz, M., & Rahman, M. M. (2013). Trade openness, financial development energy use and economic growth in Australia: Evidence on long run relation with structural breaks. MPRA Paper, No. 52546. Available at: http://mpra.ub.uni-muenchen.de/52546/
29. Jianguo, D., Ali, K., Alnori, F., & Ullah, S. (2022). The nexus of financial development, technological innovation, institutional quality, and environmental quality: Evidence from OECD economies. Environmental Science and Pollution Research, 29(38), 58179-58200. https://doi.org/10.1007/s11356-022-19763-1
30. Jóźwik, B., Doğan, M., & Gürsoy, S. (2023). The impact of renewable energy consumption on environmental quality in Central European countries: The mediating role of digitalization and financial development. Energies, 16(20), 7041. https://doi.org/10.3390/en16207041
31. Jozwik, B., Sarıgül, S.S., Topcu, B.A., Çetin, M., & Dogan, M. (2025). Trade openness, economic growth, capital, and financial globalization: Unveiling their impact on renewable energy consumption. Energies, 18, 1244. https://doi.org/10.3390/en18051244
32. Kalaycı, S., & Özden, C. (2020). The nexus between international trade, financial development and economic growth: The case of South Korea. Revista Argentina de Clínica Psicológica, 29(5), 715-725. https://doi.org/10.24205/03276716.2020.1066
33. Kar, M., Peker, O., & Kaplan, M. (2008). Trade liberalization, financial development and economic growth in the long term: The case of Turkey. South East European Journal of Economics and Business, 3(2), 25-38. https://doi.org/10.2478/v10033-008-0012-x
34. Khemakhem, M., & Saidi, S. (2024). Financial development, trade openness, and economic growth in Tunisia. Iranian Economic Review, 28(3), 975-990. https://doi.org/10.22059/ier.2024.349122.1007548
35. Kwakwa, P. A., Dankwah, J. B., Adu Boahen, E., & Hammond, P. (2023). Financial development in South Africa: The role of natural resources, IT infrastructure, and government size. Cogent Economics & Finance, 11(2), 2281844. https://doi.org/10.1080/23322039.2023.2281844
36. Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688-726. Available at: https://www.jstor.org/stable/2729790
37. Liang, Q., & Jian-Zhou, T. (2006). Financial development and economic growth: Evidence from China. China Economic Review, 17(4), 395-411. https://doi.org/10.1016/j.chieco.2005.09.003
38. Menyah, K., Nazlioglu, S., & Wolde-Rufael, Y. (2014). Financial development, trade openness and economic growth in African countries: New insights from a panel causality approach. Economic Modelling, 37, 386-394. https://doi.org/10.1016/j.econmod.2013.11.044
39. Ng, S., & Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69(6), 1519-1554. https://doi.org/10.1111/1468-0262.00256
40. Nguyen, C. P., & Lee, G. S. (2021). Uncertainty, financial development, and FDI inflows: Global evidence. Economic Modelling, 99, 105473. https://doi.org/10.1016/j.econmod.2021.02.014
41. Nguyen, H. M., Le, Q. T. T., Ho, C. M., Nguyen, T. C., & Vo, D. H. (2022). Does financial development matter for economic growth in the emerging markets?. Borsa Istanbul Review, 22(4), 688-698. https://doi.org/10.1016/j.bir.2021.10.004
42. OECD Report (2025). OECD economic surveys: South Africa 2025. OECD Publishing, No. 2025/14. Available at: https://doi.org/10.1787/7e6a132a-en
43. OECD. (2025). OECD data. Available at: https://www.greenpolicyplatform.org/tools-and-platforms/oecd-green-growth-database
44. Ohlan, R. (2017). The relationship between tourism, financial development and economic growth in India. Future Business Journal, 3(1), 9-22. https://doi.org/10.1016/j.fbj.2017.01.003
45. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326. https://doi.org/10.1002/jae.616
46. Phillips, P. C., & Hansen, B. E. (1990). Statistical inference in instrumental variables regression with I(1) processes. The Review of Economic Studies, 57(1), 99-125. https://doi.org/10.2307/2297545
47. Saadaoui, H., Dogan, M., & Omri, E. (2024). The impacts of hydroelectricity generation, financial development, geopolitical risk, income, and foreign direct investment on carbon emissions in Turkey. Environmental Economics and Policy Studies, 26(2), 239-261. https://doi.org/10.1007/s10018-023-00384-y
48. Shahbaz, M., Van Hoang, T. H., Mahalik, M. K., & Roubaud, D. (2017). Energy consumption, financial development and economic growth in India: New evidence from a nonlinear and asymmetric analysis. Energy Economics, 63, 199-212. https://doi.org/10.1016/j.eneco.2017.01.023
49. Tekbaş, M. (2022). The relationship between economic growth, financial development and income inequality in ASEAN-5 countries. Journal of Mehmet Akif Ersoy University Economics and Administrative Sciences Faculty, 9(2), 717-741. https://doi.org/10.30798/makuiibf.691416
50. Ullah, A., Dogan, M., Topcu, B. A., & Saadaoui, H. (2023). Modeling the impacts of technological innovation and financial development on environmental sustainability: New evidence from the world's top 14 financially developed countries. Energy Strategy Reviews, 50, 101229. https://doi.org/10.1016/j.esr.2023.101229
51. Utkulu, U., & Kahyaoğlu, H. (2005). To what direction did trade and financial opennesses affect growth in Turkey?. Turkish Economic Association Discussion Papers, No. 2005/13. Available at: https://www.tek.org.tr/pdf/698_9122022_203123.pdf
52. Valickova, P., Havranek, T., & Horvath, R. (2015). Financial development and economic growth: A meta‐analysis. Journal of Economic Surveys, 29(3), 506-526. https://doi.org/10.1111/joes.12068
53. World Bank. (2005). World Development Indicators. Available at: https://databank.worldbank.org/source/world-development-indicators
54. Zhang, J., Wang, L., & Wang, S. (2012). Financial development and economic growth: Recent evidence from China. Journal of Comparative Economics, 40(3), 393-412. https://doi.org/10.1016/j.jce.2012.01.001