Is Financial Development a Factor to the Leading Growth Profile of the South African Economy? Measuring and Uncovering the Hidden Secret

This paper investigates the factors contributing to the formidable growth rate of the South African economy. Specifically, we determine whether the leading role of the South African economy in the Sub- Saharan African region is a result of its sophisticated and resilient financial sector development. If not, the paper tries to identify the possible explanations for the country’s economic growth profile in recent times. From a series of empirical findings, the paper assesses the factor(s) that could impede the overall growth profile of the country’s economy in both the long-run and the short-run. To do this, we measure the shortrun and long-run impacts of financial development on economic growth of the South African economy, and we also investigate whether the relationship between financial development and economic growth is monotonic or not. The study employs time series data from 1980 to 2011 and uses the ARDL bounds-testing approach to cointegration and the U test of Mehlum and Sasbuchi. The study reveals that trade openness and the ratio of credit issued to the private sector by banks to GDP have fuelled South Africa’s economic growth in both the long-run and the short-run. Similarly, the U test also discovered that the relationship between financial development and GDP growth in the country is non-monotonic. Surprisingly, M3 has a short-run negative influence on GDP while the greatest and most crucial long-run factor that has impeded the accumulated growth profile of the South African economy is the low productive contribution of the country’s population to GDP. This study explores new insights for policy makers in South Africa.