An investigation of the relationship between financial sector development and economic growth in South Africa

This study examines the relationship between financial development and economic growth in South Africa in order to get a better understanding of which direction the causality runs. The study takes a look at the literature on the topic as well as econometric techniques using data from 1990 to 2011. A Vector Error Correction Model (VECM) is used to determine the long run relationship between the variables. The Granger causality tests are done in order to determine the direction of causality between variables. Economic growth is proxied by GDP and financial development is proxied by liquid liabilities, credit to the private sector and turnover of shares traded. After careful evaluation and interpretation, it is determined that there is indeed a relationship between financial development and economic growth. Furthermore, the relationship is bidirectional. Policies should thus take on a balanced approach in that they should pursue both financial development and economic growth in order to maximise growth and development in the country