Doctoral thesis submitted in fulfilment of the requirements for the award of Doctor of Philosophy
The Graduate School of Business Administration, Wits Business School
University of the Witwatersrand
June, 2017 / Financial sector development has been projected to play a very significant role in economic growth through the provision of improved quality and quantity of financial services. While financial development–growth nexus has received much attention in the literature, important research gaps still remain largely in areas such as financial–real sector interaction in growth trajectory, threshold effects, finance–volatility–shocks linkages; and legal system–information asymmetry nexus. Knowledge of these relationships is extremely crucial in regulating the financial sector and conducting prudent macroeconomic policy more generally. Using sub–Saharan Africa (SSA) as a case, this thesis consists of four self–contained empirical essays each investigating a critical gap relying on several advanced econometric techniques.
In the first essay, we examine the effect on economic growth when financial sector growth outstrips the solvency needs of the real sector. In this context, we find that more than two–thirds of our sampled countries in SSA have experienced at least one episode of excessive credit growth relative to real sector needs. While financial development supports economic growth, the extent to which finance helps growth depends crucially on the simultaneous growth of real and financial sectors. The elasticity of growth to changes in either size of the real sector or financial sector is higher under balanced sectoral growth. We also show that rapid and unbridled credit growth comes at a huge cost to economic growth with consequences stemming from financing of risky and unsustainable investments coupled with superfluous consumption fuelling inflation. However, the pass–through excess finance–economic growth effect via the investment channel is stronger. A good understanding of the optimal level of credit consistent with long run economic growth is needed as existence of an undisturbed equilibrated growth of real and financial sectors is a necessary condition for a
smooth economic growth. By introducing a previously missing link, our findings resolve the seemingly conflicting and highly contested results in the finance–growth literature.
The second essay investigates whether the impact of finance on growth is conditioned on the initial levels of countries‟ income per capita, human capital and financial development. While financial development is positively and significantly associated with economic growth, our evidence suggests that, in almost all the threshold variables, below a certain estimated threshold, financial sector development is positively and insignificantly related to growth. In other words, below the threshold level of per capita income, human capital and the level of finance, economic growth is largely insensitive to financial development while significantly influencing economic activity for countries above the thresholds. The main conclusion drawn is that higher level of finance drives long run growth and so is the overall level of income and human capital.
In the third essay, we disaggregate volatility into its various components in examining the effect of financial development on volatility as well as channels through which finance affects these volatility components. What emerged is that while financial development affects business cycle volatility in a non–linear fashion, its impact on long run fluctuation is imaginary. More specifically, well–developed financial sectors dampen volatility. The findings also revealed that while monetary shocks have large magnifying effect on volatility, their effect in the short run is minuscule. The reverse, however, holds for real shocks. The channels of manifestation shows that financial development dampens (magnifies) the effect of real shocks (monetary shocks) on the components of volatility with the dampening effects consistently larger only in the short run. A key implication emanating from this essay is that, strengthening financial sector supervision and cross–border oversight may be very crucial in
examining the right levels of finance and price stability necessary to falter economic fluctuations.
In the final essay, the study re–interrogates the role of law in financial development in the light of evolving legal systems in SSA as well as how legal origin explain cross–country differences in economic volatility through its effect on information asymmetry. Our evidence suggests that legal origin significantly explains cross–country differences in financial development and economic volatility. More importantly, relative to civil law, English common law countries and those in Southern Africa have higher financial sector development both in terms of financial activity and banking efficiency on the back of lower volatility. While private credit bureau positively (negatively) affects financial development (economic volatility) with economically large impact for English legal legacy countries, the latter effect is contingent on the form of legal origin suggesting that, the establishment of information sharing offices per se may be insufficient in taming growth vagaries. The effectiveness of law is exceedingly relevant. At the policy front, maintaining more agile and effective legal systems that are responsive to changing financial landscape while forcing economic agents to improve information infrastructure is healthy for both financial sector development and macroeconomic stability. / MT2017
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:wits/oai:wiredspace.wits.ac.za:10539/23129 |
| Date | January 2017 |
| Creators | Ibrahim, Muazu |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis |
| Format | Online resource (xx, 237 leaves), application/pdf |
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