The impact of Capital Markets on the Economic Growth in South Africa

Abstract

Capital markets, specifically as stock markets, are institutions that actively play a role in the development of an economy, an emerging economy and developed economy. This study investigates the impact of capital markets on economic growth in South Africa. To attain the set objective, cointegration and causality analyses was adopted, with an observation from 1971- 2013. The results indicated that there is a positive relationship between economic growth and capital markets (where market capitalization and value of transactions were proxies for capital markets) and exchange rate as an additional variable. The R-squared was a substantial 0.50%, which suggests that only 50% of economic growth in South Africa is explained by the variables employed in the model for the period 1971-2013. The results further suggest that the country should focus on factors that contribute to the development of capital markets, such as the development of financial institutions. Moreover, although capital markets and economic growth have a positive relationship, it changes in the long run because it is a developing country. The study contributes to the existing lacuna on empirical literature with regards to economic growth and capital markets, especially with reference to stock markets as South Africa has one of the largest stock markets (JSE) in the world.