Financial Deepening in South Africa: Toward and Architecture that Stimulates Growth

Theory suggests that financial liberalisation, through increasing investment as well as the average productivity of capital, stimulates economic growth. Since bank-based financial deepening is often problematic due to adverse selection and moral hazard effects, the establishment and expansion of capital markets has been advocated. This study examines the effect stock market expansion has had for South Africa’s economic development. A statistically significant negative relationship between stock market development and economic growth is found. The data suggests that the presence of thin trading prevents the theorized benefits of market development from accruing to the economy.