Working paper 615
This study seeks to establish the casual relationship between financial development and economic growth in the SADC region, factoring-in the role of financial reforms. Utilising Generalised Methods of Moments (GMM) and Panel Fixed Effects estimations, the study established that financial development has a negative effect on growth in SADC. Underdeveloped financial systems, structure and distribution of credit in the SADC countries and strong country heterogeneity factors are possible explanations to the relationship obtained. The financial reforms in the post liberalisation period have a positive but weak impact on growth in SADC. A bi-directional causality between finance and growth was established, although demand-following causality proved to be stronger. Addressing underlying structural issues in both the financial sector and overall macro economy of SADC countries may help in improving the role of finance in supporting growth in the region. Countries need to continually introduce reforms that enhance performance of their financial sectors. A strong demand-following causality implies that pro-growth policies should be intensified so that growth subsequently pulls with it financial development.
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