Impact of Financial Liberalization on Economic Growth: A Case Study of South Africa

Abstract

Financial liberalization plays a major role in stimulating economic growth. In light of this, the paper examines the impact of financial liberalization on macroeconomic performance in South Africa by using time series econometric analysis over the time period 1990-2011. The study uses GDP, the dependent variable as a measure of economic growth and the following macroeconomic variables: inflation, lending rate exchange rate and financial deepening (M2/GDP) as financial liberalization indices. To confirm the order of integration, the Augmented Dickey-Fuller and Phillips Perron unit root tests are employed. The study uses the Johansen co-integration and the Error Correction Mechanism to obtain long run and short run coefficients. Findings of the study are that inflation, lending rate and financial deepening have positive influence on economic growth whilst exchange rate has a negative impact on economic growth. This study recommends that the government should put in place measures that stimulate investments with fair lending rates so as to deepen the financial system which in turn promotes economic growth. DOI: 10.5901/mjss.2014.v5n23p238