top of page

Financial development and growth

When I switched my thesis from the effect of IMF loans on sub-Saharan Africa to the effect of stock exchanges on sub-Saharan Africa, I thought I was the bee’s knees. After all, who would come up with such a novel topic, or anything remotely related to this? Turns out Joseph Schumpeter, an Austrian economist, discussed the effect of financial development on a country’s economy way back in 1911. And sub-Saharan Africa was arguably at the helm of the neo-liberal economic order, with international organizations such as the International Monetary Fund (IMF) and the World Bank pushing for privatization and liberalization, so ofcourse effect of financial development on Sub-Saharan African countries economic growth has been covered.

However, I took countries from different zones and unions of the continent, such as MAGHREB and COMESA, and I ended up with 9 countries. So, I still have to collect data about stock markets for 9 African countries, and do regressions, and finish my thesis in time.

Thanks for letting me share and pray for me.

On the bright side, I have skimmed through enough papers to write a bit about my thesis, and as my last article for Rostra, I thought it might be a good idea to share some of the interesting things I found!

There is this huge debate regarding whether financial development and economic growth are related, and if so, in which direction. Does financial development growth cause economic growth? Or vice-versa? For now, we will look at the first question.

Financial development can refer to a variety of things. For eg., a private party setting up a group of private banks is an action which can be covered under this definition. Any action, and/or event which facilitates the betterment of the financial sector can be referred to as financial development.

A stock is a share of a company, at a very basic level. As a stockholder of a company, you own a piece of the company, thus having a claim on their profit. Stock exchanges allow companies and individuals to transfer, buy and sell these stocks, depending on their intentions. As is evident, stock exchanges are crucial for financial development. They allow companies to grow, by providing a platform where companies can raise capital for future development, and investors can buy stocks to make profits. Due to this, companies can grow at a faster rate, thus contributing to the economy.

Furthermore, stock exchanges encourage foreign investment. In countries like Zambia, where the domestic private sector is yet to develop, foreign investment could boost domestic companies, thus providing employment to more locals for example, consequentially improving the economy.

As a corollary of the above point, due to foreign inflows and shareholders, risk is shared internationally. This in turn shifts investment from safer, low return tranches to riskier, high return tranches, thus promoting investments with high returns.

Empirical findings suggest that stock exchanges affect GDP positively. However, there is a lot of debate about whether the opportunity cost of starting a stock exchange is too high. Scholars argue that the money could be otherwise used to invest in fiscal policy instruments, such as building roads, which are tried and tested methods for economic growth (in most cases).

This debate shall go on, but unfortunately, I can not present the other arguments to you, my dear readers. As mentioned above, this is my last article for Rostra Economica. I would like to thank you for supporting us. It has been my honor to be able to share ideas with you, and hopefully ignite some discussion.

Once again, thank you, to everyone I have had the good fortune of working with, and most importantly, to you, the reader.

~ Fin ~


bottom of page