Financial Sector Development and Economic Growth: An Empirical Analysis of Two Southern African Countries

P Takaendesa and Nicholas Odhiambo

Studies in Economics and Econometrics, 2007, vol. 31, issue 3, 61-80

Abstract: This study examines the direction of causality between financial development and economic growth in two Southern African countries, namely Zimbabwe and Malawi. Unlike the majority of previous studies, the study uses five proxies for financial development against real GDP per capita - a proxy for economic growth. The study seeks to answer one critical question: Does financial sector development lead in the process of economic development (as postulated by the proponents of a supply-leading phenomenon) or it is the real sector growth which drives the development of the financial sector (as postulated by the proponents of a demand-following phenomenon)ΠUsing the Johansen and Juselius (1990, 1992) and the Hsiao's (1981) test procedures, the results of this study reveal that the direction of causality between financial development and economic growth is sensitive to the choice of measurement for financial development. Overall, the study finds a distinct bi-directional causality to prevail in Malawi and a supply-leading response to predominate in the case of Zimbabwe.

Date: 2007
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DOI: 10.1080/10800379.2007.12106436

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