Financial Markets and the Economic Development Index in South Africa: An Econometric Approach

Abstract

Economic development is a phenomenon that involves the financial stability and standard of living of a nation’s population. To achieve economic prosperity, sound financial development, as a fundamental basis for economic development, is important. The effect of financial markets on economic development in South Africa is considered for the period 1998 to 2021. The economic development index (EDI) was used as the response variable as an indicator for economic development; financial markets were used as the explanatory variables, namely the foreign exchange (forex) markets, stock markets and money markets. The autoregressive distributed-lag econometric approach was applied. The stock market and money market were found to have a positive effect on the EDI, although only the stock market was statistically significant in terms of the probability value. The causality test showed that there exist unidirectional relationships between the stock market and the EDI; the EDI and the money market; and the forex market and the EDI. Sound financial markets and financial institutions make up a stable financial system, which makes the economy resilient to adverse shocks. Hence, unstable financial systems will have an adverse effect on the functioning of the economy by increasing the likelihood of a financial crisis.