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Relationship Between Financial Development And Economic Growth

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Financial Development, Human Capital Accumulation And Economic Growth: Empirical Evidence From The Economic Community Of West African States (ecowas)

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By Palesa Milliscent Lefatsa Palesa Milliscent Lefatsa Scilit Preprints.org Google Scholar * , Kin Sibanda Kin Sibanda Scilit Preprints.org Google Scholar and Rufaro Garizirai Rufaro Garizirai Scilit Preprints.org Google Scholar

Received: July 1, 2021 / Revised: September 16, 2021 / Accepted: September 22, 2021 / Published: October 21, 2021

Pdf) Financial Development And Economic Growth: A Review

This paper examines the relationship between financial development and energy consumption in South Africa. To determine the long-run and short-run relationship between financial development and energy consumption in South Africa, the paper uses the autoregressive distributed lag limit test (ARDL) and the Granger causality test to determine the type of correlation between 1980 and 2018. The ARDL bounds testing method offers specific long-run estimates and t-statistics because it is flexible whether the resulting variables are I(0) or I(1). The study used per capita (kilogram, kg oil equivalent) to measure total energy consumption, domestic credit to the private sector (percent of gross domestic product, GDP) to measure financial development, real GDP growth (to capture economic growth), industrial value added (percent of GDP ) to measure industrialization and urban population (percentage of total population) to measure urbanization. ARDL results show that the relationship between financial development and energy consumption is positive in both the short and long term. Granger causality test results revealed unidirectional causality from financial development to energy consumption. Policymakers need to formulate policy reforms that channel more credit to private sector development to encourage more energy consumption in South Africa. There should be a proper balance between financial development and energy consumption to avoid electricity crisis.

The southern African country has experienced multiple power outages, and from 2020 Eskom is unable to sustain 25% more demand at 39,000 megavolts (MV) (Renke and Steennot 2020). The need for so-called load shedding has raised concerns about the current and future reliability of energy supplies in South Africa, reducing economic growth by 1.1% (Vermeulen 2020). It also raised questions about the lack of progress since the newly appointed cabinet in 2018 (Alexandra 2020) to recover about R9.9 billion in capital expenditure to resolve Eskom’s financial and operational crisis. Electricity utility Eskom estimates that, without additional capacity, there will be an electricity supply shortfall of between 4,000 and 6,000 MW over the next five years as older coal-fired power plants reach maturity (Wirth 2020). One of the drivers of energy consumption in the literature is financial development (Bulfone 2020). A well-developed financial sector allows individuals, households, and firms to consume more energy (Ma and Fu 2020). It is therefore necessary to conduct a study that examines the relationship between financial development and energy consumption in South Africa from 1980 to 2018. Moreover, the relationship between financial development and energy consumption has attracted enormous attention from researchers and policy makers globally (Ahmed 2017). ). Although most studies generally suggest that there is a relationship between financial development and energy consumption, empirical evidence continues to show mixed results (Odhiambo 2019). One body of research argues that energy consumption leads to an increase in demand for financial services, which positively affects financial development (Odhiambo 2010; Ahmed 2017; Ma and Fu 2020). Financial development can positively affect energy consumption by increasing economic growth and providing funds to economic units at reasonable rates and terms to purchase durable goods such as refrigerators, cars, houses, etc. (Mahalik et al. 2017). The empirical results of Stern and Cleveland (2004) support the view that energy consumption leads to financial development. In contrast, studies such as Kakar (2016), Mahalik et al. (2017) and Nkalu et al. (2020) emphasize that financial development leads to energy consumption. A well-developed financial sector is thought to attract more finance for investment, fueling urbanization, industrialization, economic growth, and promoting energy consumption (Bayer et al. 2021). Other studies suggest that financial advancement in the early stages of development responds to energy consumption and increases economic growth, it improves a country’s financial development (Sadorsky 2011; Xu 2012; Mahalik and Mallick 2014; Sbia et al. 2017; Rehman and Rashid 2017). ; Haider and Adil 2019; Ma and Fu 2020). Gungor and Simon (2017) and Roubaud and Shahbaz (2018) and Sadraoui et al. (2019) support this view, indicating a bidirectional relationship between financial development and energy consumption. In some cases, financial development has no role in energy consumption (Tamaziani et al. 2009). Sare (2019) and Yue et al. (2019) found no evidence of a finance-energy nexus.

From the above, it is clear that the empirical evidence on the relationship between financial development and energy consumption is mixed (Bayer et al. 2021). In South Africa, policy makers, researchers and academics have paid very little attention to this relationship, as evidenced by the fact that few studies have examined the relationship between financial development and energy consumption (Ahmed 2017). Several existing studies follow a similar trend of grouping South Africa with other countries in their analyzes (Chitiyo 2017). Studies such as Tamaziani et al. (2009), Ahmed (2017), Gungor and Simon (2017) studied the financial-energy relationship among a group of countries that includes South Africa (Sekantsi et al. 2016; Muyambiri and Odhiambo 2018). No consensus was reached in the results of these studies. This therefore creates difficulty in generalizing the role of financial development on energy consumption in South Africa (Odhiambo 2019). Furthermore, this means that South Africa’s policy direction is deficient in the contribution of financial development to energy consumption (Karakurt and Aykutalp 2020).

Contrary to the general trend of grouping countries, this study aims to generate empirical evidence on the relationship between financial development and energy consumption specific to South Africa (Ahmed 2017). Developing empirical knowledge about this relationship is necessary to influence policy reforms that focus on advancing financial development and promoting energy consumption in the country (Simon 2016). The study also aims to examine how the financial sector affects energy consumption (Karakurt and Aykutalp 2020). Studies have shown that the direction of causality and the relationship between indicators of financial development and primary energy consumption varied between countries (Bayer et al. 2021). In summary, the study additionally attempts to determine the nature and direction of the relationship between financial development and energy consumption in South Africa (Bernanke 2008). Using time series data and the ARDL technique, the study provides the long-term and short-term dynamics of this relationship (Gujarati and Porter 2010). The study concludes with evidence-based policy recommendations necessary to enhance financial development and energy consumption in South Africa.

Pdf) Relationship Between Financial Development And Economic Growth: Empirical Evidence In Indonesia

The rest of the study is structured as follows: Section 2 provides the literature review and Section 3 provides the methodology. Chapter 4 presents the empirical results, and the last section is devoted to the conclusion and policy recommendations.

Within this brief survey, it is important to provide both theoretical background and empirical studies to provide a comprehensive view of the issue. This section is divided into two subsections, the theoretical literature and the empirical literature related to the relationship between financial development and energy consumption.

The theoretical front revealed three main effects (direct, business and wealth effects) where financial development is correlated with energy consumption and the Kuznets Curve (EKC) hypothesis.

Direct effect – An efficient financial system allows consumers to buy more goods, which encourages more borrowing by households and firms, leading to higher energy consumption (Furuoka 2015). On the contrary, an increase in credits leads to a decrease in energy consumption, therefore through the expansion of energy-saving devices, machines and new products (Masanet-Llodra 2012). Consumer energy demand may also be an increasing function of a country’s financial development (Bayer et al. 2021). A sound financial system (like South Africa) allows consumers to buy goods and services using money saved in banks or from loans given to them (Sadorsky 2011). Customers, then

Pdf) An Analysis Of The Relationship Between Financial Development And Economic Growth: G 7 Countries

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