Table 5.8.1 below reports the results of Granger causality tests on the indicators of finance which proxy financial development against economic growth (real GDP). This is important in
57 determining the direction of causality between economic growth and financial development in South Africa.
Table 5.8.1: Pairwise Granger Causality Tests Results
Null hypothesis obs F-statistics Probability
Ratio of broad money as a share of GDP does not Granger Cause real GDP
Real GDP does not Granger Cause the ratio of broad money as a share of GDP
47 0.36312
8.52176
0.6977
0.0008**
Ratio of bank liquid liabilities as a share of GDP does not Granger Cause real GDP
Real GDP does not Granger Cause the ratio of bank liquid liabilities as a share of GDP
47 3.66784
5.15948
0.03 40**
0.0099***
Ratio of domestic credit provided by the financial sector as a share of GDP does not Granger Cause real GDP
Real GDP does not Granger Cause the ratio of domestic credit provided by the financial sector as a share of GDP
47 5.45288
1.10153
0.0078***
0.3418
Domestic credit to private sector as a share of GDP does not Granger Cause real GDP Real GDP does not Granger Cause Domestic credit to private sector as a share of GDP
47 2.48254
1.60029
0.0957*
0.2139
* denotes rejection of null hypothesis at 10% level of significance, ** significance at 5% and *** significance at 1%
58 The key objective is to conduct the causality tests between economic growth as proxied by real GDP (lnY) and the financial development proxies (lnDP, lnM2, lnCF, lnBl). Since in this study, the control variables are also considered, the detailed results of causality between economic growth and the variables of gross fixed capital formation, government spending, institutional quality and financial sector reforms are reported in table 5.9.1 in appendix G.
The conclusion on the direction of causality is decided based on the probability values (p- Values). If the P-value is 5% or less than 5%, the null hypothesis is rejected in each case and failure to reject the null hypothesis occurs if it is above 5%.
Following this analogy, firstly, starting from the first row in the table 5.8.1 above, the null hypothesis which posits that the ratio of broad money to real GDP does not Granger Cause real GDP is not rejected, while the null hypothesis that real GDP on the other hand does not Granger Cause the ratio of broad money to real GDP is rejected at 5% level. This implies that real GDP does cause the ratio of broad money to real GDP; hence, causality runs from economic growth to financial development. Secondly, from the second row in the same table, the null hypothesis that the ratio of bank liquid liabilities to real GDP does not Granger Cause real GDP is rejected. Similarly, the null hypothesis that real GDP does not Granger Cause the ratio of bank liquid liabilities to real GDP on the other side is also rejected at 5%
level. These outcomes mean that causality between the two variables runs from either way.
There is bidirectional causality between the ratio of bank liquid liabilities to real GDP and real GDP.
Thirdly, in the third row, the null hypothesis that the ratio of domestic credit provided by the financial sector to real GDP does not Granger Cause real GDP is not accepted, whilst the null hypothesis that real GDP does not Granger Cause the ratio of domestic credit provided by the financial sector to real GDP is also not rejected. This implies that causality runs from finance to economic growth (proxied by log of real GDP).
Finally, the Granger causality test results indicate that the ratio of domestic credit to private sector to GDP does not Granger Cause real GDP and that real GDP does not Granger Cause the ratio of domestic credit to private sector to GDP. This means that the causal relationship between these variables is independent and such variables do not Granger Cause each other.
This is in line with Robinson (1952) and Lucas (1988) who argue that there is no causal
59 relationship between finance and growth and that finance only responds to developments in the real sector of the economy.
In considering the control variables, the causality results from trade openness, government expenditure, investment (gross fixed capital formation to real GDP) and the financial reforms dummy indicate that causality holds in two control variables. The results show that government spending (lnG) Granger Causes economic growth (real GDP) while on the other hand, there is one-way causality from institutional quality to real GDP. This implies that increasing government spending will boost economic growth while improvement in the quality of institutions seems to matter in raising the level of economic growth as evidenced by causality running from the institutional quality variable to real GDP. The study’s overall conclusion on the direction of causality between economic growth and finance is that there is bidirectional causality. This suggests that South African policy makers should simultaneously pursue a policy of improving the real sector and the financial sector in order to achieve sustainable growth and stable financial sector development that is growth enhancing in the long run.
The more institutions are free from political interference and pressure, the more they stand a chance to improve the performance of their intermediary functions to promote investment and increased savings mobilisation. In terms of the other control variables, since the null hypothesis failed to be rejected, there is no evidence of any causal relationship between these variables and real GDP; hence, such variables are independent of one another or mutually exclusive.