Financial Development and Economic Growth in Southern Africa Presented by Meshach Aziakpono Department of Economics National University of Lesotho At OECD Conference in Johannesburg:: March

SUMMARY OF ISSUES AND MAJOR FINDING ISSUES: - The Debate on FI and Econ. Growth - Alternative views on the link: (a) Mobilizing res. and ensuring an efficient transfn. Of funds into real productive capital (b) Transform maturity of portfolios of savers and investors > providing sufficient liquidity © Risk reductn through risk diversification. (d) sharing, and pooling. - The increasing International interest in Economic Integration and Monetary Union – Led to increase Capital Mobility - The increasing call for Financial Liberalization (International Financial Inst. and many Economists)

THE QUESTIONS: Whether national fin. Mkts. still matter for growth once domestic agents have access to foreign fin. Mkts. Who gains and losses? Why the gains to gainers and losses to losers

WHY THE SACU COUNTRIES: - SACU and CMA have been cited as examples of successful Economic Integration in Africa (ADB 2000 and Jenkins and Thomas 1998) The Financial Sectors of Member Countries are highly integrated (Jenkins and Thomas 1998) Therefore if Local Financial Development matters for the Growth of SACU Countries, it could be concluded that such Financial Development alongside Regional Financial Integration will continue to influence future National Growth Rates.

The REST OF THE PRESENTATION 1. Brief Economic Background of the SACU Countries 1.1 Official Integration Arrangements and Implication for the BLNSS Countries 1.2 Banking in the SACU Countries 1.3 Financial Intermediation 1.4 Economic Performance among the BLNSS Countries 2. Framework for the Analysis 2.1 Variables and data sources 3. Empirical Results 3.1 Effects of FI indicators 3.2 Effects of other variables 4.Conclusion

Brief Economic Background of the SACU Countries 1.1 Official Integration Arrangements and Implication for the BLNSS Countries -The Southern African Customs Union (SACU) -Free movement of goods -Free movement of people (large remittances from migrant labour) -Common external tariff -RSA compensate the partner countries for loss of fiscal discretion…. -Share of tariff revenue

Table 1: SACU Revenue Payments, 2001/02

CONTD. (b) CMA (RMA) - Country issue currencies but must be backed and pegged at par with RSA Rand - Countries can establish their central banks –Swaziland (MA); 1979 (CBS and Lilanggeni at par with Rand) –Lesotho (MA); 1980 (Loti) 1982 (CBL) –Botswana: 1976 (left RMA and introduced Pula linked to Rand in a basket) – CMA Trilateral agreement (RSA, Lesotho and Swaziland) Namibia (CMA); 1993 (Nam. Dollar) pegged at par with Rand Free flow of funds from current and capital account transactions –Implication - Capital flow to any country where it would earn the highest returns –Monetary policy follow RSA.

IIBanking in the SACU BLNS dominated by RSA banks Banks in BLNS follows trend in RSA (CMA and Bank ownership) RSA banks well developed, sophisticated and highly competitive BLNS –High mkt concentration –High cost of capital for entrepreneur –High spread (except Botswana) –High excess liquidity - due to low domestic invest and not high savings –Private sector credit shift to HH for consumption –Individuals and firms operates dual accounts = (low Deposit rates, Banking inefficiencies, high charges for services)

Table 2: Financial Intermediation

Table 3:SACU Countries Basic Data,

2. Framework for the Analysis 2.1 Variables and data sources - Two Indicators of FI - FIC – Ratio of Private Credit to GDP - FIL - Ratio of Liquid liabilities to GDP -Dependent Variable - log of real GDP and Growth of real GDP - Control Variables - Inflation, - Size of government = Govt. Exp. /GDP - Openness to trade = (export + import)/ GDP - Exchange rate. - All the data came from IMF International Financial Statistics 2001 and earlier issues.

Econometrics Techniques - The Panel Econometrics Analysis applied the Zellner seemingly unrelated regressions estimation (SURE) method. - The main features of SURE as a method for pooling time-series and cross-sectional data are: - The assumption of contemporaneous correlation in the disturbances, and - That each cross-sectional unit has a different coefficient vector - The objective of the econometric technique is to overcome two major weaknesses of most cross-country approaches: - These approaches give all countries, either small or large, an equal weighting since they are assumed to be homogeneous; and - The coefficients represent only an average relationship, which may or may not apply to individual countries in the sample (Bloch and Tang 2003: 250).

RESULTS Effects of FI indicators Overall: weak positive effects of FI –Allan and Ndikumana (1998) = reflect pervasive inefficiencies in credit allocation mechanism- poor legal and banking supervision –Country -specific South Africa -highest gains –Efficiency in deposit utilization –Positive externalities

Results contd. Botswana- weak effects –“Demand following finance” –Reflects general shift of resources from productive invest to consumption Lesotho: some positive effects but not strong –Most credit not used to fin dom. Private invest –Restrictive govt policies Credit ceiling by CBL to control MS ( ) MLAR ( ) - risk free invest opp for banks –Weak institutional, structural and legal environment confusion on property right weak and slow legal system to enforce contract and debt repayment non-loan repayment culture

Results cont. Swaziland Swaziland’s case looks very gloomy It appears the role of FI in promoting Growth is becoming less important Problems similar to Lesotho Attributable to negative externalities, especially since political and economic stability return to the RSA.

Table:5 Empirical Results

Effects of the controlled variables Ø Openness has a significant negative on growth in most of the SACU, except for South Africa where it was positive and significant Ø Government Expenditure had a mixed signs. o For Botswana it was positive and Significant o For the remaining countries, the negative coefficient dominates and was significant in most cases Ø Inflation was negative in almost all the countries but was insignificant Ø The coefficients of Exchange rate were positive and Significant in most of the equations.

4. The Untold Story Are there any other possible effects of the integration arrangement? (positive or negative) –yes –The credibility effects on the smaller countries