The results from the previous section suggest that large corporations in Africa have made considerable use of the stock market to finance their growth. In this section, we examine the larger-economy wide positive effect of stock market development in Africa. Stock market development has assumed a developmental role in global economics and finance following the impact stock markets have exerted in corporate finance and economic activity. For instance, due to their liquidity, stock markets enable firms acquire much needed capital quickly, hence facilitating capital allocation, investment and growth. Stock markets also help to reduce investment risk due to the ease with which equities are traded. Stock market activity is thus rapidly playing an important role in helping to determine the level of economic activities in most economies.
We examine if stock markets have economy-wide effects on sub-Saharan African economies.
We look at the effect of stock markets on economic growth through three stock market indicators—market capitalization relative to GDP, value of shares traded relative to GDP, and the turnover ratio (value traded/market capitalization). The modeling and estimation follows the framework of Levine and Zervos (1998). The essential issue is to estimate the model in a manner dynamic enough, but at the same time removing all country-specific and time effects which may be correlated with the explanatory variables, hence introducing errors and biases. In this regard, the study adopts the Arellano and Bond (1991) Difference Generalized Method of Moments dynamic instrumental variable modeling approach, where the lagged values of the dependent variable (growth) and differences of the independent variables are suitably used as a valid instrument to control for this bias and the obvious endogeneity between lagged growth values and lagged errors.
The data is an unbalanced panel of 14 African countries. The stock market indicators are obtained from Reuters Services and Emerging Stock Markets Fact Book and the macroeconomic indicators are from the International Financial Statistics of the IMF. Since some of the stock market indicators (for example, the capitalization ratio) are ratios of stocks and flows, there is a stock-flow problem, with regards to the timing of their computation. The stock-flow problem is dealt with according to Beck, Demirgüç-Kunt and Levine (1999).6 The macroeconomic variables include GDP, investment (gross domestic fixed capital formation as a proxy) and trade openness (sum of exports and imports relative to GDP).
From the literature an increase in stock market activity should increase economic growth through liquidity injection, savings mobilization and equity financing for firms. Thus, we expect a priori that an increase in market capitalization ratio, turnover ratio or value of shares traded ratio should increase economic growth. The other control variables for GDP growth are investment (Gross Capital Formation), trade openness and initial income. Again as per growth literature it is expected that trade openness and investment is positively correlated with growth. The three stock market indicators enter the model separately in order to determine which indicator is the best channel through which stock markets influence growth.
This is in tune with Filer, Hanousek and Campos (1999) and Bekaert et al (2004) who have variously noted the relevance of turnover ratio and value traded over market capitalization.
The results show that stock markets influence economic growth significantly through the value of shares traded ratio.
The results from the regression model are interesting. In Equation 1 (Table 4), which uses the ratio of market capitalization to GDP as the stock market development indicator, stock market development does not have a significant effect on economic growth. The most significant variables here are lagged growth and investment which positively influence growth. In Equation 2, however, stock market development plays a significantly positive role in economic growth alongside investment and past growth levels. The stock market development indicator used here is the total value of shares traded relative to GDP, which is indicative of liquidity on the stock markets. An increase in stock market activity via higher liquidity augments GDP growth significantly by a substantial 3.7 percentage points. In the case of the third equation, stock markets (turnover ratio) do not significantly affect economic growth, even though a significant effect of turnover ratio on economic growth would also reaffirm the effect of stock markets in growth due to the absence of a price effect in this indicator. The robustness and validity of the Difference GMM estimation is checked via the Sargan and serial correlation tests.
From the empirical analysis, the significant stock market driver of economic growth in Africa is the ratio of value of shares traded to GDP. It is important to note that the ratio of value traded relative to GDP is an indicator of the activity and liquidity of the stock market. Hence improvements in trading of shares (in the number of shares traded, frequency and efficiency in trading) or liquidity on African stock markets will on the whole boost economic growth by 3.7 percentage points. The adoption of electronic trading systems and the encouragement of new listings could boost this liquidity on African stock exchanges. It must also be added, however, that the inclusion of South Africa in this group could have led to a heavy bias towards this result. Nonetheless, this finding is suggestive of where policy should be directed with regards to stock markets in Africa.
IMF Working Paper African Department Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges Prepared by Charles Amo Yartey and Charles Komla Adjasi August 2007
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The IMF is an international organization
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Since the IMF was established its purposes
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changing needs of its member countries in
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