The depth of financial integration and its effects on financial development and economic performance of the SACU countries

[摘要] English: The study investigates the relationship between financial integration, financialdevelopment and economic growth in the SACU countries. The empirical analysiscommenced with an examination of the degree of financial integration in each of theSACU countries using a battery of tests. Overall, the results provide overwhelmingevidence that shows that individually the financial sectors of the SACU countries arehighly integrated and are becoming increasingly more so. The indicators also highlight aclear asymmetry in the capital flows among the banks in the SACU countries with thecapital flows significantly favouring South Africa and Namibia more than the othercountries, which is attributed to the underlying characteristics of these countries,especially their weak institutional development.The results further confirm the dominant role of South Africa among the SACU.Furthermore, the interest rates analyses unambiguously indicate a hierarchy of integrationof the financial systems of each member state with that of South Africa, with Namibia atthe top, followed by Swaziland, Lesotho and Botswana in that order. Moreover, theresults suggest that the prevailing integration between the financial systems stems fromboth policy convergence and market convergence. However, apart from Namibia, theevidence suggests limited arbitrage activities between the countries, which might resultfrom both weak institutional development and limited investment opportunities andinability of investors to explore such opportunities in the smaller countries.The empirical analyses of the relationships between financial development, financialintegration and economic performance based on cointegration and error correctionmodelling techniques using the Johansen approach produce mixed results among theSACU countries. On the relationship between financial development and output growth,the results vary from country to country and depend on the measure of financialdevelopment used. Overall, the results lend some support for supply-leading finance asproposed by Patrick (1966) across the SACU countries. On the effects of FD, the weightof evidence suggests a negative long-run causal effect of financial development,especially using the credit indicator, on output level in the SACU countries. The tests forthe effect of the deposit indicator on the output level were largely inconclusive, with theexception of Swaziland, where a robust positive effect was found. The weak effect offinancial development on economic growth is attributed to inefficiencies in the credit allocation mechanism due to weak regulations, banking supervision and underdevelopedfinancial systems as well as political, institutional and structural problems in some of thecountries.The results further confirm a long-run relationship between financial development andfinancial integration across the SACU countries. The results also confirm a strongfeedback relationship between financial development and financial integration across thecountries. Overall, the effect of financial integration on financial development and viceversa is ambiguous and varies across the SACU countries. In addition to the variationacross the countries, the evidence depends on the kinds of stock of capital and measure offinancial development used. Hence, it is difficult to conclude in general whether financialintegration is a complement or substitute to domestic financial development across theSACU.Lastly, the results show that in the four countries, output is predominantly endogenouswhile financial integration is mainly exogenous. This suggests a limited feedback relationfrom output to financial integration. Regarding the effects of financial integration on theoutput level, the results are mixed; the effects vary from country to country and dependon the types of capital. The effect of FDI was negative in Botswana, positive in SouthAfrica but ambiguous in Swaziland. The ratio of foreign assets of banks has anambiguous effect in Botswana, Lesotho and South Africa while no effect was detected inSwaziland. Lastly, the ratio of foreign liabilities of banks has a positive effect in Lesothoand Swaziland and a negative effect in South Africa, while the effect is ambiguous inBotswana.

[发布机构] University of the Free State