Stock markets and economic growth

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Stock markets in developing countries have expanded rapidly over the past decade, yet their role in economic development remains unclear. This study addresses this gap by examining the impact of stock market development on investment, savings, and economic growth in the Republic of South Africa. The author begins by discussing the potential effects of stock market growth, followed by an overview of South Africa's political and economic landscape during the study period. Various econometric techniques are employed for empirical analysis. Initially, findings suggest that stock market development negatively influenced South Africa’s economic progress, with declines in savings, investment, and growth despite stock market expansion. However, further analysis reveals that inflation and political instability were significant factors contributing to this downturn. The stock market helped mitigate the decline in savings by offering inflation-adjusted returns. Additionally, while public investments were adversely affected by the unstable environment, private investments showed resilience and responded positively to stock market growth. The study also highlights the increasing significance of external equity finance during this period, with causality tests confirming the beneficial effects of stock market development on economic growth.