Trade openness, financial development and economic growth: a trivariate analysis of Southern African Customs Union (SACU) countries

Abstract

The primary objective of the study was to investigate the causal relationship among trade openness, financial development, and economic growth in the Southern African Customs Union (SACU) countries. To achieve this, a series of tests were carried out on a panel of the five (5) SACU countries from 1994 to 2012. The results show that trade openness and financial development are significant contributors to growth of the economies. Specifically, long-run cointegration tests show that there is a long-run relationship between trade openness, financial development, and economic growth. Additionally, the Toda and Yamamoto (1995) and Dolado and Lutkepohl (1996) causality tests show that the direction of causality depends on the measure of financial development used. As far as domestic credit to private sector by banks is concerned, trade openness leads to financial development via economic growth. However, with the money and quasi-money as the measure of financial development, it is financial development that leads to trade openness via economic growth.