Finance-growth-poverty nexus in South Africa: A dynamic causality linkage

Abstract

This paper attempts to examine the dynamic causal relationship between financial development, economic growth and poverty reduction in South Africa-using a trivariate causality model. The study attempts to answer one critical question. Which sector leads in the process of poverty reduction in South Africa-the financial sector or real sector? Using cointegration and error-correction models, the empirical results of the study show that both financial development and economic growth Granger-cause poverty reduction in South Africa. The study also finds that economic growth Granger-causes financial development and, therefore, leads in the process of poverty reduction in South Africa. This applies irrespective of whether the causality test is conducted in the short-run or in the long-run. The study, therefore, recommends that policies geared towards increasing economic growth should be intensified in South Africa in order to make the economy more monetised, and to reduce the high level of poverty currently prevailing in the country. © 2008 Elsevier Inc. All rights reserved.