Financial Development and International Trade: Evidence from South Africa

The research employs the use of Bound Testing (ARLD) to Co-integration approach to test for the long run relationship between trade openness and financial openness in the case of South Africa. Further we are interested to test the validity of the Rajan and Zingales (2003) simultaneity of financial and trade openness impact on financial development in the case of South Africa. It is also aimed at investigating the predictive nature of trade openness on financial development using Granger Causality Test. The research used time series data on yearly basis between the periods of 1972-2014 on South African economy. The research estimate confirmed that the financial development variables are positively correlated with the interaction term of capital and trade openness with 0.97%. Specifically, the impact of interaction term (FOTO) on domestic credit to all the various sectors accounted for 0.96% of South Africa’s financial development. Similarly, the impact of interaction term (FOTO) on domestic credit to private sector only was 0.19% of South African’s financial development. The finding of the long run causality test showed a bi-directional way between financial development and the trade openness.