Financial Liberalization and Economic Growth: Lessons from the South African Experience

TLDR: This article showed that post-liberalization Foreign Portfolio Investments had no positive effect on economic growth and increased stock market turnover had a negative effect on the economic growth in South Africa, and that liberalization of the capital account is necessary but not sufficient for economic growth.

Abstract: Following liberalization in South Africa, uncertainty on the part of foreign investors due to lack of a credible macroeconomic framework led to increased volatility of capital flows; characterized by huge capital inflows and subsequent capital flight. Post-liberalization Foreign Portfolio Investments had no positive effect on economic growth. In addition, increased post- liberalization stock market turnover had a negative effect on economic growth. In contrast to this situation, evidence shows that foreign portfolio investment and increased turnover contributed positively to economic growth in a more controlled pre-1994 South African economy. This study aims to show that liberalization of the capital account is necessary but not sufficient for economic growth. Instead, countries need to adopt and implement credible macroeconomic policies meant to stabilize foreign capital flows in order for them to benefit fully from liberalization.