Capital market development and economic growth: an ARDL approach for Saudi Arabia, 1985–2018
Abstract
The aim of this paper is to analyze and test the effects of capital market development on the per-capita GDP growth in Saudi Arabian economy covering the period of 1985-2018. An ARDL, FMOLS and Johansen tests are implemented. The stock market indicators: share price index, capitalization, liquidity, number of share transactions, and number of shares are employed using a log-linear eclectic model designed to fit the availability of data. Capitalization and liquidity came up with negative signs, contrary to the findings of lots of studies in economic literature. However, the share price index, number of shares traded, and the ratio of number of share transactions had the right signs as expected a priori. The findings raise serious questions about the size of the market, the steps and efforts that have been taken to deepen the capital market and their consequences on the function and potency of capital market in fostering per-capita GDP growth. Applying Granger causality test, share price index, market capitalization and number of shares traded do not granger cause per-capita GDP. They are significant at 5 percent level. Capital market authority (CMA) should draw a road map to accelerate deepening the capital market in order to serve economic growth.
First published online 23 December 2020
Keyword : capital market, ARDL, FMOLS, capitalization, economic growth, stock shares, per-capita GDP, Saudi Arabia
How to Cite
Algaeed, A. H. (2021). Capital market development and economic growth: an ARDL approach for Saudi Arabia, 1985–2018. Journal of Business Economics and Management, 22(2), 388-409. https://doi.org/10.3846/jbem.2020.13569
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Bist, J. (2017). Stock market development and economic growth in Nepal: An ARDL representation. Journal of Finance and Economics, 5(4), 164–170.
Brasoveanu, L., Dragota, V., Catarama, D., & Semenescu, A. (2008). Correlations between capital market development and economic growth: The case of Romania. Journal of Applied Quantitative Methods, 3(1), 64–75.
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Iheanacho, E. (2016). The impact of financial development on economic growth in Nigeria: An ARDL analysis. Economies, 4(26), 1–12. https://doi.org/10.3390/economies4040026
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Jamil, T., & Shazia, F. (2013). Capital market deepening and economic growth in Bangladesh. Studia Universitatis Babes Bolyai – Negotia, 58(2), 21–32.
Kargbo, S., & Adamu, P. (2009). Financial development and economic growth in Sierra Leone. Journal of Monetary and Economic Integration, 9(2), 30–57.
Kehinde, A., Ademola, I., Kayode, K., Felix, A., & Musibau, O. (2013). Capital market and economic growth in Nigeria: An empirical analysis. IOSR Journal of Humanities and Social Science, 6(6), 60–68. https://doi.org/10.9790/0837-0666068
Khetsi, Q., & Mongale, I. (2015). The impact of capital market on the economic growth in South Africa. Journal of Governance and Regulations, 4(1), 154–163. https://doi.org/10.22495/jgr_v4_i1_c1_p6
Kolapo, F., & Adaramols, A. (2012). The impact of the Nigerian capital market on economic growth. International Journal of Developing Societies, 1(1), 11–19.
Lei, P., & Mishra, V. (2016). Stock market development and economic growth: Empirical evidence from China (Department of Economics Discussion Paper 16/16). Monash Business School.
Lenee, T., & Oki, J. (2017). Capital market development and economic growth: Evidence from MINT countries. Journal of Economics and Sustainable Development, 8(2), 68–107.
Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688–726.
Masoud, N. (2013). The Impact of stock market performance upon economic growth. International Journal of Economic and Financial Issues, 3(4), 788–798.
Mhadhbi, K. (2014). Financial development and economic growth: A dynamic panel data analysis. International Journal of Econometrics and Financial Management, 2(2), 48–58.
Mukundi, A. (2013). The relationship between financial deepening and gross domestic product in Kenya: A case of NSE listed financial institution [MA Thesis]. University of Nairobi.
Nkro, E., & Uko, A. (2016). Autoregressive distributed lag (ARDL) co-integration technique: Application and interpretation. Journal of Statistical and Econometric Methods, 5(4), 63–91.
Nordin, S., & Nordin, N. (2016). The impact of capital market on economic growth: A Malaysian outlook. International Journal of Economics and Financial Issues, 6(S7), 259–265.
Nwamuo, C. (2018). Impact of capital market on economic growth in Nigeria: An empirical analysis. IOSR Journal of Economics and Finance, 9(5), 48–59.
Nwani, C., Iheanach, E., & Okogbue, C. (2016). Oil price and the development of financial intermediation in and developing oil-exporting countries: Evidence from Nigeria. Cogent Economics Finance, 4, 1185237. https://doi.org/10.1080/23322039.2016.1185237
Okene, K., & Ndubuisi, P. (2017). The role of stock market development on economic growth in OPEC countries: Does oil price movement matter? Fresh evidence from Nigeria. Asian Journal of Economic Modelling, 5(2), 194–207. https://doi.org/10.18488/journal.8.2017.52.194.207
Okoh, J. & Eke, R. (2015). Capital market and economic growth nexus: Evidence from Nigeria. IOSR Journal of Business and Management, 17(11), 31–38.
Onuora, O. (2019). Effects of capital market on economic growth and development of Nigeria (2000– 2017). International Journal of Academic Research in Business and Social Sciences, 9(2), 211–220. https://doi.org/10.6007/IJARBSS/v9-i2/5535
Oprea, O., & Stoica, O. (2018). Capital markets integration and economic growth. Montenegrin Journal of Economics, 14(3), 23–35. https://doi.org/10.14254/1800-5845/2018.14-3.2
Osakwe, C., & Ananwude, A. (2017). Stock market development and economic growth: A comparative evidence from two emerging economies in Africa-Nigeria and South Africa. Archives of Current Research International, 11(1), 1–15. https://doi.org/10.9734/ACRI/2017/38116
Osamwonyi, I., & Kasimu, A. (2013). Stock market and economic growth in Ghana, Kenya, and Nigeria. International Journal of Financial Research, 4(2), 83–98. https://doi.org/10.5430/ijfr.v4n2p83
Osho, A. (2014). The role of stock market on Nigeria’s economic development. International Journal of Scientific and Research Publications, 4(4), 1–7.
Ouandlous, A. (2010). Capital market and economic development: A framework for newly liberalized Economies. Journal of Business and Economics Research, 8(6), 9–16. https://doi.org/10.19030/jber.v8i6.728
Pesaran, H., & Shin, Y. (1999). An autoregressive distributed lag modelling approach to cointegration analysis. In S. Strom (Ed.), Econometrics and Economic Theory in the 20th Century the Ragnar Frisch Centennial Symposium (pp. 371–413). Cambridge University Press.
Qamruzzaman, Md. & Wei, J. (2018). Financial innovation, stock market development and economic growth: An application of ARDL model. International Journal of Financial Studies, 6(69), 1–30. https://doi.org/10.3390/ijfs6030069
Quixina, Y., & Almeida, A. (2014). Financial development and economic growth in a natural resourcebased economy: Evidence from Angola (FEP Working Paper No. 542). http://wps.fep.up.pt/wps/wp542.pdf
Rahman, A., Khan, M., & Charfeddine, L. (2020). Financial development–economic growth nexus in Pakistan: New evidence from the Markov switching model. Cogent Economics and Finance, 8, 1–15. https://doi.org/10.1080/23322039.2020.1716446
Samargandi, N., Fidrmue, J., & Ghosh, S. (2014). Financial development and growth in an oil-rich Economy. Economic Modelling, 43(C), 267–278. https://doi.org/10.1016/j.econmod.2014.07.042
Saudi Arabian Monetary Agency. (2019). Yearly statistics, 2019.
Schumpeter, J. A. (1911). The theory of economic development. Harvard University Press.
Srinivasan, P. (2014). Stock market development and economic growth in India: An Empirical analysis. MPRA.
Twerefou, D., Abbey, E., Codjoe, E., & Ngotho, P. (2019). Impact of stock market development on economic growth: Evidence from selected Sub-Saharan African Countries. Acta Universitatis Agriculturae Et Silviculturae Mendelianae Brunensis, 67(93), 1071–1083. https://doi.org/10.11118/actaun201967041071
Wanaset, A. (2018). The relationship between stock market and economic growth in Thailand. Journal of Economics and Management Strategy, 5(1), 25–38.
Yadirichukwu, E., & Chigbu, E. E. (2014). The impact of capital market on economic growth: The Nigerian Perspective. International Journal of Development and Sustainability, 3(4), 838–864. https://doi.org/10.14738/abr.34.1379
Acha, I., & Akpan, S. (2019). Capital market performance and economic growth in Nigeria. Nobel International Journal of Economics and Financial Research, 4(2), 10–18. http://napublisher.org/?ic=journals&id=2
Ailemen, I., Cynthia, I., Touchukwu, O., & Areghan, I. (2016). An investigative analysis into capital market and economic growth in Nigeria, Ekonomske Praksa Broj, 23.
Alam, Md., & Hussein, M. (2019). The impact of capital market on the economic growth in Oman. Financial Studies, 2, 116–129.
Alghfais, M. (2016). Comparative analysis: The impact of financial sector development on economic growth in the non-oil sector in Saudi Arabia (SAMA Working Paper WP/16/5). Saudi Arabian Monetary Agency.
Alrassi, M., Alsabban, S., & Alarfaj, O. (2019). Does stock market performance affect economic growth? Evidence from Saudi Arabia (SAMA Working Paper WP/19/06). Saudi Arabian Monetary Agency. https://doi.org/10.5539/ijef.v11n9p21
Bader, O. (2015). Stock market development and economic growth: Evidence from Egypt. International Journal of Trade, Economics and Finance, 6(2).
Bakwena, M., & Bodman, P. (2011). The role of financial development in natural resource abundant economies: Does the natural resource matter? BOJE: Botswana Journal of Economics, 7(11), 16–31. https://doi.org/10.4314/boje.v7i11.64201
Benczur, P., Karagiannis, S., & Kvedaras, V. (2019). Finance and economic growth: Financing structure and non-linear impact. Journal of Macroeconomics, 62, 103048. https://doi.org/10.1016/j.jmacro.2018.08.001
Bist, J. (2017). Stock market development and economic growth in Nepal: An ARDL representation. Journal of Finance and Economics, 5(4), 164–170.
Brasoveanu, L., Dragota, V., Catarama, D., & Semenescu, A. (2008). Correlations between capital market development and economic growth: The case of Romania. Journal of Applied Quantitative Methods, 3(1), 64–75.
Caporale, G., Rault, C., Sova, R., & Sova, A. (2009). Financial development and economic growth: Evidence from ten new EU members (Economic and Finance Working Papers Series No. 09-37). Brunel University and CESifo & DIW Berlin. https://doi.org/10.2139/ssrn.1499786
Cevik, S., & Rahmati, M. (2013). Searching for finance-growth nexus in Libya (IMF Working Paper WP/13/92). International Monetary Fund. https://doi.org/10.5089/9781484385883.001
Coskun, Y., Seven, V., Ertugral, H., & Ulussever, T. (2017). Capital market and economic growth nexus: Evidence from Turkey. Central Bank Review, 17(1), 19–29. https://doi.org/10.1016/j.cbrev.2017.02.003
Edweib, A., Shafii, Z., & Ahmad, N. (2013). Stock market and economic growth in Libya. IOSR Journal of Economic and Finance, 2(1), 43–51. https://doi.org/10.9790/5933-0214351
Flaviabarna, P., & Mura, O. (2010). Capital market development and economic growth: The case of Romania. Annals of the University of Petrosani Economics, 10(2), 31–42.
Fisman, R., & Love, I. (2004). Financial development and growth in the short and long run (NBER Working Paper No. 10236). National Bureau of Economic Research. https://doi.org/10.3386/w10236
Havranek, T., Horvath, R., & Valickova, P. (2013). Financial development and economic growth: A meta-analysis (Working Paper No. 5). Czech National Bank. http://www.cnb.cz
Hjalmarsson, E., & Österholm, P. (2007). Testing for co-Integration using the Johansen method when variable near-integrated (IMF Working Paper WP/07/101). International Monetary Fund. https://doi.org/10.5089/9781451867053.001
Ho, S., & Odhiambo, N. (2020). The macroeconomic drivers of stock market development: Evidence from Hong Kong. Journal of Financial Economic Policy, 12(2), 185–207. https://doi.org/10.1108/JFEP-11-2018-0163
Ho, S. (2019). Macroeconomic determinants of stock market in South Africa. International Journal of Emerging Markets, 14(2), 322–342. https://doi.org/10.1108/IJoEM-09-2017-0341
Ibrahim, M. (2013). Financial development and economic growth in Saudi Arabian economy. Applied Econometrics and International Development, 13(1), 133–144.
Idenyi, O., Ifeyinwa, A., Samuel, O., & Cibuzor, C. (2017). Capital market indicators and economic growth in Nigeria: An Autoregressive Distributed Lag (ARDL) model. Asian Journal of Economics Business and Accounting, 2(3), 1–16. https://doi.org/10.9734/AJEBA/2017/32549
Iheanacho, E. (2016). The impact of financial development on economic growth in Nigeria: An ARDL analysis. Economies, 4(26), 1–12. https://doi.org/10.3390/economies4040026
Ikikii, S., & Nzomoi, J. (2013). An analysis of the effects of the stock market on economic growth in Kenya. International Journal of Economics and Finance, 5(11), 145–151. https://doi.org/10.5539/ijef.v5n11p145
Jamil, T., & Shazia, F. (2013). Capital market deepening and economic growth in Bangladesh. Studia Universitatis Babes Bolyai – Negotia, 58(2), 21–32.
Kargbo, S., & Adamu, P. (2009). Financial development and economic growth in Sierra Leone. Journal of Monetary and Economic Integration, 9(2), 30–57.
Kehinde, A., Ademola, I., Kayode, K., Felix, A., & Musibau, O. (2013). Capital market and economic growth in Nigeria: An empirical analysis. IOSR Journal of Humanities and Social Science, 6(6), 60–68. https://doi.org/10.9790/0837-0666068
Khetsi, Q., & Mongale, I. (2015). The impact of capital market on the economic growth in South Africa. Journal of Governance and Regulations, 4(1), 154–163. https://doi.org/10.22495/jgr_v4_i1_c1_p6
Kolapo, F., & Adaramols, A. (2012). The impact of the Nigerian capital market on economic growth. International Journal of Developing Societies, 1(1), 11–19.
Lei, P., & Mishra, V. (2016). Stock market development and economic growth: Empirical evidence from China (Department of Economics Discussion Paper 16/16). Monash Business School.
Lenee, T., & Oki, J. (2017). Capital market development and economic growth: Evidence from MINT countries. Journal of Economics and Sustainable Development, 8(2), 68–107.
Levine, R. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688–726.
Masoud, N. (2013). The Impact of stock market performance upon economic growth. International Journal of Economic and Financial Issues, 3(4), 788–798.
Mhadhbi, K. (2014). Financial development and economic growth: A dynamic panel data analysis. International Journal of Econometrics and Financial Management, 2(2), 48–58.
Mukundi, A. (2013). The relationship between financial deepening and gross domestic product in Kenya: A case of NSE listed financial institution [MA Thesis]. University of Nairobi.
Nkro, E., & Uko, A. (2016). Autoregressive distributed lag (ARDL) co-integration technique: Application and interpretation. Journal of Statistical and Econometric Methods, 5(4), 63–91.
Nordin, S., & Nordin, N. (2016). The impact of capital market on economic growth: A Malaysian outlook. International Journal of Economics and Financial Issues, 6(S7), 259–265.
Nwamuo, C. (2018). Impact of capital market on economic growth in Nigeria: An empirical analysis. IOSR Journal of Economics and Finance, 9(5), 48–59.
Nwani, C., Iheanach, E., & Okogbue, C. (2016). Oil price and the development of financial intermediation in and developing oil-exporting countries: Evidence from Nigeria. Cogent Economics Finance, 4, 1185237. https://doi.org/10.1080/23322039.2016.1185237
Okene, K., & Ndubuisi, P. (2017). The role of stock market development on economic growth in OPEC countries: Does oil price movement matter? Fresh evidence from Nigeria. Asian Journal of Economic Modelling, 5(2), 194–207. https://doi.org/10.18488/journal.8.2017.52.194.207
Okoh, J. & Eke, R. (2015). Capital market and economic growth nexus: Evidence from Nigeria. IOSR Journal of Business and Management, 17(11), 31–38.
Onuora, O. (2019). Effects of capital market on economic growth and development of Nigeria (2000– 2017). International Journal of Academic Research in Business and Social Sciences, 9(2), 211–220. https://doi.org/10.6007/IJARBSS/v9-i2/5535
Oprea, O., & Stoica, O. (2018). Capital markets integration and economic growth. Montenegrin Journal of Economics, 14(3), 23–35. https://doi.org/10.14254/1800-5845/2018.14-3.2
Osakwe, C., & Ananwude, A. (2017). Stock market development and economic growth: A comparative evidence from two emerging economies in Africa-Nigeria and South Africa. Archives of Current Research International, 11(1), 1–15. https://doi.org/10.9734/ACRI/2017/38116
Osamwonyi, I., & Kasimu, A. (2013). Stock market and economic growth in Ghana, Kenya, and Nigeria. International Journal of Financial Research, 4(2), 83–98. https://doi.org/10.5430/ijfr.v4n2p83
Osho, A. (2014). The role of stock market on Nigeria’s economic development. International Journal of Scientific and Research Publications, 4(4), 1–7.
Ouandlous, A. (2010). Capital market and economic development: A framework for newly liberalized Economies. Journal of Business and Economics Research, 8(6), 9–16. https://doi.org/10.19030/jber.v8i6.728
Pesaran, H., & Shin, Y. (1999). An autoregressive distributed lag modelling approach to cointegration analysis. In S. Strom (Ed.), Econometrics and Economic Theory in the 20th Century the Ragnar Frisch Centennial Symposium (pp. 371–413). Cambridge University Press.
Qamruzzaman, Md. & Wei, J. (2018). Financial innovation, stock market development and economic growth: An application of ARDL model. International Journal of Financial Studies, 6(69), 1–30. https://doi.org/10.3390/ijfs6030069
Quixina, Y., & Almeida, A. (2014). Financial development and economic growth in a natural resourcebased economy: Evidence from Angola (FEP Working Paper No. 542). http://wps.fep.up.pt/wps/wp542.pdf
Rahman, A., Khan, M., & Charfeddine, L. (2020). Financial development–economic growth nexus in Pakistan: New evidence from the Markov switching model. Cogent Economics and Finance, 8, 1–15. https://doi.org/10.1080/23322039.2020.1716446
Samargandi, N., Fidrmue, J., & Ghosh, S. (2014). Financial development and growth in an oil-rich Economy. Economic Modelling, 43(C), 267–278. https://doi.org/10.1016/j.econmod.2014.07.042
Saudi Arabian Monetary Agency. (2019). Yearly statistics, 2019.
Schumpeter, J. A. (1911). The theory of economic development. Harvard University Press.
Srinivasan, P. (2014). Stock market development and economic growth in India: An Empirical analysis. MPRA.
Twerefou, D., Abbey, E., Codjoe, E., & Ngotho, P. (2019). Impact of stock market development on economic growth: Evidence from selected Sub-Saharan African Countries. Acta Universitatis Agriculturae Et Silviculturae Mendelianae Brunensis, 67(93), 1071–1083. https://doi.org/10.11118/actaun201967041071
Wanaset, A. (2018). The relationship between stock market and economic growth in Thailand. Journal of Economics and Management Strategy, 5(1), 25–38.
Yadirichukwu, E., & Chigbu, E. E. (2014). The impact of capital market on economic growth: The Nigerian Perspective. International Journal of Development and Sustainability, 3(4), 838–864. https://doi.org/10.14738/abr.34.1379