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Browsing Faculty of Economic and Management Sciences by Author "Achameesing, Amit"

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    Total effects of bank credit on economic growth in Mauritius : a time-varying coefficient estimation of the quantity theory of disaggregated credit
    (Stellenbosch : Stellenbosch University, 2022-12) Achameesing, Amit; Aziakpono, Meshach Jesse; Stellenbosch University. Faculty of Economic and Management Sciences. Dept of Business Management.
    ENGLISH SUMMARY: The empirical literature has found mixed evidence of the effects of finance on growth. A comprehensive review by Levine (2005) found that more finance is good for the economy, and countries which have a smaller share of private sector credit to GDP should attempt to increase it to promote investment and growth. However, a part of the literature has found a non-linear relationship between ‘financial deepening’ and economic growth, suggesting that too much finance could be harmful for growth (see Deidda and Fattouh, 2002; Huang and Lin, 2009; Arcand et al., 2012, 2015; Cecchetti and Kharroubi, 2012, 2013; Law and Singh, 2014). To the best of our knowledge, none of the studies investigated the reasons for the nonlinear effects of finance on growth. Empirical studies on finance and growth in Mauritius have found a positive link between different quantitative measures of financial development (FD) such as the ratio of liquid liabilities of banks to GDP and private sector credit to GDP on investment or economic growth (see Jouan, 2005; Jankee, 2006; Seetanah, 2008; Nowbutsing et al., 2010; Muyambiri and Odhiambo, 2018). Since the empirical literature has shown that the effects of private sector credit on economic growth have been declining in many parts of the world (See Arcand et al. (2012); Cechetti et al. (2012)), this thesis investigates if the positive effects of private sector credit on economic growth still hold in Mauritius. This investigation is particularly salient as during the past three decades there has been an increase in private sector credit but economic growth has remained relatively subdued, raising questions about the efficiency of aggregate credit in promoting productive investment in the country. We start this research by performing a fixed coefficient estimation of the effects of two measures of FD: Private Sector Credit per capita1 (PSC) and Commercial Bank Credit per capita (CBC) on Real GDP per capita (RGDP). The results of the ARDL model show strong evidence of negative long-run effects of PSC or CBC on RGDP, but the effects of the former on the latter remain positive in the short-run. These results raise serious questions about the effects of aggregate credit on economic growth in the country in the long-run. We argue that the relationship between PSC or CBC and RGDP in Mauritius might have changed over time due to different economic policies adopted and structural economic changes in the country since independence in 1968, and therefore the application of a timevarying coefficient (TVC) model would be more appropriate for the analyses. In contrast to existing fixed and variable coefficient models, which ignore the indirect effects of the regressor on the dependent variable, the TVC model of Swamy and Von Zur Muehlen (2020) measure the total effects2 of PSC or CBC on RGDP from 1970 to 2019. Furthermore, as opposed to the existing empirical literature on the indirect effects of finance and growth (Sarwar et al., 2020), the TVC model uses coefficient drivers to measure more precisely the partial indirect effects3 through which finance can affect growth. The results show that the direct effects of PSC or CBC on economic growth are positive while the indirect effects measured by Private Investment (PI), Gross Fixed Capital Formation (GFCF), Private Consumption (PC) and IMPORTS are all negative which partly explains the declining effects of finance on growth in Mauritius. It is important to highlight the differences between the ARDL and TVC results. The results for the ARDL model show significant positive direct effects of PSC or CBC on RGDP in the short-run and significant negative direct effects of PSC or CBC on RGDP in the long-run. On the other hand, the results for the TVC model show that the total effects, including the direct effects of PSC or CBC on RGDP for the entire period, are always positive and in fact it is the indirect effects of PSC or CBC on RGDP which are negative. The indirect effects are significantly measured by the negative coefficient of the coefficient drivers, PI, GFCF, PC and IMPORTS which partially explains the decline in the positive total effects of private sector credit and commercial bank credit on economic growth in Mauritius over time. The ARDL model ignores the indirect effects and hence wrongly arrives at the conclusion that it is PSC or CBC which has negative direct effects on economic growth in the long-run. The TVC results suggest that banks in Mauritius have been allocating credit to sectors which are less productive during more recent times. Therefore, we introduce the Quantity Theory of Disaggregated Credit (QTDC) in Africa and provide a new theoretical framework to show the explicit link between bank credit and nominal GDP (NGDP). In particular, we use QTDC to disaggregate commercial bank credit into bank credit for GDP transactions and bank credit for non-GDP transactions, and then measure the total effects of the former on NGDP in Mauritius. The empirical results show that bank credit for GDP transactions namely proxy 104 has stronger total effects on NGDP than proxy 115 throughout the period 1970 to 2019. This result suggests that bank credit to the construction sector has had major non-GDP effects. The time path for the total effects of proxy 10 on NGDP shows that during the economic miracle period of the 1980s bank credit for GDP transactions played a significant role in stimulating GDP. However, from the late 1980s the total effects of bank credit for GDP transactions on NGDP start to decline as commercial banks gradually shifted their allocation of credit to non-GDP sectors, notably to finance and construction. Consequently, the total effects of proxy 10 on NGDP plummet and reach its minimum point in 20136. The stronger deceleration in the time path of the total effects of proxy 11 on NGDP in comparison to the time path of proxy 10 on NGDP shows that as banks increased their allocation of credit to the construction sector, the link between bank credit and NGDP weakened considerably. The indirect effects of proxy 10 and 11 on NGDP are measured by the coefficient drivers – Private Investment (PI), Gross Fixed Capital Formation (GFCF), Private Consumption (PC) and IMPORTS are all significant and negative, which partially explains the decline in NGDP during recent decades. In the final part of the empirical study, we use the proposition of Turner (2014, p. 28) and disaggregate Gross Fixed Capital Formation (GFCF) into three components: Residential and Commercial Real Estate Investment (RCREI), Investment in Machines (IM) and Investment in Infrastructure (II) to have a mesoscopic view of the indirect effects of bank credit for GDP transactions on NGDP and RGDP. We use the two disaggregated measures of bank credits for GDP transactions namely proxy 10 and proxy 11 as financing variables to measure their total effects on NGDP and RGDP. The findings show that irrespective of whether we use aggregate or disaggregate measures of investment, the total effects of proxy 10 on NGDP or RGDP outperforms the total effects of proxy 11 on NGDP or RGDP. The indirect effects of proxy 10 and proxy 11 measured by II, IM and RCREI remain always negative, which corroborates the previous findings that the uses of credit are important for strong economic performance. The high growth rates of the country during 1970s and 1980s is accurately depicted by the time path of the total effects of proxy 10 on RGDP which shows strong total effects of bank credit on economic growth through IM from 1970 to 1979 and from 1984 to 1992. From 1984 to 1992, the total effects of proxy 10 on RGDP via IM have had stronger total effects on economic growth relative to the total effects of proxy 11 on RGDP via RCREI. The period of high growth rates coincides with the imposition of the credit ceiling on non-priority sectors from 1973 to 1993. We argue that the close monitoring of the sectoral composition of bank credit and the introduction of the credit ceiling in 1973 has been an important element in explaining the high economic growth of the country in the 1970s and 1980s. However, after the removal of all forms of credit controls in July 1993, the time path of the total effects of proxy 10 and proxy 11 on RGDP experienced a sharp decline due to the gradual shift in the composition of bank credit to non-GDP transactions. In a nutshell, this study has brought to light five major findings. First, the fixed coefficient estimation of the effects of bank credit on economic growth has shown that the effects are significantly positive in the short-run but negative in the long-run. Second, the time-varying coefficient estimation shows that the effects of bank credit on economic growth are not constant but vary over time, and are non-linear which strongly challenges the findings of previous empirical studies that have used fixed coefficient models and hence assumed that the relationship between finance and growth is constant. More specifically, we find that the effect of bank credit for GDP transactions vary over time and are non-linear. This result also contrasts the findings of previous empirical studies on QTDC that have used fixed coefficient models and assumed that the positive effects of increases in bank credit for GDP transactions on NGDP growth are constant. Third, bank credit has had stronger effects on economic growth from 1970 to about 1990 but then the effects weaken due to increasing bank credit for non-GDP transactions. Fourth, proxy 10 has had stronger effects on GDP in comparison to proxy 11 because the latter includes bank credit to construction whose non-GDP effects weaken the relationship between bank credit and GDP. Fifth, the indirect effects of proxy 10 on economic growth as measured by IM give a strong channel through which bank credit can stimulate economic growth. We believe that it is possible to replicate the time path of the best model that shows sustained and strong positive total effects of proxy 10 on RGDP in Mauritius from 1973 to 1979 and notably from 1984 to 1992. Thus, we propose credit policy measures that would increase bank credit for GDP transactions and encourage investment to IM which today could include investment in agri-tech, high-tech manufacturing, renewable energy technology, information and communications technology devices and the operations of the blue economy amongst others. However, the reintroduction of a productive system of credit allocation is a necessary but not sufficient condition to reignite economic growth in the country. It should also be accompanied by an industrial policy like in 1980s which includes the production of higher value added goods mainly for the exports market.