Natural resource endowment, stock market development and economic growth in Africa

Abstract

The inability to create sustainable wealth has plagued many resource endowed economies on the African continent. Natural resource wealth has not translated into to economic growth, in fact studies done illustrate that of lack of education and subsequent poor economic performances are linked to natural resource endowment. Revenue emanating from the extraction of natural resources is not being effectively managed and this is evident in the level of corruption on the African continent. Natural resource endowed economies rely on rent and commodity exports as their main source of income and due to this dependency, these economies are more prone to volatile income streams as a result of changes in the prices of commodities. The inadequate investment in human capital has resulted in African stock markets not developing further despite having some of the oldest stock exchanges in the world. The Johannesburg Securities Exchange was established in 1887 and the Egyptian Stock Exchange in 1887. This research investigated three natural resource endowed countries; South Africa, Nigeria and Egypt. These countries also happen to have the more sophisticated stock markets as compared to other countries on the continent; however these markets remain relatively small and illiquid compared global stock markets. The purpose of this paper is to ascertain whether stock market development increases economic growth when natural resources revenue is modelled as a determinant for stock market development. The paper also seeks to determine whether the lack of stock market development could be attributed to the natural resource curse, a phenomena where resource endowment is associated with poor economic performance. The results show that natural resource revenue and liquidity enhance economic growth, Nigeria displayed symptoms of suffering from the natural resource curse. The paper also finds that the type of natural resource that a country is endowed with has different effects on economic performance and that the growth of an economy has a significant relationship with the price of commodities. The study concludes that if natural resource endowed economies are to manage its resource revenue efficiently and focus on improving institutional quality and the level of human development. An increase in institutional quality will enhance stock market integrity, while an increase in human development will foster local participants to learn about the stock markets. An increase in the number of participants will enhance stock market liquidity.