Financial integration, capital market development and economic performance: Empirical evidence from Botswana

A substantial body of literature suggests that financial market development plays a significant role in economic growth through fostering savings mobilization, easing risk management, promoting technological transfer and reducing information and transaction costs. However, the effect of financial integration on growth remains an empirically controversial topic. This paper explores the impact of financial integration on economic growth in Botswana over the period 1974-2009. We do not find a direct, robust and statistically significant association between financial integration and economic growth in Botswana. However, our results show that financial integration is positively and significantly correlated with financial development in the Botswana economy. Although the relationship between financial integration and growth initially is, at best, weak, we believe this is not to say that financial integration does not promote economic growth, as it could do so indirectly through fostering financial development. Policy-wise, we observe that institutional quality, lower level of government spending and a stable macroeconomic environment are important determinants of both financial development and long-term economic growth. Thus, the Botswana government should continue strengthening and developing its capital market to international standards so as to attract both local and foreign investors and encourage foreign investment in the non-mining sectors. The government should ensure that financial reforms are coordinated, law enforcement authorities are strengthened and property rights are protected to reduce investment risks.