Linkage Between Capital Market Development and Economic Growth
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY Recent literatures on economic growth asserted that ex-ante development of the financial system facilitate ex-post economic growth (e.g. Rajan and Zingales). In recent time, the link between financial market development and economic growth has received much attention in the literatures (King and Levine 1993, Rajan and Zingales 1998, Calderon and Liu 2002, Sunday E. Ewah and Judey Bassey 2004, T.S. Osinubi 2000). This is not unexpected as the financial market provides the needed finance which serves as the lubricant of the economy. The capital market is an integral part of the financial system that provides efficient delivery mechanism for mobilization and allocation, management and distribution of long-term fund (Sunday O.E. Ewah and Judey Bassey). The capital market is a market for long-term debt and equity securities, where business enterprise and government can raise fund for long-term investments. It is normally divided into two broad categories: the stock market and the bond market (Central Bank of Lesotho Economic Review 2009). According to Tokunbo S. Osinubi (2000), the stock market is reported to perform some functions which promote the growth and development of an economy. It plays a pivotal role in mobilizing idle fund from surplus economic unit and channels such fund into deficit unit for investment in long-term project. The supplier of funds are basically individuals and corporate bodies who subscribe to capital market instrument as a way of adding value to their unused financial resources while the deficit unit i.e. the end users of the fund are government and corporate bodies as individual cannot approach the capital market for fund. Equally, the capital market provides ideal source for corporate bodies and government to pool monies from people and corporate bodies to finance capital intensive project which its internal purse cannot cope with.
Akingboungbe (1996) opined that the
INTRODUCTION
1.1 BACKGROUND TO THE STUDY Recent literatures on economic growth asserted that ex-ante development of the financial system facilitate ex-post economic growth (e.g. Rajan and Zingales). In recent time, the link between financial market development and economic growth has received much attention in the literatures (King and Levine 1993, Rajan and Zingales 1998, Calderon and Liu 2002, Sunday E. Ewah and Judey Bassey 2004, T.S. Osinubi 2000). This is not unexpected as the financial market provides the needed finance which serves as the lubricant of the economy. The capital market is an integral part of the financial system that provides efficient delivery mechanism for mobilization and allocation, management and distribution of long-term fund (Sunday O.E. Ewah and Judey Bassey). The capital market is a market for long-term debt and equity securities, where business enterprise and government can raise fund for long-term investments. It is normally divided into two broad categories: the stock market and the bond market (Central Bank of Lesotho Economic Review 2009). According to Tokunbo S. Osinubi (2000), the stock market is reported to perform some functions which promote the growth and development of an economy. It plays a pivotal role in mobilizing idle fund from surplus economic unit and channels such fund into deficit unit for investment in long-term project. The supplier of funds are basically individuals and corporate bodies who subscribe to capital market instrument as a way of adding value to their unused financial resources while the deficit unit i.e. the end users of the fund are government and corporate bodies as individual cannot approach the capital market for fund. Equally, the capital market provides ideal source for corporate bodies and government to pool monies from people and corporate bodies to finance capital intensive project which its internal purse cannot cope with.
Akingboungbe (1996) opined that the