Relationship Between Capital Market Development and Economic Growth in East Africa Community

Abstract

Financial market development can be defined as the policies, factors, and the institutions that lead to the efficient intermediation and effective financial markets. A strong financial system offers risk diversification and effective capital allocation. The greater the financial development, the higher would be the mobilization of savings and its allocation to high return projects. Levine, (1993) emphasized to consider the importance of financial sector in economic growth. Economic growth is the sustained increase in welfare of an economy nation, region, city together with the ongoing changes in that economy's industrial (Ray 1998). Economic growth is conventionally measured as the percent rate of increase in Gross domestic product (GDP). Economic growth will be dependent variable in the study, while financial market development being independent variable. This study will tend to answer how financial market indicators relate to economic growth in East African Countries. The population of study focuses on the five official EAC member countries namely: Kenya, Uganda, Tanzania, Rwanda and Burundi for an eight year period between the years 2006 to 2014. The study establishes positive relationships between market capitalization, money growth and economic growth. The fixed effect model reveals that there is a positive significant effect of capital development on economic growth. The effect of human capital, physical capital and foreign direct investment also has positive effect on economic growth at all conventional levels. The objective of the study was to establish the relationship between capital market developments on economic growth. It was also established that macroeconomic factors that include foreign direct investment, physical capital and labour development have positive and significant effect on GDP for East Africa countries.