Pension Funds, Institutional Quality and Capital Market Development in Africa

Abstract

Pension funds and capital market development have received a lot of attention across the globe with researchers’ findings ranging from positive, negative, and no relationship at all. However, little attention has been given to the role of institutional quality in influencing the relationship between the two variables. Again, one vital aspect of the economic growth determinant which is pension fund, capital market, and infrastructure development has been little researched. The specific objectives of this thesis, which are based on three empirical essays, are: 1) to examine the effects of pension funds and institutional quality on capital market development in Africa; 2) to investigate the impact of pension funds and capital market on economic growth in Africa; and 3) to examine the effects of pension funds and capital markets on infrastructural development in Africa. The first empirical paper investigates the effect of pension funds and institutional quality on capital market development in 52 African countries using a system GMM regression model. The study shows that the interaction between pension funds and institutional quality negatively affects capital market development. The results of the study also show that pension funds in Africa contribute positively to overall financial development and that pension fund managers seem to be focusing more on other financial market assets. The second empirical paper examines the effects of pension funds and capital markets on economic growth by employing the GMM method of estimation based on a dataset of 52 African countries, over the period, 1990 – 2017. The results show that the stock market positively affects economic growth, whereas pension funds negatively influence economic growth. The interactive term (pension funds and stock market capitalization) shows a significantly positive effect on economic growth. This finding clearly suggests that a positive effect of pension funds on economic growth exists in the presence of a capital market and that capital markets positively improve the relationship between pension funds and economic growth. The third empirical paper examines the effects of pension funds and capital markets on infrastructure development in Africa. The investigation was done by employing a GMM method of estimation based on 52 African countries during the period, 2005 - 2017. The results show a negative relationship between pension funds and infrastructural development. However, the interaction between pension funds and capital markets indicates a positive and significant relationship with infrastructural development. This suggests that even though pension funds may not have a positive influence on infrastructural development, the capital market is an important medium that pension fund managers use to support infrastructural development in Africa. The study concludes that pension funds have the potential to bridge the infrastructural gap in Africa but capital markets have an important role to play in this regard. The findings of these essays have important implications for the design of appropriate policies for developing the pension funds industry and capital markets to support infrastructure development and economic growth in Africa.