In the case of South Africa, the study is of national importance for two reasons. First, while South Africa‟s agriculture contributes less than 3% of the GDP, it has the highest employment per unit of GDP (SARB, 2009). The agricultural sector contributes 10% to formal employment. Second, the World Bank (2008) observes that a unit of output of agriculture has a greater poverty impact than a unit of output of another sector. This observation is in line with the argument of Irz, Lin, Thirtle and Wiggins (2001), who posed a question as follows: “How important is agricultural growth to alleviating poverty in a world in which farming‟s share of total output is in decline?” Using cross-country data, the authors concluded that agriculture has the ability to create employment, stimulate the rural economy through linkages and reduce the cost of food for the whole economy. Although counter-arguments have been advanced, such as that urban incomes reduce poverty during a downturn in the agricultural sector (Mallick, 2012), there is overwhelming empirical evidence for poverty reduction via increases in agricultural productivity (Schneider and Gugerty, 2011). Hence, the findings of the study have implications for developing countries other than South Africa.
The rest of the study is comprised of the following chapters:
1.8 THESIS CHAPTER OUTLINE
Chapter 2: The finance-growth nexus: Theory and evidence
This chapter outlines the structure of rural financial markets in South Africa. Risks inherent in agriculture are also examined and the products offered by rural financial institutions are presented. These risks explain why formal financial institutions shun the agricultural sector in general and the smallholder farming sector in particular.
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The theoretical underpinnings of the demand for and supply of credit are discussed in this chapter. It elucidates, among other concepts related to the credit-granting process, information asymmetry and adverse selection. The supply-leading and demand-leading financial paradigms are also reviewed.
Chapter 3: Bank finance and agricultural growth: Empirical evidence
The chapter examines theoretical models for agricultural growth and the causal relationship between increased doses of credit and agricultural output. It further reviews the theory of agricultural growth and attempts to link it to available empirical evidence. This is done by analysing the role of government and banks in smallholder farmer development. A discussion is also included on management interventions required for smallholder farmers. The study explored the available interventions necessary to enhance the business management skills of smallholder famers.
Chapter 4: Methodological issues review
The research methods used in the study are discussed in this chapter. This includes a review of research methodologies used in previous studies in order to determine the methodology for this study.
Chapter 5: Research design and statistical methods
In this chapter, the empirical research design is articulated. The survey methodological approach is discussed. The data, data-collection instruments and the methods of analysis are elucidated in this chapter. The various descriptions of the research design are outlined, giving the respective merits and demerits of each. Chapter 6: Hypothesis testing and empirical results: Secondary data
This chapter outlines the results of the secondary data analysis. The long- and short- run relationship between bank credit and agricultural output is discussed in detail. Furthermore, the causal relationship between bank credit and agricultural output is examined.
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Chapter 7: Hypothesis testing and empirical results: Survey data
A discussion of how the survey data were analysed and interpreted is presented in this chapter. The chapter begins with a presentation of the descriptive and inferential statistics and multiple regression analysis and concludes with more robust SEM techniques. The chapter demonstrates the contribution made by this study to the body of knowledge by suggesting a modified model for agricultural production in South Africa.
Chapter 8: Discussion of results, conclusion and recommendations
In this chapter, the results from the analysis of both secondary and primary data are synthesised in order to get a clear understanding of the relationship between bank credit and agricultural output. The conclusions of the study are presented in this chapter. A discussion of the contribution made by this study is presented. The chapter also includes recommendations for further research.
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CHAPTER 2
THE FINANCE-GROWTH NEXUS: THEORY AND
EVIDENCE
2.1 INTRODUCTION
The aim of this chapter is to discuss theoretical and empirical literature on finance, production and economic growth. It attempts to explain the factors of production in general and then focuses on the empirical evidence of the impact of credit on output. Over the past several years, the role of financial development in economic growth has been a focus of attention and has attracted a large number of theoretical and empirical studies to investigate the relationship between the two (e.g. Demirgüç-Kunt & Malsimovic, 1998; Goldsmith, 1969; King and Levine, 1993; McKinnon, 1973; Rajan and Zingales, 1998; Shaw, 1973). In addition to the growing body of literature on the determinants of economic growth, this chapter attempts to explore the following question: “Is finance a precondition for growth?” At a micro level, particularly in developing countries, some researchers, such as Rioja and Valev (2004), who studied low-income countries such as Cameroon, India, Philippines and Sudan; Odhiambo (2007), who studied Tanzania; and Wolde-Rufael (2009), who studied Kenya, argue that it is still not clear whether (1) finance plays a significant role as a factor of economic growth, or (2) whether it is economic growth that stimulates the growth of the financial sector. Accordingly, the finance-growth nexus still remains an inconclusive empirical issue. This chapter reviews literature on this debate.
2.2 FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: THEORETICAL