Foreign Capital Flows and Human Development in Developing Countries: Does Institutional Quality Matter?

Abstract

The impact of foreign capital on human development has been at best ambiguous, while that of institutions is undoubtedly favorable. That said, the way foreign capital relates to human development may be affected by the quality of institutions. This paper assesses this very phenomenon in 65 developing countries over the time period 1984-2014. In this regard, this study incorporates three indicators of human development namely, per capita income (PCI), Secondary School Enrollment (SSE) and Life Expectancy (LE). Using two step system GMM estimation technique, we found that the impact of foreign capital varies with respect to the indicators of human development and the type of foreign capital being studied. Both FDI and FPI negatively affect per capita income and secondary school enrollment, while, remittances affect all the indicators of human development positively, except for life expectancy. The interaction between institutions and each type of foreign capital flow exerts a positive influence on all indicators of human development. However, this positive interaction fails to completely eliminate the adverse influence of the capital flows, which reflects inadequacy of existing institutional quality in developing countries and the need for institutional reforms.

Conditional Effect of Environmental Degradation and Institutional Environment on Human Development in Developing Countries: Evidence from Method of the Moment-Quantile Regression with Fixed Effect

“…Another strand of empirical studies reported that institutions have significant positive effect on human development (Balcerzak and Pietrzak, 2017;Ejuvbekpokpo, 2017;Hashem, 2019;Kamalu and Wan Ibrahim, 2022;Muro and Tridico, 2008). The study of Kouadio and Gakpa (2022) show that quality institutions have negative effect on inequality and poverty, while Ali et al (2020) found that institutions plays a significant role in enhancing positive effect of official development assistance on human development. However, a study by Ejemeyovwi et al (2018) reported that ICT development have negative impact on human development, while Mardanov (2020) found that institutions have positive insignificant effect on human development in 22 transitional economies.…”

“…However, efficient allocation of scarce resources is one of the factors that greatly improve living conditions Strong institutional environment control corruption, curb mismanagement, protect property rights, rule of law and implement quality regulations, which have strong correlation with increasing human development (Brady, 2019). It is been argued that institutions determine almost everything in a society, hence, the difference between GDP growth is determine by the level of quality institutions in the society (Ali et al, 2020;Kamalu and Ibrahim, 2022).…”

The combined effect of institutional quality and capital flows on food and nutrition security and undernourishment in Sub-Saharan Africa

“…For example, Nigeria alone has witnessed about 180% increase in the number of undernourished people over the last decade as reported in the 2019 Africa regional overview of food security and nutrition. Furthermore, weak institutional capacity in many SSA countries undermines efforts to achieve optimal level of food and nutrition security as they significantly impact on economic development [ 6 , 7 ].…”

“…While factors such as climate change affect countries globally, countries with limited economic growth struggle to achieve significant development targets and food self-sufficiency without inputs from foreign aid and other capital flows. Studies on the impact of foreign capital flows in SSA, mainly in connection with foreign direct investment, official development assistance, remittances, and portfolio equity, have largely focused on developmental indicators such as human capital development, economic growth, and employment among others [ 6 , 10 , 11 ]. However, the impact of foreign capital flows on food and nutrition security has not received significant attention and this needs to improve.…”