Foreign capital inflows: a panacea to slow economic growth and infrastructure decay in Africa?

Abstract

PurposeThe purpose of this study is to examine the effect of foreign capital inflows on economic growth in 15 Economic Community of West African States (ECOWAS) countries over the period 2008–2018. Specifically, this paper investigates whether selected foreign capital inflows, namely, foreign debt, foreign aid and foreign direct investments substitute or complement government spending in ECOWAS.Design/methodology/approachThe study adopts the two-step system generalized method of moments (GMM) method of estimation to address the problem of dynamic endogeneity inherent in the relationship.FindingsThe result shows that foreign capital inflows into ECOWAS region have not transmitted into economic growth in the region. Further, the findings reveal that foreign capital inflows to ECOWAS have substituted for government spending. The results might be as a result of the high level of corruption in ECOWAS. The results also show that when institutional quality is interacted with foreign capital inflows, the result shows a negative and statistically significant effect on economic growth.Originality/valueUnlike previous studies which pooled both developed and developing economies together, the authors investigate this relationship in a regional study, using ECOWAS to create a roughly optimum size. In addition, the authors adopt the GMM-system method of estimation to address the problem of dynamic endogeneity inherent in the relationship, which has largely been ignored in extant studies.

Effect of women’s political inclusion on the level of infrastructures in Africa

“…The negative effect of foreign aid on infrastructure established in Table 3 is in accordance with the work of Olaoye et al (2021) who argue for a negative effect of foreign aid on infrastructures in Africa. This is mostly attributed to the fact that aid for development comes to replace public spending in Africa mostly attributed with poor institutional set-up.…”

“…This variable can therefore be positive or negative depending on the sustainability threshold. The next control variable is foreign direct investment inflows (%GDP), which is expected to have a negative sign in accordance with the study of Olaoye et al (2021).…”

“…Ngouhouo et al (2021) established that Africa has one of the worst institutions in the World and therefore development aid especially for infrastructures that is channelled through government agencies has always ended in private pockets than actually being used for economic development. However, the positive effect of foreign direct investment contradicts the study of Olaoye et al (2021). Foreign investors most often establish their investments after constructing the required infrastructures necessary for the take up of such investments.…”

“…Donaubauer and Nunnenkamp (2016) argue that aid for infrastructure is ineffective in improving the stock of infrastructure in recipient countries, an assessment that was supported by the work of Kengdo et al (2020). Equally, Olaoye et al (2021) posit that foreign financial inflows notably, foreign debt, foreign aid and foreign direct investments have substituted government spending on infrastructures in the Economic Community of West African States (ECOWAS) region mostly attributed to poor institutional setup in this region which has contributed to deterring economic growth. Anyaduba and Aronmwan (2015) rather argue of the importance of fiscal policy in infrastructural development, positing that tertiary education and company income taxes matter a lot for the development of infrastructures in Nigeria while value added taxes do not.…”

Effect of Women’s Political Inclusion on the Level of Infrastructures in Africa

“…Donaubauer and Nunnenkamp (2016) argue that aid for infrastructure is ineffective in improving the stock of infrastructure in recipient countries, an assessment that was supported by the work of Kengdo et al (2020). Equally, Olaoye et al (2021) posit that foreign financial inflows notably, foreign debt, foreign aid and foreign direct investments have substituted government spending on infrastructures in the Economic Community of West African States (ECOWAS) region mostly attributed to poor institutional setup in this region which has contributed to deterring economic growth. Anyaduba and Aronmwan (2015) rather argue of the importance of fiscal policy in infrastructural development, positing that tertiary education and company income taxes matter a lot for the development of infrastructures in Nigeria while value added taxes do not.…”