International Capital Inflow and Sub-Saharan African Economy: Does Capital Inflow Lead Growth?

Abstract

Sub-Sahara African (SSA) countries have become more integrated with the world economy since the early 1990s leading to a surge in international capital inflows, but have also experienced sporadic downfalls in their growth rates leading to instabilities in some macroeconomic variables. This paper examined the dynamic and causal relationship between economic growth and international capital inflow in SSA using data covering the period of 1990 to 2018. Through Structural Vector Autoregression (SVAR) impulse response and variance decomposition, the study found a positive relationship between growth and international capital inflow in SSA. It also found negative relationships between macroeconomic instability and economic growth; and macroeconomic instability and international capital inflow in SSA. In addition, through VAR Granger Causality or Block Exogeneity Wald Tests, the study found a unidirectional causal relationship running from growth to international capital inflow in SSA. The study also found that international capital inflow did not cause economic growth but economic growth attracts international capital inflows. Therefore, the study concluded that a buoyant and viable economy provides conducive business environment for international investors better than less viable economy. Thus, the study recommended that governments and policy makers in SSA should put in place policies that will promote economic growth to attract more international capital inflows which would augment the scarcely available domestic capital resources most especially in terms of knowledge, skills and other technological advancement, that would later translate into further economic growth in SSA region.

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“…A number of studies have looked into the nexus between savings and economic growth in developed and developing countries (Bacha, 1990;Agrawal, 2000;Jangili, 2011;Misztal, 2011;Mohamed, 2014;Turan and Olesia, 2014;Hundie, 2014;Verma, 2017;Patra, et al, 2017;Siaw et al, 2017;Joseph et al, 2019: Ajisafe andOkunade, 2020). A handful of studies in Nigeria context have also intensely investigated the relationship between savings and economic growth in the last few decades as presented in Table 1.…”

Foreign capital inflows and trade openness nexus: the case of selected Sub-Saharan Africa countries.

“…Generally, FDI and FPI are the main forms of foreign capital inflows and major ways by which investments are made in other countries (Akinlo, 2003;Mcmillan, Rodrik & Verduzco-Gallo, 2014;Bah & Giritli, 2020). Most developing countries have been over-reliant on external financial sources because domestic resources are insufficient to finance long-term development (Akinlo, 2003;Ahmed & Mmolainyane, 2014;Akobeng, 2016;Batu, 2017;Cantah et al, 2018;Chorn & Siek, 2017;Varela, 2018). Moreover, researchers are advocating foreign capital as a preferred source of capital, particularly in Africa, because most African countries have low domestic savings and, besides that, Africa is generally poor (Adams & Klobodu, 2017;Carp, 2014;Karadam & Ocal, 2014;Adams & Klobodu, 2018;Beegle & Gaddis, 2016;Loungani & Razin, 2001).…”