Foreign capital flows and economic growth in selected Sub-Saharan African economies

Adeola, Omolola Oluwatoyin (2017-03)

Thesis (PhD)--Stellenbosch University, 2017.


ENGLISH SUMMARY : The need for foreign capital flows to developing countries to supplement domestic savings for investment and economic growth cannot be overemphasized. This is especially the case in sub-Saharan Africa (SSA) where there is high level of poverty and low domestic capacity to save. To achieve sustainable economic growth, countries require other sources of capital outside the domestic economy. This has led many countries in SSA to liberalise their financial systems with a view to attracting inflow of capital to the region. This has resulted in substantial capital flow to the region. However, the extent to which the various capital flows have contributed to the growth of the economies remains unclear. If they do contribute to economic growth, which of the capital flows contributes the most to the growth of their respective economies? Against this backdrop, the study explored the effect of different foreign capital flows (foreign direct investment, foreign portfolio investment, foreign debt flows, official development assistance and remittances) on economic growth in four selected sub-Saharan Africa’s major economies to determine the foreign capital flows that contributes most to the economic growth in these countries. Tests of Co-integration and Vector Error Correction modelling were used in the estimation to achieve this. The thesis comprises of four empirical chapters with each chapter focusing on a particular country. A country each was chosen from the three sub-regions of SSA. South Africa, Nigeria, and Kenya to represent the regional economies of Southern, Western and Eastern Africa respectively; and lastly Mauritius was included as a success story in SSA. The first empirical chapter explains the need for external capital flows to South Africa where there are high levels of poverty, unemployment, inequality and low domestic capacity to save. This chapter analyses the effects of four major capital flows into South Africa in order to determine the relative contribution of these flows to South Africa’s economic growth. The second empirical chapter shows how foreign capital plays a major role in the economic growth of developing countries such as Nigeria through bridging the savings-investment gap. The effects of four major capital flows into the Nigerian economy were analysed to determine their relative contribution to economic growth. In light of vision 2030 for Kenya, the third empirical chapter provides a synopsis of capital flows in Kenya and analyses the effects of five major capital flows into Kenya to determine these capital flows’ relative contribution to the economic growth of the nation. The last empirical chapter of the thesis analyses the effects of three major capital inflows into the Mauritius economy in order to determine the relative contribution of these flows to Mauritius’ economic growth. Overall, it appears that the evidence gathered from this thesis indicates that remittances, which is a growing form of foreign capital flows, contributes the most to economic growth in two out of the four countries studied in sub-Saharan Africa. Foreign direct investment was also another capital flow that contributes to economic growth. This implies that policies should be geared towards the increase of foreign direct investment and remittances in sub-Saharan Africa to enhance economic growth.

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