The Global Financial Crisis, Slowing Private Capital Inflows and Economic Growth in Rwanda and Burundi

The impact of the Global Financial Crisis on the real sector has become increasingly evident. African countries are mainly affected through: lower exports, decreasing remittances, FDI and aid flows. Though the impact of the global financial crisis is projected to be less severe in developing countries and occur with lag, they will still be vulnerable to a number of adverse effects of the global downturn amongst with lower Foreign Direct Investment (FDI), reduced aid flows and weakness in the financial systems. The vulnerability would come from external dependence to homogeneous products and external financing constraints and weak balance of payments.

This paper analyzes the controversial link between capital flows and economic growth both in Rwanda and Burundi. More precisely, we analyze the effects of the global financial crisis on FDI in both countries and likely consequences on economic growth. A long-run relationship between growth and three different types of capital inflows namely FDI, Remittances (RM) and other private transfers (OT) during the period 1998-2008 is estimated. We found no significant Impact of FDI on economic growth.

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