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The Global Financial Crisis and Sub-Saharan African Countries: The Effects of Slowing Private Capital Inflows on Growth

Isabella Massa

This paper uses a panel cointegration analysis to examine the long-run relationship between economic growth and four different types of private capital inflows (cross-border bank lending, foreign direct investment (FDI), bonds flows and portfolio equity flows) on a sample of selected sub-Saharan African countries over the period 1980-2007. Our results show that FDI and cross-border bank lending exert a significant and positive impact on sub-Saharan Africa’s growth, whereas portfolio equity flows and bonds flows have no growth impact. Our estimates suggest that a drop by 10% in FDI inflows may lead to a 0.5% decrease of income per capita in sub-Saharan Africa, and a 10% decrease in cross-border bank lending may reduce growth by up to 0.7%.

Therefore, the global financial crisis is likely to have an important effect on sub-Saharan Africa’s growth through the private capital inflows channel (half a percent of growth is worth around $5 billion in lost output).