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Working Paper 285 - Capital Inflows and Economic Growth in Sub-Saharan Africa

04-Oct-2017

This study analyzes the effect of capital flows on economic growth in sub-Saharan Africa, using a system of generalized methods of moment (GMM) model. It tests the extent to which the level and volatility of capital inflows, both disaggregated and total, affect economic growth. The study finds that portfolio equity has a positive effect on economic growth while private equity and debt are inversely related to growth. However, volatility of portfolio equity and private equity has no impact on economic growth, pointing to low levels of financial integration in these countries. Total capital inflows, both gross and net inflows, have a negative effect on growth, while volatility of total gross capital inflows has a positive effect, and that of total net capital inflows is positively related to growth. The effect of total capital inflows is possibly influenced by the overall effect of debt in these economies. The findings suggest that concerns on capital inflows should mainly be addressed through the debt market, and that the growth benefits of capital inflows can be achieved by improving financial markets, ensuring macroeconomic stability, and having in place good institutions.

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