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2009 AEC- Cross-border bank lending versus FDI in Africa’s growth story

10-nov-2009

For most of the large African economies that have undertaken financial sector reforms since the early 1980s, the two main types of private capital inflows are FDI and cross-border bank lending. This paper seeks to investigate the relative long run impact of each of these inflows on economic growth in African countries. In addition to controlling for some factors (e.g. financial sector reforms and trade openness), the paper seeks to investigate the outcomes for four groups of economies, namely: (i) all the African economies; (ii) all the African economies except the SANE (South Africa, Algeria, Nigeria and Egypt) countries, which are considered the dynamos of growth in Africa; (iii) natural resource countries, which includes some of the SANE; and (iv) countries without a sizeable hydrocarbon endowment. Our estimates suggest that both FDI and cross-border bank lending exert a significant and positive impact on African countries as a whole. However, the effect of cross-border bank lending becomes negative once the sample is restricted to oil countries alone. Moreover, financial sector reforms appear to have a positive impact on economic growth in non-oil countries, while they have no growth effect on oil-countries. The importance of trade openness as a key driver of economic growth is confirmed with respect to all African countries.

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