Economic Growth Adjustment Rate to Financial Inflows Fluctuation, Case Study of Selected African Countries (1997-2016)

Abstract

The purpose of this research paper was to investigate financial inflows on economic growth in eight (8) selected African countries. Data for the period: 1997-2016 from World Bank Data Indicator was used. This is necessitated by the doubts being raised as whether the huge inflows of foreign capital/finance in developing economies over the years have transmitted to real economic growth.  To investigate the impact of financial inflows, logged values of foreign direct investment(FDI), foreign Portfolio investment (FPI), overseas development assistance(ODA), migrant remittances (MR), gross fixed capital formation (GFCF), openness to international trade (OPN) were used as proxies while the log value of gross domestic product per capita (GDPP) proxied for economic growth. The study employed a cross-section random effect model on the longitudinal data for the selected eight African countries, while the Solow growth model serves as the theoretical framework. Augmented Dickey Fuller and Philip Perron tests were used to test for non-stationarity of the variables, while all variables were integrated of order one with exception of INFDI and INFPI which were at level. In addition, Johansen Cointegration test was employed to determine whether or not the variables were cointegrated. Error correction model was employed to estimate short- run and long run relationship. The study found that INODA was the only variable significant at Short run, while with the random effect test, only FPI has a positive but no significant impact on GDPP of the eight countries. While the Granger causal test posit that all the variables has both directional and bi-directional causal effect on GDPP, with the exception of INOPN and INGFCF. An enabling environment should be created in these countries to encourage more financial inflows, as this will help in closing the savings-investment gap and encourage economic growth in these countries. The study signifies that financial inflows is indispensable in closing the investment-savings gap required for economic growth of developing countries.

Keywords: Financial Inflows, Afica, Panel Data, Conitegration, Granger Causalty And Ecm