The Global Financial Crisis and Sub‐Saharan Africa: The Effects of Slowing Private Capital Inflows on Growth*

Abstract: This paper uses the bias‐corrected least‐squares dummy variable (LSDV) estimator to examine the 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 15 selected sub‐Saharan African countries over the period 1980–2008. 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 per cent in FDI inflows may lead to a 3 per cent decrease of income per capita growth in sub‐Saharan Africa, and a 10 per cent decrease in cross‐border bank lending may reduce growth by up to 1.5 per cent. Therefore, the global financial crisis is likely to have an important effect on sub‐Saharan Africa's growth through the private capital inflows channel.     

Measurement of Capital Flight: Methodology and Results for Sub‐Saharan African Countries*

Abstract: This paper presents the methodology for the computation of capital flight and reports new estimates of the magnitude and timing of capital flight from 33 sub‐Saharan African countries from 1970 to 2004. Our methodology calculates capital flight as the residual difference between inflows and outflows of foreign exchange recorded in the balance of payments, with corrections for the magnitude of external borrowing, trade misinvoicing, and unrecorded remittances. We find that total capital flight from these countries in this period amounted to $443 billion (in 2004 dollars). With imputed interest earnings, the accumulated stock of flight capital amounted to $640 billion. These numbers exceed these countries’ external debts, which in 2004 amounted to $193 billion, indicating that sub‐Saharan Africa is a net creditor to the rest of the world.     

THE ROLE OF PRIVATE CAPITAL INFLOWS AND THE EXCHANGE MARKET PRESSURE ON REAL EXCHANGE RATE APPRECIATION: THE CASE OF TURKEY

The aim of this paper is to investigate the role of different private capital inflows and the exchange market pressure (EMP) on the real effective exchange rate (REER) appreciation of the currency in Turkey. To that end, the paper first investigates the long‐run equilibrium relationship and then employs Granger causality analysis. Results of the bounds test for cointegration within the autoregressive distributed lag (ARDL) modelling approach of Pesaran et al. (2001 ) reveal level relationship between the diverse private capital inflows, EMP and REER. Granger causality analysis suggests that there is a unidirectional causality running from all the concerned private capital inflows and EMP to REER. The ARDL model shows first that the impact of bank liabilities and portfolio investment liabilities are almost equal, high and positive. Second, foreign direct investment and workers' remittances have a negative but statistically insignificant effect. Third, EMP mitigates REER appreciation of the currency in Turkey. The empirical results suggest that speculative portfolio investment liabilities but particularly bank liabilities with short maturities should be better managed; more flexibility should be introduced to the floating exchange rate regime to avoid loss of competitiveness related with capital inflows; whereas foreign direct investments and remittances should be encouraged.     

SOUTH AFRICA'S POST‐LIBERALISED CAPITAL FLOWS AND BUSINESS CYCLE FLUCTUATIONS

This study used Christiano and Fitzgerald filtered correlation analysis to investigate the cyclical relationships between South Africa's post‐liberalised capital flows and domestic business cycle fluctuations. The results show that foreign direct investment inflows are counter‐cyclical and proactive, while the “hot” inflows are acyclical. Thus, South Africa's post‐liberalisation “hot” inflows have not been significantly associated with domestic business cycle fluctuations. In contrast, the capital outflows are found to be consistently procyclical and proactive, suggesting that the outflows are more significantly associated with domestic business cycle fluctuations than the capital inflows. In addition, it is found that the cyclical relationships between the capital inflows and the business cycle components of exports, household consumption and gross fixed investment are generally procyclical, except for portfolio inflows, which have a counter‐cyclical relationship with fixed investment. In contrast, the capital outflows are counter‐cyclically associated with exports and household consumption, and procyclically associated with fixed investment.     

Impact of Public Investment on Private Investment in Sub‐Saharan Africa: Crowding In or Crowding Out?

This paper investigates the possible crowding‐in or crowding‐out effect of public investment on private investment in sub‐Saharan Africa. While this relationship has been theoretically and empirically studied in the literature, most studies used traditional panel fixed effects or Generalized Method of Moments estimators which can potentially lead to biased and inconsistent estimates. We employ heterogeneous parameter models, including the Mean Group, the Common Correlated Effects Mean Group Model, and the Augmented Mean Group estimators, to incorporate the possibility of slope heterogeneity and the presence of cross‐sectional dependence. Using a large sample of 44 sub‐Saharan African countries over the period 1960–2015, we find that on average public investment crowds in private investment in sub‐Saharan Africa. We also find that the impact differs between countries and is higher in countries with a strong private sector.     

Does China Transfer Productivity Enhancing Technology to Sub‐Saharan Africa? Evidence from Manufacturing Firms*

Abstract: This paper considers whether trade between China and sub‐Saharan Africa results in productivity‐enhancing technology transfers to sub‐Saharan African manufacturing firms. As trade flows between countries potentially results in interactions that lead to technological improvements in the production of goods and services, we parameterize the level of total factor productivity for African manufacturing firms as a function of foreign direct investment flow, and for the country in which it operates, trade openness with China, and its interaction with foreign direct investment. With micro‐level data on manufacturing firms in five sub‐Saharan African countries, we estimate the parameters of firm‐level production functions between 1992 and 2004. Our parameter estimates reveal that across the firms and countries in our sample, there is no relationship between productivity‐enhancing foreign direct investment and trade with China. In addition, increasing trade openness with China has no effect on the growth rate of total factor productivity. To the extent that total factor productivity and its growth is a crucial determinant of economic growth and living standards in the long run, our results suggest that increasing trade openness with China is not a long‐run source of higher living standards for sub‐Saharan Africa.     

Distance to Growing Markets and Sub‐Saharan African Exports*

Abstract: A typical person in sub‐Saharan Africa is a long way from world markets and is further from world markets now than in 1980. This partly reflects slower growth within Africa than for the world as a whole. Despite slower growth in Africa, African exports have become increasingly regionalized. By 2005, a country in Africa typically exported more than twice as much to a country in its own region as would be expected based on economic size and bilateral distance. This regionalization was not present in the early 1980s and has become stronger over time. We find evidence of positive neighborhood effects through exports, but sub‐Saharan countries benefit less from growth in their own region than this typical relationship indicates. Given the small share of exports destined to their neighbors, low‐income countries in sub‐Saharan Africa experience relatively modest export growth from growth in the region. These factors imply that African countries are unlikely to pull each other out of poverty and a regional focus may be less effective than a focus on countries outside of the region.     

The Determinants of High-Technology Exports: A Panel Data Analysis

This paper uses a panel dataset from 1980 to 2008 to examine the determinants of high-technology exports. This research finds evidence that human capital, inflows of foreign direct investments, and openness to international trade are the major factors impacting the performance of a country's high-tech industry in the global market. It also shows that institutions do not have a direct impact on high-tech exports. However, institutions might impact high-tech exports indirectly via their effect on proximate factors such as human capital and inflows of foreign direct investments. This paper also demonstrates that gross capital formation, savings, and macroeconomic volatility have no significant effect on high-tech exports.     

Obstacles in attracting increased portfolio investment into southern Africa

Measured in terms of foreign participation in its domestic financial markets, the major part of southern Africa has to date been largely isolated from international financial markets and the process of financial globalisation. With the exception of South Africa and, to a lesser extent, Mauritius, the region receives negligible amounts of foreign portfolio investment. For the majority of countries, the main types of foreign capital inflows consist of development assistance and foreign direct investment. Foreign portfolio investment, which has hitherto remained largely untapped, may become important in future, especially in view of the dwindling international development assistance to the region. However, portfolio investment is volatile and can be relatively easily withdrawn, posing some financial risk to an economy that has to be managed. This article identifies and assesses possible obstacles to foreign portfolio investment in the region, which could be addressed over time in order to improve the region's competitiveness for foreign investment.     

The Role of Capital Flight and Remittances in Current Account Sustainability in Sub‐Saharan Africa

Abstract: The literature on capital flight and remittances is copious, as a plethora of studies in recent years have focused greater attention on the determinants and impact of capital flight and remittances in the development process. These issues are particularly pertinent to Africa in view of its relatively high incidence of capital flight in the presence of foreign exchange constraints, limited foreign capital inflows, external indebtedness and high dependence on overseas development assistance. The principal aim of this paper is to estimate the extent and magnitude of capital flights from Africa and remittance inflows to Africa, and to assess their role in current account sustainability. The paper employs standard methodological approaches to estimating capital flight and remittances for selected African countries and analyses their relationships with current account balance and key economic indicators. The findings from the statistical exercises in the paper yielded a number of important results:

• ? The magnitude of capital flight from Africa has increased considerably in recent years, with widespread fluctuations and volatility.
• ? The volume of remittances into Africa has increased dramatically but steadily.
• ? There is a negative association between balances on current account and capital flight, implying that capital flights tend to worsen current account difficulties.
• ? There is a positive relationship between remittances and current account, suggesting that remittances could play an important role in mitigating current account problems.
• ? The link between remittances and economic growth is positive, albeit insignificantly in the statistical sense, suggesting some evidence of the crucial role of remittances in the economic growth and development process.
• ? External debt and capital flight are positively intertwined, providing support to the so‐called ‘round‐tripping’ or ‘back‐to‐back’ hypothesis

The policy implications of these findings are that in spite of the good progress made by many African countries towards economic and political reforms, more innovative policy thinking and reform deepening must be initiated to create a conducive environment for private sector participation in general and foreign capital (including capital flight reversal) in particular. Similarly, there is a need for incentivising and mainstreaming remittances into national development strategies with the view to promoting the growth‐enhancing effects of remittances. A wide range of policy options and forward thinking analyses were advanced in the paper.     

Capital flows and real exchange rates in emerging Asian countries

This paper examines the impact of capital flows on real exchange rates in emerging Asian countries during 2000–2009 using a dynamic panel-data model. The estimation results show that the composition of capital flow matters in determining the impact of the flows on real exchange rates. Other forms of capital flow, especially portfolio investment, bring in a faster speed of real exchange rate appreciation than foreign direct investment (FDI). However, the magnitude of appreciation among capital flows is close to each other. The increasing importance of merger and acquisition (M&A) activities in FDI in the region makes these flows behave closer to other forms of capital flow. The estimation results also show that during the estimation period, capital outflows bring about a greater degree of exchange rate adjustment than capital inflows. This evidence is found for all types of capital flow. All in all, the results indicate that the swift rebound of capital inflows into the region could result in excessive appreciation of (real) currencies, especially when capital inflows are in the form of portfolio investment.     

Promoting of Investment in Africa*

Abstract: This paper examines the trend, constraints, promotion, and prospects of investment – domestic investment, foreign direct investment, and private portfolio investment – in Africa. After identifying the importance of investment in Africa's economic development, it was shown that all forms of investment are low in Africa and hence inadequate for the attainment of the MDGs and poverty reduction in the continent. The constraining factors include: low resources mobilization; high degree of uncertainty; poor governance, corruption, and low human capital development; unfavorable regulatory environment and poor infrastructure, small individual country sizes; high dependence on primary commodities exports and increased competition; poor image abroad; shortage of foreign exchange and the burden of huge domestic and external debt; and undeveloped capital markets, their high volatility, and home bias by foreign investors. The paper recommends that successful promotion of both domestic, foreign direct and portfolio investment in Africa will require actions and measures at the national, regional, and international levels. It concludes that the prospects are bright. New and attractive investment opportunities are emerging in infrastructure, particularly as most African countries now encourage public/private partnerships for investments in this sector. In addition to privatization, renewed interest within Africa in undertaking regionally based projects and joint exploitation of natural resources is creating other investment opportunities. Apart from the fact that investment in Africa yields the highest returns, investment risk in the continent is declining. In addition, much progress has been made in recent years to improve the investment climate in Africa. All this is of course is not to deny that obstacles do remain hence economic reforms to enhance domestic investment would need to be complemented by measures to attract increased foreign capital. Critical in such endeavors must be efforts to improve governance in some countries as well as to eliminate socio‐political violence in others and development of domestic capital markets, while government institutions must be modernized and upgraded.     

The impact of disinvestment and the debt crisis on the South African economy

The paper considers the economic implications of disinvestment and the debt crisis for the South African economy with the aid of some historical analysis of foreign capital inflows and growth. It considers the changes that have occurred in the structure of foreign liabilities over the last twenty years and it examines the quantitative and qualitative roles of private investment and non‐direct investment over this period. The debt issue is examined within the framework of disinvestment, and the conclusion reached is that the economic problems consequent to a withdrawal of foreign loans pose a far greater threat to the South African economy than the loss of foreign direct investment. We assume that disinvestment is not accompanied by any official trade embargo, and the controversy surrounding the relationship between economic growth and social and political change in South Africa is ignored.     

Aid Effectiveness in Africa*

Abstract: This paper revisits the issue of aid effectiveness in Africa by examining the effect of aid on growth. Historically, Africa's development context appears to be an aid‐dependent one, and with the New Partnership for Africa's Development (NEPAD) calling for additional capital flows to improve growth levels on the continent, and the attainment of the UN's Millennium Development Goals partly conditioned on aid inflows, there is a new urgency to evaluate the effectiveness of aid. Using a sample comprising 40 member countries of the African Union, and estimating fixed‐effects growth models, we find a positive and statistically significant effect of aid on growth. Aid increases investment, which is a major transmission mechanism in the aid‐growth relationship. An extension of our analysis to examine sources of growth finance shows aid, workers' remittances, debt‐service resources and domestic savings are important sources of development finance. Thus, for now, aid matters for the continent's growth. However, given the apparent donor aid fatigue and the debt servicing implications of concessional loans, the paper supports the need to strategize to reduce future dependence on aid.     

Relationship between foreign capital flows,domestic investment and savings in the SADC region

The importance of foreign capital in the domestic economy cannot be underestimated as it bridges the gap between domestic capital demand and supply. Given this background the paper studies the relationship between the different types of foreign capital flows in the Southern Africa Development Region (SADC) region – foreign direct investment (FDI), remittances, cross border bank flows (CBF), overseas development assistance (ODA) – and domestic savings and investment, employing the panel cointegration test and the dynamic ordinary least squares method (DOLS). The empirical results reveal that there is a strong positive relationship between domestic investment and domestic savings, FDI and remittances. These findings indicate that FDI remittances help in overcoming the limits on the domestic capital formation in the SADC region through permitting a rate of investment which is in excess of that which can be generated by domestic savings. Important policy implications on attracting foreign capital flows are discussed in the paper.     

Do International Remittances Affect Poverty in Africa?*

Abstract: International remittances flowing into developing countries are attracting increasing attention because of their rising volume and their impact on recipient countries. This paper uses a panel data set on poverty and international remittances for African countries to examine the impact of international remittances on poverty reduction in 33 African countries over the period 1990–2005. We find that international remittances—defined as the share of remittances in country GDP—reduce the level, depth, and severity of poverty in Africa. But the size of the poverty reduction depends on how poverty is being measured. After instrumenting for the possible endogeneity of international remittances, we find that a 10 percent increase in official international remittances as a share of GDP leads to a 2.9 percent decline in the poverty headcount or the share of people living in poverty. Also, the more sensitive poverty measures—the poverty gap (poverty depth) and squared poverty gap (poverty severity)—suggest that international remittances will have a similar impact on poverty reduction. The point estimates for the poverty gap and squared poverty gap suggest that a 10 percent increase in the share of international remittances will lead to a 2.9 percent and 2.8 percent decline, respectively, in the depth and severity of poverty in African countries. Regardless of the measure of poverty used as the dependent variable, income inequality (Gini index) has a positive and significant coefficient, indicating that greater inequality is associated with higher poverty in African countries, much in conformity with the literature. Similar results were obtained for trade openness. In the same vein, per capita income has a negative and significant effect on each measure of poverty used in the study. Our results also show that inflation rates positively and significantly affect poverty incidence, depth and severity in Africa. In all three poverty measures, the dummy variable for sub‐Saharan Africa is strongly positive, and strongly negative for North Africa. The policy implications of these results are discussed.     

A general equilibrium analysis of FDI growth in Chinese services sectors

This paper analyzes one of the features of the Chinese economic transition, namely, the impact of foreign direct investment (FDI) accruing to advanced services sectors. To that aim we use an innovative computable general equilibrium (CGE) model that includes, in a multi-regional setting, foreign multinationals operating in monopolistic competition. The model is based on data that split the world economy in 2016 into 11 regions (China - US - EU27 - Great Britain -other advanced economies - India - Japan - South East Asia - Latin America - Middle East - Sub Saharan Africa) and 21 sectors. We provide quantitative evidence on several characteristics of the 21 sectors in China, EU27 and the US, as well as other data on the role of China in the global stage, including its evolution since 2004. Several scenarios focusing on the increase of FDI inflows in services, because of the reduction of its FDI barriers, are simulated deriving short and long run results. We find that the impact of more foreign multinationals in services is positive for China but smaller than the one that had been obtained in other previous studies on FDI in manufactures. This is due to the still limited role of services in the Chinese economy and to a crowding out effect that domestic firms experience after the entry of foreign multinationals. On the whole the impact is, however, slightly positive for China, because manufactures benefit from the entry of foreign services multinationals. The rest of regions are unaffected or benefit very slightly, due to the fact that services production is less export oriented and more devoted to private consumption than in the case of manufactures. However, their manufacturing sectors are slightly harmed by the stronger Chinese competition. Many of them manage to more than offset this latter trend through higher exports or FDI in services directed to China.     

Foreign Direct Investment and Trade Openness in Sub‐Saharan Economies: A Panel Data Granger Causality Analysis

This study uses annual balanced panel data for 25 sub‐Saharan African economies over the period 1977‐2009 to investigate the Granger causality relationship between trade openness and foreign direct investment (FDI) for the region. We took advantage of recent developments in econometric testing techniques for Granger noncausality heterogeneous panels that takes into consideration the effects of cross section dependence across the units of the panel data set to analyse the trade–FDI nexus in the region. The empirical result of this study reveals a bidirectional causal relationship between trade openness and foreign direct investment in sub‐Saharan economies. Concurrently, African countries should devote more emphasis for the promotion and attraction of FDI in order to expand their productive capacity to produce and export; in this way, by addressing supply‐side constraints, FDI will have positive multiplier effects on trade.     

Capital Flight Repatriation: Investigation of its Potential Gains for Sub‐Saharan African Countries*

Abstract: Despite the substantial recent increase in capital flows to sub‐Saharan Africa (SSA), the sub‐continent remains largely marginalized in financial globalization and chronically dependent on official development aid. The current debate on resource mobilization for development financing in Africa has overlooked the problem of capital flight, which constitutes an important untapped source of funds. This paper argues that repatriation of flight capital deserves more attention on economic as well as moral grounds. On the moral side, the argument is that a large proportion of the capital flight legitimately belongs to the African people and therefore must be restituted to the legitimate claimants. The economic argument is that repatriation of flight capital will contribute to propelling the sub‐continent on a higher sustainable growth path while preserving its financial stability and independence and without mortgaging the welfare of its future generations through external borrowing. The anticipated gains from capital repatriation are large. In particular, this paper estimates that if only a quarter of the stock of capital flight was repatriated to SSA, the sub‐continent would go from trailing to leading other developing regions in terms of domestic investment. The paper proposes some strategies for inducing capital flight repatriation, but cautions that the success of this program is contingent on a strong political will on the part of African and Western governments and effective coordination and cooperation at the global level.     

Foreign direct investment in crisis and recovery: lessons from the 1997–1998 Asian crisis

Is foreign direct investment more resilient at the onset of an economic crisis and the subsequent economic collapse in a host country compared to other forms of foreign capital inflows? Are affiliates of multinational enterprises in a crisis‐hit country better equipped to withstand a crisis and aid the recovery process by readjusting their investment, production and sales strategies compared to local firms? This article examines these issues in the context of the 1997–1998 economic crisis in Thailand, Malaysia, Indonesia, Korea and the Philippines. The findings suggest that foreign direct investment was a relatively stable source of foreign capital in the crisis context and that the affiliates of multinational enterprises were instrumental in ameliorating the severity of economic collapse and facilitating the recovery process.