Analyzing The Effect of Foreign Capital Movements on Human Development in Developing Countries: A System GMM Approach

Abstract

Foreign Capital Inflows (FCIs) have been playing a robust role in economic growth and development of the capital-deficient developing economies. Foreign Direct Investment (FDI), workers’ remittances, and Official Development Assistance (ODA) are the major FCIs for developing economies. Previous empirical studies have concluded mixed impacts of such flows on human development in recipient economies. The present study examines the impacts of FDI, remittances, and ODA flows on human development in a larger panel of 71 developing economies from 2001 to 2019 using the system GMM econometric technique. The results show a positive and statistically significant impact of FDI and remittances on human development measured by the Human Development Index (HDI). Whereas, ODA has been found to have a negative impact on human development in selected developing economies. In addition, the study also concludes the positive impact of GDP and governance indicators on the human development of these economies. The findings of the study provide a comprehensive insight into the roles of FCIs in setting the human development trajectory of the developing economies. It provides guidelines for the policymakers and the governments to frame feasible and efficient policies to achieve the objective of human development in capital-starved developing countries.