Capital Inflows and Economic Growth in Selected COMESA Member Countries

Abstract

Abstract This study examines the impact of capital inflows (FDI, ODA and Remittances) on economic growth in COMESA member countries. Applying System GMM estimation, the study finds a positive and significant relationship between capital inflows (except remittances) and GDP per capita growth, supporting the positive role capital inflows play in bridging the savings and investment gap, by providing finance for investment. However, remittances do not significantly influence GDP per capital growth. Remittances contribute positively to GDP per capita growth only when interacted with a variable for domestic financial depth. Examining whether capital inflows adversely affect economic growth, the study finds that except for the remittances whose effect is not significant, capital inflows (FDI, ODA and total inflows) leads to an appreciation of the REER, that may be detrimental to growth. The parameter for remittances does not significantly effect REER, implying that remittances are in most cases used to smoothen households’ consumptions during macroeconomic shocks and hence are counter-cyclical in nature. The study recommends, among others, financial sector reforms that will ensure increased depth of the domestic financial sector, capable of harnessing and providing efficient vehicles that can direct remittances for investment. JEL classification numbers: F15, F21, F24, F35, F43, F45. Keywords: Capital inflows, Economic Growth, COMESA.