Exploring the nature, motives, and implications of foreign capital in Africa

Abstract

Africa, like many developing regions, has long suffered from savings and foreign exchange gaps. This has contributed to its low rate of capital accumulation, and lagging development. In search of ways to boost the domestic capital stock, a number of scholars have recommended increasing financial flow from external sources. For example, some scholars have advocated for a reasonable and sustained flow of development aid in order to help these countries meet and surpass that threshold necessary for the takeoff into self-sustained growth. Others have embraced the debt relief programs as an additional policy tool for tackling the poverty problem in these countries and consequently, increasing the domestic savings rate. Moreover, proponents of the free market system have strongly pushed for integrating Africa into the global financial system in order to attract foreign direct investment (FDI) and other portfolio-type investments. In some countries in the region, such efforts have only resulted into greater volatility, with consequences for exchange rate instability and capital outflows. It is against the aforementioned that this paper evaluates the influence of foreign capital in Africa. Its novel contribution lies in its multifaceted analysis and exploring some of the nuances that are often ignored in the traditional econometric analysis.