On the Nexus of Foreign Capital Inflow, Volatility, Financial Development and Economic Growth in Sub-Saharan Africa: A Sectoral Approach

Abstract

There is increasing concern among policymakers over the effect of capital inflows and volatility on economic growth. The empirical literature on the foreign capital - growth nexus in subSaharan Africa has, however, focused on aggregate growth overlooking sector-specific dynamics that might lead to varying responses. This study, therefore, examines whether the impacts of capital inflows and volatility in the region vary across different sectors, namely service, industry, and agriculture over the period 1990 to 2017. It also assesses the role of financial development. The study employed the dynamic panel ordinary least square technique due to its ability to correct for serial correlation and endogeneity. The results reveal that capital flows and volatility have varying effects on the three sectors. In the service sector, only aid exerted a significant negative effect while FDI and cross-border bank lending volatilities showed a depressing effect. Regarding the agricultural sector, only FDI had a negative impact, with the rest showing significant positive relationships. Concerning industrial growth, FDI and remittances had the potential to drive growth, while aid exhibited negative impacts. The findings thus have some policy implications. Policymakers in sub-Saharan Africa could target FDI and remittances to develop the industrial sector while aid and remittances could be channeled into the agricultural sector.