The Economic Performance Effects of Capital Flows in OPEC Member Countries

Abstract

Many countries have stepped up efforts to support capital mobility on the premise that it stimulates capital inflows and bridges domestic-financing gaps – with attendant economic-enhancing benefits. Whether these benefits have materialized has puzzled researchers for decades. In this paper, we assess the impact of capital flows and their components on the economic performance of OPEC member countries. We find aggregate capital flows to have a long-run positive link with economic performance only in Qatar. For the rest member countries, aggerate capital flows either dampen performance, have only short-term effects or no conclusive impact on performance. Our disaggregated analysis shows that the components of capital flows have differentiated effects on economic performance. FDI has the least performance-inducing benefits in the long-run, in line with the extant literature which documents that FDI needs other supportive factors to be performance-enhancing. These results underscore the need for OPEC countries to pay attention not only to capital flows but also to the types of capital flows and ensure domestic conditions are benign for the flows to be economically supportive.