The Relationship between External Financial Flows and Economic Growth in the Southern African Development Community (SADC): The Role of Institutions

Kapingura Forget Mingiri,S.I Ikhide,A Tsegaye

doi:10.22610/jebs.v8i1(j).1209

Kapingura Forget Mingiri, S.I Ikhide + Show 1 more

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https://doi.org/10.22610/jebs.v8i1(j).1209

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Abstract

The study examined the relationship between external financial flows, domestic savings and economic growth in the SADC region for the period from 1980 to 2009 specifically looking at the role played by institutions. The majority of countries in the SADC region are experiencing low levels of savings, which has led to them relying more on external financial flows to bridge the gap between domestic demand for finance and domestic supply. However the relationship between external finance and economic growth is still a contentious issue. Given this, the study has thus examined the link between growth and external finance in the region, specifically focusing on the impact of the different forms of external financial flows on economic growth in the region incorporating the role played by institutions. The empirical results revealed that three types of external financial flows have a significant impact on economic growth in the SADC region except ODA; however when all the different types of external financial flows were interacted with the measure of institutions, they all become significant and more enhanced in explaining economic growth in the region. This supports the hypothesis that good institutions are necessary in promoting economic growth in developing countries. The empirical results also suggest that foreign capital is another channel through which a crisis in developing countries can be transmitted to the SADC region.

Highlights

Introduction and Background to the StudyGenerally it is accepted that foreign capital influences the course of the real economy, and this accounts for the popularity of the subject of capital flows in academic and official policy discourse
The study focused on analysing the impact of the different forms of external financial flows on economic growth in the SADC region emphasising the importance of institutions utilising a panel model
The analysis in the study highlights that the importance of external financial flows to countries in the SADC region cannot be underestimated given that countries have low levels of savings to finance investment

Summary

Introduction

Introduction and Background to the StudyGenerally it is accepted that foreign capital influences the course of the real economy, and this accounts for the popularity of the subject of capital flows in academic and official policy discourse. The available studies on the relationship between external financial flows and economic growth documents that foreign capital flows may impact positively on both the country of origin and recipient countries. A study by Schoenmaker and Wagner (2011) indicates that the presence of external finance in the form of foreign banks in the domestic economy bring about diversification effects. In addition to the benefits which come with cross border banking, there are studies which argue that FDI provides benefits that domestic investment does not. Borensztein et al (1998) and Choong et al (2010) suggest that foreign capital inflows can provide additional capital and augment domestic savings, promoting capital accumulation and increase the growth rate. External financial flows in the form of portfolio investment are thought to help in the modelling of financial markets in developing countries through knowledge spillover and market efficient effects (Choong et al, 2010)

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