The Role of Remittances, FDI and Foreign Aid in Economic Growth in Low and Middle Income African Countries

Abstract

This study investigates the relative contribution of foreign direct investment (FDI), net official development aid (ODA) and personal remittances in the economic growth of African countries using the system GMM approach. It uses data from the World Development Indicators’ 2016 dataset spanning the period 1985–2015 for 50 African countries. The study analyzes the effects of these three external factors by categorizing African countries into low and middle-income countries. The system GMM results show that FDI, net ODA received and personal remittances have a positive impact on economic growth in low income African countries. But in middle income African countries FDA, net ODA received and personal remittances are not significant determinants of economic growth. Gross capital formation has a positive and significant effect in both low and middle income African countries. Financial depth, government expenditure on education and population growth have a positive and statically significant effect on economic growth in middle income African countries whereas openness positively and inflation rate negatively affects economic growth in low income African countries. From a policy perspective our findings suggest a need for policies that encourage remittances, foreign aid and FDI for economic growth in low income countries.