External Capital Flows Research Articles

Relationship between External Domestic Debt and Economic Growth

Purpose: Pakistan is surrounded by serious socio-economic problems. Due to the low tax base and double deficit, Pakistan has to rely on internal and external capital flows. Foreign capital flows are not easily accessible, but domestic capital flows are always accessible Methodology: The study investigates the effects of domestic debt on economic growth in Pakistan by applying the OLS technique Findings: The study indicates that the stock of domestic debt positively affects economic growth in Pakistan. This clearly means that the resources generated through internal debt have been partially used to finance public spending which contributes to economic growth. The study also notes that there is an inverse relationship between domestic debt service and economic growth. This result is due to the fact that the enormous burden of non-development spending hinders economic growth. The study results reveal that the negative effects of domestic debt service on economic growth is stronger than the positive effects of domestic debt on economic growth. Unique Contribution to Theory, Policy and Practice: The study also suggests some policies to repay existing internal debt.

The combined effect of institutional quality and capital flows on food and nutrition security and undernourishment in Sub-Saharan Africa.

Issues related to malnutrition, broadly defined, have received a growing attention in recent years, not only in connection with the Sustainable Development Goals but also recently with the unprecedented Covid-19 pandemic. At the same time, there exists a complex interaction between institutions, capital flows, and food and nutrition security that has received less attention in the relevant literature. In this paper we estimate a series of dynamic panel data models to examine the impact of institutional quality and capital flows on food security, nutrition security and undernourishment by using panel data for 25 SSA countries over the period 1996 to 2018. One of the key contributions of the paper is the use of both aggregate and disaggregated capital flows to examine the impact on both food and nutrition security, a dimension that has been surprisingly neglected in most of the relevant literature. We combine this with the interaction of various types of capital flows with an institutional quality index we constructed from various governance indicators to examine the impact of institutions on the overall nexus. Finally, we examine the impact not only on food and nutrition security but also on undernourishment. Our findings clearly demonstrate the importance of a heterogeneity approach and reflect on earlier work regarding the role of institutional quality in the overall nexus between external capital flows and various measures of food and nutrition security which leads, and as expected, to an interesting variation in the results obtained, depending on the type of capital flows and the interaction with the governance indicators.

Effect of Fiscal and Monetary Policy on Gross Domestic Savings in Kenya

Domestic savings is a vital source of investment funds, especially for developing economies. It is thus essential that internal savings capacity in these economies is increased to enhance investment financing and economic growth. Since increased reliance on external capital flows can result in economic instability, achieving a higher national saving rate is a critical macroeconomic objective for many developing countries. However, domestic savings remain low in many of them including Kenya, posing a serious development challenge. Fiscal and monetary policies have been a major focus by governments in trying to improve on gross domestic saving. The main purpose of this study was to analyze the role of fiscal and monetary policy on gross domestic savings in Kenya. This study was informed by the theory of Life cycle hypothesis. The study utilized explanatory research design. Yearly time series data was sourced from Economic surveys, World Bank reports and Statistical abstract of the period between 1990 and 2017. The time frame was viewed as the economic reform period; this was started in the country in the 1990s. Johannes co-integration methods were applied together with its vector error correction estimation approach to determine coefficients that define the relationship between variables under study and the gross domestic savings. Augmented Dickey Fuller test was applied for unit-root test. The results obtained from the regressions were spurious free. The regression result revealed that monetary and fiscal policy variables explained domestic savings in Kenya. The study recommends that monetary and fiscal policy implemented by the government should promote a favorable investment atmosphere through appropriate stabilization of lending rates, inflationary rates, and promoting income growth to ensure increase in national savings for economic sustainability in Kenya. Keywords: Savings, Investments, Fiscal Policy, Monetary Policy, Life Cycle Hypothesis, Economy DOI: 10.7176/JESD/13-2-05 Publication date: January 31 st 2022

Global Oil Price Volatility and Foreign Direct Investment Inflows in Kenya

External capital flows play a crucial role in driving investment and economic growth in financial resource constrained countries such as Kenya. As such, the vulnerability of a country’s foreign direct investment flows to external shocks is a key area of research interest. In the past, studies on Kenya’s vulnerability to oil price volatility have focused on its pass-through effects through inflation and the exchange rate. To date, there is a gap in literature with regard to assessment of how oil price volatility impacts foreign direct investment flows into Kenya and this has been premised on Kenya being an oil importing economy. In August 2019, however, Kenya made its first commercial sale of oil in the global market selling 200, 000 barrels and realizing USD 12.0 million (Kes 1.2 billion) in proceeds. The first objective was to establish the trend of global oil price volatility between 1970 and 2016 and to investigate the effect of global oil price volatility FDI inflows in Kenya. The study used GARCH model encompassing Kenya’s FDI inflows as the endogenous variable and exchange rate, external balance, inflation, net exports, real interest rate and gross domestic product growth as exogenous variables. The GARCH model entailed estimating two equations, the mean and the variance equations, at the same time with the residuals of the former allowing one to model the volatility of exogenous variables. Multiple linear regression analysis was used to establish strength of linear relationship between the selected macroeconomic variables and FDI inflows in Kenya. The findings of the first objective using ARCH (1, 1) model, yielded a statistically significant coefficient for the lag, 1=1.032, the second objective, the results of multiple linear regression analysis established that only Global Price of Oil (USD per Barrel) and External Balance (USD) were statistically significant at 5% level. The findings provide important insights for economic policy implementers regarding how to take necessary measures to counter the effect of global oil price volatility in order to realize sustainable inflow of FDI in the country. Keywords: Volatility; foreign direct investment; oil price DOI: 10.7176/JESD/12-8-05 Publication date: April 30 th 2021

Restrictions on Capital Flows and International Financial Institutions’ Support

n the wake of the 2008 financial crisis, international financial institutions have changed their views on the benefits of capital account liberalization and the management of capital flows. The International Monetary Fund (IMF) began to publicly express support for what have traditionally been referred to as “capital controls.” The impacts of restrictions on capital flows have, unfortunately, still not been established, and capital controls create distortions if they remain in place indefinitely. The present study uses quarterly data on capital controls in 25 emerging economies over the period between 2000 and 2016. Through an examination of a panel vector autoregressive (PVAR) with variance decomposition and impulse-response functions analysis, the study provides further evidence of some domestic effects of restrictions on capital flows. The results show that restrictions were more effective following the 2008 financial crisis and allowed for more monetary policy autonomy and exchange rate stability. Unexpectedly, the findings do not show any significant impact on international reserves accumulation. The study highlights the necessity of following the international financial organizations’ guidelines to well manage external capital flows and to better coordinate macroeconomic policies in the hope of finding an optimal policy mix.

Foreign financial flows, human capital and economic growth in African developing countries

AbstractThis study investigates the relationship between foreign financial flows (i.e., FDI inflows, ODA, and remittances), human capital, and economic growth in African developing countries. Along with the two‐step system GMM estimator, fixed effect panel quantile regression is applied as a robustness check for the sample of 38 African countries over the period 2002–2017. First, FDI inflows emerge with different impacts on economic growth, depending on the level: negative and positive effects at low and high levels, respectively. Interestingly, these effects are moderated by the human capital of hosting countries. Second, ODA and remittances are found as negative factors for economic growth; notably, higher human capital accumulation of receiving countries reduces these negative impacts. Overall, the results imply that foreign financial flows are correlated differently with human capital in influencing economic growth among African countries. Nevertheless, the significant implications are that more attention must be paid to human capital in these countries, and more feasible policies are urgently needed for better absorption of external capital flows.

Trade Openness and Diversification of External Financial Flows for Development: An Empirical Analysis

The implementation of sustainable development goals (SDGs) adopted in 2015 by the international community in the Agenda 2030 requires a substantial mobilization of financial resources. In the meantime, Goal 17 of this Agenda recognizes trade as an important means of the implementation of the SDGs. The current article investigates empirically the impact of openness to international trade on the diversification of external financial flows for development, which could help developing countries achieve the SDGs by 2030. To that end, three major external flows for development have been considered: development aid inflows, migrants’ remittances inflows and foreign direct investment (FDI) inflows. The analysis relies on a panel data set comprising 116 countries, over the period 1970–2017. The empirical analysis relies primarily on the two-step system generalized method of moments (GMM) approach and shows that greater trade openness exerts a positive and significant impact on the diversification of external financial flows for development, in particular, in the least developed countries (LDCs). As a result, greater openness to international trade could be an important tool for external capital flows diversification in developing countries.JEL Classification: F13, F14, F21, F24, F35, O20

Análisis de flujos de capitales externos en Costa Rica del año 1980 al 2016

Mediante la comprobación econométrica de los determinantes de los flujos externos de capital hacia Costa Rica entre los años 1980-2016, se demuestra que los ahorros brutos nacionales y la apertura comercial son elementos influyentes en la atracción de inversión extranjera hacia el país. Por tanto, se logra analizar el impacto que estas variables junto con otras de relevancia, tales como la tasa de crecimiento poblacional, la inflación, la actividad del sector financiero costarricense a través de su Bolsa de Valores, puedan tener en el ingreso per cápita mediante la atracción de los capitales externos. Se construye un modelo econométricamente robusto, se plantean otros diversos que se complementan y que mantienen de manera consistente las conclusiones; estas últimas respaldan las recomendaciones de dirigir las políticas públicas hacia un mayor incentivo al ahorro nacional y hacia una mayor apertura comercial.

CAPITAL FLOWS, MONEY SUPPLY AND PROPERTY PRICES IN CHINA

This article examines the interaction among capital flows, money supply and property prices with a focus of Chinese economy by using a vector auto-regression (VAR) estimation as an analytical framework. The key research questions were, first, whether money supply has been determined independently from capital flows, and then which factor, capital flows or money supply, has given a dominant effect on property prices. The contributions of this study are to investigate the impacts on property prices jointly from capital flows as an external factor and from money supply as a domestic factor, and to count on the differences in the trends in property prices of seventy regional cities in China. The main findings through the VAR estimations were as follows. First, domestic money supply has been determined exclusively from external capital flows through the authority’s perfect sterilization of foreign-exchange-market intervention. Second, the main contributor to property prices’ movement has been domestic money supply rather than external capital flows. Third, some deviations of property prices from the trend in money supply were found in big cities and/or coastal advanced cities.

The relative contribution of alternative capital flows to South Africa: An empirical investigation

The need for external capital flows to developing countries to supplement domestic savings for investment and growth cannot be over-emphasised, especially in Africa, where there are high levels of poverty and low domestic capacity to save. To achieve sustainable economic growth, countries require other sources of capital from outside the domestic economy. This study uses co-integration and error correction modelling techniques together with tests for weak exogeneity to analyse the effects of four major capital flows into South Africa. This is done for the period 1970 to 2012 in order to determine the relative contribution of these capital flows to South Africa

On the effectiveness of capital controls during the Great Recession: The Brazilian experience (2007–2013)

ABSTRACTIn this study, we analyze the impact in Brazil of a tax on external capital flows called “Imposto Sobre Operações Finaceiras” (IOF), by following data on a monthly basis from 2007 to 2013. Our goal is to determine whether a change in tax legislation can produce significant effects on the pattern of financial inflows from abroad. Using univariate structural models, our results show that changes in the IOF produced structural breaks on foreign portfolio investments.

FIIs Investment and Economic Growth: A Case Study of Indian Economy

A major feature of economic reforms in India since 1991 has been a progressive liberalisation of external capital flows, especially non debt creating ones like Foreign Direct investment (FDI) and Foreign Institutional Investment (FII).This opened a new door for the foreign investors to invest in India due to which a large number of foreign institutional investors (FIIs) flocked towards India. In this paper, we make an effort to study cause and effect relationship between FIIs' inflows and economic growth in India. The study covers the period from 1994 to 2016. The pragmatic relationship between FII inflows and economic growth has been examined by applying Engle- Granger Co-integration test, Granger Causality test and further VAR model. The results of the study have given no backing to the speculation that FII inflows have the capability of impacting the process of economic growth in India. Further, we have also found that economic growth is not a substantial determinant of FII inflows in India.

FDI from a ‘financing for development’ perspective. Opportunities for Africa’s Great Lakes Region

Financing for development requires that developing countries increasingly mobilize financial resources other than aid, domestically or externally. This paper looks at the external financial flows in the countries of Africa’s Great Lakes Region: Burundi, Democratic Republic of Congo (DRC), Rwanda and Uganda. First, we study the relative importance of aid flows, debt (relief), portfolio investment and Foreign Direct Investment (FDI), across our case study countries, and across time. Second, we zoom in on FDI, which is hailed as less volatile than other private external capital flows and as more able to promote local spillovers. These benefits are however not automatic but depend on the kind of FDI and the FDI policy regime. Our comparative approach across countries serves to highlight this aspect: which countries manage to attract FDI with a high development potential, which don’t, and why?JEL Classification: F21, O16, O55

Foreign Direct Investments and Economic Growth: The Primary Drivers

<p>In order to achieve the Global Millennium Development Goals (MDGs) there is need for enhanced global partnerships in areas such as trade, health, security, environmental sustainability, food security and education. Owing to these initiatives Foreign Direct Investments (FDIs), Official Foreign Development Assistance (ODAs) and other external capital flows are increasingly considered as drivers of economic growth for developing countries. By year 2000 FDIs flow to developing countries accounted for 19% of the total global FDI flow compared to 52% in 2010. Collectively FDI equates to 11% of global GDP and generates close to 80 million jobs globally. Global FDI totaled to US$ 1.2 trillion in 2010, US$ 1.4 trillion in 2011 and US$ 1.8 trillion in 2012. Similarly, the developing countries received half of the FDI and only invested a quarter of the FDI out flow. Studies show that FDIs contributes to economic growth by stimulating several macro-economic and demographic variables which are major agents of economic growth. This paper sought to explain the effect of FDI on the determinants of economic growth human capital development, financial sector development and trade openness. A sample of 30 African countries was used for the study. The data used was retrieved from UNCTAD and World Bank online databases for the period between 1980 and 2012 and analyzed through a fixed effect regression model. The results of the study show that FDI had a positive impact on measures of financial sector development and trade openness. However the effect of FDI on human capital development was negative. The study recommends the need for favorable monetary policies that elicit more FDI for enhanced economic growth. The study also suggests increased global trade liberalization and integration to boost trade. Finally the study recommends that additional FDI flows should be directed towards human capital development. </p>

External financial inflows and domestic investment in the economies of WAEMU: Crowding-out versus crowding-in effects

This paper analyzes the effects of capital inflows on domestic investment in the Economic and Monetary Union of West Africa (WAEMU). The WAEMU countries are Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo. Several studies have examined the conditions of attracting foreign capitals and their contributions to economic growth in sub-Saharan economies of WAEMU. However, very few studies have examined the effects of capital on domestic investment in national economies. In this respect, there are three types of foreign capital to be taken into account namely Foreign Direct Investment (FDI), Official development Assistance (ODA) and Migrants Remittances (MR). FDI, ODA and MR are major sources of external capital flows in developing countries. The current empirical study is based on the theoretical model of to test the hypothesis of crowding-out and crowding-in of domestic investments by different types of foreign capitals considered. The econometric estimates are based on the GMM method of Arellano and Bond (1991) applied to a panel of WAEMU countries over the period 1996-2011. The results of the study show that FDI crowds-out domestic firms in both the short and long term. Similarly, ODA have a lasting crowding-out effects on local investment. As for migrants’ remittances, the econometric results show that they do not have a significant effect on domestic investment in the countries of the union. These findings imply that the host countries of the WAEMU should invest more on developing their absorptive capability to attract technology transfer oriented FDI, channel the ODA to develop vital infrastructure for rapid economic development and create conducive environment for the MR to divert towards productive investments to create more crowding-in effects in lieu of the crowding-out effects. Practically, the results of this study show that multinationals have a lasting crowding-out businesses in the WAEMU region. This is mainly due to the low technological absorption capacity of local firms and the lack of complementarity between local enterprises and multinational companies. Several future research on capital flows will better appreciate the impact of foreign investment on the economies of developing countries especially those in Africa.

TheEuroPlusPact: Competitiveness and External Capital Flows in theEUCountries

AbstractThe Euro Plus Pact was approved by the European Union countries in March 2011. The pact stipulates various measures to strengthen competitiveness with the ultimate aim of preventing accumulation of unsustainable external imbalances. This article uses Granger causality tests to assess the short‐term linkages between changes in relative unit labour costs and changes in the current account balance for the period 1995–2011. The main finding is that changes in the current account balance precede changes in relative unit labour costs, while there is no discernible effect in the opposite direction. This suggests that capital flows from the European core to the periphery contributed to the divergence in unit labour costs across Europe prior to the global financial crisis. The results also suggest that the measures to restrain unit labour costs may have only limited effect on the current account balance in the short term.

A Choice between Dependence and Interdependence: The Baltic States in Quest for Peace and Prosperity

Interdependence is a political and institutional tool, which can work either in favor of or against the needs of small member states in the international organisations. The European model of co-operation based on economic interdependence and integration has been the indisputable success for the last half of a century. At the same time, interdependence does not solely offer opportunities, but also entails risks. Theoretically, the weakness of the securitization based on the interdependence is related to the situation where some member states receive more gains from the interdependence than others, but feel less motivated to pay the costs associated to security. In this case, interdependence can also create security illusion and make some member states in the community be less careful and responsible both in terms of economic and military security. For small states the needs and threats are different than for bigger member states in the core. High economic openness and vulnerability to external shocks, dependence from the external capital flows leaves them less options for long-term stability. This study aims to analyse the relationship between the inter¬dependence, security and wel¬fare, discussing whether interdependence should be considered as a simple, linear mechanism which increases the security and welfare of all participants, or it also involves risks related both to economic and security aspects, which should be evaluated before applying for a membership in the international organisations. Are the security and prosperity gains expected from interdependence and integration real or rather an “illusion” what small states would like to believe in and big states are happy to promote?

External debt and capital flight in Nigeria: Is there a revolving door?

Using the residual method of capital flight estimation, this paper estimates Nigerian capital flight over the period 1970 - 2001 and finds a close correlation between external debt and capital flight flows. This phenomenon suggests a paradoxical revolving door of a bi-directional flow of capital, i.e. where capital enters the country in the guise of external borrowing and simultaneously slips out of the country as private capital flight. The research question addressed by this paper is whether such a financial revolving door relationship exists in Nigeria, just as previous empirical researches had established in a number of countries. The paper utilises a simultaneous equation model and three stage least square estimation technique (3SLS), in addition to two-way Granger causality tests, to obtain statistical evidence that confirms the existence of a financial revolving door relationship between the two endogenous variables. In addition, existence of stronger causality from debt to capital flight is instrumental in showing that growing public deficit and the resulting increase in external debt is being used as a transfer mechanism for capital flight.

The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries

The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries

Why don't banks lend to Egypt's private sector?

Bank credit to Egypt's private sector decreased over the last decade, despite a recapitalized banking system and high rates of economic growth. Recent macro-economic turmoil has reinforced the trend. This paper explains the decrease based on credit supply and demand considerations by 1) presenting stylized facts regarding the evolution of the banks' sources and fund use in 2005 to 2011, noting two different cycles of external capital flows, and 2) estimating private credit supply and demand equations using quarterly data from 1998 to 2011. The system of simultaneous equations is estimated both assuming continuous market clearing and allowing for transitory price rigidity entailing market disequilibrium. The main results are robust to the market clearing assumption. During the global financial crisis, a significant capital outflow stalled bank deposit growth, which in turn affected the private sector's credit supply. At the same time, the banking sector increased credit to the government. Both factors reduced the private sector's credit supply during the period under study. After the trough of the global crisis, capital flowed back into Egypt and deposit growth stopped being a drag on the supply side, but bank credit to the government continued to drive the decrease in the private sector's credit supply. Beginning in the final quarter of 2010, capital flows reversed in tandem with global capital markets, and in January 2011 the popular uprising that ousted President Hosni Mubarak added an Egypt-specific shock that accentuated the outflow. Lending capacity dragged again, accounting for 10% of the estimated fall in private credit. Credit to the government continued to drain resources, accounting for 70–80% of the estimated total decline. Reduced economic activity contributed around 15% of the total fall in credit. The relative importance of these factors contrasts with that of the preceding capital inflow period, when credit to the government accounted for 54% of the estimated fall, while demand factors accounted for a similar percentage.