Foreign Financial Flows Research Articles

China’s Infrastructure Investments in Africa: An Imperative for Attaining Sustainable Development Goals or A Debt-Trap?

In recent times, China, as part of its ‘Going Global Strategy’, has extended its development aids to countries in Africa. Being the largest country-to-country lender in the world, China has become the largest supplier of infrastructural finance and second largest source of foreign direct investments (FDI) to Africa. Some scholars have expressed concern that the engagement is a debt trap, a ruse towards modern neo-colonization and resource extinction in Africa. However, others have documented the significance of such investments in attaining SDGs. In this paper, we employ the Heckman two-stage model and logistic regression to predict the debt-trap crisis in Africa and the results establish no debt-trap paradigm for China’s infrastructure investments in Africa. Contrary to the belief on resource-seeking motive, we find that commodity-based infrastructure loan reduces debt burden on African countries, albeit other inherent factors contribute to the upsurge of government debt. Furthermore, we test the impact of China’s infrastructure investments on achieving the SDGs, specifically SDG 3 (human development) and SDG 7 (environmental sustainability through access to modern energy). While we reckon that China’s infrastructure investment is beneficial for SDG attainment, our study recommends that fiscal policy governing foreign financial flows should be periodically reviewed to avoid debt overhang.

Foreign Financial Flows on Financial Efficiency in Sub-Sahara African Countries

The level of financial efficiency in Sub-Saharan Africa (SSA) remained low and incomparable to that of industrialized nations of the world, despite the supposed advantages of foreign capital inflows. This study examined the relationship between foreign financial inflows and financial efficiency in Sub-Saharan Africa against this backdrop (SSA). This study's specific goals are to look into how remittance inflows affected financial efficiency in SSA and how FDI inflows affected it as well. Out of 49 countries in Sub-Saharan Africa, 42 were chosen for the study using a purposive sampling technique and an ex-post facto research design. The study used pooled mean group, mean group, and dynamic fixed effects techniques to estimate the model parameters using panel autoregressive distributed lag (PARDL) methods of estimation. The findings revealed that remittance inflows have significant positive impact on the financial efficiency, while FDI inflows have insignificant influence on the financial efficiency. In addition, the combination of economic growth with remittance inflows yielded negative impact on the financial efficiency while the combination of economic growth with FDI inflows yielded a positive impact on financial efficiency. The study concluded that remittance and FDI inflows play vital roles in guaranteeing improvement in financial efficiency of Sub-Sahara African countries directly and indirectly through inclusive economic growth. The study recommended that financial openness policies, like removing restrictions and encouraging free flow of financial resources between entities in domestic economy and foreign economies to promote further foreign financial inflows and enhance further financial efficiency. It is also recommended that financial openness policy should be pursued alongside inclusive economic growth measures such as economic diversification policies.

Limits to Fiscal and Monetary Policy in Small Open Economies

ABSTRACT In this paper we investigate the impact of the balance-of-payments constraint on output, income distribution and policy space in a small economy open to both commercial and financial flows. We do so by extending a Sraffian supermultiplier growth model to consider current and capital accounts and endogenous money. Expansionary fiscal policies increase output and its long run growth rate but have a negative impact on the balance-of-payments. Based on these results, we derive the value of government spending that maximises output while maintaining external equilibrium. Monetary policy also influences the balance-of-payments by attracting foreign financial flows through higher interest rates. This relationship is non-monotonic, since these flows can finance the external deficit resulting from a high output level but can also lead to a greater interest burden. This trade off allows us to find the level of the interest rate that maximises external space. It also implies that, with limits, raising interest rates might allow for higher real wages. Lastly, we examine the effects of the currency denomination of debt. We find that, in case of a depreciation, debt in domestic currency allows for a less contractionary adjustment than foreign currency-denominated debt but does not lead to higher economic growth.

Impact of Remittances on Inflation in Nigeria

International remittances have emerged as an indispensable financial resource for development. However, despite remittances’ growing relevance in overall foreign financial flows in Nigeria, the consumptionoriented nature of the economy of the country presents an intriguing opportunity to consider the connection between foreign remittances and inflation within the country. This study investigates the influence of foreign remittances on inflation in Nigeria from 1990 to 2021. The autoregressive distributed lag technique was employed to scrutinize the long-term behavior of inflation and remittances. The empirical findings indicate that foreign remittances exhibit a negative and statistically insignificant correlation with inflation in Nigeria. The money supply has a satisfactory impact on inflation and is statistically substantial. According to statistical analysis, the exchange rate and economic growth have a negative correlation with inflation, while the exchange rate of the national currency remains stable. Additionally, economic growth has a significant impact on inflation, whereas no correlation has been found between remittances and inflation in the short run. The study argues that in order to ensure price stability, it is important to establish and maintain a mechanism that effectively controls the growth of the money supply and aligns it with economic development goals. This mechanism should promote interaction between financial and fiscal authorities to establish a coherent structure that adjusts monetary policy based on government spending, stimulates sustainable economic growth to reduce inflation, and encourages the creation of jobs and production zones to accelerate economic growth. This may lower inflation by increasing the supply of goods and services. It is necessary to support these efforts by regularly monitoring exchange rate changes and their implications for inflation. Nigeria can maintain economic stability and low inflation by balancing domestic and foreign financial flows.

Types of foreign finance and slum upgrading: How do official development assistance, foreign direct investment, and foreign remittances affect slum upgrading across regime types in developing countries?

How do types of foreign financing, such as official development assistance (ODA), foreign direct investment (FDI), and foreign remittances affect slum upgrading in developing countries? We posit that while inflows of financial resources would likely reduce slum prevalence in general, the effects will diverge depending on the type of foreign finance: ODA and remittances will be more effective than commercially motivated FDI in upgrading slums. We further theorise that the effects of ODA, over which governments can exercise greater discretion, will be stronger in autocratic countries than in democratic ones. This is because there are stronger political incentives for autocratic leaders to channel public resources into slums to avoid an urban uprising – a significant threat to the political survival of autocratic leaders. In comparison, those who live in slums in democracies often face legal and practical challenges in participating politically; thus, political incentives for democratic leaders to cater to the interests of slum dwellers are weaker, resulting in less public investment in slums in democracies. Utilizing the existing datasets of populations living in slums and foreign financial flows, we find the following: 1) FDI exerts no statistically significant effects on reducing slum populations; 2) remittances reduce the number of slum dwellers in both democratic and autocratic countries; and 3) ODA reduces the number of slum dwellers only in autocratic countries. These findings suggest that the types of foreign financing and domestic institutions in developing countries should be accounted for when devising strategies for slum upgrading.

Foreign Financial Flows, Human Capital and Economic Growth in North African Countries

The purpose of this study is to analyze the relationship between foreign financial flows (i.e., FDI inflows and remittances), human capital, and its effects on economic growth in 4 North African countries. Annual panel data from 2000 to 2018 are examined using the system GMM. First, we found strong evidence of a positive link between FDI and economic growth. Moreover, the results indicate that the complementarity between FDI and human capital positively influences economic growth. Second, the remittances are found to be positive factors for economic growth. In fact, higher human capital accumulation of receiving countries increases these positive impacts. Overall, the results indicate that foreign financial flows are positively correlated with human capital in influencing economic growth in the North African countries. Therefore, it becomes pertinent for policymakers to pursue a human capital policy to improve their absorptive capacities to exploit full benefits of foreign financial flows.

Countries influence the trade-off between crop yields and nitrogen pollution.

National institutions and policies could provide powerful levers to steer the global food system towards higher agricultural production and lower environmental impact. However, causal evidence of countries' influence is scarce. Using global geospatial datasets and a regression discontinuity design, we provide causal quantifications of the way crop yield gaps, nitrogen pollution and nitrogen pollution per crop yield are influenced by country-level factors, such as institutions and policies. We find that countries influence nitrogen pollution much more than crop yields and there is only a small trade-off between reducing nitrogen pollution and increasing yields. Overall, countries that cause 35% less nitrogen pollution than their neighbours only show a 1% larger yield gap (the difference between attainable and attained yields). Explanations of which countries cause the most pollution relative to their crop yields include economic development, population size, institutional quality and foreign financial flows to land resources, as well as countries' overall agricultural intensity and share in the economy. Our findings suggest that many national governments have an impressive capacity to reduce global nitrogen pollution without having to sacrifice much agricultural production.

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.

Exchange rate pressure, fiscal redistribution and poverty in developing countries

This article investigates the interplay between the exchange rate pressure (ERP), which is a proxy for export demand and foreign financial flows shocks, and fiscal redistribution in influencing poverty in developing countries. The analysis relies on an unbalanced panel dataset containing 90 developing countries over the period 1980–2014 and uses the two-step system GMM approach. Empirical results show that ERP influences positively poverty in developing countries, with the magnitude of this positive effect being the same for least developed countries (LDCs) and NonLDCs (countries not classified as LDCs in the sample). In addition, fiscal redistribution exerts a positive effect on poverty in developing countries, including in NonLDCs, but for LDCs, it leads to lower poverty rates. Interestingly, over the full sample, fiscal redistribution helps in reducing the magnitude of the positive effect of ERP on poverty. A further analysis has been performed by replacing ERP with a measure of terms-of-trade instability. Previous results are largely confirmed, with the exception that terms-of-trade instability exerts a higher positive effect on poverty in LDCs than in NonLDCs. Furthermore, while the positive poverty effect of terms-of-trade instability diminishes as the extent of fiscal redistribution rises, terms-of-trade instability leads to poverty reduction above a certain level of the extent of fiscal redistribution. Overall, these findings indicate that well-designed fiscal redistributive measures could help governments mitigate the adverse effects of external economic and financial shocks on poverty in developing countries.

Investor sentiment and foreign financial flows: Evidence from South Africa

Foreign financial flows to emerging markets have increasingly become important following the opening of financial markets globally. These financial flows are a function of a country’s fundamentals related to future productivity. However, macroeconomic fundamentals cannot explain some of the patterns in these financial flows, especially in emerging markets. In this study, we tested whether investor sentiment can be used as an alternative explanation for the foreign financial flows in South Africa. We employed net foreign purchases of shares and bonds, and we constructed a composite investor sentiment measure using a set of proxies. We then estimated autoregressive distributed lag models – linear and non-linear – to determine the relationship between sentiment and foreign financial flows in both the long and short run. The results showed that investor sentiment does influence foreign financial flows into South Africa. Therefore, it can be concluded that besides economic performance and stability of a country, it is of crucial importance to improve the perceived outlook for the country as to attract foreign financial flows. This finding is relevant for South Africa as a country that depends significantly on foreign capital flows to fill its widening gap between the savings and the investment needed to support enough economic growth.

The risk-taking channel of international financial flows

From the second half of the 1990s, the high saving propensity in emerging economies triggered massive inflows towards safe assets in the United States; then, from the early 2000s, global banks also increased investment in US markets targeting riskier securities. We investigate to what extent the global saving glut and the global banking glut have stimulated risk taking, and find significant effects on credit spreads, market volatility and bank leverage. In a VAR framework, we also detect linkages between foreign inflows, US household indebtedness and house prices, suggesting a substantial risk-taking channel. Our findings provide evidence of the autonomous role of foreign financial flows during the run-up to the global financial crisis.

International Financial Flows and the Risk-Taking Channel

During the 1990s, the increased propensity to save in emerging market economies triggered massive inflows towards safe assets in the United States; a few years later, rising dollar funding by global banks was concurrent to increasing inflows to private-label US securities. While it is well documented that foreign financial flows have eased financing conditions in the US through the compression of long-term yields, in this paper we also find significant effects on the credit spread and the VIX, suggesting a relevant risk appetite channel. Moreover, flows into the US corporate bond market, partly linked to the previous saving glut in emerging economies, also directly affected bank leverage, household indebtedness and the housing market. This evidence provides a new perspective on the global banking glut, complementary to the role of banks in the risk-taking channel of monetary policy.

Financialization of Economic Growth and the Russian National Financial System

The last decades was been marked by the financialization of the world economy, i. e. the faster development of the financial system as compared with other sectors. This process lost its pace but did not stop after the global financial crisis of 2007–2009. However, in the post-crisis years, it is continuing against the background of the international financial system restructuring and the changing role and place of developing countries therein. The paper analyzes the current stage of the global financialization and outlines the specificity of this process in Russia. With the use of cross-country comparisons as well as extensive financial statistics data, it is shown that the Russian economy has failed to be fully integrated into the above development trend. Neither the internal nor the external investment potentials of the financialization are being utilized in full due to imperfections of both the institutions for mobilizing financial resources and the institutions that convert the latter to long-term investments. Inside the country, the “financialization” scale of the economic growth is assessed as very modest, near to “definancialization”. There is a predominance of bank intermediation while non-banking sectors remain underdeveloped; meanwhile, the liquidity surplus accumulated in the banking system since 2016 does not lead to a significant increase in lending to the real sector. Corporate and government borrowings through financial markets by bond issues are still at a low level. The global potential of financialization is noted to be underutilized too because Russian financial institutions do not fully cope with the role of the transmission mechanism between international funding sources and the demand of the domestic economy for investment, especially under sanctions. Their inability to use foreign financial flows for this purpose, unlike China and India, has become one of the reasons for the loss of investment attractiveness of the national economy. The research findings prove that the lack of depth and the institutional instability of the Russian financial system impose serious constraints on the investment process whose significance for reaching a new trajectory of sustainable economic growth can be hardly overestimated. Seeking ways to overcome these constraints by joint efforts of both national financial market players, including major banks, and financial regulators could be subject for further discussion.

Economic Regulations: Effect on Growth and Stability in Brazil and India

Brazil and India are two of the important emerging economies of today. A comparative study of the two country's economic regulations is interesting and can give useful learning for both countries. Their similarities in terms of large geographical area, large size of population, high unemployment rates, dominant services sector, a mixed economy framework, common interests in international markets and trade platforms like WTO (pharmaceuticals, agriculture, etc.) on the one hand and contrasts by way of political experiences, economic upheavals, dependence on foreign financial flows combine to make this a rich and meaningful study (Oliver Stuenkel, 2010). The paper aims at identifying the reasons that have helped India to achieve rapid GDP growth and remain economically stable over the last quarter of a century and have also enabled Brazil, with a history of economic ups and downs to manage the effects of the 2008-09 crises quickly. The Brazilian economy posted positive economic conditions in barely a year, without resorting to large increases in government spending or monetary easing. This makes us think that the Brazilian economic regulations model has matured.

Foreign Aid and Domestic Savings: A Spurious Correlation?

Previous articleNext article No AccessForeign Aid and Domestic Savings: A Spurious Correlation?Donald SnyderDonald Snyder Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Economic Development and Cultural Change Volume 39, Number 1Oct., 1990 Article DOIhttps://doi.org/10.1086/451858 Views: 14Total views on this site Citations: 19Citations are reported from Crossref Copyright 1990 The University of ChicagoPDF download Crossref reports the following articles citing this article:Thanh Dinh Su, Canh Phuc Nguyen Foreign financial flows, human capital and economic growth in African developing countries, International Journal of Finance & Economics 3 (Oct 2020).https://doi.org/10.1002/ijfe.2310Mostafa E. AboElsoud Did USAID promote economic growth prior to the 2011 Egyptian Revolution?, Journal of Chinese Economic and Foreign Trade Studies 11, no.33 (Oct 2018): 219–235.https://doi.org/10.1108/JCEFTS-05-2018-0013Yéro Baldé The Impact of Remittances and Foreign Aid on Savings/Investment in Sub-Saharan Africa*, African Development Review 23, no.22 (Jun 2011): 247–262.https://doi.org/10.1111/j.1467-8268.2011.00284.xJohn Loxley, Harry A. Sackey Aid Effectiveness in Africa, African Development Review 20, no.22 (Sep 2008): 163–199.https://doi.org/10.1111/j.1467-8268.2008.00181.xChris (Hristos) Doucouliagos, Martin Paldam Aid Effectiveness on Accumulation, SSRN Electronic Journal (Jan 2005).https://doi.org/10.2139/ssrn.1147608Chris (Hristos) Doucouliagos, Martin Paldam Aid Effectiveness on Growth, SSRN Electronic Journal (Jan 2005).https://doi.org/10.2139/ssrn.1147609Chris (Hristos) Doucouliagos, Martin Paldam Conditional Aid Effectiveness, SSRN Electronic Journal (Jan 2005).https://doi.org/10.2139/ssrn.1147610Clifford Zinnes, Bineswaree (Aruna) Bolaky Harnessing the Power of Incentives: A Framework for Increasing Aid Effectiveness by Design, SSRN Electronic Journal (Jan 2002).https://doi.org/10.2139/ssrn.1156905Peter Hjertholm, Finn Tarp References, (Jan 2010).https://doi.org/10.4324/9780203461761.bmattFinn Tarp, Henrik Hansen Aid effectiveness disputed, (Jan 2010).https://doi.org/10.4324/9780203461761.ch4Henrik Hansen, Finn Tarp Aid effectiveness disputed, Journal of International Development 12, no.33 (Apr 2000): 375–398.https://doi.org/10.1002/(SICI)1099-1328(200004)12:3<375::AID-JID657>3.0.CO;2-MHoward White Literature Review, (Jan 1998): 19–51.https://doi.org/10.1007/978-1-349-26249-6_2Christopher J. Cook On the appropriate specification of the life cycle savings rate model: The roles of sectoral shares, financial intermediation and foreign capital, International Review of Economics & Finance 6, no.22 (Jan 1997): 145–165.https://doi.org/10.1016/S1059-0560(97)90021-6Janine Bowen Foreign Aid and Economic Growth: An Empirical Analysis, Geographical Analysis 27, no.33 (Sep 2010): 249–261.https://doi.org/10.1111/j.1538-4632.1995.tb00908.xChristopher J. Cook Savings rates and income distribution: further evidence from LDCs, Applied Economics 27, no.11 (Jul 2006): 71–82.https://doi.org/10.1080/00036849500000009Robert Lensink Recipient government behavior and the effectiveness of development aid, De Economist 141, no.44 (Dec 1993): 543–562.https://doi.org/10.1007/BF02375171Howard White Aid and government: A dynamic model of aid, income and fiscal behaviour, Journal of International Development 5, no.33 (May 1993): 305–312.https://doi.org/10.1002/jid.3380050306Gian S. Sahota, William A. Darity, Paul J. Taubman Saving and Distribution, (Jan 1993): 193–240.https://doi.org/10.1007/978-94-017-3294-9_5Howard White What do we know about aid's macroeconomic impact? An overview of the aid effectiveness debate, Journal of International Development 4, no.22 (Mar 1992): 121–137.https://doi.org/10.1002/jid.3380040203