Private Capital Flow Shocks and Sub-Saharan African Macroeconomic Performance

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The economic situation of Sub-Saharan Africa (SSA) defies the prediction of the neoclassical theory that capital flows positively affect the economy. Despite increasing inflows of private capital, the region’s gross domestic product (GDP) as a percentage of the world’s has not risen above the 1980’s level. While previous studies have explained why capital inflows have not helped SSA economies to grow in the light of flows extrinsic factors such as the economic/financial structures of flows recipients, limited attention has been paid to the role played by intrinsic properties of the flows, e.g. private capital flow shocks. Employing annual data on 14 SubSaharan African (SSA) countries from 1980 to 2012, this study estimated a structural vector autoregression (SVAR) model to evaluate the effect of the shocks (measured as one standard deviation of orthogonal structural errors) on macroeconomic performance of the SSA countries. Shocks to gross inflows of portfolio investment per capita (PIC) as well as gross inflows of bank lending per capita (BLC) reduced GDP per capita (YC), while shocks to gross inflows of FDI per capita increased YC. These findings support the conventional wisdom that volatile financial flows like bank lending and portfolio flows hampers economic growth of countries, especialy those with weak financial system; whereas, stable flows like FDI prove beneficial to growth. The negative effects of both bank lending and portfolio flows partitally explained why the SSA’s economic situation has not improved in the modern era of global financial integration.

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