Munich Personal RePEc Archive

Capital inflows and economic growth nexus in Sub-Saharan Africa: evidence on the role of institutions

Ndiweni, Zinzile Lorna and Bonga-Bonga, Lumengo (2021): Capital inflows and economic growth nexus in Sub-Saharan Africa: evidence on the role of institutions.

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Abstract

This paper assesses the relationship between international capital inflows and economic growth in developing economies. We employ methods of threshold regression to examine whether capital flows have different effects in developing economies with weak institutions as compared to those with good institutional infrastructure.. Our findings show that a threshold effect exists in the capital inflows and growth nexus. More precisely, the results obtained demonstrated that the impact of capital inflows on economic growth is positive and significant once a defined threshold level of institutional quality has been exceeded. At any point below that threshold level, the capital inflows-growth relationship appears to be non- existent. These results support the notion of the capital inflows and growth relationship being contingent on the level of institutional development in an economy. Therefore, providing vital policy implications for policy makers and government in ensuring the improvement of a country’s institutional environment with the purpose of enhancing economic growth through capital flows.

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