Do Capital Inflows and Financial Development, Influence Economic Growth in West Africa? Further Evidence from Transmission Mechanisms

Abstract

This study investigates the channels through which shocks from foreign capital inflows and financial development are transmitted to economic growth in the ECOWAS region using quarterly data for the period between 2000 and 2017. The work adopted the panel vector autoregressive (pVAR) model in a generalized method of moments (GMM) framework to actualize its objective. The empirical results show that foreign direct investment (FDI), net domestic credit (CRE), and economic growth (ECG) all have significant relationships with each other, while gross capital formation (GCF), labour force (LF), and foreign aid (AID) have significant relationships with FDI, CRE and ECG. Furthermore, FDI and CRE have negative relationship with economic growth in the short run but have positive impulse response functions with economic growth in the long run. FDI and CRE exhibit positive relationship between themselves in the short run and negative relationship in the long run. Thus, the study recommends concerned policy makers to pursue financial deepening and enact credible policies that strengthen the financial system. In addition, a conducive socio-economic environment should be actively maintained so as to attract the required foreign capital inflows. Finally, more efforts should be made towards the establishment of a single monetary union, as it is likely to further strengthen the region and improve the trade among the member-countries. This should lead to further growth within the region.

Keywords

• Foreign Capital Inflows
• Financial Development
• Investment
• Economic Growth
• ECOWAS