The Impact Of Foreign Capital And Financial Resources On The Economic Growth In The Common Market For Eastern And Southern Africa Region

Abstract

The Common Market for Eastern and Southern Africa (COMESA) region has experienced fast economic growth coupled with increased flows of foreign capital and financial resources since 2000. However, the link between economic growth, foreign capital, financial resources and absorptive capacity in the region is not clear: few studies have been conducted in the region, others have omitted some COMESA countries, components of foreign capital/financial resources and absorptive capacity from their analysis. Furthermore, previous studies conducted in other regions obtain conflicting results. This study seeks to determine the impact of foreign capital and financial resources on the real GDP per capita and examine how this impact is affected by the absorptive capacity in the COMESA region. It also explores the effect of applying different estimators on the regression results. The study uses country-level panel data covering the period from 2000 to 2015. Panel data estimators are used to generate regression results. The dynamic generalized method of moments (GMM) difference estimator produces reliable, efficient and robust estimates. According to the results, GDP growth in the COMESA region is driven by aggregated foreign capital and financial resources. Short term foreign capital flows, cross-border bank lending, remittances, overseas development assistance and aid affect growth positively, while FDI has a negative impact. Absorptive capacity too drives economic growth and enhances the ability of the region to absorb and benefit from the spillovers of foreign capital and financial resources. However, the absorptive capacity has a minimum threshold for the region to realize a positive impact of foreign capital and financial resources on GDP growth. The findings suggest that the COMESA countries should encourage and promote greater inflow of foreign capital and financial resources. The countries should also adopt FDI targeting and implement economic policies that encourage inflows of beneficial FDI. Finally, they should improve the absorptive capacity in order to realize positive GDP growth from aggregated and disaggregated foreign capital and financial resources.