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One Bad Turn Deserves Another: How Energy Production, Financial Instability, and Political Governance Crisis Sustain the Decline of FDI Inflows in the Central African Republic

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Abstract

Foreign direct investment (FDI) in many African countries has risen sharply over the past two decades. Yet, the rising trend has not been apparent in the Central African Republic. The purpose of this study is to examine the reasons for the declining FDI net inflows in the Central African Republic (CAR) considering the main issues such as energy production, financial instability, and political governance crisis with exports of goods and services as a control variable. This study used an autoregressive distributed lag model (ARDL) to check the long-run relationship among the engaged variables covering the period 1977–2007 and 1977–2016, as the time interval including the post-crisis period. The results show energy production, political governance crisis, and exports of goods and services have a positive effect on FDI inflows both in the short and long run before the financial crisis. Furthermore, we found that financial instability and the structural break effects have positive effect on FDI inflows both in the short and long run. However, the post-financial crisis period indicates that financial instability and the structural break effects have a negative effect on FDI both in the short and long run, while the political governance crisis has a positive effect on FDI in short run and negative effect on FDI inflows in the long run. Furthermore, we found that energy production has a positive and statistically significant effect on FDI inflows both in the short and long run. The global financial crisis impacts positively and significantly the FDI net inflows in the long run while in the short run, it has a negative and significant impact on FDI net inflows. The findings underscore the need to improve financial institutions, energy sector, and governance as well as encourage private sector development. Moreover, diversification is necessary to meet the sustainable growth requirements of the Central African Republic.

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Notes

  1. https://unctad.org/en/docs/gdsafrica20051_en.pdf.

  2. The seven countries such as Cameroon, Central African Republic, Democratic Republic of Congo, Equatorial Guinea, Gabon, Republic of the Congo, São Tomé and Príncipe.

  3. https://www.diplomatie.gouv.fr/IMG/pdf/CENTRAFRIQUE_-_Les_investissements_directs_etrangers_cle0d6d6f-1.pdf

  4. Available at https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/5739.pdf

  5. https://www.lemonde.fr/international/article/2002/03/18/le-consensus-de-monterrey-lie-developpement-et-partenariat_267208_3210.html

  6. ENERCA is the leading energy company in the Central African Republic. The company has a monopoly on the production and electricity supply in the country.

  7. The gigawatt-hour (GWh) is a unit of energy representing 1 billion watt-hours, and it is the equivalent of 1 million kilowatt-hours.

  8. https://info.undp.org/docs/pdc/Documents/CAF/Rapport%20de%20diagnostic%20du%20secteur%20%C3%A9nergie%20RCA%20VF.pdf

  9. https://unctad.org/Sections/dite_fdistat/docs/wid_cp_cf_en.pdf

  10. The reserve requirement ratio has been maintained at zero since 2003, and banks are now investing excess liquidity in BEAC. For the first time since 2003, the reserves held by the banking system exceeded the level of reserves that would be needed to meet the reserve requirement ratio that was in place before 2003.

  11. Despite recent progress in recapitalization and provisions for non-performing loans, the capital base of commercial banks is weak and vulnerable to shocks.

  12. The availability of loan accounts is low and very concentrated. The diversification of financial products offered by banks is low. Financial services such as securities transactions and foreign exchange operations, leasing, and remittances are marginal.

  13. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=878903.

  14. Available at http://www.sef.hku.hk/~larryqiu/Papers/FDI.pdf

  15. Available at: https://www.princeton.edu/~dixitak/home/Dixit_TradeSec_Final.pdf

  16. Available at https://unctad.org/en/Docs/iteiia20061_en.pdf

  17. Available at https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/850.pdf

  18. FDI inflows (% of GDP) are the net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors and are divided by GDP.

  19. Energy production measured in our study based on the case of the CAR is the total primary energy production (Quadrillion Btu). Because, the supply of energy is lower than demand, the electricity company is obliged to set up a load shedding program in Bangui while in provincial city towns, plants are purely off, demonstrates how the production of energy is not sufficient confirming an existence of low energy production in the country.

  20. Exports of goods and services represent the value of all goods and other market services provided to the rest of the world.

  21. https://digidownload.libero.it/rocco.mosconi/JohansenJuselius1990.pdf.

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  1. Centre de Recherche pour le Développement Economique (CEREDEC), Central African Republic, Bangui, Cameroon

    Yapatake Kossele Thales Pacific

  2. Pan-African University, African Union Commission, Institute of Governance, Humanities and Social Sciences (PAUGHSS), Yaounde, Cameroon

    Ngaba Mbai-Akem Gabriella Magalie

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Pacific, Y.K.T., Magalie, N.MA.G. One Bad Turn Deserves Another: How Energy Production, Financial Instability, and Political Governance Crisis Sustain the Decline of FDI Inflows in the Central African Republic. J Knowl Econ 14, 831–853 (2023). https://doi.org/10.1007/s13132-022-00891-5

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  • DOI: https://doi.org/10.1007/s13132-022-00891-5

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