Skip to main content
SpringerLink
Log in

Volatile capital flows and economic growth in sub-Saharan Africa: the role of transparency

  • Published:
Empirical Economics Aims and scope Submit manuscript

Abstract

The study set out to investigate whether transparency can mitigate the negative effects volatile capital flows have on growth using cross-section panel data from 21 sub-Saharan African countries from 2000 to 2019. Using the IVQR model, the study finds that at 75th quantile, poor growth performance in SSA is explained mostly by the volatility in debt net inflows compared to other categories of capital, while portfolio net inflow contributes most significantly to the low-level growth for low and medium income countries. Focusing on the interaction between transparency and capital net inflows, the study finds evidence that transparency reduces most of the negative effects of the volatility in debt net inflow compared to other categories of capital inflow. Thus, the study provides evidence that transparency can reduce the negative effects of volatile capital inflows on growth by a significant amount, which varies depending on the type of capital inflow. The implication is that the extent transparency dampens the negative impact of volatile capital flows depend on both the capital type and the level of income of the country concerned. Regarding FDI and FPI, transparency is most effective in reducing volatility of the flow for low income countries, while for debt flows transparency penalizes the volatility of flows for high income countries. On this basis, it recommends that central banks should adopt transparency as a policy tool, particularly in SSA economies with probably low initial transparency to help mitigate the harmful effects of large and volatile capital inflows.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Data availability

The data that supports the findings of this study are available from the corresponding author upon reasonable request.

Notes

  1. Institution which is a proxy for indicator of Government Quality is the mean of six aggregate governance indicators with each ranging from approximately − 2.5 (weak) to 2.5 (strong) governance performance.

References

  • Abbas Z, Afshan G, Mustifa G (2022) The effect of financial development on economic growth and income distribution: an empirical evidence from lower-middle and upper-middle-income countries. Dev Stud Res 9(1):117–128

    Article  Google Scholar 

  • Abdychev A, Alonso C, Alper ME, Desruelle MD, Kothari S, Liu Y, Sharma P (2018) The future of work in sub-Saharan Africa. International Monetary Fund.

  • Adeola OO, Aziakpono MJ (2022) Unlocking the relationship between capital flows and economic growth in a small open economy of Kenya: An empirical investigation. Cogent Econ Finance 10:1–24

    Article  Google Scholar 

  • African Development Bank (2020) African Economic Outlook 2020: Developing Africa’s Workforce for the Future.

  • Agbloyor EK, AborJ Y, Adjasia CKD, Yawson A (2014) Private capital flows and economic growth in Africa: the role of domestic financial markets. J Int Finan Markets Inst Money 30:137–152

    Article  Google Scholar 

  • Alfaro L, Kalemli-Ozcan S, Volosovych V (2014) Sovereigns, upstream capital flows, and global imbalances. J Eur Econ Assoc 12(5):1240–1284

    Article  Google Scholar 

  • Alhassan A, Usman O, Ike GN, Sarkodie SA (2020) Impact assessment of trade on environmental performance: accounting for the role of government integrity and economic development in 79 countries. Heliyon 6(9):e05046

    Article  Google Scholar 

  • Amiri H, Karim MH, Toussi A, Javanmard R (2017) Impact of economic transparency on economic growth in the Middle East countries. Int J Bus Dev Stud 9(2):115–138

    Google Scholar 

  • Bailliu JN (2000) Private capital flows, financial development, and economic growth in developing countries. Bank of Canada Working Paper 2000-15

  • Benmelech E, Dvir E (2013) Does short-term debt increase vulnerability to crisis? Evidence from the East Asian Financial Crisis. J Int Econ 89(2):485–494

    Article  Google Scholar 

  • Ben-Salha O, Zmami M (2020) The impact of private capital flows on economic growth in the MENA region1. Econ Bus Rev 6(20):45–67

  • Bluedorn JC, Duttagupta R, Guajardo J, Topalova P (2013) ‘Capital flows are fickle; anytime, anywhere’ (13/183), Technical report, International Monetary Fund.

  • Brandao-Marques L, Gelos RG, Melgar N (2013) Country transparency and the global transmission of financial shocks. IMF Working Papers, 2013(156).

  • Broner F, Didier T, Erce A, Schmukler S (2011) Gross capital flows: dynamics and crises (No. 5768). The World Bank.

  • Cai Z, Chen L, Fang Y (2018) A semi-parametric quantile panel data model with an application to estimating the growth effect of FDI. J Econ 206:531–553

  • Calderón C, Kubota M (2013) Sudden stops: are global and local investors alike? J Int Econ 89(1):122–142

    Article  Google Scholar 

  • Choong C, Liwe VK (2009). Impact of foreign direct investment volatility on economic growth of asean-5 countries. Econ Bull 29(3):1–13

  • Combes JL, Kinda T, Ouedraogo R, Plane P (2017) Does it pour when it rains? Capital flows and economic growth in developing countries. Ferdi Working paper no. 157

  • Committee on the Global Financial System (2021) Changing patterns of capital flows. CGFS Papers No 66.

  • Crystallin M, Efremidze L, Kim S, Nugroho W, Sula O, Willett T (2015) How common are capital flows surges? How they are measured matters-a lot. Open Econ Rev 26:663–682

    Article  Google Scholar 

  • Dincer N, Eichengreen B, Geraats P (2022) Trends in monetary policy transparency: further updates. Int J Cent Bank 18(1):331–348

    Google Scholar 

  • Dinh TTH, Vo DH, The Vo A, Nguyen TC (2019) Foreign direct investment and economic growth in the short run and long run: empirical evidence from developing countries. J Risk Financ Manage 12(4):176

    Article  Google Scholar 

  • Forbes KJ, Warnock FE (2012) Capital flow waves: surges, stops, flight, and retrenchment. J Int Econ 88(2):235–251

  • Gabriel BT, John O, Baryl IO (2019) Capital flows and economic growth in Nigeria: an econometric approach. Int J Res Granthaalayah 7(9):183–199

    Article  Google Scholar 

  • Glennerster R, Shin Y (2003) Is transparency good for you, and can IMF help? IMF Working Paper. WP/03/132

  • Huo L, Kim TH, Kim Y (2015) Revisiting the effect of FDI on economic growth using quantile regression (No. 2015rwp-83).

  • IMF (2012) The liberalization and management of capital flows: an institutional view. International Monetary Fund, Washington DC.

  • International Monetary Fund (2017) Increasing resilience to large and volatile capital flows: the role of macroprudential policies; Case studies. International monetary fund

  • Islam AM, Lederman D (2020) Data transparency and long-run growth. Policy Research Working Paper no 9493

  • Janus T, Riera-Crichton D (2013) International gross capital flows: new uses of balance of payments data and application to financial crises. J Policy Model 35(1):16–28

    Article  Google Scholar 

  • Kamara YU (2014) Essays on the effects of foreign direct investment on economic growth and welfare: the case of Sub-Saharan Africa. Kansas: PhD thesis, department of economics, graduate faculty of the University of Kansas

  • Kawai M, Lamberte MB (2010) Managing capital flows: emerging Asia’s experiences, policy issues and challenges. Edward Elgar Publishing, In Managing Capital Flows

    Book  Google Scholar 

  • Khobai H, Hamman N, Mkhombo T, Mhaka S, Mavikela N, Phiri A (2019) The FDI-growth nexus in South Africa: A re-examination using quantile regression approach. Stud Univ Babes-Bolyai Oecon 63:33–55

    Article  Google Scholar 

  • Kim S (2011) The effects of foreign capital inflow on economic growth. J Econo Literat (JEL) 2(3):14, 35.

  • Kostakis I (2021) The socioeconomic determinants of sustainable residential water consumption in Athens: empirical results from a micro-econometric analysis. Discover Sustain 2(37):1–8

    Google Scholar 

  • Lee H, Park C, Byun H (2013) Do contagion effects exist in capital flow volatility? J Japan Int Econ 30:76–95

    Article  Google Scholar 

  • Lensink R, Morrissey O (2006) Foreign direct investment: flows, volatility, and the impact on growth. Rev Int Econ 14(3):478–493

    Article  Google Scholar 

  • Lin Y (2014) New structural economics: a theoretical framework for rethinking economic development and policy, rev. Peking University Press, Beijing, pp 19–96

    Google Scholar 

  • Machado JA, Silva JS (2019) Quantiles via moments. J Economet 213(1):145–173

    Article  Google Scholar 

  • Mallik G, Chowdhury A (2001) Inflation and economic growth: evidence from four South Asian countries. Asia-Pacific Dev J 8(1):123–135

    Google Scholar 

  • Mody A, Murshid A (2011) Growth from International Capital Flows: The Role of Volatility Regimes (No. 2011/090). International Monetary Fund.

  • Mordi CNO (2010) The link between the Financial (Banking) Sector and the Real Economy. Central Bank of Nigeria. Econ Financial Rev 48(4):7–30

  • Mowlaei M (2018) The impact of foreign capital inflows on economic growth on selected African countries. Afr J Econ Manag Stud 9(4):523–536. https://doi.org/10.1108/AJEMS-01-2018-0021

    Article  Google Scholar 

  • Mugenzi P, Nuwagira W, Uwimana A (2022) Financial flows volatility and economic growth in SSA countries: extended case of Rwanda. BNR Econ Rev 19(1):40–58

    Google Scholar 

  • Nabli MK (1999) Financial integration, vulnerabilities to crisis, and EU accession in five Central European Countries (Vol 439). World Bank Publications

  • Neanidis KC (2019) Volatile capital flows and economic growth: the role of banking supervision. J Financ Stab 40:77–93

    Article  Google Scholar 

  • Neanidis KC (2015) Volatile capital flows and economic growth: the role of macro-prudential regulation. centre for growth and business cycle research, economic studies Discussion Paper Series.

  • Neumann RM, Penl R, Tanku A (2009) Volatility of capital flows and financial liberalization: do specific flows respond differently? Int Rev Econ Financ 18(3):488–501

    Article  Google Scholar 

  • Nwosa PI, Ugwu E, Ehinomen C (2020) Volatility in foreign capital inflows and economic growth in Nigeria. EuroEconomica 39(1).

  • Nyang’oro O (2017) Capital inflows and economic growth in sub-Saharan African countries, s.l.: African Development Bank Abidjan, Cote d’Ivoire, Working Paper No.285

  • Onwiodiokit EA, Otolorin GE (2021) Capital formation and economic growth in Nigeria: an empirical re-examination. Bullion 45(2):58–72

  • Ostry JD, Ghosh AR, Habermeier K, Chamon M, Qureshi MS, Reinhardt D (2010) Capital inflows: the role of controls. Rev Econ Inst 12(23):135–164

    Google Scholar 

  • Pagliari MS, Hannan SA (2017) The volatility of capital flows in emerging markets: measures and determinants. International Monetary Fund. IMF Working Paper no 41

  • Raheem I, Le Roux S, Asongu S (2019) The role of asymmetry and uncertainties in the capital flows-Economic Growth Nexus. European Xtramile Centre of African Studies WP/19/047.

  • Shin Y, Glennerster MR (2003) Is transparency good for you, and can the IMF help?. International Monetary Fund.

  • Stiglitz JE (2000) Capital Market lberalization, economic growth, and instability. World Dev 28(6):1075–1086

  • Sumanjeet (2015) Institutions, transparency, and economic growth. Emerg Econ Stud 1(2):188–210

    Google Scholar 

  • Teig M (2006) Fiscal Transparency and Economic Growth. In: Challenges to change-Middle and Eastern European countries in transition: Fifth European Doctoral Seminar; seminar volume 06.–07. October 2005, Budapest, 183–209.

  • UNCTAD U (2017) World Investment Report 2017: investment and the digital economy. In: United Nations Conference on Trade and Development, United Nations, Geneva, pp 1–56.

  • Ustarz Y (2023) On the nexus of foreign capital inflow, volatility, financial development and economic growth in Sub-Saharan Africa: a sectoral approach. Ghana J Dev Stud 20(1):20–39

    Article  Google Scholar 

  • Waqas Y, Hashmi SH, Nazir MI (2015) Macroeconomic factors and foreign portfolio investment volatility: a case of South Asian countries. Future Bus J 1(1–2):65–74

    Article  Google Scholar 

Download references

Funding

This study was not funded either by any agency, institution or government.

Author information

Authors and Affiliations

  1. Department of Economics, Godfrey Okoye University, Enugu, Nigeria

    Augustine C. Odo

  2. Center for Financial Economics, National Institute for Policy and Strategic Studies (NIPSS), Plateau State, Kuru, Nigeria

    Nathaniel E. Urama

  3. Department of Economics, Abia State University, Uturu, Nigeria

    Joseph Chukwudi Odionye

Authors
  1. Augustine C. Odo
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Nathaniel E. Urama
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Joseph Chukwudi Odionye
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Augustine C. Odo.

Ethics declarations

Conflict of interest

The authors have no conflict of interest that are relevant to this work.

Ethical approval

The article does not contain any studies with human participants or animal participants by any of the authors.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix: Country sample

Appendix: Country sample

Angola, Benin, Botswana, Burkina -Faso, Cameroon, Ghana, Guinea-Bissau, Kenya, Lesotho, Malawi, Mali, Mauritius, Togo, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, South Africa, Uganda,

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Odo, A.C., Urama, N.E. & Odionye, J.C. Volatile capital flows and economic growth in sub-Saharan Africa: the role of transparency. Empir Econ (2024). https://doi.org/10.1007/s00181-024-02592-1

Download citation

  • Received:

  • Accepted:

  • Published:

  • DOI: https://doi.org/10.1007/s00181-024-02592-1

Keywords

Search

Navigation