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

• Published in: Empirical economics 2024-10, Vol.67 (4), p.1801-1827
• Main Authors: Odo, Augustine C., Urama, Nathaniel E., Odionye, Joseph Chukwudi
• Format: Article
• Language: English
• Subjects: Capital movement; Central banks; Debt; Econometrics; Economic crisis; Economic growth; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Finance; Foreign investment; Insurance; Management; Panel data; Portfolio investments; Statistics for Business; Transparency; Volatility
• ISSN: 0377-7332; 1435-8921
• DOI: 10.1007/s00181-024-02592-1

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.