foreign capital inflows

The Two-Gap Model suggests that the Poor countries have to rely on the foreign capital inflows (FCI) to fill the two Gaps: Import-Export Gap and the Savings-Investment Gap. There are many forms of the foreign capital inflows like FDI (Foreign Direct Investment), External loans & Credit, technical assistance, Project & non-project aid etc. So, UDC’s (including Pakistan) have to rely on the Foreign aid, Debt FDI and portfolio investments. The role of these external resources (FCI) always remains questionable. This paper analyzes the impact of the foreign capital inflow on GDP Growth in Pakistan during 1975-2004.

The empirical findings on the link between foreign aid and growth are generally mixed depending on whether it is a panel study, cross sectional study or a country specific study 7 . Studies that confirms a positive relationship between foreign aid and growth argue that foreign aid stimulates economic growth by: supplementing domestic sources of finance such as savings; increasing physical and human capital investment; increasing the capacity to import capital goods and technology (Hansen and Tarp, 2000; Dalgaard et al., 2004; Karras, 2006). However, other empirical studies found a negative relationship between growth and foreign aid (Burnside and Dollar, 2000; Brautigam and Knack, 2004). Studies such as Mosley and Horrell (1987) and Jensen and Paldam (2003) found no relationship between foreign aid and growth. Papanek (1973) disaggregated foreign capital inflows into foreign aid, foreign private investment and all other foreign inflows 8 . Using a cross section data of 34 countries in the 1950s and 52 countries in the 1960s, foreign aid was found to have a statistically significant positive impact on growth. Moreover, the study found the effect of foreign aid on economic growth to be stronger than other factors. Other studies have also moved from cross country studies to time series specific country studies in examining the relationship between economic growth and foreign aid. Fambon (2013) employed the ARDL framework on a time

ABSTRACT : Using the Seemingly Unrelated Regression Estimation (SURE) technique, we examine the implications of four different types of foreign capital inflows, namely; Foreign Direct Investment (FDI), Official Development Assistance (ODA), Foreign Private Investment (FPI) and Remittances (REM) on output growth of the West Africa Monetary Zone (WAMZ) economies over the period 1981-2010. Our results show that there are differences in the growth impact of the various forms of foreign capital inflows in the WAMZ countries. The result also shows that more than one form of capital inflow contributed positively to output growth in Nigeria. Again, we find that ODA positively contributes more to output growth in Sierra Leone and Ghana, whereas, FDI foster more output growth in Nigeria and Gambia. Remittances have the highest contribution in Liberia and finally none of the inflows has positively impacted on Guinea’s economic growth. We therefore recommend that WAMZ countries should endeavor to create competitive economic environments that will be attractive to foreign investors since promoting trade and investment through sound economic policies and strengthened institutions are essential in maximizing the benefits from Foreign Capital Inflows in the region.

The existence of feedback effect between economic growth and energy consumption suggests utilizing energy sources efficiently for long run economic development and explore new sources of energy such as renewable energy for maintaining future energy demand. A technology fund can be introduced by the Pakistan government to encourage the energy efficient-projects to enhance domestic production and hence exports. This would help to earn foreign exchange via boosting exports. Exports should be utilized as a source for importing advanced technology. Furthermore, devaluation of local currency can be helpful after improving the quality of exports otherwise it would be harmful not only for foreign capital inflows, exports but also for economic growth. There is dire need of comprehensive policy framework to direct institutional, political, social and economic factors which affect energy intensity in Pakistan.

Despite the large number of literatures on foreign capital inflows-growth relation, the issue is not clearly resolved. Some studies find evidence of positive and negative relationship between foreign capital inflows-growth respectively, while others finds such nexus subtle, and another group finds such relation dependent on domestic policies, country characteristics, economic and institutional environment and donors interest. Also most of the studies on foreign capital flows-growth are cross sectional, such results obtained by cross-country studies must be treated with great caution as they are subject to extreme limitations. Such limitations include; a common economic structure and similar production technology across different countries which appears not be accurate in reality. However, this study is an attempt to contribute to the existing literatures on foreign inflows and economic growth in Nigeria.

The Auto Regressive Distributed Lag method of cointegration developed by Pesaran and Pesaran (1997), Pesaran and Shin (1999) Pesaran et al. (2000, 2001) has been used with the help of unrestricted vector error correction model to investigate the long run relationship between foreign capital inflows, economic growth and stock market capitalization. The ARDL approach has several advantages upon other cointegraion methods. ARDL approach may applies irrespective of whether underlying variables are purely I(0), I(1) or mutually co-integrated. 23 ARDL approach has estimated better small sample properties. 24 In ARDL procedure the estimations of results is even possible if the explanatory variable are endogenous. 25 The ARDL model is developed for estimations as follow:

Foreign capital inflows (FCI) have been considered to be a key element in the process of economic globalization and integration of the world economy. However, the frequent occurrence of financial crises around the world has awakened the debate about the causes, consequences, impact and aftershocks of these crises. These sorts of financial crises are majorly occurring because of systemic banking crisis and currency crisis. These crises significantly influence the relationship between FCI and economic growth. The objective of this study is to identify the impact of foreign direct investment, foreign debt, workers‘ remittances and exports of goods and services on economic growth in high, upper middle, lower middle and low income countries. To attain the objective of this research, we collect a panel data of 96 countries and group them on the basis of different income levels. The final sample of this study consists of 10 low income countries, 23 lower middle income countries, 30 upper middle income countries and 33 high income countries. We employed fixed effect & random effect model estimation method to judge the desired relationship among variables. Fully modified ordinary least squares (FMOLS) has also been used to ensure the robustness of initial results. Results indicate the negative and significant influence of systemic banking and currency crisis. Results also indicate the positive and significant impact of all four types of FCI on economic growth in all income level countries except, remittances in low income countries and foreign debt in lower middle income. These two results show the negative impact on economic growth. Results also conclude that the banking and currency crisis are harmful for the relationship of foreign direct investment and economic growth in all income level countries. The study recommends several policy implications to improve the positive impact of foreign capital inflows on economic growth and reduce or control the negatively influence of systemic banking crisis and currency crisis on the relationship of foreign capital inflows and economic growth.

objective of this study is to examine the nature of relationship between foreign capital inflows and the level of economic growth selected West Afiican Countries [r]

Impact of foreign capital inflow (aid) on poverty depends on the sectors that receive these inflows [White (1996)]. Therefore an analysis that explicitly takes into consideration various sectors (import competing or export) give more insights into the mechanism of poverty reduction. Poverty orientation of foreign capital inflow relates to the rise in demand for factors of production in different sectors of the economy with increased inflow of traded goods and trace the impact on rich and the poor through changes in factor rewards and prices. The main thrust of the argument is that increased foreign capital inflows increases the demand for goods for investment purposes. Firms shift their resources towards the sheltered sectors in the presence of trade restrictions. In the presence of trade restrictions, demand for factors of production, used intensively in the import competing sectors (capital), increases and as such rich, the owner of capital are expected to benefit more. A trade-induced change in the country’s product prices alters the relative profit opportunities facing price-taking firms who shift their resources towards the industries whose relative profitability has risen. Given fixed factor supplies, the shift in demand changes factor prices until the zero profit condition is restored. The distribution of cost and benefit depends on the following:

The impact of foreign capital inflows on the economic growth of SSA, with emphasis on Nigeria, Ghana and South Africa was studied using multiple regression technique. Outcome of the study revealed that there is no significant long run relationship between foreign capital inflows and the level of economic growth in Nigeria and South Africa. It was only the lagged value of GDP (In the immediate past year), taken as an independent variable that was found to be positively significant. Other Inflow indicators that were hitherto significant in the short run, turned out to be insignificant in the long. The scenario was almost the same for Ghana except for FDI and the lagged value of GDP (In the immediate past year), taken as independent variable that were positively significant in the long run. It was also revealed that, there exist causality relationships between capital inflow indicators and economic growth in the aforementioned countries. Conclusively, it was ascertained that most of the investment inflows into SSA were based on speculations, targeted at the non priority sectors of the economies and channeled into businesses with short gestation periods. Their impacts are only felt in the immediate periods and given that the funds are quickly repatriated after profits are made, they do not make the desired impact in the long run. The study therefore, recommends a conscious effort on the concerned economies to enact some investor friendly policies that will encourage/ attract more capital inflows and to provide a conducive and enabling environment. Basic infrastructures like good roads, electricity supply and security must be seen to be adequate. Again, there is need to play down on speculative businesses and to invest in the real sectors of the economy .To reduce the level of capital flight, inflows should be tied to specific, relevant and purposeful projects. This will help to create employment opportunities in the long run. Lastly, there is equally the need for prudence and accountability in the management of accruals from official capital inflows and transfers. Such monies are expected to be channeled into productive ventures by the governments in power and not for profligacy.

The unit root properties of the variables are investigated by applying ADF, DF-GLS and Ng-Perron unit root tests. ARDL bounds testing approach to cointegration is flexible about integrating order of the variables. The variables of interest should be stationary at level or 1 st differenced form or I(0) or (1) or I(0) / I(1). Unit root tests are just applied to ensure that no variable is integrated at I(2). If any variable is stationary at 2 nd difference or integrated at I(2), then computation process for F-statistic is useless through ARDL bounds testing to examine cointegration between the variables. The results of ADF, DF- GLS and Ng-Perron unit root tests are reported in Table-1. Our empirical evidence reveals that variables have unit root problem at their level form and to be stationary at 1 st difference. This leads us to conclude that all series are integrated at I(1). The unique order of integration supports to apply ARDL bounds testing approach to cointegration to examine long run relationship between economic growth ( ln GDP t ) , imports ( ln IMP t ) and foreign capital inflows ( ln FC t ) .

Even the Africa best economy South Africa was ranked second in Africa with regards to corruption index. The example is president Zuma‟s irregular expenditure of R316 million incurred in 2015 on the re-registration of beneficiaries by cash paymaster service and other looting cases. Transparency international 2015 hinted that more than 75 million African people pay bribe, corruption in the region increase by 58% and many governments failed completely in addressing the issue through anti-corruption agencies. Apart from Nigeria among ECOWAS, situation is worst in Liberia where over 69 per cent paid bribe. West Africa is very rich with natural resource oil, gas, gold diamond and fertile soil for agricultural products but political instability and corruption responsible for miserable poverty and fall in economic performance. In West Africa, corruption is a daily practice across every sector of the economy schools, banks, police, media, commercial driver, civil society and even churches and mosques are free from corruption. In light of these issues on institution, the study would examine the impact of corruption and infrastructure on economic performance in ECOWAS economies. Our intention is owing to the fact that, growth of any economies is dependent on level of infrastructural development. Infrastructural decay is a real problem in West African economies. Energy, telephone and electricity decay affect most the manufacture firm in West Africa. It has often said that infrastructural development like road and energy to bridging the infrastructure gap and ending poverty in the region. Mohamed et al 2013 hinted that for ECOWAS economies performance to improve there is need to reduce poverty which can enhance via more investment in infrastructural facilities like energy for capital productivity boost. They found that infrastructure availability reduces productivity in the largest economics Nigeria and Cote d‟ Ivoire. 1.3. Problem and issues of the study

To measure the impact of capital inflows on domestic investment, we use the Hecht, Razin and Shinar (HRS) model for Pakistan in which Hecht et al. (2004) tried to capture the impact of different form of investment inflows. The model is based on system of four equations where domestic investment (DI), foreign direct investment (FDI), Portfolio investment (P) and Loans (L) are dependent variables and observations. As the vast literature confirms that capital inflows not only affect domestic investment but it also gets affected in the process. Therefore, the system of equation is the true representation of reality. Every equation also includes the dependent variable with a one-period lag as an explanatory variable. The quality of this model is that it measures the impact of all kind of investment inflows, including FDI, to a host country. This will throw light on the importance of FDI in the presence of other types of investments from a different angle. The system of equations is given as

significant, but its lag is significantly negative. These results suggest that liquidity in the financial system improves due to OFFCR, which enhances HEWE through DOMCR. DOMCR positively and significantly affects the consumption, education, and health components of HEWE (Table 11 in Appendix 3). Nevertheless, the in- fluence of its lag on HEWE is negative and significant. These results support Clarke et al.’s (2006) hypothesis of widening income inequality as financial develop- ment proceeds. Though DOMCR ’ s lag has an insignificant effect on the individual components of HEWE, it significantly affects the HEWE index (Table 11 in Appen- dix 3). Therefore, the results in Model III of Table 3 suggest that domestic credit supports economic welfare enhancing activities as new official credit flows into SSA. These inflows, among other things, improve financial derivatives to increase credit and monetize the economy. Nevertheless, the negative effect of the previous year ’ s DOMCR on current welfare is plausibly due to the haste among financial in- stitutions to issue new and improved financial derivatives in the current years in their attempt to capture a considerable share of the market. However, banks may not thoroughly think through a supposedly new and improved financial derivative or properly analyze their risks before selling them to economic agents. These risks, along with the laxity associated with risk assessment and monitoring of loans in current years tend to reduce investment in welfare-enhancing activities after one year (Ocaya 2012).

The Portfolio investment flows, by spurring the stock market efficiency through specialization, acquisition and information dissemination, improve firm control, reduce monitoring costs and result in investment increase (Jensen and Meckling, 1976). Specifically, equity portfolio investments through risk sharing help to finance innovation (King and Levine, 1993) and increase capital productivity by insuring against liquidity risk (Greenwood and Jovanovic, 1990). However, detractors of these flows advance that portfolio investment inflows are often short term and speculative driven by the attempts of foreign investors to diversify their risks and to have instant liquidity so they can be counterproductive as they hinder economic growth through externalities emanated both during the surges and sudden reversals. Foreign bank lending can supplement low levels of domestic credit and enhance investment given the higher activity level and the greater capitalization of foreign banks, De Haas and Van Lelyveld (2004). Despite the possible positive effects, in the presence of moral hazard problems, the buildup of short term debt can cause crisis, Rodrik and Velasco (1999) since the ratio of short term debts to reserves is a robust predictor of financial crisis.

The global economy is passing through a phase of uncertainties after the outbreak of economic slowdown from US in last quarter of 2007. The economy and economic development of a nation largely depends on the efficient and effective financial system of that nation which acts as its nerve system. With the inception of globalization, financial markets have become more important now a days. A developed stock market has become very crucial to national economic growth by providing additional channel along with banks and other financial institutions, for encouraging and thus mobilizing domestic savings. It also ensures improvements in the productivity of investment through market allocation of capital and increases managerial discipline through the market for corporate control. A study by World Institute for Development Economic Research (WIDER, 1990) argued that the developing countries should liberalize their financial markets in order to attract foreign portfolio equity flow. The Indian government opened the gates for foreign individual investors to invest directly into Indian stock markets accordingly. There is no doubt that India as a preferred investment destination is gaining more and more acceptance with each passing day. India is now seeing inflows from all corners of the globe, be it global macro funds, hedge funds or exchange-traded funds. The European Union's Institute for Security Studies (EUISS) ranking India as the third most powerful country in the world after the US and China and the fourth most powerful bloc after the US, China and the European Union.

Chakraborty (2001) examined the effects of private foreign capital on some major macroeconomic variables in India using quarterly data for the period 1993-99. The analyses of trends in private foreign capital inflows and some other variables indicate instability. Net inflows of private foreign capital, foreign currency assets, wholesale price index, money supply, real and nominal effective exchange rate and exports follows an I(1) process, current account balance is the only variable that follows I(0) process. Cointegration test shows the presence of long run relationship between a few pair of variables. The Granger causality test shows the unidirectional from private foreign capital to nominal effective exchange rates- both trade based and export based.

Foreign capital inflows have been perceived as an important source of augmenting the saving-investment gap in most resource deficient economies like Nigeria. However, massive capital inflows put pressure on the exchange rate of the domestic country’s currency (Ghosh, 2010, De Paula et al., 2012), thereby reducing the trade competitiveness of the economy. Such decline trade competitiveness could escalate public internal and external debt; deteriorates fiscal deficit and even worsen the current account balance (De Paula, et al., 2012; Rashid & Husain, 2010). Also, massive capital inflows create a strong challenge for economic managers in the conduct of macroeconomic policies. This is because attempts at curbing exchange rate appreciation monetary policy tightening, may even result in additional inflow of foreign capital into the domestic economy (given that higher interest differentials are signals for higher returns) and thereby putting further pressure on the exchange rate. Besides, large-scale sterilised foreign exchange market intervention by the monetary authority to curtail exchange appreciation from large capital inflows may even lose their effect or become increasingly costly as domestic interest rate continues to rise (Caruana, 2011).

2. The value and purchasing power of Latin-American exports markedly increased before or at the start of the capital inflow episodes. As detailed in Table 6.8, real export earnings expanded at a healthy rate in all ten countries during 1972 - 81. Thus, despite heavy bor- rowing to finance current account deficits, ratios of debt to ex- ports remained stable. Between 1975 - 6 and 1977 - 8, the value of Latin-American exports rose by 40 per cent and the purchasing power of exports increased by 13 per cent. Similarly, between 1986-7 and 1988-9 the value of Latin-American exports increased by 29 per cent and the purchasing power of exports rose by 14 per cent. These developments cannot be accounted for by fluctuations in the terms of trade alone. In fact, the terms of trade were rising at the start of the earlier episode, but were decreasing at the start of the recent one; their level during the latter was about 20 per cent lower than at the start of the previous episode. Interestingly, it is precisely at times of improved export performance that Latin-Ameri- can countries borrow more from abroad.

Licensed under Creative Common Page 6 development outcomes with the use of empirical evidence. The primary focus of this study was to determine whether providing aid to developing countries through bilateral or multilateral channels produces a significant influence on such development outcomes as governance and human development indicators, GDP growth, and non-aid investment inflows. The analysis shows that 13 of the 45 studies found multilateral aid to be more effective than bilateral aid; 9 studies found that bilateral aid is more effective than multilateral aid; 13 studies found that there is no statistical difference between the two, and the remaining 10 studies provided mixed conclusions. The findings of this study suggest that the effectiveness of aid is based on such variables as aid donors, recipients, objectives, and time periods. These results are of value not only to the scholarly community that can utilize them to perform further research on the topic, but also to the potential investors interested in maximizing the effectiveness of their investments in developing economies.