Working Paper 252 - Capital flow surges and economic growth in sub-Saharan Africa: Any role for capital controls?

This study provides explanation for weak linkage between private capital flows and economic growth of the sub-Saharan African region and offers policy recommendations for stronger linkage and growth optimization. Estimation of a simple growth equation shows, in support of stylized facts, that the flows do not significantly affect growth. Further analyses controlling for surge components of these flows and the effects of capital controls provides useful insights. Risk-sharing private capital (foreign direct investment and equity capital) proved beneficial in terms of growth contribution and improved credit supply while risk-apathetic capital (bond) harmed growth and weakened competitiveness. Surges to these flows imposed costs in terms of growth loss, reduced credit supply and poor capital formation. These costs detracted from the benefits and resulted in the weak linkage. Capital controls were more effective at containing surges to risk-sharing capital and when selectively targeted. Financial institutions (national and regional) should be encouraged to attract more of risk-sharing private capital to finance the region while governments should appropriately target controls to optimise benefits from the flows.