HETEROGENEOUS CAPITAL SOURCES AND LONG-TERM GROWTH IN SMALL OPEN ECONOMIES: EVIDENCE FROM ECONOMIC COMMUNITY OF WEST AFRICAN STATES (ECOWAS)
Abstract
The heterogeneity of foreign capital sources has rekindled interest among researchers and policymakers in understanding their growth implications in small open economies. In this context, we provide new and valuable insights into how different sources of foreign capital contribute to economic growth in selected member countries (Ghana, Guinea, Liberia, Nigeria, Sierra Leone, Niger, Mali, Senegal, Cote d'Ivoire and Burkina Faso) of ECOWAS. Specifically, we employed the pooled mean group (PMG) estimator and the Hausman test to analyse panel data from the World Development Indicators of the World Bank and the International Monetary Fund (IMF) Financial Statistics. The findings revealed that FDI inflows are growth-enhancing. This indicates that FDI is a crucial source through which foreign capital amplifies GDP growth, thus reaffirming the need to maximise benefits, minimise risks, and promote sustainable growth. Similarly, the results showed that remittances and ODA inflows significantly bolstered annual GDP growth during the study period. This finding is not surprising given that remittances have been identified as a significant and stable flow of foreign capital, which directly supports households and stimulates consumption, thereby creating opportunities for economic growth. However, the results also showed that external debt hampers growth. The adverse effects of external debt on economic growth could be attributed to the growing challenge of debt servicing and principal repayments alongside poor institutional quality, including systemic corruption. Hence, we recommend that governments must ensure smart and targeted regional integration by fully implementing the ECOWAS protocols on the free flow of capital, including goods and services, to foster sustainable growth. Additionally, Central Banks and the West African Monetary Agency (WAMA) must synergise their efforts to reduce the cost of remittance transfers by providing low-cost and digital remittance channels for rapid and sustained growth in the ECOWAS region.
JEL: F30, F34, F35, F41. F43, O55
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DOI: http://dx.doi.org/10.46827/ejefr.v9i1.1962
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