Challenges in the Era of Globalization - iaabd

Proceedings of the 12th Annual Conference © 2011 IAABD
do not suggest that either trade openness or capital account openness is able to transform the insignificant
effect of FPI into growth.
The significant predictors of economic growth in our empirical modelling are inflation, government
expenditure, savings and the level of infrastructure. We expected that high rates of inflation will
negatively influence economic growth. This is because such high rates of inflation distort financial
markets and make it difficult for economic agents to plan. Also very high rates of inflation suggest that
the fiscal and monetary authorities are facing challenges managing an economy. Therefore everything
being equal, countries with higher rates of inflation should experience lower growth indicating a negative
relationship between inflation and economic growth. However, results from our empirical estimations
seem to suggest otherwise. In fact, in all six estimations, inflation is strongly significant and positive at
the one percent level. The results are baffling and are difficult to rationalize. However, we interprete these
results to mean that a threshold may exist beyond which inflation has a negative impact on growth. This
interpretation may be plausible since the mean level of inflation in our sample is 13% which is low for
African countries. As Barro (1995) notes, the evidence that inflation is harmful is not overwhelming.
Barro (1995) stresses that the clear negative influences of inflation on growth come from the experiences
of high inflation.
We find that government expenditure is positive and significant in explaining economic growth. This is
contrary to our a priori expectation, as excessive government expenditure can be destabilizing. This is
because such expenditure has to be financed from taxes or by the government borrowing from the
financial markets. Excessive taxes on productive agents can reduce their incentives to produce and
therefore the level of production is likely to fall. Again, expenditure financed by excessive borrowing by
the government in the financial market can crowd out the private sector. Therefore high levels of
government expenditure are likely to detract from growth. It can also be argued that depending on the
nature of government expenditure, such expenditure can be growth enhancing. Government expenditure
may for example be in defense and other services that are beneficial to economic agents by creating a
conducive environment for economic growth. A threshold may also exist beyond which government
expenditure negatively influences economic growth. We interprete our finding to mean that the private
sector is weak and that government expenditure helps to stimulate economic activity. In most African
countries, the government is one of the biggest spenders and helps drive economic activity by providing
contracts and services that are growth enhancing to the private sector. This likely accounts for the positive
growth effects of government expenditure in our model.
We also find evidence of a positive and significant relationship between savings and economic growth.
Countries with higher savings rates tend to experience higher growth rates. This finding is in line with our
a priori expectations. We observe a positive and significant relationship between infrastructure and
economic growth. This is in line with our a priori expectations. Our results therefore suggest that
countries with better developed infrastructure benefit more by experiencing higher economic growth
rates. Infrastructure, which can be in the form of good roads, railway systems, availability of electricity
and water, and good telecommunications and internet facilities makes it easier and less expensive for
economic activity to take place. Therefore the evidence suggests that infrastructural development spurs
economic growth.
Conclusion
In this paper, we empirically investigated whether FPI has contributed to economic growth on the
continent. After controlling for several standard determinants of economic growth identified in the
literature, our results suggest that FPI has no significant growth impact. Even after interacting FPI with
financial markets, FPI still has no positive growth impact. The results suggest that the amount of FPI
flows have not been sufficient for FPI to independently have a positive impact on growth. The results also
suggest that the link between financial markets especially the stock market and the real economy may be
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