GLOBAL FINANCIAL CRISES AND CAPITAL FLOWS: EVIDENCE FROM WEST AFRICAN MONETARY ZONE
ABSTRACT
The impact of foreign capital inflows on the economic growth of sub-Saharan Africa, with emphasis on West African Monetary Zone, WAMZ member countries was studied using panel Data Regression Models and Hausman Test. Outcomes of the study revealed that there is positive and significant relationship between capital flows and the level of economic growth in West African Monetary Zone. Foreign direct investment (FDI) as capital flows variable has inverse relationship with the economic growth in the region, while other capital flows variables such as foreign private investment (PPI), overseas development Assistance (ODA) and economic Migrant’s remittance are positively and statistically significant in the long run. In conclusion, most of the investment inflows into sub-Saharan- Africa were based on speculations targeted at the non- priority sectors of the economies and channeled into businesses with short gestation periods. Their impact are only felt in the immediate periods and given that the funds are repatriated after profits are made, they do not make desired impact in the long run. The study, therefore, recommends conscious efforts on the economies of West African Monetary Zone (WAMZ) to enact some investor friendly policies that will encourage, attract more capital inflows to provide a conductive and enabling environment. Basic infrastructure like good roads, electricity supply and security must be seen to be adequate. Again, there is a need to plan down on speculative businesses and to invest in the real sectors of the economies. 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 the need for prudence and accountability in the management of accruals from official capital inflows and transfers. Such movies are expected to be channeled into productive ventures by the governments in power and not for profligacy.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Global financial crisis, also known as the financial crisis of 2007/ 08, is considered by many economists to have been the worst financial crisis since the Great Depression of the 1930s. (Reuters, September 30, 2009. Williams, Carol J. It threatened the collapse of large financial institutions, which was prevented by national governments but stock markets still dropped worldwide. In many areas, the housing market also suffered, resulting in evictions, foreclosure and prolonged unemployment. The crisis played a significant role in the failure of key business, declines in consumer wealth estimated in trillion of U.S dollars, and a downturn in economic activity leading to the 2008 – 2012 global recession and contributing to the European sovereign debt crisis, (Brookings, Larry Elliot 2012). The active phase of the crisis, which manifested as a liquidity crisis can be dated back from August 9, 2007, when BNP Paribas terminated withdrawals from three hedge funds citing ‘a complete evaporation of liquidity’ Larry Elliot (2012).
The bursting of the U.S (United States) housing bubble, which peaked in 2004, caused the values of securities tied to U.S real estate pricing to plummet, damaging financial institutions globally Micheal Simkovic, (2010). The financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing easier access to loans for (lending) borrowers, overvaluation of bundled sub prime mortgages based on the theory of that housing prices would continue to escalate, questionable trading practice on behalf of both buyers and sellers, compensation structures that prioritize short- term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making Micheal Simkovie (2010) regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stocks markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined World Economic Outlook, (2009). Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts Kavaljit Singh (2008).
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