This study examines the impact of capital inflows (FDI, ODA and
Remittances) on economic growth in COMESA member countries. Applying System GMM
estimation, the study finds a positive and significant relationship between
capital inflows (except remittances) and GDP per capita growth, supporting the
positive role capital inflows play in bridging the savings and investment gap,
by providing finance for investment. However, remittances do not significantly
influence GDP per capital growth. Remittances contribute positively to GDP per
capita growth only when interacted with a variable for domestic financial
depth. Examining whether capital inflows adversely affect economic
growth, the study finds that except for the remittances whose effect is not significant,
capital inflows (FDI, ODA and total inflows) leads to an appreciation of the
REER, that may be detrimental to growth. The parameter for remittances does not
significantly effect REER, implying that remittances are in most cases used to
smoothen households’ consumptions during macroeconomic shocks and hence are
counter-cyclical in nature. The study recommends, among others, financial
sector reforms that will ensure increased depth of the domestic financial
sector, capable of harnessing and providing efficient vehicles that can direct
remittances for investment.
JEL classification numbers: F15, F21, F24, F35, F43, F45.
Keywords: Capital inflows, Economic Growth, COMESA.