Cross-border bank lending versus FDI in Africa

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Cross-border bank lending versus FDI in Africas
growth story
Jose Brambila Macias Isabella Massa
Victor Murinde
University of Reading Overseas Development
Institute Birmingham Business School
African Economic Conference 2009 Addis
Ababa, 11-13 November 2009
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Outline

• Stylized Facts
• Methodology and data
• Results
• Conclusions and policy recommendations.

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Stylized Facts

• Arguably, FDI and cross-border bank lending are
  the two main types of private capital flows for
  many African countries.
• They are distributed heterogeneously within the
  African region
• - SANE and resource-intensive countries are the
  main FDI recipients
• - in 2007 SANE attracted 45 and APPA countries
  60 of banks total international claims on
  African countries.
• FDI and cross-border bank lending have been
  found to be the main drivers of growth among
  private capital flows in SSA (Brambila Macias and
  Massa, 2009).
• African countries have different degree of trade
  openness.
• Financial sector reforms have been introduced in
  a heterogeneous way and through different paths
  over time in Africa (Murinde, 2009).

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Objectives

• We extend Brambila Macias-Massa paper by
  investigating the relative long-run growth impact
  of FDI and cross-border bank lending in a larger
  sample of African countries.
• We investigate the impact of trade openness and
  financial sector reforms on Africas growth.
• We investigate these relationships by
  distinguishing between four country groups
• 1. All African countries
• 2. All African countries except SANE
• 3. Oil-countries
• 4. Non-oil countries.

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Methodology Data

• We use GMM Panel Data Techniques

• where
• is real per capita income
• include trade openness, government
  consumption, inflation rate, financial sector
  reforms proxy.

• The whole sample includes 43 African countries,
  and has been split into three sub-samples (i)
  all African countries except SANE (ii) APPA
  countries (iii) all countries outside the APPA.
• Time horizon 1995-2007.
• Data sources UNCTADs FDI On-line database, BIS
  Consolidated Banking Statistics, World Banks
  WDI, IMFs IFS, Heritage Foundation.

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Descriptive Statistics

• Real output per capita is higher in APPA
  countries, which also include SANE.
• APPA countries are on average the main FDI
  recipients.
• Cross-border bank lending on average is lower in
  APPA countries than in non-APPA countries.
• Trade openness on average is quite high in the
  whole sample and slightly higher in oil countries
  than in non-oil countries.
• Non-APPA countries score higher in terms of
  financial reforms than APPA countries.
• Government consumption is a bit higher in
  non-APPA countries.
• Inflation on average is high in the whole sample
  and in particular in APPA countries.

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Correlation Matrix

• FDI, international bank lending, trade, reforms
  are positively correlated with economic growth.
• FDI and trade have the highest correlation with
  growth.
• Government consumption and inflation are
  negatively correlated with growth.

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Dynamic Panel (GMM) Results
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Results

• FDI has a significant positive growth impact in
  the whole sample and especially in APPA
  countries.
• Cross-border bank lending has a positive growth
  impact in the whole sample
• But is significant and negative in oil-countries
  where weak institutions (resource curse) leave
  these countries exposed to international banking
  risks in the long-run.
• As expected, inflation has a negative impact on
  growth while trade openness is equally important
  for growth for all African economies.
• Government consumption play a negative role in
  non-oil countries while it has a positive growth
  impact in oil countries. Mixed evidence in the
  whole sample.
• Reforms appear not to play a major role in
  fostering growth in the whole sample and in the
  sample excluding SANE.
• But they play a significant and positive role in
  non-oil countries.

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Conclusions

• FDI has a significant and positive impact on
  Africas growth, especially in SANE and
  oil-countries.
• Cross-border bank lending has a significant
  positive effect on growth of the whole African
  region, but a negative growth impact in oil
  countries.
• FDI has a larger impact than cross-border bank
  lending on Africas growth.
• A slim and efficient government as well as
  financial reforms are drivers of growth in
  non-oil countries but not in oil countries.
• Trade openness has a positive impact on all
  African countries economic growth.

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Policy implications

• Overall, FDI and cross-border bank lending have
  the potential to help the African region to
  overcome the current growth impasse caused by the
  global financial crisis.
• African countries should continue to improve the
  investment environment in order to continue to
  attract FDI.
• Oil countries should make an effort to undertake
  more financial reforms especially in order to
  offset in the long-run the potential negative
  growth impact of cross-border bank lending.
• Adequate fiscal and monetary policies should
  continue to be the rule, rather than the
  exception, in order to keep inflation below the
  international threshold levels of 11-12.

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Ideas for further research

• To extend the current model to include human
  capital.
• To test the robustness of our results in the
  presence of other relevant financial flows for
  Africa such as remittances and aid.
• To assess the growth versus stability effects of
  FDI and international bank lending.

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Thank you J.BrambilaMacias_at_reading.ac.uk