How does capital flows affect the impact of trade on economic growth in Africa?

The paper empirically examines the extent to which different forms of capital flows (foreign direct investment [FDI], remittances, foreign aid and external debt) affect the impact of trade (exports) on economic growth in Africa. We do this with the aid of an augmented endogenous growth model which we estimate by dynamic system GMM technique with endogeneity-expunging efficiency. First, we find that whilst the direct impact of trade (exports) has been crucial in driving economic growth in Africa in both the short- and long-run, capital flows (FDI, remittances, foreign aid and external debt) do not. Second, our results clearly show that, in both the short- and long-run, inflows of FDI and remittances serve as important channels through which trade (exports) has its largest impact on economic growth while inflows of foreign aid and external debt do not. Following these outcomes, we conclude that policies aimed at attracting FDI and remittances to African countries are what policy reforms should target. Further, our findings suggest that moderating the inflow of external debt and foreign aid could be beneficial to the effect of trade (exports) on economic growth.