Cross-border bank lending versus FDI in Africa’s 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

Outline

Stylized Facts;

Methodology and data;

Results;

Conclusions and policy recommendations.

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).

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 Africa’s 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.

Methodology & Data

We use GMM Panel Data Techniques:

ititititititit uXcrossbankFDIyy 1

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

itXity

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: UNCTAD’s FDI On-line database, BIS Consolidated Banking Statistics, World Bank’s WDI, IMF’s IFS, Heritage Foundation.

Descriptive StatisticsAll African Countries Africa without SANE countries Non-APPA members APPA members

Mean S.D. Min Max Mean S.D. Min Max Mean S.D. Min Max Mean S.D. Min Max

Y 2.2 5.1 -17.6 58.5 2.2 5.3 -17.6 58.5 2.0 3.6 -17.6 15.0 2.6 7.1 -10.9 58.5

FDI 3.6 6.1 -8.8 54.1 3.7 6.4 -8.8 54.1 2.9 2.8 -3.4 14.0 4.8 9.4 -8.8 54.1

crossbank 15.6 44.8 0.1 375.8 16.3 47.2 0.1 375.8 17.9 55.1 0.1 375.8 11.5 10.9 0.2 64.3

Trade 74.3 35.5 14.8 209.4 76.0 36.9 14.8 209.4 72.9 34.6 23.5 209.4 76.9 37.1 14.8 193.3

Reforms 52.4 11.0 17.4 74.1 52.1 11.5 17.4 74.1 54.9 9.9 27.0 74.1 48.0 11.7 17.4 72.7

Gov 13.6 5.7 2.7 31.2 13.7 5.8 2.7 31.2 14.6 5.6 2.7 31.2 11.8 5.6 2.9 30.1

Inflation 28.8 231.4 -9.9 4145.1   31.3 245.2 -9.9 4145.1   9.0 10.9 -9.6 83.3   63.0 380.2 -9.9 4145.1

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.

Correlation Matrix  Y FDI crossbank Trade Reforms Gov Inflation

Y 1.00

FDI 0.45 1.00

crossbank 0.02 0.07 1.00

Trade 0.21 0.37 0.12 1.00

Reforms 0.13 0.05 0.03 0.15 1.00

Gov -0.02 -0.07 0.10 0.22 0.25 1.00

Inflation -0.15 -0.06 -0.03 -0.09 -0.19 -0.17 1.00

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.

Dynamic Panel (GMM) Results

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.

Conclusions

FDI has a significant and positive impact on Africa’s 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 Africa’s 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.

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%.

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.

Thank youJ.BrambilaMacias@reading.ac.uk