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.









Title page                                                                                                                                i          

Declaration                                                                                                                             ii

Certification                                                                                                                            iii

Dedication                                                                                                                               iv        

Acknowledgements                                                                                                                v

Abstract                                                                                                                                   vi

Table of Contents                                                                                                                   vii                               




1.1       Background of the Study                                                                                            1

1.2       Statement of the Problem                                                                                           4

1.3       Research Question                                                                                                      5

1.4       Objective of the Study                                                                                                5

1.5       Research Hypothesis                                                                                                  6

1.6       Scope of the Study                                                                                                     6

1.7       Justification of the Study                                                                                            6

1.8       Organization of the Study                                                                                          7

References                                                                                                                  9


2.1       Cause of Global Financial Crisis of 2008-2009                                                         10

2.2       Empirical Review “A Critique of Related Empirical Works and

Consequent Research                                                                                                  18

2.3       Methodological Review                                                                                              20

2.4       Implication of the Review for the Current Study                                                       21

References                                                                                                                  22



3.1       Theoretical Framework                                                                                               23

3.2       Methodology                                                                                                              26

3.3       Estimation Technique                                                                                                 26

3.4       Sources and Measurement of Data                                                                             28

3.5       Model Specification                                                                                                    28



4.1       Presentation of Results                                                                                               30

4.2       Discussion of Results                                                                                                 40

4.3       Comparison of Results with Previous Findings                                                         42


5.1       Summary of findings:                                                                                                 44

5.2       Conclusion:                                                                                                                45

5.3       Recommendations                                                                                                      45

5.4       Limitations of the Study                                                                                             46

5.5       Suggestion for Further Research                                                                                46

Biographic                                                                                                                   47









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).

In the U.S, congress passed the American Recovery and Reinvestment Act of 2009; many causes for the financial crisis have been suggested, with varying weight assigned by experts (Ben Bernanke, 2007).The U.S senate’s Levin Coburn Report concluded that the crisis was the result of ‘high risk, complex financial products, undisclosed conflict of interest, the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street. The Financial Crisis Inquiry Commission concluded that the financial crisis was avoidable and was caused by ‘widespread failures in financial regulation and supervision’, dramatic failures of corporate governance and risk management at many systemically important financial institutions, a combination of excessive borrowing, risky investment, and lack of transparency by financial institutions, ill preparation and inconsistent action by government that added to the uncertainty and panic, a systemic breakdown in accountability and ethics, collapsing mortgage-lending standards and the mortgage securitization pipeline, deregulation of over-the-counter derivatives, especially credit default swaps and the failures of credit rating agencies to correctly price risk Kevm Drum (2009).


West African Monetary Zone (WAMZ) was established by the authority of the Heads of States and government of five West African member states, including Nigeria, Ghana, Gambia, Sierra Leone and Guinea in December 2000. The objective was to establish a monetary union, a common central bank and introduce a single currency to be called the ECO. After a decade of being an observer status, Liberia was absorbed as a full fledged member of West African Monetary Zone in 2010. The West African Monetary Institute (WAMI) which would primarily undertake technical preparations for the launch of the monetary union and the establishment of a West African Central Bank (WACB) was established and commenced operations in March 2001.

However, slow progress casts shadow on the possibility of West African Monetary Union; various deadlines have been set for the commencement of the monetary union project in 2003, 2005, 2009, and even January  2015, these dates have been missed already. This is because the six member states of WAMZ are finding it difficult to simultaneously meet all agreed macroeconomic convergence criteria before the project can take off (Onyinye Nwachukwu and Nnanna (2012).

The WAMZ project requires all member states to meet four primary criteria and six secondary macroeconomic convergence criteria as pre-conditions for take off of the common monetary space. The four primary criteria include that each member state must maintain a single digit inflation rate in year, keep fiscal deficit within 5% of GDP, ensure that its central bank’s financing of fiscal deficit does not exceed10% of previous year’s tax revenue, and keep to gross external reserves that cover at least three months of imports (Centre Bank of Nigeria, (CBN) Annual Reports, various years). Also, the six secondary convergence criteria on the hand include, clearance and non-accumulation of arrears, tax revenue that should be at least 20% of GDP, salary mass of not more than 35% of tax revenue, public investment from domestic resources of at least 20%, real deposit interest rate which must not remain positive and nominal exchange rate appreciation or depreciation within a band of 15% of 2006 WAMZ exchange rate. But West African Monetary Institute (WAMI) says that the multilateral surveillance missions it had conducted so far to assess the compliance of the member states shows that members find it difficult to satisfy and sustain their performance on the convergence criteria (Obaseki, (2001) and Onwioduokit (2001).

1.2       Statement of the Problem

The theory of the two-gap model had acknowledged that capital inflow was needed to provide the required growth that would make economic take-off possible in developing countries. Chenery and Strout (1966). This implies that the development of emerging economics is imbedded in their ability to embrace the global production web through capital inflow which brings increase productivity, technology transfer, effective competition and economic growth (Ha-jonahing, 2000).

Hence, over the years, private capital inflow had taken off, driven by a number of domestic and external factors that contributed towards enhancing the region’s (ECOWAS) attractiveness for foreign investors. In April 2000, the WAMZ countries agreed to move toward monetary integration such proposal has been signed to provide much needed exchange rate and price stability in the WAMZ region. Above all, the agenda is expected to stimulate capital flows and  investment that enhances growth and development in the WAMZ countries in spite of the possible benefits of the foreign capital in the host economy, it is worrisome that African sub-region West Africa has not attracted sufficient  foreign capital that will launch them into economic development.

It is therefore important to  understand the underlying factors, which are significant in linked with net capital inflows to guide policy and regional reforms and their effective implementation in the WAMZ region. Especially now that WAMZ nations are taking important steps to improve their investment climate, governance, infrastructures and over all macroeconomic investment (UNECA and AUC, 2011)    

1.3       Research Questions

This study seeks to address the following research questions:

1)      What has been the trend of foreign capital inflows (FCI) in the WAMZ countries over the years?

2)      What is the composition of foreign capital inflows in the WAMZ countries over the years?

3)      Which of the foreign capital inflows (FCI) foster more growth across the WAMZ countries?

1.4       Objective of the Study

Having stated the research problem, the main objective of this study is to determine if capital inflows foster economic growth in Anglophone West Africa specifically, this study intends to find out the following.

i)                   To examine extensively the capital flows across the WAMZ region.

ii)                 To unravel the trend of foreign capital inflows (FCI) in the WAMZ countries over the years.

iii)               To examine the composition of foreign capital inflows in the WAMZ countries over the years.

iv)               To investigate the specific type of foreign capital flows (FCF) that foster more growth in the various WAMZ countries. 

1.5       Research Hypothesis

The hypothesis to be tested is that

Ho:      There is no significant relationship between global crises and foreign capital flows in West African Monetary Zone.  (WAMZ)

H1:      There is no significant relationship between global financial crises and foreign capital flows in West African Monetary Zone.  (WAMZ)

1.6       Scope of the Study

The study is restarted on the trend and composition of international capital inflows as well as its role in the economic growth of the WAMZ. The international flows to be considered are Foreign Direct Investment (FDI), Foreign Private Inflows (FPI), and Official Development Assistance (ODA).

In doing this, my interest is mainly on the WAMZ countries which include, the Gambia, Ghama, Guinea, Liberia, Nigeria and Slerra Jeone. The empirical investigation would be limited to the period between 2001 and 2014.

1.7       Justification of the Study

Foreign capital flows have become one of the most important issues in the international macroeconomic literature (Alfaro et al., 2005; Prasade et al., 2003). And as noted earlier, there is virtually no study on the subject with specific to WDMZ as a regional bloc. From this stand, there is a yawning gap in the literature on the compotation of international capital flows and their implications on the WAMZ economic growth which need to be filed consequently, private capital flows have outstripped official flows as a source of development finance but  the WAMZ nations still attract more the following facts. WAMZ needs to attract substance private capital flows to compensate for the perennial widening defect in the current accounts; secondly, capital flows are needed to accelerate the growth rate of WAMZ economy for the attainment of the Millennium Development Goals (MDGs) and vision 2020 in some WAMZ counties. Thirdly, foreign inflows can increase welfare by enabling households to smooth out their consumption overtime and achieve higher level of consumption (Calvo et al., 1996).

Also, there have been calls at national, regional and international levels to attract private capital to developing countries in general consideration of the aids fatigue and fiscal pressure on industrial/donor countries and the resultant destine in ODA flows (Montul and Sharma 1997). Furthermore, the result of this study will feed in to policy formulation framework of the WAMZ countries under study in order to enhance their attraction and utilization of foreign capital flows. This will subsequently contribute immensely to the achievement of their various international macroeconomic goals.

To other researchers, policy makers, and academic, the result of this make will form a veritable reference material in their own policy making and research efforts.  

1.8       Organization of the Study

The research work consists of five different chapters chapter one is the introductort part, chapter two examines the theoretical review, empirical review, methodological review and implication of the current, while chapter three examines the theoretical framework, model specification, estimation technique and chapter four focuses on results presentation, discussion of results and comparison of results with previous findings and the last chapter examines clearly the summary of  findings conclusions, recommendations, ;imitations of the study and suggestions  for future research.   

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