n AfricaGrowth Agenda - Institutions and international capital flows in SSA emerging and frontier market economies

Volume 2012, Issue 10
  • ISSN : 1811-5187


One of the major debates put forward in favour of free capital movement is that it enhances efficiency in the allocation of global resources and leads to improved risk sharing opportunities (Prasad et al., 2005). In recognition of the benefits associated with free capital mobility, most countries have taken steps to promote cross-border capital flows. In spite of the fall in capital flows and reversal of flows in some instances during the 2007-2009 global financial crisis, the general outcome of the initiative to promote cross-border capital flows is a surge in international investment flows over the past two decades (Agenor, 2003; Lane and Milesi-Ferretti, 2003; Morrison and White, 2004; Vo, 2005; and International Monetary Fund, 2011). Nonetheless, Sub-Saharan Africa (SSA) has remained one of the least recipients of the increased global flows. Total foreign private capital inflows and official aid inflows to the sub region amounted to 126 billion United States Dollars, accounting for merely 2 percent of total global capital inflows in 2007 (International Monetary Fund, 2008 & 2011). This observation raises an important question, namely, what should be done to attract a greater share of the increase global flows? In the past two decades, an increasing number of SSA countries have resorted to reduce restrictions on their capital accounts transactions, in addition to several measures to de-regulate activities in their domestic financial markets and create other incentives for the attraction of foreign investments. However, Delechat et al. (2009) suggest that these measures can only be effective if countries develop strong or good quality institutions. In this article, an attempt is made to explore the relationship between institutions and international capital flows as a way of providing an answer to the question on whether good institutions matter for SSA countries. The focus of the article is on political institutions and international capital flows in the 13 SSA emerging and frontier market economies.

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