Dynamic Effects of Foreign Aid, Trade Openness and Fdi on Economic Growth for West African Countries

Abstract

ABSTRACT:Several arguments have been raised about the tripartite relationship between capital inflows, trade openness and economic growth; and most especially on their role as economic stimulators. Despite the above, the role of capital inflows in the development process cannot be overemphasized since they ensure enhancement of technology transfer, efficiency and improvement in the quality of factor inputs. As alternative to aids and FDI, many West African countries embraced trade liberalisation policy with the belief that trade openness has the potential of enhancing economic growth by increasing the variety of intermediate inputs as well as the size of the domestic market. It is upon this premise that the current paper examines the individual, interactive and threshold effects of aid, FDI and trade openness on economic growth by employing panel autoregressive distributed lag (PARDL) and mean group (MG) estimation techniques on 14 West African countries using datasets from 1980 through 2018. The PARDL is adopted because of its dynamic nature and ability to obtain both short and long-term effects, while mean group technique records the uniqueness of individual West Africa countries and examine their degrees of sensitivity to regional characteristics. The results revealed that long run relationship was observed and aid, FDI and trade openness positively enhanced output growth. Second, the interactive effect of aid, trade openness and FDI was negative, but strengthens the individual effects in the long run period. Third, an average financial flows threshold of 8.3 percent is required to spur output growth to equilibrium. Fourth, MG estimation affirms that it is only in Senegal that the coefficients of these financial flow variables were sensitive to regional characteristics. These are the major contributions to knowledge. Thus, the paper recommends the need to embrace medium-and long-term policy framework which focuses on channelling funds from aid towards infrastructural and human development in order to accelerate future output growth. More so, regional representatives should concentrate efforts towards shifting their exports from primary to secondary and tertiary products so as to increase the value of trade transactions to members. Lastly, regional macroeconomic policies aimed at improving economic integration and regional sensitivity among members should be considered.