Capital Inflows, Macroeconomic Conditions and Growth Convergence in The West African Monetary Zone (WAMZ)

ABSTRACT:Capital inflows have been pinpointed as an important pathway through which the low-income, poor savings and investment as well as widening resource-gap, characterised within the West African sub-region can be filled. Besides the above, the convergence hypothesis has been identified as an important model with which to confirm evidence of club-convergence among countries within the sub-region aimed to supporting or refuting the call for a single-currency or monetary union recently agreed upon by the individual Heads of State. To achieve the above, this study employed Panel Autoregressive Distributed Lagged (PARDL) Technique to examine the threshold effects of capital inflows and macroeconomic conditions, as well as their interactive effects, necessary to spur growth and facilitate convergence among WAMZ countries from 1980 to 2017. The findings revealed that index of macroeconomic conditions and capital inflows are substitutes. Also, thresholds of capital inflows and macroeconomic conditions equivalent to 2.2 percent and 6 percent of GDP respectively are required within each member countries in order to enhance growth and accelerate growth convergence. The study recommends that macroeconomic stability should be ensured, in order to maintain inflows of adequate dosage. In addition, governments of member countries should maintain a threshold of 2.17% and 5.99% of GDP for index of capital inflows (CAPIN) and macroeconomic conditions (MACRO) in order to attract and retain investible funds, reduce external shocks arising from volatility, which in turn enhance growth and convergence. Most significantly, policy-makers should not rely on capital inflows in the short run because it transmits negative signals into the WAMZ economies which militates against growth. Rather, deliberate efforts should be channelled at advancing human capital and trade facilitation through qualitative education and infrastructural financing. In order to extend this study, researchers interested in international macroeconomics can re-examine the capital inflows-macroeconomic conditions relation by adding institutional quality into the models.