Foreign Capital Flows and Economic Growth in Sub-Saharan Africa: The Moderating Role of Government Effectiveness

Abstract

This paper empirically analyses the moderating role of government effectiveness in the relationship between foreign capital flows and economic growth in Sub-Saharan Africa. The study analyzed a sample of 766 country-year observations drawn from 32 Sub-Saharan African countries over the period 2000–2023. The study employed the fixed-effects model on panel data to test the hypotheses. The foreign capital flow variables included foreign direct investment, official development aid, remittances, and sovereign debt, while population, trade openness, and human capital were included as control variables. Results based on the fixed-effects model suggest that foreign direct investment and sovereign debt are positively and significantly associated with economic growth. In contrast, official development aid and remittances are negatively and significantly associated with economic growth, suggesting that not all foreign capital flows automatically translate into productive growth outcomes. Furthermore, the regression results confirmed that government effectiveness moderates the relationship between foreign capital flows and economic growth, particularly by strengthening the growth effects of official development aid, remittances, and sovereign debt. The findings provide valuable insights for policymakers, government leaders, investors, development partners, and financial regulators in Sub-Saharan Africa. Strengthening government effectiveness is critical for improving the productive use of foreign capital flows, enhancing public investment efficiency, reducing aid dependency, and ensuring sustainable debt management. This study contributes to the growing literature on foreign capital flows and economic growth by focusing on the moderating role of government effectiveness within the Sub-Saharan African context.