Development Implications of Cross-Border Capital Flows: A Focus on Living Standards in the ECOWAS Sub-Region

Development Implications of Cross-Border Capital Flows: A Focus on Living Standards in the ECOWAS Sub-Region

*Christopher Ifeanyi Ezekwe¹, Ebere Chimezie Onyewuchi¹ & Esther Chimekwa Oriji²

¹Department of Economics, Rivers State University, Port Harcourt, Nigeria

²Department of Economics, Ignatius Ajuru University of Education (IAUE), Port Harcourt

DOI: https://dx.doi.org/10.47772/IJRISS.2025.905000519

Received: 17 May 2025; Accepted: 21 May 2025; Published: 25 June 2025

ABSTRACT

This study provides new insights into the link between cross-border capital flows and living standards in the ECOWAS sub-region with a focus on Ghana, Guinea, Liberia, Nigeria, Sierra Leone, Niger, Mali, Senegal, Cote d’Ivoire and Burkina Faso. This was motivated by the growing recognition of the West African sub-region as an important destination for foreign capital in recent times. Thus, we employed the pooled mean group (PMG) estimator and the Hausman test to analyse panel datasets from the World Bank database and the International Monetary Fund (IMF) Financial Statistics. The findings showed that FDI inflows significantly increased GNI per capita growth, thus creating an opportunity for a long-term improvement in living standards. Similarly, there is evidence of significant improvements in living standards following an increase in remittances and Official Development Assistance (ODA) inflows. This highlights the importance of personal remittances and foreign aid in boosting GNI per capita in the ECOWAS sub-region. However, the results showed that external debt has a negative and significant effect on GNI per capita, thus highlighting the ineffectiveness of external debt as foreign loan inflows have not translated to better living standards in the ECOWAS sub-region. Hence, it is recommended for policymakers in the ECOWAS sub-region to intensify their efforts to mobilise foreign capital by prioritising economic and political stability, as well as fostering good institutions, while ensuring that foreign aid by donor organisations is put to good use for longer-term improvement in living standards.

Keywords:  Cross-border capital, living standards, FDI, remittances, external debt, ODA and ECOWAS

INTRODUCTION

Cross-border capital flows, including foreign direct investment (FDI), portfolio investment, foreign aid, remittances, and external debt, are recognised as vital enablers of economic development, particularly in developing and emerging economies. This underscores their essential roles in shaping the economic trajectories of these nations by providing the necessary resources for investment in infrastructure growth, job creation, innovation, and technological advancement, which can potentially lead to improved living standards. The International Monetary Fund (IMF, 2016) report describes capital flows as an integral aspect of the international monetary system and, consequently, offers both immediate and long-term benefits for the recipient economies, along with some undesired costs. Chude & Chude (2023) assert that capital inflows are more significant to developing economies in achieving economic development because they introduce capital and technology, which are required to use local resources. This explains the role of inward capital mobility in addressing the two problems of capital and technology shortages, as domestic savings fall short in offering the required investment. Similarly, Mowlaei (2018) highlights the importance of foreign capital inflows in driving technology transfer, development, and foreign exchange earnings in recipient economies. This reinforces the importance of international capital in mobilising other economic variables for economic development in the host country.

Rehman & Ahmad (2016) present evidence in favour of the foreign capital inflow hypothesis, arguing that foreign capital inflow enhances the capacity of production, offers more employment opportunities and promotes sustainable development through the efficient use of resources. Besides the benefits of capital inflows as outlined in the extant literature, they pose a threat to economic prosperity in host countries. For instance, large capital inflows tend to undermine recipient economies’ ability to absorb shocks from the outside world [Organisation of Economic Cooperation and Development (OECD), 2011]. They are also believed to exacerbate the risks associated with an overheated domestic economy, encourage reversals in inward capital mobility, and facilitate the creation of boom-and-bust cycles in asset prices and credit. Africa, and in particular the West African sub-region, has been identified as a notable destination of foreign capital. Available statistics show that FDI inflows to West Africa in 2022 increased by 48% to US$14 billion [United Nations Conference on Trade and Development (UNCTAD), 2022]. Nigeria reportedly led the rest of the countries in the sub-region with an FDI inflow of US$4.8 billion, which was predominantly due to the resurgence of investments in oil and gas.

Remittances also represent a greater share of GDP in West African countries. The worth of remittance flows to West Africa for 2019 was US$35.6 billion (World Bank, 2019; United Nations Department of Economic and Social Affairs, Population Division, 2019). Share of remittances in GDP for Ghana, Senegal, Liberia and Nigeria stood at 7.3%, 9.1%, 12.0% and 6.1% respectively (World Bank, 2020).  Despite the significant amount of remittances flowing into West Africa, the region’s economic development is still quite unsatisfactory as it falls below expectations. While the theoretical links between economic development and foreign capital are gaining traction in international economics literature, the mixed evidence from both specific country studies and cross-country comparisons has sparked ongoing debates on the topic, making this study necessary. In this light, this study examines how foreign capital inflows affect living standards in some selected West African countries.

RELATED LITERATURE

Solow (1956) proposed the neoclassical growth theory, highlighting the link between capital inflows and economic development. This theory assumes that capital inflows, including FDI, can increase a country’s capital stock, leading to higher productivity and economic development. The theory further explains that capital inflows can help developing countries fill the gap between savings and investment, indicating that they can invest more in capital without relying solely on domestic savings. Studies such as Slimani, Omri & Abbassi (2024); Githaiga & Kilong (2023); and Ali, Jehan & Sherbaz (2022) have shown that capital inflows are critical for economic development, including human capital formation by funding education, training, and infrastructure that can improve the quality of the labour force. Fundamentally, neoclassical growth theory argues that capital inflows play a central role in fostering economic development by increasing capital accumulation, augmenting the efficiency of technology, and potentially improving human capital.

Furthermore, the law and finance hypothesis proposed by Porta et al. (1998) explains the relationship between the legal and financial systems of a country and its ability to attract capital inflows. The fundamental proposition of this hypothesis is that the legal framework and the efficiency of a country’s financial system significantly impact the flow of investment capital from foreign investors. Thus, countries with strong legal systems that protect property rights, enforce contracts, and provide a stable business environment tend to attract more foreign capital for economic development. Overall, the law and finance hypothesis underscores the importance of a sound legal framework and a well-functioning financial system in attracting capital inflows, fostering economic growth, and promoting sustainable development.

Empirically, the link between capital flows and economic development, including living standards, has received widespread attention in existing literature. Studies such as Aust, Morais & Pinto (2020), Ibhagui (2020), Xu et al. (2021), Nyasha & Odhiambo (2022), Adjei et al. (2020), Bezabh & Kumar (2020), Djokoto et al. (2022), and Dash, Gupta & Mishra (2025) found that capital inflows contributed positively to living standards in recipient economies. However, previous studies established that capital inflows, particularly FDI and portfolio investments, adversely affected per capita income in developing economies (see Ali, Jehan & Sherbaz, 2022; Kounou, 2020; Nam & Ryu, 2023). The conflicting findings regarding the development implications of capital inflows in recipient economies provide the basis for this study. In particular, this study seeks to improve on previous studies by acknowledging the heterogeneous sources of capital inflows in the model setup and focusing on living standards, an integral aspect of human development. 

DATA AND METHODOLOGY

Data Description

In this study, we employed panel data, which integrates the time series and cross-sectional dimensions (selected ECOWAS countries). The time series includes gross national income (GNI) per capita, FDI inflows, remittances inflows, net Official Development Assistance (ODA) inflows and external debt stock. Essentially, the GNI per capita is used to measure living standards within the Human Development Index (HDI) framework. On the other hand, FDI inflows describe the sum of equity capital, reinvestment of earnings and other long-term capital in the balance of payments. It is measured by net inflows from foreign investors divided by GDP. While remittances and net ODA inflows are measured by the personal remittances received as a percentage of GDP and net ODA received as a percentage of GNI, respectively, external debt is measured by external debt stocks as a percentage of GNI. The datasets were obtained from the World Bank World Development Indicators and the International Monetary Fund (IMF) Financial Statistics.

Model Specification

Following previous studies by Adjei et al. (2020), Bezabh & Kumar (2020) and Djokoto et al. (2022), this study adopts a non-linear panel model to capture the development implications of capital inflows, focusing on GNI per capita income as a measure of living standards within the HDI framework. The functional specification of the model is provided as follows:

GNIP = f (FDI, REM, ODA, EXD) (1)

Where: GNIP = gross national income per capita, a measure of living standards in line with the HDI framework, FDI = FDI inflows, REM = Remittances, ODA = net ODA inflows and EXD = external debt stock.

The panel autoregressive distributed lag (PARDL) models specification of the model with p and q lags is provided below:

Where: β_0i = heterogeneous intercept, λ_i = error correction coefficient, β_1i = heterogeneous slope parameters, x_i,t= vector of independent variables, α_ij and φ_ij = short run parameters, p and q = optimal lag orders, Δ = first difference operator, i = cross-sectional units (the selected ECOWAS countries), t = time dimensions (1990-2022), ui = individual effects and vit = remainder disturbance term.

Estimation Strategy

We employed the Mean Group (MG) estimator of Pesaran & Smith (1995) and the Pooled Mean Group (PMG) estimator developed by Pesaran, Shin, & Smith (1999) for estimating the PARDL model. The MG estimator allows short-run coefficients, error correction terms, intercepts, and error variances to be different in the cross-section (Fazli & Abbasi, 2018; Onuoha et al., 2018). On the other hand, the PMG estimator only permits the short-run coefficients and the intercept to differ across groups but maintains equal long-run coefficients. The PMG is a mid-level estimation strategy for heterogeneous panel data. As PMG and MG contain lags of the dependent and independent variables, they provide consistent coefficients even if endogeneity in the models can occur. We also applied descriptive statistics to analyse the distribution of all the variables during the research period. In addition, the panel unit test proposed by Im, Pesaran & Shin (IPS, 2003), and the panel cointegration test credited to Kao (1999) were applied in this study to test for the stationarity of the series and long run relationship among the variables. This is considered critical to control for spurious results and understand the long-term dynamic relationship among the variables. 

RESULTS AND DISCUSSION

Panel Unit Root Test

As outlined previously, the IPS unit root test was applied to determine the stationarity status of each of the variables. The results are presented in Table 1.

Table 1: IPS panel unit root test results

Source:  STATA 17 output

Note: *** p<0.01, ** p<0.05, * p<0.1 denote significant at 1%, 5% and l0% level respectively

The results from the IPS panel unit root test indicated that GNI per capita, FDI, and ODA are stationary at their levels, as the probability values of their test statistics fall below 0.05. This means we can confidently reject the null hypothesis of nonstationarity for each of these variables at the 5% significance level. Thus, these variables are all integrated of order zero, or I(0). Conversely, the test results revealed that other variables, such as remittances inflow and external debt stocks, are not stationary. This conclusion is drawn from the fact that the probability values of their test statistics at levels exceed 0.05. Therefore, we cannot reject the null hypothesis of no unit root for these variables. However, the first difference test results showed that the variables are stationary at first difference. Therefore, the results showed that remittances inflow and external debt stocks are all integrated of order one, I(1). It followed from the IPS unit root test results that the variables are mixed integrated with evidence of I(0) and I(1) series. This finding agrees with the earlier results by Akinwale and Adekunle (2019) and Olorogun (2021), who established that capital inflows and economic development indicators are mixed-integrated.

Panel cointegration test

This study relied on Kao’s (1999) panel cointegration to test for the evidence of a long-run relationship among the variables. The results are presented in Table 2.

Table 2: Summary of Kao’s cointegration test results

Source:  STATA 17 output

Note: *** p<0.01, ** p<0.05, * p<0.1 denote significant at 1%, 5% and l0% level respectively

The Kao test cointegration results showed that the test statistics for all test types are associated with probability values greater than 0.05. This finding led to the rejection of the null hypothesis of no cointegration. In other words, the results indicated that all panels are cointegrated, suggesting that GNI per capita has a long-run relationship with capital inflows during the study period. The long-term relationship between capital inflows and GNI per capita supports the findings of Song et al. (2022) and Dinh-Su & Phuc-Nguyen (2022), who reported evidence of cointegration between foreign capital flows and economic development, including standards of living. This finding is significant as it underscores that changes in capital inflows can be used to predict changes in per capita GNI.

Model Estimation

Based on the mixed-integration evidence from the panel unit root test results and the long-term relationship evidence from Kao’s test for panel cointegration, we estimated the PARDL model to explore both the long-term and short-term impacts of capital inflows on GNI per capita, which is a proxy for standard of living within the HDI framework. The PMG and MG results for each of the models, along with the associated Hausman test results, are presented as follows:

Table 3: PARDL and Hausman test results

Source: Regression output from using STATA 17

Note: *** p<0.01, ** p<0.05, * p<0.1 denote significant at 1%, 5% and l0% level respectively

As noted previously, the Hausman test formed the basis for deciding the appropriate results between MG and PMG. The results show that the Chi-square statistic’s (7.59) probability value (0.4813) is less than 0.05. This finding provides enough empirical evidence for accepting the null hypothesis that PMG is the appropriate result. Therefore, the PMG results for model formed the basis for discussing the implications of of capital inflows on the GNI per capita. As observed from the PMG results, the error correction coefficient (-0.47475) is negative and significant, indicating that the model can adjust from the short to long run at a speed of 47.5%. This suggests that it would take about two years for the distortions to be corrected.

The PMG results showed that FDI has a positive and significant effect on GNI per capita in both the short and long run. This finding indicates that a 0.3569% increase in GNI per capita in the short run is as a result of a 1% increase in FDI inflows. This is similar to the long-run results, which showed that a percent increase in FDI inflows is associated with a 0.4269% increase in GNI per capita. This finding is impressive as it aligns with the a priori expectations, which explains that FDI is fundamental for building income to improve the standard of living of the population. The positive contribution of FDI to GNI per capita is in accordance with the findings of Aust, Morais and Pinto (2020), Ibhagui (2020) and Xu et al. (2021), who found that FDI contributed significantly to income growth in Africa. This finding could be attributed to the fact the FDI provides opportunities for higher wages for the labour force, thereby increasing the income level for improved living standards. It is also a pointer that FDI inflows play an important role in improving the standard of living of the population.

The results also showed that personal remittances have a positive and significant effect on GNI per capita in the long run. This finding highlights the fact that the inflow of remittances by 1% drives the growth of GNI per capita by 0.1823% in the long run. This finding could be attributed to the fact that remittance inflow allows for consumption smoothing among migrants’ households, thereby improving their living standards. The findings also imply that an increase in remittance inflows provides an opportunity to improve the income of the population. It also indicates that remittance inflow enables migrants’ households to undertake economic activities capable of creating opportunities for improvement in their income. The significant positive contribution of remittances to GNI per capita growth agrees with the findings of Nyasha & Odhiambo (2022), Adjei et al. (2020), and Orok, John & Udoka (2020), who found that inflows of remittances are good for economic growth and an increase in household income in Africa.

Similarly, the long-run results further showed that ODA has a positive and significant effect on GNI per capita. This finding conforms to the a priori expectations, which highlights that foreign aid is important for economic development. This finding is significant at the 5% level, indicating that a percentage increase in ODA leads to a 0.2638% increase in GNI per capita. This finding could be attributed to the high dependence of developing countries, including those in the ECOWAS sub-region. Notably, the significant positive contribution of ODA to GNI per capita is consistent with the findings of Tefera & Odhiambo (2022) and Yahyaoui & Bouchoucha (2021), who established that aid inflows to Africa significantly improved the living standards.

The results further showed that external debt has a negative effect on GNI per capita in both the short and long run. This finding is significant at the 5% level. As observed from the estimated parameter, GNI per capita decreases by 0.847%, in the long run, following a percentage increase in external debt. This finding suggests that external debt has not provided the intended and desired opportunity for investment in areas with the potential to enhance the living standards of the population. This finding is contrary to the a priori expectation but highlights the fact that the growth in external debt has not translated to improvement in the living standards of the population. This is consistent with the findings of Manasseh et al. (2022), Didia & Ayokunle (2020) and Edo, Osadolor & Dading (2020), who reported that external debt adversely affected income growth in Africa.

CONCLUSION AND POLICY INSIGHTS

The crux of this study is to provide new insights into the developmental implications of cross- border capital flows in the ECOWAS sub- region, with an emphasis on living standards. This is based on the understanding that capital inflows offer a roadmap for economic development by bridging the savings gap and providing resources for capital formation in developing economies, including Africa. Thus, the primary focus of this study is to ascertain how FDI inflows, remittances, ODA, and external debt stocks have affected GNI per capita growth. The findings showed that FDI inflows significantly improved living standards through a long- term positive contribution to per capita income. Therefore, governments in the ECOWAS sub- region should intensify their efforts to mobilise FDI across various sectors of the economy by prioritising economic and political stability, as well as fostering good institutions to bolster FDI inflows for better living standards. This is not surprising given the extent of FDI inflows and the benefits they offer to recipient countries. The findings also establish that remittance inflows positively and significantly improved living standards during the study period. This indicates that inward remittances are pivotal for long-term growth in GNI per capita. Thus, policymakers, including the West African Monetary Agency (WAMA), must build synergy with central banks to promote the flow of remittances for sustained improvements in living standards. Similarly, there is evidence of significant improvements in living standards following an increase in ODA net inflows, highlighting the importance of foreign aid in boosting GNI per capita. Therefore, governments should ensure that foreign aid from donor organisations is put to good use by investing it in critical economic and social services to enhance living standards in the ECOWAS sub-region. However, the results showed that external debt has a negative and significant effect on GNI per capita, indicating that inflows of foreign loans have not provided the intended opportunities for improvement in the population’s living standards. Overall, this study concludes that capital inflows in the forms of FDI, remittances, and ODA drive economic development through long-term improvements in living standards in the ECOWAS sub-region.

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