The impact of capital inflows on economic growth of Ghana: Does quality of institutions matter?

• Published date: 01 February 2022
• Author: Emmanuel Duodu,Samuel Tawiah Baidoo
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2384

ACADEMIC PAPER

The impact of capital inflows on economic growth of Ghana:

Does quality of institutions matter?

Emmanuel Duodu | Samuel Tawiah Baidoo

Department of Economics, Kwame Nkrumah

University of Science and Technology, Kumasi,

Ghana

Correspondence

Emmanuel Duodu, Department of Economics,

Kwame Nkrumah University of Science and

Technology, Kumasi, Ghana.

Email: emmanuelduodu9@gmail.com

The economic growth of most developing countries has been abysmal, and, there-

fore, has attracted the attention of researchers and policy think tanks. The present

study contributes by estimating the impact of different forms of capital inflows on

economic growth with evidence from Ghana. The study further examines the interac-

tion effects of these inflows and quality of institutions on economic growth. The cap-

ital inflows considered in the study are foreign direct investment, remittances,

foreign aid and external debt. Using annual time series data, spanning 1984–2018,

the autoregressive distributed lag model is employed for the analysis. The results

without interaction terms show that remittances have a positive impact on economic

growth, whereas external debt and foreign direct investment impact economic

growth negatively in the long run. Foreign aid exerts an insignificant impact in both

the short and long run. However, the results reveal that external debt significantly

impacts economic growth positively when interacted with quality of institutions vari-

able in the long run. The results further reveal that remittances have a positive impact

on economic growth in the long run when interacted with quality of institutions vari-

able. It is, therefore, concluded that the quality of institutions in Ghana is crucial for

economic growth. Important policy implications aimed at improving economic growth

have been provided based on the findings.

JEL CLASSIFICATION

C22; F20; F24; F35; 040

1|INTRODUCTION

The issue of economic growth is of a major concern to every econ-

omy, as governments, especially those in the developing world, strive

to put measures and strategies in place to ensure that growth is

enhanced and sustained. Given this, governments and stakeholders of

these economies, for which Ghana is no exception, have adopted and

implemented many policies and strategies to stimulate economic

growth. It is a well-known fact that the economic growth of every

nation is determined by either its private sector, government sector or

combination of both (see, for instance, Acheampong & Dana, 2017;

Dana, 2007; Dana & Ratten, 2017; Khan & Kemal, 1996). According

to Dana (2007), promotion of the private sector is key to achieving

economic growth in Africa. It is also reported that most African coun-

tries tend to rely on the public sector for growth, given the weak

private sector in these economies (see: Austin, 2010). Furthermore, it

is documented that the gloomy performance of the private sector in

developing countries, which prevents it from contributing to eco-

nomic growth, is due to lack of adequate investment, which is also

caused by low domestic savings (Baidoo & Akoto, 2019; Baidoo,

Boateng, & Amponsah, 2018; Sakyi, Onyinah, Baidoo, & Ayesu, 2019).

Hussain, Haque, and Igwike (2015) also report that the financial mar-

kets of most developing countries are less developed and this makes

it difficult in terms of raising enough funds to support investment,

which is a prerequisite for economic growth. The inadequate domestic

capital to facilitate investment, and hence growth, explains why gov-

ernments of economies tend to rely on foreign capital for economic

growth and development.

The economic growth of most emerging economies has not been

encouraging and Ghana is not an exception to this phenomenon.

Received: 28 January 2020 Revised: 12 March 2020 Accepted: 10 August 2020

DOI: 10.1002/pa.2384

J Public Affairs. 2022;22:e2384. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of13

https://doi.org/10.1002/pa.2384