Do capital inflows boost economic growth in developing countries? the Ugandan case

Abstract

The main objective of this study is to assess the impact that capital inflows have on the economic growth of Uganda. A secondary analysis was conducted using the Autoregressive Distributed Lags (ARDL) regression and the Error Correction model on data obtained from the World Bank website from the year 1988 to 2018 to study the effects of capital inflows on economic growth both in the short and long run. The result of the Bounds F cointegration test shows the existence of long run relationship among the variables entered the specified growth model after all the variables have been characterized as stationary after the first difference. The estimated long run model depicts a negative effect of gross fixed capital formation and labour force participation on economic growth. FDI augments growth while official direct assistance and real interest rates were insignificant. In the short run, capital formation and FDI, official direct assistance and exchange rate are significant in explaining economic growth. Thus, the results of the study demand better focus on internal factors specifically investment on attracting and catering for foreign direct investment to foster economic growth as well as instituting policy to encourage domestic savings and hence encourage domestic investment. The direction of gross fixed capital formation, labour force participation and real effective interest rate on growth that is negative raises concern about the utilisation of loans and the cost of borrowing. It is therefore recommendable to revisit loan utilisation to ensure the citizenry are not subjected to paying debt that has no gains at all. There is also need to ensure the country negotiates better loan terms to ensure the yield is registered for all external loans obtained.