Remittances, Foreign Direct Investment and Growth in SADC: A Panel Co-integration Approach

Abstract

The current growth in per capita gross domestic product for countries within Southern Africa Development Community (SADC) has been below the target of 7% as provided by the sustainable development goals. This study uses panel co-integration techniques to establish the presence of non-linearity between long term growth and remittances, the substitutability or complementarity between foreign direct investment (FDI) and remittances as sources of long term growth. Annual data for 12 SADC member states for the period 1970 to 2014 was employed. Findings show that remittances promote long term growth and the connection between the two is nonlinear. Remittances positively affect growth as long as the level of elasticity is at most 1.09% after which the level of growth subsides. The non-linearity connection suggests the need for strong institutions to extend the positive effect of remittances beyond the threshold. The study finds that remittances and FDI flows are complementary in the growth process. The SADC region benefits by putting policies that promote trade and develop financial products that promotes continuous investment by households who are the key recipients of remittances. SADC countries benefit more by increasing reliance on remittances as opposed to FDI flows to spur growth.

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