An analysis of the impact of international financial flow on key macroeconomic perfomance indicators in SADC countries

Abstract

The Southern African Development Community (SADC) finds itself at a critical juncture, contending with several macroeconomic instabilities that present considerable challenges for the region. Notable among these are elevated unemployment rates, significant disparities in income, high levels of inflation, and a lack of robust economic growth. Within this context, the role of various forms of international financial flows merits close examination for their potential to mitigate poverty within developing economies, facilitate globalization, and ameliorate income inequality. Specifically, remittances, foreign direct investment (FDI), and foreign aid emerge as pivotal elements in fostering economic development. These financial inflows not only play a crucial role in poverty alleviation but also in the advancement of skills, the acceleration of cross-border technological and knowledge transfers, and the development of more sophisticated financial markets. Therefore, an in-depth analysis of these international financial flows reveals their indispensable role in promoting economic development, globalization, and income equalization in the context of the SADC. This study explores the effects of international financial flows on critical economic performance indicators to identify policy solutions to achieve macroeconomic stability in the region. The study contributes to the relatively scarce body of research examining the relationship between financial flows and macroeconomic indicators within the Southern African Development Community (SADC) region by developing four unique models. The theoretical models employed include the Endogenous Growth Model, the Quantity Theory of Money, the Generalized Harris-Todaro Model, and the Cobb-Douglas Production Function. This multifaceted approach represents a novel endeavour, as an extensive analysis had not been undertaken. The study aims to inform policymakers and empirically contribute to the identified knowledge gap. Specifically, it investigates the impact of international financial flows, namely remittances, foreign aid, and FDI, on key macroeconomic performance indicators, including economic growth, income inequality, inflation, and unemployment, in selected SADC countries (Angola, Botswana, Democratic Republic of Congo, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Tanzania, and Zambia) over the period from 1995 to 2022. The empirical inquiry utilizes four distinct macroeconomic models grounded in well-established economic theories to achieve the aim. The Economic Growth Model is based on the Endogenous Growth Model, the Inflation Model is rooted in the Quantity Theory of Money, and the income inequality and unemployment models are based on the Generalized Harris-Todaro Model and the Cobb-Douglas Production Function, respectively. An intensive literature review was conducted to identify appropriate financial flow variables for the investigation, ensuring a robust empirical analysis. The study employed the Cross-Sectionally Augmented IPS (CIPS) Unit Root Test to address the dependencies. Additionally, the study utilised the Pedroni's Panel cointegration techniques to examine the long-run relationships among variables. The Panel ARDL Model captures short-term and long-term estimates, providing a comprehensive view of the relationships studied. Finally, the Wald Test for Causality enhances understanding of causal relationships among the variables, contributing to the strength of the findings. The results from the panel ARDL model make several significant contributions to understanding the economic dynamics in the SADC region. The study finds that remittances significantly reduce income inequality, contrary to the anticipated negative impact on unemployment, underlining the need for policies that channel remittances into productive investments. Secondly, foreign aid positively affects inflation, emphasizing the necessity for effective aid management to avoid inflationary pressures while promoting human capital and infrastructure development to reduce income inequality. Thirdly, the analysis demonstrates that FDI contributes to reducing unemployment but does not significantly influence income inequality, suggesting a need for policies that enhance absorptive capacity and align FDI with broader development goals. Lastly, the study emphasises the complex relationship between financial development and unemployment. It suggests that financial development can stimulate economic growth but may also increase unemployment if not adequately managed. These findings collectively offer a comprehensive understanding of how various financial flows impact economic growth, inflation, income inequality, and unemployment, providing valuable insights for policymakers in the SADC region to design more effective economic policies. This study emphasised the diverse impacts of international financial flows on key macroeconomic indicators in the SADC region. Remittances boost economic growth but increase unemployment; thus, the study recommends that policies encourage productive investments. Foreign aid shows minimal impact on growth but reduces income inequality; therefore, the study recommends effective utilization of foreign aid. FDI stimulates growth and reduces unemployment. Thus, the analysis recommends a business-friendly environment to attract FDI. Financial development enhances growth but may increase income inequality and unemployment, stressing the need for inclusive financial policies. Domestic investment's positive link with growth and unexpected rise in unemployment calls for improved investment climates and structural reforms.