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Economic Report on Africa 2006

Capital Flows and Development Financing in Africa

image of Economic Report on Africa 2006

Capital flows to Africa in the form of aid, remittances and foreign direct investment have increased considerably over the past four years. However, they are unevenly distributed among countries. In addition, capital flows to Africa are highly volatile and unpredictable, increasing macroeconomic uncertainty and undermining government’s ability to design and sustain long-term development plans. The 2006 edition of the Report places capital flows at the centre of the debate on development financing and examines how external capital can help countries accelerate growth and reduce poverty.

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Capital Flows and Factor Markets

Capital flows in the form of FDI, ODA, remittances, and to a much lesser extent, portfolio investments, have important implications for both domestic investment and local labour markets in Africa. Capital flows can stimulate domestic investment and productivity, resulting in job creation in the host country. Causality also runs in the other direction insofar as the characteristics of factor markets, especially labour market conditions, influence the type, the amount and the stability of inflows. In an increasingly competitive global economy, the level of education and skills of the labour force are important determinants of private capital flows.

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