Infrastructure Development And External Financing Nexus In Sub-Saharan Africa: Panel VECM Analysis.

Abstract

Research background It is evident that relying solely on domestic financing cannot bridge the infrastructure gap in the Sub-Saharan African (SSA) region. Therefore, exploring alternative sources of financing becomes crucial to complement domestic efforts and address the infrastructure needs effectively. Purpose This study investigates the relationship between infrastructure development and external financing factors (foreign direct investment - FDI, private participation in infrastructure - PPI, and official development assistance - ODA) by considering the short- and long-run equilibrium and their causal direction. Research methodology These objectives are achieved by employing the panel vector error correction mechanism (PVECM), impulse response functions (IRF), variance decomposition analysis (VDCs), and VAR causality on a dataset covering 43 SSA countries from 2000 to 2021. Results The results reveal the presence of feedback causal relationships between infrastructure development and external financing factors, and PVECM results demonstrate that only private participation in infrastructure has a positive influence on infrastructure development both in the long and short-run, while ODA and FDI only influence infrastructure development in the long- run. Novelty The current study contributes to the existing literature by examining the impact of external financing factors on infrastructure development, with a specific focus on SSA, by considering the three major external financing factors (PPI, FDI, and ODA) as the determinants of infrastructure.