Examining foreign capital inflows and growth in The Gambia: A dual-gap approach

Abstract

Background: Foreign capital is vital for small, low-income countries like The Gambia, where domestic resources are often insufficient to meet development needs. Despite reforms since the 1980s, the country has experienced volatile growth, even amid efforts to attract capital inflows. Aim: This research investigates how foreign capital inflows influence economic growth in The Gambia, emphasising the roles of savings and the foreign exchange gaps. Setting: The study uses the dual-gap framework and annual data from 1980 to 2023. Method: The study applies robust econometric techniques of Dynamic Ordinary Least Squares (DOLS) and Fully Modified Ordinary Least Squares (FMOLS) to analyse the long-term relationship between capital inflows and growth. Results: Findings indicate that capital accumulation, foreign direct investment (FDI), and remittances significantly drive economic growth. FDI shows a stronger impact of 12% compared to remittances’ 7%. Human capital is also positively significant. Conversely, foreign exchange constraints exhibit substantial negative effects, while the negative labour input coefficient suggests inefficiencies in the labour market, likely linked to high informal employment. The savings gap was found to be insignificant. These results support classical growth theory and the capital-augmenting hypothesis. Conclusion: Policy recommendations include attracting more FDI, streamlining remittance channels, addressing labour market inefficiencies, and implementing import substitution and export promotion strategies to ease foreign exchange constraints and foster sustainable economic growth. Contribution: This study offers the first empirical assessment for The Gambia examining foreign capital inflows, growth, and the dual-gap dynamics, particularly relevant and timely in light of the growing reliance on external capital.