CHAPTER 1

b            INTRODUCTION

1.1 Background of t h e Study

A consensus seems to have emerged amongst economists that economic growth is inextricably tied to globalised financial flows (GFF). This GFF - growth nexus is implicitly implicated in the relation showing domestic savings and net capital inflows as the main sources of financing domestic investment and budget deficit*. On exploring the equality relationship between current account balance (CAB) and the capital account balance (CAP) of a country, it becomes obvious that a deficit on the CAB implicitly measures the financial inflows into the country'seconomy and there-fore measures the resources coming into a country to finance investment demand in excess of national savings, i.e. savings - investment gap - 51 gap (Diwivedi, 2006;

T

Okojie, 2005; Roubini and Watchel, 1997). Since globalised financial flows into a country indicate the resources flowing into the country, an inference could be made motivated by the fact that i f GFF equals CAB which also equals CAP, then GFF is an alternative for financing the SI gap when confronted with difficult domestic con-straints". Economic theory based on: Harrod-Domar; Neoclassical; and Endogenous Growth models, recognizes SI gap as being correlated with growth, therefore GFF is intrinsically tied to growth (Hakkio, 1995; Ayhan et al, 2003; Calvo and Reinhart, 1999; and Smith e t al, 2003).

GFF needs the framework of financial globalization (FG) and financial integration (FI).

FG and FI are in principle different concepts. FG is an aggregate concept that refers

f

to rising global linkages through cross - border financial flows. FI on the other hand refers to an individual country'slinkages to international capital markets. Obviously the two concepts are intimately related. For instance, increasing FG is perforce associated with FI on average and together they. imply increasing GFF (Ayhan e t al,

*  Recall that Uses = Sources. Uses are usually for Investment (I) and Budget Deficit (BD), while Sources are domestic Savings (S) and Net Capital Inflow (i.e. net of GFF) Hence: I + RD - S + GFF , 'dDomestic uses >

Domestic Sources, GFF > 0,GFF = I + BD - S

?

* CAD 2  CAP - GFF, but

CAP = CAD + AR = FDI + FPI + ODA but GFF = CAD + AX

i.2 GFF = FDI + FPI t-ODA

-. ~-.-~ . .... . ..  ..-.-.-

. --..-   .

.. . -  -...

Depczrtment yf Economics, Universify ryf                                                                                                               Nigeria Nsukkn                                                                   1 of 108