abundance; fragility, conflict, and violence; and income.<sup>2</sup> We also examine whether the sensitivity of capital flows to global vis-à-vis domestic factors has changed in the post-crisis period. The capital flows data are gross capital inflows, which capture not only the real channels, but also the financial channels of transmission of shocks. Consequently, gross inflows would identify the different channels (real vs. nominal variables) because net and gross inflows have significantly diverged since the mid-1990s (i.e. net flows, a mirror of the current account, are more reactive to real shocks, while gross flows are influenced by both nominal and real variables).

Despite the heterogeneity of economic structures and composition of flows across Sub-Saharan African countries, the empirical analysis provides some major directions for African economic development. These results suggest effective priorities and focus on sustainable development in the region. What policy recommendations would result from the regression analysis for the region? It is important to diversify the economic and export structure to mitigate the output effects of volatility in oil and commodity prices, develop domestic financial markets that provide domestic financial instruments to attract investors, and implement policies that enhance the business environment and create investment opportunities for foreign and domestic investors. According to the empirical evidence, financial openness would attract all types of capital inflows; therefore, a priority should be to develop the domestic financial markets in Sub-Saharan Africa. FDI and foreign aid are the main sources of financing in some countries in the region —especially where public sector participation in the economy is larger than private sector business activity. Therefore, policies that improve the business environment for domestic private sector firms will foster sustained foreign financing in productive activities.

Our main empirical results suggest that the behavior of capital flows across Sub-Saharan African countries is unique: differences in the economic structure of countries vis-à-vis industrial countries may help explain the different transmission channels on the impact of external factors on gross capital inflows. On the other hand, both pull and push factors help explain gross capital inflows to countries across the world and the impacts of these drivers have become much stronger in the 2000s. Greater financial openness has facilitated the entry of gross capital inflows in the 2000s. Trade openness, on the other hand, worked as a complement of capital flows before 1999 and has turned into a substitute from the year 2000 —especially, a substitute of FDI inflows. Macroeconomic policy plays a role in attracting capital inflows. For instance, fiscal discipline promotes greater gross other investments inflows and less flexible exchange rate arrangements (more exchange rate stability) fosters portfolio investments inflows.

Our paper consists of the following sections: Section 2 overviews the trends in gross capital inflows in SubSaharan Africa. Section 3 describes the data and econometric methodology. Section 4 investigates the relationship between capital inflows and the main macroeconomic variables, using mean/standard deviation equality tests and regression analysis. Section 5 concludes.

# **2. Trends in International Financing Flows in Sub-Saharan Africa**

This section overviews the recent trends in gross capital inflows and the structure of financing in SubSaharan Africa. It focuses on the 2000s, when gross and net capital flows started to diverge significantly. The behavior of capital flows in Sub-Saharan Africa has followed a different path from that of other countries. The global financial crisis severely influenced the behavior of global capital inflows. Although the global financial crisis and the European sovereign debt crisis affected Sub-Saharan Africa, the latter

> 2 Some of these regression estimates are not presented in the Appendix; however, they are available upon request.

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