Trade, Finance and Development in a Global Context

In Chapter 1, the external finance problems of Africa were discussed. This chapter will focus on providing a theoretical perspective to this analysis. More specifically, the chapter will attempt to identify key analytical elements, which may be used to explain Africa’s external finance problems. With this objective in mind, the theoretical determinants of capital flows to Africa, and the ‘South’, in general, will be identified. The major systemic explanations found to be relevant in explaining Africa’s external finance problems will form the basis of attempts to develop a formal model. The development of such a model will be set out in subsequent chapters. The general approach chosen will be to examine the issue of Africa’s external finance problems across different financial instruments, each of which is assumed to have its own specific features. With these broad objectives in mind, the remainder of this chapter is organized as follows. In section 2.2, international finance theories, which may have relevance for the modelling of Africa, within a North-South framework will be discussed. Section 2.2.1 will examine the determinants of foreign direct investment (FDI) with a view to arriving at an explanation for such flows, which might have relevance for Africa. Section 2.2.2 focuses on theories of bank lending and their relevance for Africa.