DOES CAPITAL ACCOUNT LIBERALIZATION PROMOTE ECONOMIC GROWTH IN DEVELOPING COUNTRIES: INVESTIGATING THE NIGERIAN AND SOUTH AFRICAN EXPERIENCE

Abstract

This study examines whether capital account liberalization (CAL) promotes economic growth 
in developing countries, with a specific focus on the experiences of Nigeria and South Africa. 
The motivation stems from mixed empirical evidence on CAL’s growth effects and the need 
to understand why some developing countries gain while others face instability, particularly in 
the context of external financial shocks like the 2008 global financial crisis. The study employs 
a critical review of empirical literature and a descriptive comparative analysis of 
macroeconomic outcomes (FDI, portfolio investment, exchange rates, GDP growth, and 
market capitalization) in Nigeria and South Africa before, during, and after the 2008 crisis, 
using data from World Bank WDI (2022) and CBN statistical bulletins. CAL’s impact on 
growth is neither automatic nor uniform; it is contingent on complementary factors such as 
institutional quality, macroeconomic policy soundness, and regulatory oversight. While 
Nigeria experienced severe macroeconomic disruptions during the 2008 crisis, evidenced by a 
sharp drop in market capitalization (over 100%), portfolio reversal, and sustained GDP 
slowdown, South Africa showed greater resilience due to more developed financial markets 
and a gradual, sequenced approach to liberalization. The study therefore recommends that 
developing countries should adopt a gradual and well sequenced CAL strategy, underpinned 
by strong institutional frameworks, prudent macroeconomic management, and effective 
financial regulation to mitigate risks from capital flow volatility and external shocks.