Foreign private capital inflows and economic growth in Tanzania: A cointegration and vector error-correction analysis, 1990–2023

Foreign private capital inflows (FPCI) remain a contested driver of economic growth in developing economies, with collected evidence yielding heterogeneous results across contexts and methodologies. This study considers the dynamic relationship between FPCI and economic growth in Tanzania over the period 1990-2023, clearly accounting for institutional quality as a moderating factor. Employing annual time-series data and a comprehensive econometric framework that combines Johansen cointegration analysis, vector error-correction modelling (VECM), vector autoregression (VAR), and Granger causality tests, we address critical methodological challenges, including non-stationarity, endogeneity, and structural breaks. FPCI was measured using data from the Bank for International Settlements and UNCTAD, expressed in constant 2020 prices, while institutional quality was assessed using a composite index from Worldwide Governance Indicators. Our study reveals a statistically significant long-run elasticity of 0.42, indicating that a one per cent increase in FPCI is associated with a 0.42 per cent increase in GDP, with effects materialising over a two-year adjustment period. Short-run dynamics exhibit positive but attenuated effects (elasticity = 0.23) and an error-correction coefficient of -0.56, denoting a moderate adjustment speed toward the long-run equilibrium. Critically, institutional quality significantly moderates this relationship, with each one-standard-deviation improvement in governance indicators increasing the growth impact of FPCI by approximately 0.08 percentage points. Structural break analysis verifies that the 2007 Investment Act reform enhanced the effectiveness of FPCI, with post-reform elasticity (0.46) exceeding pre-reform estimates (0.36). These findings stress the importance of complementary institutional reforms, particularly in property rights protection, regulatory quality, and corruption control, to maximise the developmental benefits of foreign capital inflows. Policy implications emphasise strengthening governance, targeting sector-specific investment, and persistent monitoring of distributional outcomes to ensure fair and long-term growth.