Energy Infrastructure, Institutions, and Trade Openness: Reassessing the Lucas Paradox in the COMESA Region

Abstract

The Standard neoclassical theory predicts that international capital should flow toward economies where the marginal returns are the highest. However, foreign direct investment (FDI) continues to bypass many capital-scarce developing regions, a contradiction widely referred to as the Lucas Paradox. This study re-examines the paradox in the Common Market for Eastern and Southern Africa (COMESA) by focusing on energy infrastructure reliability as a determinant of risk-adjusted capital return. Using a balanced panel of 21 COMESA economies over the period 2009–2023, the analysis combines country fixed effects, instrumental variable estimation, and a continuous treatment generalised propensity score (CTGPS) framework. Installed electricity capacity is instrumented using exogenous geophysical variations in solar irradiation and wind potentials. The results indicate that expansion in installed capacity is associated with higher FDI inflows. However, the magnitude of this effect depends critically on institutional quality and trade openness. The relationship is nonlinear, with large gains at low-capacity levels and diminishing marginal effects as the energy systems mature. Overall, the findings suggest that international capital responds to credible and reliable returns rather than nominal productivity alone, providing a risk-adjusted resolution of the Lucas Paradox in the COMESA context.