The effectiveness of aid on savings and investment in Sub-Saharan Africa: do volatility and institutional quality matter?

The effectiveness of aid is somewhat subject to its volatility. This study investigates the impact of aid volatility, especially on savings and investment, with a particular focus on the role of institutional quality in 45 Sub-Saharan African (SSA) countries over the period from 1990 to 2013. We used the Generalized Method of Moments (GMM) technique combined with a measure of volatility, namely an averaged data method involving six 4-year sub-periods. Our results suggest that while aid is positively associated with savings and investment, its volatility is harmful to savings and investment. However, when higher quality institutions exist, the volatility of aid has a less negative impact on savings and investment.

The policy implications are diverse; first, donors and SSA aid-dependent countries need to take into account the diversity of shocks to which aid can respond in mitigating its unpredictability. Secondly, SSA countries should be encouraged to establish the conditions for better quality institutions to mitigate the negative effects of the volatility of aid on macroeconomic aggregates such as savings and investment.     

Does Corruption Persist In Sub-Saharan Africa?

Corruption is said to be characterized by persistence. This conclusion is derived from the theoretical literature, although little empirical evidence exists to support it. Using corruption ratings data from the Political Risk Services Group, International Country Risk Guide on 110 countries from 1984 through 2006, I seek to determine whether or not corruption has actually exhibited persistence over this period. The Markov Transition Chain Matrices were used in the empirical analysis. The calculations show that corruption does persist in more than half of the sample. Next I focus on two regions: Sub-Saharan Africa, the Middle East, and North Africa. The analysis shows these regions to be characterized by persistent corruption.

Microfinance institutions’ transparency in Sub-Saharan Africa

This study analyses the impact of the ownership structure and macro-level factors on Microfinance institutions’ (MFIs) transparency in Sub-Saharan Africa (SSA). Using cross-sectional data from 223 MFIs in 11 countries, we find that MFI transparency in SSA is low and highly variable. Our results indicate that larger MFIs and non-governmental organizations (NGOs) are associated with greater transparency. Greater transparency of NGOs is consistent with the need to sustain and attract donor funding. Country-level resources, such as the level of financial sector development, also impact MFI transparency.     

Do remittances improve political institutions? Evidence from Sub-Saharan Africa

Do remittances represent a significant positive determinant of democratic institutions in Sub-Saharan Africa? In this paper, we estimate the effect that remittances have on democratic institutions in Sub-Saharan Africa over the period 1975–2014. Using a 5-year non-overlapping panel sample and controlling for country and time fixed effects, we find that remittances are positively associated with democratic institutions. Our baseline system-GMM estimates indicate that a one standard deviation increase in remittance flows improves democratic institutions by around 0.32 standard deviations. Furthermore, we find that remittances improve democratic institutions by increasing schooling and reducing poverty.     

Does the quality of political institutions affect intra-industry trade within trade blocs? The ASEAN perspective

There has been a renewed resolve for deeper integration and cooperation within ASEAN. Intra-industry trade (IIT) is often viewed as a way of achieving economic as well as political integration. This article tests for the effect that political regime and governance may have on the intensity of IIT. We particularly examine if quality of political institutions which includes corruption and democracy indices as well as economic factors comprising corporate tax rate, regional FDI flow, flexibility of exchange rate regime, size of the market, economic distance affect the intensity of horizontal and vertical IIT. The study finds that control of corruption and good governance both increase the vertical IIT but not the horizontal IIT. The study further finds that intra-economy FDI flow, stable exchange rate regime, market size and proximity positively affect IIT within the trade bloc. However the negative effect of corporate tax rate suggests that if countries were to coordinate their tax policies, they could avoid harmful tax competition and promote IIT across their borders. The findings regarding the effect those economic and political factors have on the intensity of IIT certainly warrants the attention of policy makers and researchers alike.     

Does economic growth benefit the poor? The role of institutions and religions

This paper seeks to explain the difference across countries of the impact of national growth on the growth of the income of the poor. Traditionally, studies attempting to explain such differences investigate only the impact of some additional variables on the income level of the poor. Here, we introduce interaction terms to explain the change in the elasticity of income of the poor to national income. We focus on the role of formal and informal institutions and religions; variables which have rarely been considered in this context. The results show that only formal institutions (i.e., Resistance to corruption) and, to some extent, informal institutions (i.e., Trust all) explain the differences. Religion has no impact. The findings also show that improvements in the Resistance to corruption benefits the extremely poor more than the poor.     

Does deflation affect household spending? The case of the Netherlands

This article investigates the impact of deflation on real private consumption and residential investment by Dutch households during the 1980–2013 period. We estimate theoretically founded consumption and investment equations and show that a fall in the general price level significantly negatively affects both growth in real consumption and residential investment. The impact on residential investment is more delayed, but stronger.     

Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?

This paper aims at studying the sustainability of current accounts in Sub-Saharan Africa and determining whether this sustainability depends on the exchange rate regime. Relying on a formal theoretical framework and recent panel cointegration techniques, our findings show that current accounts have been globally sustainable in Sub-Saharan Africa countries over the 1980–2011 period. However, this sustainability has been lower for countries operating a fixed exchange rate regime or belonging to a monetary union. We also find that the difference in the level of sustainability could be explained by a higher persistence in the current account adjustment of countries operating under rigid exchange rate regimes.     

The quality effect: Does financial liberalization improve the allocation of capital?

We document evidence of a “quality effect” of financial liberalization on allocative efficiency, as measured by dispersion in Tobin's Q across firms. We predict that financial liberalization, by equalizing access to credit, is associated with reduced variation in expected marginal returns. We test this prediction using a new financial liberalization index and firm-level data for five emerging markets: India, Jordan, Korea, Malaysia, and Thailand. We find robust evidence that financial liberalization, rather than financial deepening, is associated with improved allocative efficiency.     

Gender difference in support for Democracy in Sub-Saharan Africa: Do social institutions matter?

Several recent papers have noted gender differences in support for democracy in Africa, but the causes of this difference remain unclear. This article investigates whether the observed gender gap is due to the related gender inequality in social institutions, which affects women's daily life and deprives them of social and economic empowerment inside and outside the home. Using Afrobarometer survey data (rounds 2 [2002–3], 3 [2004–5], and 4 [2008–9]), the study finds that the gender difference in support for democracy is no longer significant once gender discrimination is controlled for in the family code, physical integrity, or civil liberties components of the Social Institutions and Gender Index (SIGI). Interaction terms show that women's support for democracy is only lower in places where gender inequality in these social institutions is particularly large. This study thus provides evidence that women who live in countries with favorable institutions toward women are more supportive of democracy than women who do not.     

Does PPP hold in the transition economies? The case of poland Hungary

This paper uses non-stationarity and cointegration of time series to investigate the validity of long-run purchasing power parity for Poland and Hungary for the period 1981:1-1993:2. Long-run PPP is examined vis-à-vis three countries, the United States, United Kingdom and Germany. Although the nominal exchange rates and relative price ratios between Poland and Hungary and each of the three countries are non-stationaary, they are not cointegrated indicating a rejection of the hypothesis. This conclusion is supported by the real exchange rate, which follows a random walk.     

Does mutual recognition of qualifications stimulate services trade? The case of the European Union

This article analyses the services trade impact of recognition of professional qualifications using a unique database compiled by the European Commission. It observes that there is large variation in the number of regulated professions across the EU. The number of recognitions is small relative to total employment in regulated professions. Nevertheless, a robust positive relationship between services trade and recognition of qualifications is found. Recognition stimulates two-way trade between the source and the host country, suggesting that arms-length exports as well as cross-border outsourcing take place. Recognitions in health and education professions are most strongly related to services trade.     

Did rainfall shocks cause civil conflict in Sub-Saharan Africa? The implications of data revisions

In their seminal paper, Miguel et al. (2004) found that negative rainfall shocks (measured as negative year-on-year rainfall growth) had caused civil conflict in sub-Saharan Africa over the 1981–1999 period. Since then, the rainfall and conflict data they used had undergone multiple revisions. We show that rainfall shocks are no longer statistically significant for civil conflict when the revised data are used. This is true whether we employ a different functional form for rainfall, extend the sample to include more recent observations, use longer lags for rainfall shocks, employ dynamic panel regression, or panel regressions that take into account of cross-sectional dependence. Using rainfall shocks as instruments for growth, we also find that growth is insignificant for civil conflict if the revised data are used. Upon further investigation, we find that updates in the rainfall and conflict data for one or a few countries may alone cause rainfall shocks to lose statistical significance.     

Does competition cause government decentralization? The case of state-owned enterprises

This paper examines the causal effects of competition on governments’ incentives in decentralizing state-owned enterprises (SOEs). By using the shocks to product market competition caused by China's trade liberalization, we find that competition substantially improves SOEs’ decentralization. Furthermore, we also provide evidence of the incentive to exploit local information and roll out an alternative interpretation that government divests itself of SOEs because they become burdensome. Finally, we find that the effect of competition on decentralization is augmented when governments are geographically distant from their SOEs or when SOEs are located in regions characterized by low social trust, high dialect diversity, or heavy pressure for economic growth.     

Does dependence on internal finance help explain the prevailing pattern of manufacturing? The case of the Italian Mezzogiorno

The purpose of the paper is to ascertain a possible relationship between sectorial financial dependence and the regional industrialization pattern in the backward areas of Southern Italy, the so-called Italian Mezzogiorno. The analysis is based on a definition of financial dependence different to that of Rajan-Zingales in that it is determined as the contribution of internal resources to the financing of firm growth and is measured through the estimation of the LPE standard model augmented by the cash flow variable on a large sample of Italian SMEs observed from 2001–2008. The relationship between sectorial measures of financial dependence and composition of manufacturing in Italian Southern regions is then tested; the analysis shows that firms’ shares of the low financial dependence sectors tend to prevail in manufacturing in the Southern regions.     

Do denominations of origin provide useful quality signals? The case of Bordeaux wines

This paper investigates whether the existing Denominations of Origin (DOs) provide useful quality signals for wine consumers. To test our conjecture that the large number of existing DOs is too many for the typical consumer, we investigate the patterns of co-movement among average monthly wholesale prices for red wines from the 11 main DOs in Bordeaux over 16 years, 1999–2014. Our results indicate that consumers substitute among these wines according to the similarity of semantic elements in the names of DOs on the labels, and not according to prices or terroir that could reflect intrinsic quality where the names as such cannot. This finding suggests that the current DOs are too numerous and complex to provide helpful quality signals to consumers. A substantial reduction of the number of DOs might be warranted to better address the broader informational issue in wine markets.     

Does democracy facilitate economic growth or does economic growth facilitate democracy? An empirical study of Sub-Saharan Africa

This paper examines the relationship between democracy and economic growth in 30 Sub-Saharan African countries. As our proxy for democracy we first use the democracy index constructed by Freedom House and then check the sensitivity of our findings using, as an alternative proxy for democracy, the Legislative Index of Electoral Competitiveness (LIEC). We find support for the Lipset hypothesis - in the long run, real GDP Granger causes democracy and an increase in GDP results in an improvement in democracy - in Botswana and Niger with both datasets, for Chad with the Freedom House data only and for Cote d'Ivoire and Gabon with the LIEC data only. Support for the compatibility hypothesis - in the long run democracy Granger causes real income and an increase in democracy has a positive effect on real income - is found for Botswana with the Freedom House data and for Madagascar, Rwanda, South Africa and Swaziland with the LIEC data. Support for the conflict hypothesis - in the long run democracy Granger causes real income and an increase in democracy has a negative effect on real income - is found for Gabon with the Freedom House data and Sierra Leone with the LIEC data.     

Does student employment really impact academic achievement? The case of France

Student employment is usually thought to curb academic achievement. Our research relating to a survey at a French university in 2012 emphasizes the significance of the intensity of student working hours. Allowance for the endogeneity of student employment reinforces the negative effects, particularly for young people working more than 16 hours a week. However, the academic achievement of those working fewer than 8 hours per week seems unaffected. The type of employment also affects the chances of success: students with public sector jobs appear to be less prone to failure, possibly because of more flexible working hours.     

Does institutional quality resolve the Lucas Paradox?

The Lucas Paradox observes that capital flows predominantly to relatively rich countries, contradicting the neoclassical prediction that it should flow to poorer capital-scarce countries. In an influential study, Alfaro, Kalemli-Ozcan, and Volosovych (AKV) argue that cross-country variation in institutional quality can fully explain the Paradox, contending that if institutional quality is included in regression models explaining international capital inflows, a country’s level of economic development is no longer statistically significant. We replicate AKV’s results using their cross-sectional IFS capital flow data. Motivated by the importance of conducting inference in statistically adequate models, we focus on misspecification testing of alternative functional forms of their empirical model of capital flows. We show that their resolution of the Paradox relies on inference in a misspecified model. In models that do not fail basic misspecification tests, even though institutional quality is a significant determinant of capital inflows, a country’s level of economic development also remains a significant predictor. The same conclusions are reached using an extended dataset covering more recent IFS international capital flow data, first-differenced capital stock data and additional controls.     

Does Latin America Have More to Gain From Exchange Rate Liberalization than Sub-Saharan Africa?

An examination of the relationship between exchange rate liberalization and economic growth in selected Latin American and Sub-Saharan African countries reveals evidence of a short-run causal relationship between the two variables in both Latin America and Sub-Saharan Africa. Within each region, exchange rate liberalization causes growth in some countries while others exhibit reverse causality running from growth to exchange rate leads to increased growth and growth induces exchange rate liberalization in most Latin American countries, in the majority of Sub-Saharan African countries studied, exchange rate liberalization reduces growth while growth causes distortions in the exchange rate. Market imperfections, expansionary fiscal and monetary policies under a fixed exchange rate regime, and poor terms of trade are cited as possible explanations for the findings for Sub-Saharan Africa. [F, O]