Foreign Direct Investment and Trade Openness in Sub‐Saharan Economies: A Panel Data Granger Causality Analysis

This study uses annual balanced panel data for 25 sub‐Saharan African economies over the period 1977‐2009 to investigate the Granger causality relationship between trade openness and foreign direct investment (FDI) for the region. We took advantage of recent developments in econometric testing techniques for Granger noncausality heterogeneous panels that takes into consideration the effects of cross section dependence across the units of the panel data set to analyse the trade–FDI nexus in the region. The empirical result of this study reveals a bidirectional causal relationship between trade openness and foreign direct investment in sub‐Saharan economies. Concurrently, African countries should devote more emphasis for the promotion and attraction of FDI in order to expand their productive capacity to produce and export; in this way, by addressing supply‐side constraints, FDI will have positive multiplier effects on trade.     

Agricultural Exports: Important Issues for Sub‐Saharan Africa

Abstract: The central argument of this paper is that African countries stand to benefit more from the goodwill currently being shown by industrialized countries who have committed themselves to further opening up of their markets for commodities from the region. However, more needs to be done by African governments and the international community if these benefits are to trickle down to the African farmers and result in attaining the goal of poverty reduction. This paper identifies the issues that need to be addressed by all parties involved. At the macro level, our results find that the distortion in the macro environment is a major factor hindering African exports. At the micro level, our results show that for farmers to benefit from the opening up of the international market, they would need more access to market information, easier road access to the markets for both their output and inputs, improve their farming techniques by utilizing modern scientific farming methods and inputs, and to increase their productivity. At the international level, our study finds strong results indicating that foreign tariff rate, price support (PNAC) and standards act as a market barrier to African agricultural exports.     

Citizens' support for Economic Reforms in Sub‐Saharan Africa

The objective of this paper is to investigate the factors that influence citizens' support for costly economic reforms in sub‐Saharan Africa. This is relevant for several reasons, but the most obvious perhaps is that economic reform will be difficult if faced by strong resistance from citizens. In this paper, individual data from Round 4 of the Afrobarometer surveys is used to investigate how support for economic reforms is influenced by factors falling under the following broad categories: (i) Economic variables; (ii) group identity and fairness variables; (iii) Institutional and state/government variables; (iv) Demographic and control variables. An individual's trust in the president and the belief that the government manages the economy well are two of the most significant and robust factors. This is in keeping with the results found in Williamson (The Political Economy of Policy Reform, Institute for International Economics, Washington, DC, 1994 ). Another robustly significant variable is satisfaction with how democracy works in the country. Variables related to ethnic identity and community membership also play a significant role in support for costly economic reforms, which is in line with the theories put forward by van de Walle (African Economies and the Politics of Permanent Crisis, 1979–1999. Cambridge University Press, New York, 2001 ). Females are less likely to support economic reforms, while individuals with higher levels of education are more likely to support economic reforms.     

Institutional Foundations for Shared Growth in Sub‐Saharan Africa*

Abstract: The paper examines the dynamically evolving triangular relationships between institutions, growth and inequality in the process of economic development, in order to deepen the understanding of institutional conditions for pro‐poor growth and shared growth. In this context, the paper discusses the institutional conditions found in sub‐Saharan Africa, which may have produced the growth pattern that is unequal and against the poor. The analysis shows that sub‐Saharan African countries require transforming institutions for embarking upon and sustaining a development path which would ensure shared growth in years to come. The paper first evaluates the growth‐inequality‐poverty nexus, as found in the recent literature, which increasingly challenges the trade‐off between growth and equity, as postulated in the traditional theories. Various definitions of pro‐poor growth are discussed and a sharper definition of the concept of ‘shared’ growth is provided. Definitions of institutions are then examined, as well as the triangular inter‐relationships between institutions, inequality and poverty. The paper finally analyses specific institutional conditions found in sub‐Saharan Africa that prevent economies from emerging out of low‐equilibrium poverty traps that are characterized by low economic growth, unequal distribution of income and wealth as well as unequal access to resources and power.     

Internet Adoption and Financial Development in Sub‐Saharan Africa: Evidence from Nigeria and Kenya

Financial development is influenced by the dynamics of multiple factors which have remained insufficiently explored up to date. In view of this, an attempt is made in this paper to investigate the impact of internet adoption on financial development in sub‐Saharan Africa, using Nigeria and Kenya as case studies. The dynamic ordinary least squares and vector error correction mechanism methods were employed in the study which revealed that the internet, complemented by financial openness, exerted a significant positive impact on financial development in the period 2000–16. The null hypothesis which states that the internet does not encourage financial development is therefore rejected. It follows that the level of financial development in both countries, and indeed most countries in sub‐Saharan Africa, could be enhanced by adopting appropriate policies that encourage more inclusive use of the internet. The policy recommendations of this study therefore include (i) relaxing the stringent requirements for licensing internet operators in order to make more services available for financial transactions, (ii) integrating internet technology into the national infrastructure framework in order to sustain its application, (iii) fostering local skills and expertise that will be maintaining internet infrastructure and (iv) providing a legal framework that protects personal information and ensures responsible usage of internet.     

Government Spending Patterns and the Real Exchange Rate in Sub‐Saharan Africa

Do government spending patterns and composition influence the behaviour of the real exchange rate in sub‐Saharan Africa (SSA)? First, we present a two‐sector small open economy model which proposes that government spending together with productivity differential leads to real exchange rate appreciation. Then, we take these propositions to SSA data and perform a coordinated empirical analysis. Interestingly, we find empirical support for the propositions in SSA. Finally, we disaggregate government spending into three components—consumption, investment and transfer payments—and check whether the composition of government spending provides any insight into the behaviour of the real exchange rate in SSA. Our results suggest that government composition does influence the real exchange rate in SSA. Specifically, we find that government consumption induces a real appreciation while government investment leads to a real depreciation. Although these findings yield appropriate magnitudes and signed directions, their effects are not always significant.     

Foreign Aid,Governance and Economic Growth in Sub‐Saharan Africa: Does One Cap Fit All?

Sub‐Saharan Africa (SSA) has been receiving foreign aid for many decades; nonetheless, it ranked among the poorest regions in the world. This study revisits the aid effectiveness debate quantitatively by investigating the relationship among foreign aid, governance and economic growth in SSA using more recent data from 1996 to 2012 and testing for heterogeneity in aid recipient countries. Fundamental questions raised in this study are: does aid work the same way in all regions and group of countries in SSA? Do governance and size of aid matter? Employing the system generalized methods of moments (system GMM) technique, results show that foreign aid has an insignificant negative relationship with economic growth in aggregate SSA. However, one cap does not fit all in SSA as heterogeneity across aid recipients has implications for aid effectiveness. Moreover, governance and size of aid complement each other to improve growth in SSA. This study has been able to show quantitatively that a general policy for countries in SSA is not good enough for aid effectiveness; donors should increase the size of aid, and governance in recipient countries must improve. In conclusion, heterogeneity, governance and size of aid matter for aid effectiveness in SSA.     

The External Debt‐Servicing Constraint and Public‐Expenditure Composition in Sub‐Saharan Africa

Abstract: In the light of the current global financial and economic crises, how would governments in sub‐Saharan Africa (SSA) allocate their budgets across sectors in response to a binding debt‐servicing constraint? Within a framework of public‐expenditure choice, the present paper estimates constraint‐consistent debt‐service ratios and employs them in a Seemingly Unrelated Regression involving a five‐year panel for up to 35 African countries over 1975–94, a period preceding the Highly Indebted Poor Countries (HIPC) initiatives. While observed debt service is found to be a poor predictor of expenditure allocation, constraining debt servicing shifts spending away from the social sector, with similar impacts on education and health. The implied partial elasticity of the sector's expenditure share with respect to debt is estimated at 1.5, the highest responsiveness by far among all the explanatory variables considered, including external aid. Thus, if the social sector is to be protected, sufficient debt relief for SSA countries should be pursued.     

Capital Inflows and Exports Diversification in Sub‐Saharan Africa during the MDGs Era

This paper explores the impact of different forms of capital inflows, including foreign direct investment, foreign aid, portfolio investment, and remittances, on exports diversification in sub‐Saharan Africa during the Millennium Development Goals (MDGs) era. We employ the Generalized Method of Moments (GMM) estimator to deal with the endogeneity issue. Using a sample of 35 countries over the period 2000–15, it shows that the impact of capital inflows on exports diversification depends on the type of capital. We find evidence that foreign aid, foreign direct investment, and remittances have positive effects on exports diversification, while portfolio inflows negatively affect exports diversification. Moreover, we find that the impact of capital inflows on exports diversification differs across the region of destination of the exported products. This study underscores the important role of international cooperation and capital inflows in sub‐Saharan Africa, and lends support to policies aiming to attract foreign capital.