Can Africa's Saving Collapse Be Reversed?

Private saving in Sub-Saharan Africa declined from more than11 percent of disposable income in the 1970s to less than 8percent in the 1980s and only partially recovered (to less than9 percent) in the 1990s. This article analyzes the determinantsof private saving in Sub-Saharan Africa, seeking to explainthe region's dismal performance and identify policies that couldhelp to reverse the region's decline in saving. The analysisshows that in Sub-Saharan Africa causality runs from growthto investment (and perhaps to private saving), whereas a risein the saving rate Granger-causes an increase in investment.Foreign aid Granger-causes a reduction in both saving and investment,and investment also Granger-causes an increase in foreign aid.The empirical analysis of private saving in Sub-Saharan Africaand other regions over 1970–95 suggests that private savingin Africa can be explained by standard behavioral models. Accordingto these models private saving in Africa lags behind that inother regions (most notably, the high performing Asian economies)because of the region's lower per capita income, high young-agedependency ratio, and high dependence on aid. The combined effectsof these factors substantially outweigh Africa's advantage fromits lower public saving and higher government consumption. Finally,analysis of the experiences of Kenya, Zimbabwe, and Botswanaprovides further insight into the saving process in Sub-SaharanAfrica.     

Foreign Aid, the Real Exchange Rate, and Economic Growth in the Aftermath of Civil Wars

Foreign aid, the real exchange rate (RER), and economic growthare three key variables that shape the aftermath of civil warsin many developing countries. Panel estimations drawn from asample of 39 conflict and 44 nonconflict countries between 1970and 2004 indicate that although postconflict countries receivelarger aid flows and exhibit moderate RER overvaluation afterpeace is attained, overvaluation cannot be traced to aid. Yetforeign aid is among the significant determinants of the equilibriumRER. Aid is also an important determinant of economic growth,particularly after peace is reached. Aid exhibits decreasingreturns, however, and interacts negatively with RER overvaluation.RER overvaluation reduces growth, but this effect is amelioratedby financial development. Postconflict policies should thereforeaim to use aid prudently, avoid RER misalignment, and supportfinancial and capital market development to achieve high andstable growth in the aftermath of war and beyond.     

Market access,supplier access,and Africa's manufactured exports: A firm level analysis

Abstract

In a large cross-country sample of manufacturing establishments drawn from 188 cities, average exports per establishments are smaller for African firms than for businesses in other regions. Based on the estimation of firm level exporting equations, we show that this is mainly because, on average, African firms face more adverse economic geography and operate in poorer institutional settings. One part of the effect of geography operates through Africa's lower ‘foreign market access’: African firms are located further away from wealthier or denser potential export markets. A second occurs through the region's lower ‘supplier access’: African firms face steeper input prices, partly because of their physical distance from cheaper foreign suppliers, and partly because domestic substitutes for importable inputs are more expensive. Africa's poorer institutions reduce its manufactured exports directly, as well as indirectly, by lowering foreign market access and supplier access. Both geography and institutions influence average firm level exports significantly more through their effect on the number of exporters than through their impact on how much each exporter sells onto foreign markets.     

External aid: help or hindrance to export orientation in Africa?

The central proposition of this paper is that African countriesshould start thinking through undertaking an orderly transitionfrom the current high dependence on foreign aid for financingeconomic and social development. Aid dependency should be reducednot because the international development community believesit will eventually happen, but because such dependence on foreignaid could substantially impair Africa's export competitivenessand therefore derail the Continent export-oriented developmentstrategies. A combination of further debt relief, reforms ofthe current aid regime and enhanced policy environment shouldallow a managed transition to a mixed menu of official developmentassistance (ODA) and private capital flows. However, the attemptby Africa to increase its share of investments from internationalprivate capital markets should be firmly anchored to the basictenets of an export-based development strategy. To provide thebasis for these policy conclusions, I estimate the relationshipbetween ODA, real exchange rates (RER) and non-traditional exportsfor a panel of 62 developing countries, including 28 from Africa.Unsustainable ODA flows were shown to have caused substantialpartial RER overvaluation in many African and non-African countries.Moreover, exceptionally high aid-dependent African countrieshave either experienced, or are likely to experience, overallRER overvaluation. Conditional on absence of RER overvaluation- a proxy for good policy environment of relevance to exportperformance - a robust Laffer curve-type relationship existsbetween aid and non-traditional exports through the misalignmentof RER relative to its equilibrium. The Laffer curve relationshipjustifies a 'precise' concept of aid dependency, based on theextent to which excessive ODA flows exceeded the threshold beyondwhich more ODA actually hinders rather than helps export expansion.According to this concept, several African countries were characterisedas being 'aid dependent'.     

Postconflict Transitions: An Overview

In the two to five years immediately following end of conflicts,UN peacekeeping operations have succeeded in maintaining peace,while income and consumption growth rates have been higher thannormal and recovery on key education and health indicators hasbeen possible. Aid also has been super-effective in promotingrecovery, not only by financing physical infrastructure butalso by helping in the monetary reconstruction of postconflicteconomies. However, sustaining these short-term gains was metwith two difficult challenges. First, long-term sustainabilityof peace and growth hinges primarily on the ability of postconflictsocieties to develop institutions for the delivery of publicgoods, which, in turn, depends on the capacity of post-conflictelites to overcome an entrenched culture of political fragmentationand form stable national coalitions, beyond their immediateethnic or regional power bases. Second, after catch-up growthruns its course, high levels of aid could lead to overvaluedreal currencies, at a time when growth requires a competitiveexchange rate and economic diversification. Successful peace-buildingwould, therefore, require that these political and economicimperatives of postconflict transitions be accounted for inthe design of UN peacekeeping operations as well as the aidregime.     

Why are there so many civil wars in Africa? Understanding and preventing violent conflict

Contrary to popular belief, Africa's civil wars are not dueto its ethnic and religious diversity. Using recently developedmodels of the overall incidence of civil wars in 161 countriesbetween 1960 and 1999, we draw lessons with special referenceto Africa, showing that the relatively higher incidence of warin Africa is not due to the ethno-linguistic fragmentation ofits countries, but rather to high levels of poverty, failedpolitical institutions and economic dependence on natural resources.We argue that the best and fastest strategy to reduce the incidenceof civil war in Africa and prevent future civil wars is to institutedemocratic reforms that effectively manage the challenges facingAfrica's diverse societies. To promote inter-group cooperationin Africa, specially tailored political governance and economicmanagement institutions are needed, and we advance some hypotheseson the nature of such institutions. We suggest that Africa'sethnic diversity in fact helps - rather than impedes - the emergenceof stable development as it necessitates inter-group bargainingprocesses. These processes can be peaceful if ethnic groupsfeel adequately represented by their national political institutionsand if the economy provides opportunity for productive activity.