Determinants of Economic Growth in Africa

This paper analyzes the impact of foreign direct investment (FDI) on economic growth in sub-Saharan African (SSA) countries for which relevant macroeconomic data is available for the period 2001–2015. To attain this objective it develops a dynamic panel system Generalized Method of Moments (GMM) model to capture the impact of FDI on economic growth. The choice of GMM is not haphazard or without purpose. It is superior to other models in that it takes care of endogeneity problems and alleviates possible biases in estimation. Forty-three SSA countries for which data is available were included in the study. The countries were categorized into ‘resource-rich’ and ‘resource-poor’ on the basis of the IMF (2013) classification using data about natural resource endowments and other factors. Our study found that there is no meaningful difference in the growth of per capita GDP and in the countries’ abilities to attract FDI inflows. Our findings indicate that FDI had a negative and statistically significant effect on the growth rate of per capita GDP in SSA for the period under consideration. However, the own lagged value of the growth rate of per capita GDP, gross capital formation (which is used as a proxy for domestic investment) and exports had a positive and statistically significant effect on the growth rate of per capita income.

Based on a new analytical country classification of African economies as fragile, factor and investment driven economies, we identify the main determinants of FDI inflows to Africa. Using a panel co-integration approach for the period 1996–2012 we find market size, availability of natural resources, openness to international trade, a stable macroeconomic environment, better infrastructure and an effective bureaucracy to have a strong positive impact in attracting FDI to Africa. On the other hand, political and macroeconomic instability and high financial and transfer risks have a negative effect in attracting FDI to the continent. However, the effect of these factors varies significantly across the analytical country classification that we have developed. Among all FDI determinants only government effectiveness and natural resource abundance are important across all countries. This suggests the importance of emphasizing different policies in different countries or country groups. Moreover, our analysis also suggests that the new analytical classification developed in this study can be an important guide for operational and analytical works of continental organizations such as the African Development Bank, the Economic Commission for Africa and the African Union.

The nexus between foreign direct investment and economic growth has been widely debated in recent years. A fundamental challenge to the economies of developing countries in East Africa is how to achieve a sustainable increase in output over time. They have been attracting foreign direct investments to bridge the gaps between the domestically available supplies of savings and investment demands; generating foreign exchange; transferring technology; and enhancing job creation and human capital skills to achieve sustainable economic growth and development. This study examines the impact of foreign direct investment (FDI) on economic growth and its determinants in East African countries. Secondary data for 20 years for 14 Sub-Saharan Africa countries was collected from the World Bank’s World Development Indicator database, the World Governance Indicator and political Risk Services International’s Country Risk Guide database for the study. The study uses the dynamic generalized method of moment estimator for data analysis after conducting all the diagnostic tests. Empirical evidence shows that FDI has a positive and significant effect on economic growth in the region. The pairwise Granger causality test shows that there is unidirectional causality running from economic growth to FDI. However, while attracting FDI for promoting economic growth the countries need to take care of its nature and composition.

This study investigates the relative contribution of foreign direct investment (FDI), net official development aid (ODA) and personal remittances in the economic growth of African countries using the system GMM approach. It uses data from the World Development Indicators’ 2016 dataset spanning the period 1985–2015 for 50 African countries. The study analyzes the effects of these three external factors by categorizing African countries into low and middle-income countries. The system GMM results show that FDI, net ODA received and personal remittances have a positive impact on economic growth in low income African countries. But in middle income African countries FDA, net ODA received and personal remittances are not significant determinants of economic growth. Gross capital formation has a positive and significant effect in both low and middle income African countries. Financial depth, government expenditure on education and population growth have a positive and statically significant effect on economic growth in middle income African countries whereas openness positively and inflation rate negatively affects economic growth in low income African countries. From a policy perspective our findings suggest a need for policies that encourage remittances, foreign aid and FDI for economic growth in low income countries.

This study examines the short and long-run impact of financial development, institutional quality and globalization on economic growth on a sample of 40 Africa countries. It also examines whether the relationships differ across sub-groups of countries namely low-income, lower-middle-income and upper-middle-income over the period 1980–2014. It uses a new technique in macro-econometrics panel estimation to control for dynamic heterogeneity and cross-sectional dependence for an econometric analysis. The findings reveal that the existence of cross-sectional dependence which is non-stationary at their level becomes stationary in their first difference. It also shows the presence of co-integration among the variables showing a long run relationship among the variables. The results from a panel-mean-group model with a correction for common correlated effects show that financial development, institutional quality and globalization have significantly positive effects on long-run economic growth for the entire sample of countries. Further, looking at different income levels the empirical evidence shows that in low-income countries financial development, institutional quality and globalization have a positive impact on long-run economic growth in the entire sample and also in low-income countries. This provides strong evidence that the impact of financial development on economic growth is heterogeneous across income levels. Moreover, the interaction between financial development and institutional quality has a negative and significant effect on economic growth. This implies that either financial development or institutional quality can help boost economic growth.

This study finds the determinants of total factor productivity in sub-Saharan Africa during 2001–2015 for 43 countries for which data was available on a host of supposed determinants on the basis of a priori theoretical and previous empirical findings. The study closely looks at past literature to find out what explains sub-Saharan Africa’s growth slumber and conundrum. It uses a linear dynamic panel data model of the system-GMM to estimate the model’s results. The empirical findings show that the lagged value of TFP, gross capital formation and macroeconomic stability positively and significantly affected TFP while FDI and imports affected TFP negatively but insignificantly. Other variables like FDI and imports with varying signs were also incorporated in the model; however, their individual effect on TFP turned out to be insignificant. Much needs to be done to boost TFP growth which is abysmally poor. An improvement in TFP will put SSA on a trajectory of sustained growth.

This study examines the effect of flow and stock human capital (education and health) on economic growth on the whole African continent with specific focus on low and middle income African countries using dynamic GMM panel data estimation techniques. It uses panel data from 52 African countries from the World Bank’s World Development Indicators (WDI) over the period 1985–2015. The major findings reveal that investments in education and health positively and significantly affect economic growth in all the African countries with health investments in human capital having stronger effects compared to investments in education. Health, which is measured by life expectancy, has positive and statistically significant effects in low income countries while it has no statistically significant impact on economic growth in middle income African countries. In all the African countries the stock of education as human capital has no effects on economic growth. Other control variables like net FDI inflows, openness, inflation and domestic credit to the private sector affect income growth in low income African countries while in middle income countries only inflation and domestic credit significantly affect income growth. The other findings of the study include income growth and domestic credit to the private sector positively and significantly effects investments in health and education. However, inflation rate negatively affects investments in human capital. The policy implications of these findings are that there should be more investments in health and education aspects of human capital as this will help in enhancing economic growth in African countries while controlling inflationary pressures. Further, better financial services for the private sector will also improve economic growth and investments in health and education in Africa. Finally, liberalizing trade could boost economic growth and healthcare investments in low income African countries.

Labour productivity reflects a firm’s ability to generate higher production or value-added. This paper analyses labour productivity and its determinants in the manufacturing and service sectors in Kenya. As the largest economy in East Africa, it is crucial for Kenya to have high labour productivity as it has strong implications for economic growth and welfare. The paper also provides practitioners with a better understanding of the state of labour productivity in the country. Using the World Bank’s Enterprise Survey’s database for 2013, we find that capital intensity and wage significantly and positively affected labour productivity. A higher female share in the labour force reduced labour productivity. We also found that training and education were associated with higher labour productivity. Reliance on technologies such as emails and websites for communication had a positive but insignificant impact on firms’ labour productivity. On the basis of these observations we make a number of recommendations to promote higher productivity of labour.

This study gives empirical evidence on the Balassa effect which represents the coefficient of the productivity growth variable in the relationship between productivity growth and the real exchange rate. A meta-analysis of 45 previous studies shows a large and significant magnitude of the Balassa effect under a random-effects model after correction for publication bias. Ceteris paribus, 78.68 percent of the size of the effect (effect size) of change in productivity growth was directly transmitted to the real exchange rate for countries in the sample studies. The publication bias test does not preclude the existence of an (inflated) effect size. About 63.86 percent of the variations in effect size are accounted for by differences in the sample size (precision), parameters and estimation methods used in the sample studies. The results of our study show that the marginal value of studies on the Balassa hypothesis is significantly different from zero. Therefore, policymakers should be aware of the impact of productivity growth on the real exchange rate while promoting policies of rapid economic growth.

This paper empirically examines the relationship between balance of trade and economic growth in the East African Community’s (EAC) member countries. It investigates this issue in a panel of EAC member countries (Rwanda, Uganda, Kenya, Tanzania and Burundi) for the period 1991–2015. Data on GDP growth, exports, imports, BOT, gross capital formation, FDI, exchange rate and the labor force participation rate was collected from the World Development Indicators (WDI). Different tests were done for the panel unit root (IPS, MW, Breitung and LLC) test, the results of which show that except LFPR which was I(2); the other variables were I(0). The results of the Housman test show that there was no systematic difference between the fixed effects model (FEM) and the random effects model (REM). Further, EXP, LFPR, GCF, FDI and D were positively connected with RGDP in five EAC countries; in short they are the key pillars of the growing economy in the region under study. This means that an increase of 1 percent in EXP, LFPR, GCF, FDI and D leads to an increase in RGDP by 0.302, 3.716, 0.532, 0.0934 and 0.702 respectively. Similarly, an increase of 1 percent in the remaining variables (IMP, BOT, and EXR) which are negatively associated with RGDP, leads to a decrease of 0.367, 0.786 and 5.338 respectively. Researchers have introduced dummy variables for regional economic integration, the results of which show a positive relationship but not a statistically significant one. We did the Pasaran CD and Breusch-Pagan LM tests for cross-sectional dependence which show that there was no cross-sectional dependence across countries.

This paper adopts and explains the application of panel vector autoregressive (PVAR) and spatial panel vector autoregressive (SPVAR) models to investigate the effects of food price volatility and transmission on welfare and efficiency in the East African Community (EAC). Our results show that it takes time for spatial effects to influence prices in the markets; they also show that price volatility and transmission are more predictable in models predicted with spatial effects than in those predicted without spatial effects. The variance decomposition results show that 100 percent variations caused by a one unit shock in the prices of cereals in one market creates strong variations reverberate both in the short-term and long-term in the prices of cereals in other markets across EAC. This paper suggests that on the one hand agricultural policies should focus on ensuring crop yield stability and enhancing regional food distribution systems in order to stabilize food prices and reduce food market inefficiencies across the EAC in particular and ensure and improve regional food access in general. On the other hand, trade policies should be formulated considering the gains of trading with the near-neighboring markets in order to avoid delayed spatial effects on price volatility and transmission.