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FDI to Africa: The role of price stability and currency instability

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  • Reinhart, Carmen
  • Rogoff, Kenneth

Abstract

Africa lags behind other regions in attracting foreign direct investment (FDI). In some circumstances, there are obvious explanations for the absence of FDI, such as a high incidence of war. In this paper, we examine the role that monetary and exchange rate policy may have played in explaining this outcome. Specifically, we document the incidence of inflationary episodes and currency crashes in order to compare countries within the region as well as to make comparisons with other regions. Furthermore, since monetary policy can range from very transparent to very opaque, we assess Africa’s track record with dual and parallel markets. We use the parallel market premia as an indicator of the degree of distortions and extent of transparency. Our findings, suggest that this is a promising line of inquiry because Africa does stand apart from other regions in this measure of transparency. We also discuss some of the fiscal underpinnings of Africa’s bouts with high inflation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13872.

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Date of creation: Aug 2002
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Handle: RePEc:pra:mprapa:13872

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Keywords: parallel market exchange rates inflation capital controls volatility foreign direct investment;

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References

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  1. Stanley Fischer & Franco Modigliani, 1978. "Towards an understanding of the real effects and costs of inflation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 810-833, December.
  2. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  3. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," CEPR Discussion Papers 1772, C.E.P.R. Discussion Papers.
  4. Collier, Paul & Hoeffler, Anke, 2000. "Greed and grievance in civil war," Policy Research Working Paper Series 2355, The World Bank.
  5. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  6. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  7. Reinhart, Carmen & Reinhart, Vincent, 2001. "What hurts most?: G-3 exchange rate or interest rate volatility," MPRA Paper 14098, University Library of Munich, Germany.
  8. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  9. Reinhart, Carmen & Calvo, Guillermo, 1999. "The Consequences and Management of Capital Inflows: Lessons for Sub-Saharan Africa," MPRA Paper 7901, University Library of Munich, Germany.
  10. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
  11. Sebastian Edwards & Jeffrey A. Frankel, 2002. "Preventing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa02-2, October.
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Citations

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Cited by:
  1. Stanley Fischer & Ratna Sahay & Carlos A. Vegh, 2002. "Modern Hyper- and High Inflations," NBER Working Papers 8930, National Bureau of Economic Research, Inc.
  2. Helmut Wagner & Wolfram Berger, 2004. "Globalization, Financial Volatility and Monetary Policy," Economic Change and Restructuring, Springer, vol. 31(2), pages 163-184, June.
  3. Céline Azémar & Rodolphe Desbordes, 2009. "Public Governance, Health and Foreign Direct Investment in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 18(4), pages 667-709, August.
  4. Norbert Funke & Faisal Ahmed & Rabah Arezki, 2005. "The Composition of Capital Flows: Is South Africa Different?," IMF Working Papers 05/40, International Monetary Fund.
  5. Gaston Gelos & Guido Sandleris & Ratna Sahay, 2004. "Sovereign Borrowing by Developing Countries: What Determines Market Access?," IMF Working Papers 04/221, International Monetary Fund.
  6. Dupasquier, Chantal & Osakwe, Patrick N., 2006. "Foreign direct investment in Africa: Performance, challenges, and responsibilities," Journal of Asian Economics, Elsevier, vol. 17(2), pages 241-260, April.
  7. Jean-François HOARAU, 2009. "Investissements Directs Étrangers Et Intégration Régionale : Un État Des Lieux Pour Le Marché Commun D’Afrique De L’Est Et Du Sud," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 29, pages 69-103.
  8. Kaufmann, Daniel, 2003. "Governance Redux: The Empirical Challenge," MPRA Paper 8210, University Library of Munich, Germany.
  9. Faisal Ahmed & Rabah Arezki & Norbert Funke, 2007. "The composition of capital flows to South Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 19(2), pages 275-294.
  10. Udomkerdmongkol, Manop & Morrissey, Oliver, 2008. "Political Regime, Private Investment, and Foreign Direct Investment in Developing Countries," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  11. Pierre van den Boogaerde & Charalambos G. Tsangarides, 2005. "Ten Years After the CFA Franc Devaluation: Progress Toward Regional Integration in the WAEMU," IMF Working Papers 05/145, International Monetary Fund.

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