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Is investment in Africa too low or too high : macro and micro evidence

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  • Devarajan, Shantayanan
  • Easterley, William R.
  • Pack, Howard

Abstract

The authors investigate the relationship between weak growth performance and low investment rates in Africa. The cross-country evidence suggests no direct relationship. The positive and significant coefficient on private investment appears to be driven by Botswana's presence in the sample. Allowing for the endogeneity of private investment, controlling for policy, and positing a nonlinear relationship make no difference to the conclusion. Higher investment in Africa would not by itself produce faster GDP growth. Africa's low investment and growth rates seem to be symptoms of underlying factors. To investigate those factors and to correct for some of the problems with cross-country analysis, the authors undertook a case study of manufacturing investment in Tanzania. They tried to identify why output per worker declined while capital per worker increased. Some of the usual suspects--such as shifts from high- to low-productivity subsectors, the presence of state-owned enterprises, or poor polices--did not play a significant role in this decline. Instead, low capacity utilization (possibly the by-product of poor policies) and constraints on absorptive capacity for skill acquisition seem to be critical factors. If Tanzania is not atypical,the low productivity of investment in Africa was the result of a combination of factors that occurred simultaneously, not any single factor. What does this tell us? First, we should be more careful about calling for an investment boom so that Africa can resume growth. Unless some or all of the underlying problems are addressed, the results may be disappointing. We should also be more circumspect about Africa's low savings rate; it may be low because returns to investment were so low. The relatively high level of capital flight from Africa may have been a level rational response to the lack of investment oportunities at home. Second, there is probably no single key to unlocking investment and GDP growth in Africa. All of the factors contributing to low productivity should be addressed simultaneously.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2519.

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Date of creation: 31 Jan 2001
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Handle: RePEc:wbk:wbrwps:2519

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Related research

Keywords: Economic Growth; Achieving Shared Growth; Environmental Economics&Policies; Trade and Regional Integration; Economic Theory&Research;

References

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  1. Dhaneshwar Ghura & Anupam Basu & Evangelos A. Calamitsis, 1999. "Adjustment and Growth in Sub-Saharan Africa," IMF Working Papers 99/51, International Monetary Fund.
  2. Paul Collier & Jan Willem Gunning, 1998. "Explaining African economic performance," Economics Series Working Papers WPS/1997-02.2, University of Oxford, Department of Economics.
  3. Dollar, David & Easterly, William, 1999. "The search for the key : aid, investment, and policies in Africa," Policy Research Working Paper Series 2070, The World Bank.
  4. De Long, J Bradford & Summers, Lawrence H, 1991. "Equipment Investment and Economic Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(2), pages 445-502, May.
  5. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, Elsevier, vol. 60(2), pages 423-438, December.
  6. Shantayanan Devarajan & Vinaya Swaroop & Heng-fu Zou, 1996. "The composition of public expenditure and economic growth," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 77, China Economics and Management Academy, Central University of Finance and Economics.
  7. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
  8. Khan, Mohsin S. & Reinhart, Carmen M., 1990. "Private investment and economic growth in developing countries," World Development, Elsevier, Elsevier, vol. 18(1), pages 19-27, January.
  9. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, American Economic Association, vol. 82(4), pages 942-63, September.
  10. Easterly, W & Levine, R, 1996. "Africa's Growth Tragedy : Policies and Ethnic Divisions," Papers, Harvard - Institute for International Development 536, Harvard - Institute for International Development.
  11. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
  12. Dhaneshwar Ghura & Michael T. Hadjimichael, 1996. "Growth in Sub-Saharan Africa," IMF Staff Papers, Palgrave Macmillan, vol. 43(3), pages 605-634, September.
  13. Hoeffler, Anke E, 2002. " The Augmented Solow Model and the African Growth Debate," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(2), pages 135-58, May.
  14. Michael Bruno & William Easterly, 1995. "Inflation Crises and Long-Run Growth," NBER Working Papers 5209, National Bureau of Economic Research, Inc.
  15. Pritchett, Lant, 1996. "Where has all the education gone?," Policy Research Working Paper Series 1581, The World Bank.
  16. Dhaneshwar Ghura & Michael T. Hadjimichael, 1995. "Public Policies and Private Savings and Investment in Sub-Saharan Africa," IMF Working Papers 95/19, International Monetary Fund.
  17. Young, Alwyn, 1995. "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 641-80, August.
  18. Oshikoya, Temitope W, 1994. "Macroeconomic Determinants of Domestic Private Investment in Africa: An Empirical Analysis," Economic Development and Cultural Change, University of Chicago Press, vol. 42(3), pages 573-96, April.
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Citations

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Cited by:
  1. Ludvig Söderling, 2002. "Escaping the Curse of Oil? The Case of Gabon," IMF Working Papers 02/93, International Monetary Fund.
  2. Abu-Ghaida, Dina & Klasen, Stephan, 2004. "The Costs of Missing the Millennium Development Goal on Gender Equity," IZA Discussion Papers 1031, Institute for the Study of Labor (IZA).
  3. Leonce Ndikumana, 2008. "Can macroeconomic policy stimulate private investment in South Africa? New insights from aggregate and manufacturing sector-level evidence," Journal of International Development, John Wiley & Sons, Ltd., vol. 20(7), pages 869-887.
  4. Kraay, Aart & Raddatz, Claudio, 2005. "Poverty traps, aid, and growth," Policy Research Working Paper Series 3631, The World Bank.
  5. Causa, Orsetta & Cohen, Daniel & Soto, Marcelo, 2006. "Lucas and Anti-Lucas Paradoxes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6013, C.E.P.R. Discussion Papers.
  6. Watu Wamae, 2006. "Why Technological Spillovers elude Developing Countries A Dynamic Non-linear Model," DRUID Working Papers, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies 06-02, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
  7. Daniel Cohen; Marcelo Soto, 2004. "Why are poor countries poor?," Econometric Society 2004 Latin American Meetings, Econometric Society 75, Econometric Society.
  8. Recanatini, Francesca & Wallsten, Scott J. & Lixin Colin Xu, 2000. "Surveying surveys and questioning questions - learning from World Bank experience," Policy Research Working Paper Series 2307, The World Bank.
  9. Sebastián Fleitas & Andrés Rius & Carolina Román & Henry Willebald, 2013. "Contract enforcement, investment and growth in Uruguay since 1870," Documentos de Trabajo (working papers) 13-01, Instituto de Economía - IECON.

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