Foreign inflows and growth challenges for African countries
Foreign inflows are important sources of income that many African governments use to finance public investments and to support the development of manufacturing or export-oriented service sectors. Yet the recent growth experience of many African economies shows that domestic-oriented industry (construction, utilities) and services have become the largest sectors. Using Ghana and its newly found oil as an example, we analyze the dynamic relationship between increasing foreign inflows and economic growth and structural change by developing a multisector intertemporal general equilibrium model. We find that the sudden increase in petrodollars used to finance either the governments recurrent spending or public investment generates a substantial short-run growth shock consistent with the Dutch disease theory. Opposed short-run effects on the growth of the tradable and nontraded sectors lead the structure of the economy to become more domestic oriented. The creation of an oil fund helps reduce the negative growth and structural effect, while in the longer term, if oil spending does not enhance productivity, growth declines and the GDP share of the nontraded sector further increases. Smart use of oil revenue thus not only involves the creation of an oil fund but also spending inflows on productivity-enhancing investment. Whether public investments can help overcome Dutch disease effects also depends on the growth magnitude of the inflows. At the same level of investment-to-productivity-growth efficiency, public investments take longer to overcome the negative growth effects the higher the growth rate of inflows. This paper further shows that the structural effect of foreign inflows on economic development is a long-term challenge for Africa. The domestic-oriented economic structure can become a persistent phenomenon for countries that continue to receive foreign inflows in the form of petrodollars or in any other form.
|Date of creation:||2010|
|Contact details of provider:|| Postal: 1201 Eye Street, NW, Washington, DC 20005-3915|
Web page: http://www.ifpri.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Diao, Xinshen & Somwaru, Agapi, 2000. "An Inquiry on General Equilibrium Effects of MERCOSUR--An Intertemporal World Model," Journal of Policy Modeling, Elsevier, vol. 22(5), pages 557-588, September.
- Xavier Sala-i-Martin & Arvind Subramanian, 2013.
"Addressing the Natural Resource Curse: An Illustration from Nigeria,"
Journal of African Economies,
Centre for the Study of African Economies (CSAE), vol. 22(4), pages 570-615, August.
- Xavier Sala-i-Martín & Arvind Subramanian, 2003. "Addressing the natural resource curse: An illustration from Nigeria," Economics Working Papers 685, Department of Economics and Business, Universitat Pompeu Fabra.
- Arvind Subramanian & Xavier Sala-i-Martin, 2003. "Addressing the Natural Resource Curse; An Illustration From Nigeria," IMF Working Papers 03/139, International Monetary Fund.
- Xavier Sala-i-Martin & Arvind Subramanian, 2003. "Addressing the Natural Resource Curse: An Illustration from Nigeria," NBER Working Papers 9804, National Bureau of Economic Research, Inc.
- Agénor, Pierre-Richard & Bayraktar, Nihal & El Aynaoui, Karim, 2008. "Roads out of poverty? Assessing the links between aid, public investment, growth, and poverty reduction," Journal of Development Economics, Elsevier, vol. 86(2), pages 277-295, June.
- Pierre Richard AGÉNOR & Nihal BAYRAKTAR & Karim EL AYNAOUI, "undated". "Roads out of Poverty? Assessing the Link between Aid, Public Investment, Growth and Poverty Reduction," EcoMod2004 330600003, EcoMod.
- Agenor, Pierre-Richard & Bayraktar, Nihal & El Aynaoui, Karim, 2005. "Roads out of poverty? assessing the links between aid, public investment, growth, and poverty reduction," Policy Research Working Paper Series 3490, The World Bank.
- Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 38(3), pages 265-296, April.
- Lawrence H. Goulder & Lawrence H. Summers, 1987. "Tax Policy, Asset Prices, and Growth: A General Equilibrium Analysis," NBER Working Papers 2128, National Bureau of Economic Research, Inc.
- Jeffrey D. Sachs & Andrew M. Warner, 1995. "Natural Resource Abundance and Economic Growth," NBER Working Papers 5398, National Bureau of Economic Research, Inc.
- Sachs, J-D & Warner, A-M, 1995. "Natural Resource Abundance and Economic Growth," Papers 517a, Harvard - Institute for International Development.
- Claudio Bravo-Ortega & Jose De Gregorio, "undated". "The Relative Richness of the Poor? Natural Resources, Human Capital and Economic Growth," Working Papers Central Bank of Chile 139, Central Bank of Chile.
- Bravo-Ortega, Claudio & de Gregorio, Jose, 2005. "The relative richness of the poor? natural resources, human capital, and economic growth," Policy Research Working Paper Series 3484, The World Bank.
- Sachs, Jeffrey D. & Warner, Andrew M., 1999. "The big push, natural resource booms and growth," Journal of Development Economics, Elsevier, vol. 59(1), pages 43-76, June.
- Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor & Zoega, Gylfi, 1997. "A Mixed Blessing: Natural Resources and Economic Growth," CEPR Discussion Papers 1668, C.E.P.R. Discussion Papers.
- Paul Collier & Benedikt Goderis, 2007. "Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum," CSAE Working Paper Series 2007-15, Centre for the Study of African Economies, University of Oxford.
- Collier, Paul & Goderis, Benedikt, 2008. "Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum," MPRA Paper 17315, University Library of Munich, Germany.
- Michael A. Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting chickens when they hatch: The short-term effect of aid on growth," International Finance 0407010, EconWPA.
- Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development.
- Go, Delfin S., 1994. "External shocks, adjustment policies and investment in a developing economy: Illustrations from a forward-looking CGE model of the Philippines," Journal of Development Economics, Elsevier, vol. 44(2), pages 229-261, August.
- Diao, Xinshen & Rattsø, Jørn & Stokke, Hildegunn Ekroll, 2002. "International spillovers, productivity growth and openness in Thailand," TMD discussion papers 89, International Food Policy Research Institute (IFPRI).
- Leamer, Edward E. & Maul, Hugo & Rodriguez, Sergio & Schott, Peter K., 1999. "Does natural resource abundance increase Latin American income inequality?," Journal of Development Economics, Elsevier, vol. 59(1), pages 3-42, June.
- Raddatz, Claudio, 2007. "Are external shocks responsible for the instability of output in low-income countries?," Journal of Development Economics, Elsevier, vol. 84(1), pages 155-187, September.
- Raddatz, Claudio, 2005. "Are external shocks responsible for the instability of output in low income countries?," Policy Research Working Paper Series 3680, The World Bank.
- van der Ploeg, Frederick, 2006. "Challenges and Opportunities for Resource Rich Economies," CEPR Discussion Papers 5688, C.E.P.R. Discussion Papers.
- Frederick van der Ploeg, 2008. "Challenges and Opportunities for Resource Rich Economies," OxCarre Working Papers 005, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
- Breisinger, Clemens & Diao, Xinshen, 2008. "Economic transformation in theory and practice: What are the messages for Africa?," IFPRI discussion papers 797, International Food Policy Research Institute (IFPRI). Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:fpr:ifprid:967. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.