Private investment in guinea, does macro-instability matter? A comparative analysis
This paper examines empirically the link between macro-instability and private investment rate in Guinea, in comparison with WAEMU countries . Notwithstanding the caution imposed by data and methodological limitations in interpreting the results, the paper shows that macroeconomic instability is, in general, higher in Guinea than WAEMU countries. Consequently, macroeconomic uncertainties are cause of concern. Using a panel data approach, the findings suggest that the negative effects of relative price volatility (mainly inflation, real effective exchange rates) expected in theory, do not occur when small deviations are combined with competitiveness, resulting from a declining real effective exchange rate. In addition, the positive effect of foreign exchange reserves on the private investment rate supports the view that the availability of foreign exchange reserves is critical in a fixed exchange rate regime as that of WAEMU, as well as in an imperfect floating exchange rate regime as that of Guinea. While the panel data approach shows no evidence of negative impact of macroeconomic uncertainties, it suggests further analysis to explore the robustness of this result. A time series approach is carried out for Guinea, with regard to this purpose. As mentioned above, Guinea registers higher level of macroeconomic instability, compared to WAEMU countries. Using a single error correction model, the counter-intuitive impact of macroeconomic instability variables (measured by the real effective exchange rate, inflation rate and the terms of trade) persists. Given the dominant share of the mining sector in the private investment figures, the findings may be misleading as this sector may be protected from the wrong market signals resulting from the increasing macro-instability. However, capturing such an ‘enclave-effect’ is unfortunately limited by the lack of disaggregated investment data by sector. Finally, the results indicate a negative (indirect) impact of macroeconomic instability (measured by the real lending rate and the flow of credit to the economy) on the private sector investment. They suggest additional efforts to improve the overall macroeconomic context and especially, an in-depth openness of the financial sector, to diversify credit instruments to the private sector in Guinea.
|Date of creation:||04 Feb 2008|
|Date of revision:|
|Publication status:||Published in European Journal of Scientific Research 4.19(2008): pp. 758-783|
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