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Determinants of Growth in Sub-Saharan Africa

Written by: International Monetary Fund

Article Overview: Several underlying factors can affect the rate of output change. Key among these are the rate of investment, increase in the size of the workforce, and changes in economic policies.

Determinants of Growth in Sub-Saharan Africa

Several underlying factors can affect the rate of output change. Key among these are the rate of investment, increase in the size of the workforce, and changes in economic policies. A country's macroeconomic policies will affect its growth performance through their impact on certain economic variables. For example, a high rate of inflation is generally harmful to growth because it raises the cost of borrowing and thus lowers the rate of capital investment; but at low, single-digit levels of inflation, the likelihood of such a trade-off between inflation and growth is minimal. At the same time, highly variable inflation makes it difficult and costly to forecast accurately costs and profits, and hence investors and entrepreneurs may be reluctant to undertake new projects. Likewise, given that financial resources in the form of domestic savings and foreign grants and loans are limited, a larger budget deficit will mean that more of those limited resources must be devoted to financing the budget deficit. Fewer resources will thus be available for the private sector. If the fiscal deficit increases to an unsustainable level, private investors' perception of country risk is likely to become increasingly negative and hurt private investment.

Finally, outward-oriented trade polices are conducive to faster growth because they promote competition, encourage learning-by-doing, improve access to trade opportunities, and raise the efficiency of resource allocation.

The evidence for sub-Saharan Africa suggests that the recent economic recovery was underpinned by a positive economic environment influenced—either directly or indirectly—by improvements in macroeconomic policies and structural reforms. The estimated growth equation indicates that per capita real GDP growth is positively influenced by economic policies that raise the ratio of private investment to GDP, promote human capital development, lower the ratio of the budget deficit to GDP, avoid overvalued exchange rates, and stimulate export volume growth. The key results are the following:



The effect of an increase in the private investment-GDP ratio on economic growth is large and statistically significant; also this effect is larger than that of an increase in the government investment-GDP ratio.

The policy environment matters for growth. Per capita real GDP growth is positively influenced by reductions in the budget deficit-GDP ratio, enhancements in external competitiveness, and expansions of export volume.

The results support the view that countries that implemented IMF-supported programs on a sustained basis were able to achieve faster rates of growth than others. The fact that this effect is significant after controlling for the effects of the macroeconomic policy-related variables suggests that it is most likely capturing the independent effects of structural reforms.

The effect of an increase in human capital is positive, but not robust, when other factors affecting growth are taken into account.

These results suggest that macroeconomic stability, the implementation of structural reforms, and increases in private investment are necessary for boosting growth in sub-Saharan Africa..

Promoting Growth in Sub-Saharan Africa: Learning What Works
Anupam Basu, Evangelos A. Calamitsis, Dhaneshwar Ghura
©2000 International Monetary Fund
August 2000

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Article Tags: budget deficit, capital investment, change key, cost of borrowing, country risk, economic environment, economic policies, economic recovery, economic variables, fiscal deficit, gdp growth, growth performance, macroeconomic policies, polices, private investment, private investors, rate of inflation, real gdp, resource allocation, sub saharan africa



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