Financing Developmetn in Africa

FINANCING DEVELOPMETN IN AFRICA Revised VersionSeptember 2000 . (Paper Prepared for Economic Commission for Africa, Addis Ababa, Ethiopia) . Alemayehu Geda Institute of Social Studies (the Hague) and KIPPRA (Nairobi) . . FINANCING DEVELOPMETN IN AFRICA . . TABLE OF CONTENTS I. An Overview II Recent Economic Performance And Future Challenges: The Implication For Financing Development III Official Development Assistance IV Foreign Direct Investment And Other Private Capital Flows Foreign Direct Investment (FDI) Other Private Capital Flows V Domestic Resource Mobilization VI Issues Of Capital Flight VII Africa’s External Debt VIII The New Financial Architecture And Its Implication IX POLICY IMPLICATIONS APPENDIX I: DATA APPENDIX 2 TECHNICAL NOTE . FINANCING DEVELOPMETN IN AFRICA . I. An Overview This study is concerned with issues of financing development in Africa. The analysis commences by organizing major possible sources of financing development in the continent in to seven sub-sections of the study. First, the paper briefly reviews the recent growth trend and the daunting task of reducing poverty in the years to come. This is done by examining both the growth performance of the continent, the challenges of reducing poverty, as well as how this growth might be financed. The implications for financing (both from internal and external sources), drawn from this analysis, are pursed at length in the rest of the paper. The brief overview of issues of poverty, growth and financing requirements sets the scene for the rest of the paper. That is, once the enormity of the task of reducing poverty and its huge resources implication is drawn, the next stage of the analysis is executed under two broad themes:   What is the nature and source of such finance (ODA, FDI and Other Capital flows, Domestic resource mobilization) and, The financing implication of addressing finance related problems such as issues of Capital flight, External Debt, and the International Financial Architecture. 1. The rest of the study is organized as follows. Section three examines issue of ODA both from theoretical and empirical perspective. Section four deals with foreign direct investment and other capital flows such as portfolio, banks, equity and bonds. Section five examines the role of domestic financing. Section six deals with the issue of capital flight and the implication of its reversal for financing development. In a similar way, section seven examines the issue of debt and the possible effect of addressing it for financing development. The paper concludes by briefly examining the implications of the new (international) financial architecture for developing countries such as those in Africa. Finally, an attempt to draw short to medium term policy and research implications is made. . II Recent Economic Performance And Future Challenges: The Implication For Financing Development 1. In sharp contrast to 1970s and 1980s, the mid-1990s witnessed a growing optimism about Africa’s economic future. Real GDP growth of more than 4 percent, exceeding the rapid population growth, compared to nearly 1 percent growth in the first half of the 1990s, the doubling of the growth of exports, from around 4 percent in the mid 1990s to nearly 8 percent in the second half of the 1990s (See Appendix I), growing emphasis on appropriate policy reforms and the new political discourse of the ‘African renaissance’, associated with political reforms, may partly explains this optimism. 2. Such optimism was not fully embraced by African policy makers, governments and the academics at large, however. This is because the enormity of the challenge facing the continent is apparent from the grim social data they are confronted with. This is in particular true of poverty in the continent. By the end of the 1990s even the macro indicators started to slide down. The recovery in the per capita real GDP growth that started from -2.9 percent in 1992 and picked to 2.6 percent in 1996 has decelerated to 0.4 percent in 1998 (See Table 1.2 in Appendix I). Exports as the share of GDP that rose form 27 percent in 1990 to 30 percent in 1995 started to slide to 27 percent in 1998 (See Table 2.2 in Appendix I). This unhealthy trend is rather vivid when one looks at the social data. 3. According to ECA’s study, which is based on household surveys of 20 countries that constitute 60 percent of the continent’s population and 76 percent of its GDP, the continent is characterized by (a) a high degree of inequality of income (with a Gini coefficient 0.44). The highest inequality is fund in South Africa and Kenya (58 percent) and the lowest in Egypt (32 percent); similarly the bottom 20 percent of the population received only 5 percent of the income (the top 20 percent getting 50 percent); (b) about 44 percent of the population is leaving below the poverty line of $39 per person per month. This incidence being 22 percent and 51 percent in North and Sub-Saharan Africa, respectively (the highest incidence is found in GuineaBissau, 70 percent, and the lowest, 15 percent, in Algeria). In gross terms the average income of the poor for the continent as a whole is found to be only 83 US cents per person per day (this figure being $1.5 for North Africa and 67 US cents for Sub-Saharan Africa). In general the average incidence of poverty for the 32 sample countries is 46.7 percent; the poverty gap being 27.3 percent (ECA 1999). 4. There is noticeable regional variation in the state of poverty. North African countries are in a better shape having an average score of 21.4 percent and 5. 6. 7. 8. 5.5 percent for incidence of poverty and poverty gap, respectively. West African countries follow this, with a corresponding value of 48.6 percent and 18.8 percent, respectively. Eastern Africa countries have registered the third rank with incidence of poverty of 50.7 percent and poverty gap of 18.3 percent. Although the sample from Central Africa has only two countries, it has the most severe state of poverty – a head count ratio of 58 percent with a poverty gap of 29 percent. This is followed by Southern Africa with incidence of 57.5 percent and a poverty gap of 27 percent. Looking the issue in a broader perspective, the main conclusion that can be drawn from evaluation of recent economic performance and sustainability in the continent, based on ECA’s African Economic Report (ECA 1999), is that there is a clear difference between performance and sustainability. The study noted only three African countries (constituting about 6 percent of the population) are found to be good enough to sustain growth and development. Twelve countries (having nearly 25 percent of the population) are also found in the ‘good’ category. Thus, it is reasonable to conclude that African countries in general are not in a good shape in terms of overall performance and, in particular, its sustainability. This underscores the need to conduct an in-depth study of the growth process in the continent so as to understand constraints to growth as well as the sustainability of growth attained. In fact, the second half of the 1990s witnessed a proliferation of what can loosely be termed as ‘growth literature’ that focused on Africa. These studies range from those that attribute the slow growth to geographical and related factors (Bloom and Sachs 1998), as well as prevalence of social tension-cumexternal vulnerability (Rodrik 1998, Easterly and Levin 1997) to micro-based explanation that are blamed to hinder proper market operation by making economic activities risky and costly (Collier and Gunning 1999). The proliferation of this literature, as aptly noted by Azam and others (1999), although does not provide hard and fast rule to revitalized growth, suggests important lessons for the future. After reviewing this literature, Azam and others (1999) stressed the importance of addressing structural problems such as lack of social capital and deficient political institutions. The discussion above clearly shows the enormity of the challenge facing the continent. The relevant question is what would it take to address these challenges, and most importantly, what is its resource implication. In order to answer these questions this paper has followed two approaches. In the first approach, the level of investment is compared with the level of domestic saving to arrive at the trend of the current level of the resource gap (financing requirement) from a macro perspective. In the second part the challenge of reducing poverty is converted in to its growth rate equivalent and the financing needed thereof. This will be based on the scenario drawn by Amoako and Ali (1998). For Sub-Saharan Africa (SSA) excluding S. Africa, the share of investment in GDP has increased from 15.8 percent in 1990 to 18.8 and 19.5 percent in 1995 and 1998, respectively. This figure is relatively high for the North Africa region that had a ratio of 28.2 percent in 1990, 23.1 percent in 1995 and 22.7 percent in 1998. Although these figures are higher than the ones for SSA, they do show a declining trend. (See Tables 2.3 in Appendix I for details). East, Southern and West African regions broadly followed the SSA trend. Although the trend in SSA and the actual ratio of North Africa are good, investment in both regions is way below the level of domestic resources. 9. Gross domestic saving in SSA (excluding South Africa) has declined from 17.4 percent recorded in 1990 to 13.5 percent in 1995 and picked up again to 17.2 percent in 1996 only to decline to 12.6 percent in 1998. The corresponding figures for North Africa are 21.9, 18.1 and 18.9 percent in 1990, 1995 and 1998, respectively. These figures are far below the 30 plus percent domestic saving rate observed in newly industrializing countries of East Asia. What is worrisome in Africa is not only the low level of the absolute figures but also their oscillating and, more often, declining trend (See Tables 2.4 in Appendix I for details). 10. A simple computation of resource gap following the above two paragraph shows that the external finance requirement in SSA (excluding S. Africa), which had been negligible in the early 1990 rose to 5 and 7 percent of GDP in 1995 and 1998, respectively. The Corresponding figure for North Africa stands at 5 and 4 percent in 1995 and 1998, respectively. Taking the GDP of the regions in 1998, the 1998 ratios indicate an annual external resource gaps of around 20 billions of US$ for Africa. Although these figures point to a very high level of dependence on external finance, the needs of Africa are much higher when the continent’s objective of reducing poverty is taken on board (See Tables 2.3 and 2.4 in Appendix I for details). 11. Apart from such simple computation, there had also been various attempts to estimate the resource requirement of the continent. Almost all such studies are based on the typical Harrod-Dommar set up and usually come up with reasonable estimates. Recently, Easterly (1997) has noted various pitfalls of this approach. However, using some regression results of ‘the Easterly type’ for a sample of African countries, Amoako and Ali (1998) argue that still sensible projections can be made using this approach. In the paragraph below we have reported the result of projection that is made by Amoako and Ali (1998). We have used this estimate for various reasons. First, they have attempted to address some of Easterly’s concerns in the African context; second, they have set up the average and the best performance by taking the actual experience of African countries (such as efficiency of capital use in Uganda). Finally, their projection for the period 2000 – 2005 embraces the period under analysis. 12. Amoako and Ali’s (1998) review of the literature on estimates of expected transfers to Africa shows that over the period 1986-92 an annual inflow of US$ 9 billion over and above the previous level of ODA were expected in the context of UN Program of Action for Africa’s Economic Recovery and Development (UN-PAIRED). This had failed and a new initiative called UN Agenda for Development of Africa (UN-NADAF) estimated a minimum of US$ 30 billion in net ODA in 1992; moreover, this ODA is stipulated to grow by 4 percent in real terms. Although specific estimates are not explicitly made such requirement is also noted in the context of the Copenhagen Declaration. Africa and Nigeria). External Resource Requirement (Percentage of GDP. This figure will be much higher if World Bank and others’ (2000) estimated cost of combating HIV/AIDS (estimated to be 1 to 2 percent of GDP) is factored in. is the result of the authors’ assumption of rising level of savings and efficiency of capital use over the planning horizon.4 48.0 47. 13.0 8. Note: SSA1=SSA excluding S.1 Source: Amoako and Ali(1998). This result is given in the Summary table below. After reviewing such estimates Amoako and Ali (1998) came up with their own estimates.5 percent by the year 2015.3 1999-2000 46. This is combined with an average ICOR (7. This has the strait foreword implication for policy. Africa and Nigeria . Estimates of resource needs are also made by ADB (1995) and ECA (1993) (See Amoako and Ali 1998). On the basis of the above assumptions they have reported estimates of resource requirement for eight countries in their sample and for SSA (including and excluding S. 14.1 26. The result shows a trend of graduating from aid dependency. For the purpose of estimation they have set the objective of reducing poverty by half by 2015.3 2001-2005 32. Using a general measure of poverty and population growth rate.4 55.8 40.2 10.1 (observed in the 1990s and noted above) and that this rate is assumed to increase to the feasible level of 23. and SSA2=SSA excluding S. This. They have also assumed an initial domestic savings rate of 16.1 30. Africa.1 -6.1 -7.1 2011-2015 -7. III Official Development Assistance .4 2006-2010 10.8) for the sample of countries in their studies. however.5) at the end of the planning horizon. such an objective can be attained if GDP could grow by annual figure of 8 percent (World Bank and others 2000 put this at 7 percent). One way to minimize external finance requirement and meet the objective of reducing poverty is raising domestic saving and efficiency of capital use. It is further assumed that each country will approach the most efficient one (Uganda with ICOR of 2. Annual Average) 1998 SSA SSA1 SSA2 52. and declined to 7 percent in 1997. Mosley (1985). for example. Ruttan. OECD. and White and McGllivary (1992. Mosley. However. After discussing. 1993) have gone so far as to portray these empirically based studies as representing a distinct approach. Africa) between 1970-97 represent a staggering level of 120 percent of GDP (World Bank and others 2000). Cumulative terms of trade loss for SSA (excluding S. In one of the earliest studies. In general. 12. Riddell. sometimes conflicting. Indeed. how these propositions might be . and Frey. one school of thought maintains that official capital flows are determined by the economic and geo-political interests of donors. and the ‘aid as a public good’ literature of Mosley. 1984). official capital flows represent an important component of financial flows to African countries. net transfer per capita has fallen sharply form $32 in 1990 to $19 in 1998 mainly because of Africa’s less strategic significances and donor fatigues. According to this ‘recipient need model’. respectively. The analysis in section II shows not only the huge external finance requirement of Africa but also the frustration of various initiatives aimed at effecting such transfers to the continent. we prefer to view these simply as empirical manifestations of the theoretical explanations noted above. 1992. such aid is simply fulfilling the donor’s interests. McKinley and Little (1979) develop a ‘recipient need and donor interest model’ which sets out to examine the ‘humanitarian’ versus ‘national (donor) security’ explanations for aid flows. 16. This is done by examining both its current trend as well as its theoretical and empirical determinants. McGllivary and White. 1985. this suggestion finds support in a number of studies (See. Dudley and Montmarquette. 1987. Another major explanation for aid flows relates to humanitarian or developmental considerations (studies supporting this viewpoint include Streeten. A number of studies investigate one or both of these explanations empirically.15.3 percent in 1990. 1985. Thus. However. aid should be allocated in proportion to the economic and welfare needs of the recipient. This section examines the flow of ODA and their future contributions in financing development in Africa. theoretical explanations. The corresponding figure for the whole of Africa were 5. at length. respectively (See Table 3. 1985. this net transfer itself is largely being offset by the terms of trade loss. devoid of theory. ODA is also increasingly shifting in composition (towards humanitarian assistances) and facing competition from Eastern Europe. 18.4 . otherwise. Both the theoretical and empirical literature about such flows attempts to answer ‘what determines official capital flows to the South?’ and ‘why such flows?’ The search for an answer to these questions leads one to different. Mikesell.1 in Appendix I). Indeed. 1968. either as a commitment. Beenstock (1989). 4. cited in Gasper 1992. 1976. 1995 and 1997.1 percent in 1990 and 1995. net disbursement of ODA have dropped almost 30 percent percent in real terms (O’Connell and Soludo cited in World Bank 2000). For Sub-Saharan Africa (excluding South Africa) the recent trend shows that net ODA as the share of the recipients GDP has been 9. 17. or as leverage strategy. Notwithstanding this recent trend. 1993). 1976. Relative to donor GDP.4 and 3.5. Using a time trend. McKinley and Little conclude that the recipient need argument is likely to be a secondary one. However. In a similar study of what determines total aid volumes. one might add the observation that such time series studies might as well suffer from spurious (non-sense) regression. 19. Although Beenstock’s analysis focuses on the supply side of the issue. it is quite difficult to envisage a situation where politics is used solely in allocation.. commercial and (albeit often begrudgingly) humanitarian motives (White and McGillivray. and not also in the determination of total supply. He points out that. In this study. They conclude that models should approximate the actual practice of aid determination process. we do not examine this phenomenon. they suggest. Perhaps more importantly. strategic. 1993) can throw light on the evidence from the existing body of knowledge. secondly. A summary of the findings of a recent survey of the literature on allocation of aid. Beenstock suggested a tendency for ODA to increase over time. correlated with all included variables). the balance of payment. This.e. all are significant at a 5 per cent significance level (Beenstock. syndicated efforts are more widely followed. At a statistical level. 1980:142). And. by international and regional organizations in their effort to realize donor interests. White and McGillivray illustrate how different results may be obtained if one allows for correction of such specification errors (White and McGillivray. Further. Beenstock (1980) starts from the assumption that political factors affect the geographical distribution and not the total volume of aid. Firstly. Having surveyed such models. undertaken by White and McGillivray (1992. 1993: 36-41). White and McGillivray adopt two broad classification schemes. descriptive measures. 21. economic. To this. most econometric studies of recipient need models are not robust either. Caribbean and Pacific (ACP) region. White and McGillivray (1993) note that the separate estimation of recipient need/donor interest models suffers from specification error due to the omission of relevant variables. while this paper focuses on bilateral issues. while measuring donor performance (White and McGillivray. which are evaluative in their nature. whatever the objective of aid. explanatory studies which trace their origin to political-economy theories. They conclude that aid to ACP countries is strongly associated with the Pre-Lome association. with the exception of the budget term. these surveys also highlight how aid allocation is the outcome of a bureaucratic decision making process. They argue that this problem is inherent in the very methodology of this approach. 1993:2). and base their explanation on ‘political. which are usually not orthogonal (i. today. we would refer the interested reader to Anyadike-Danes and Anyadike-Danes’ (1992) review of evidence relating to European Community (EC) aid to the African. These surveys raise a number of important issues. 1992:1). leads to OLS estimates with bias. he found all signs as expected and. political and other . However.operationalized. levels of unemployment and the size of net budget surplus of the donor state. his analysis does not explain the central reason for aid. Moreover. 20. its volume is constrained by GNP (or GNP per capita). relations between the donor and the recipient (White and McGillivray. This conclusion shouldn’t deter countries from vigorously raising external resources through the customary channels such those initiatives outlined at the beginning of this section (See Section IX for detail). We have empirically examined this line of thought in the African context. It is curious to note that the growth recovery since 1994 has relied on productivity gains rather than an increase in investment as such. this remains true even when these flows chiefly comprise aid (See Appendix II. On the second point understanding the bureaucratic/budgetary process of donors while handling aid is crucial for influencing flows to the continent. 22. growth oriented polices might go hand in hand with increased flows. nevertheless they do provide a useful second best indicator of the determinants of official flows to Africa. a cumulative transfer of 178 percent GDP (1970-97). there exists a long-run equilibrium relationship between Africa’s relative economic performance and flows of capital to that continent. In any case. Technical Appendix 3. 25. no matter how flawed. The sharp increase in aid may also have long run detrimental effects depending on the initial institutional set-up of the recipient countries as well . 1993:68). But the increase after 1970-73 (125 percent of GDP) was a little more than the terms of trade loss. and particularly involvement in trade. behind aid effectiveness in Africa is the extreme low level of growth which is predominately explained by huge setback in (investment) productivity. apart form terms of trade loss. the use of results obtained in the context of this study. Indeed. Moreover. is preferable to using spurious results arising from existing literature. identifying the geo-political and strategic interest of donors and acting on them is crucial. The main culprit. because of the relatively short time series data used. Although the results of this empirical analysis are not robust and need further research. Besides. by 1997 external debt equals to GDP for most countries. 23. Firstly.1 for detail). The major short to medium policy implication of this result is straightforward. see section VI below (World Bank and Others 2000). Thus this failure in growth/productivity combined with the oil price shock and terms of trade loss led to sharp increase in Aid. Once such flows are secured the next most important task is to enhance aid effectiveness and design ways of graduating from aid-dependency. This result would tend to lend support to the apparently obvious notion that capital flows are associated with the level of development. 24. According to the World Bank and others (2000) the ICOR in Africa is half that in Asia in 1970-97. Instead of expecting aid from pure humanitarian consideration. these may be summed up as follows. humanitarian and developmental considerations are found to be largely negligible in influencing such flows to Africa. Secondly. In relation to the actual results of these estimations. Moreover. this investment productivity decelerated from 25 to 5 percent (and GDP growth from 5 to 1 percent) from early 1970s to now. a regionally based estimation for Africa is not available. Africa’s share of world FDI is extremely low. Egypt. Many factors are given for such failure of aid to address poverty (aid ineffectiveness). South Africa. Tunisia. Namibia. Between 1991 and 1996 ten countries (Nigeria. In the African context. Tunisia. They argue that when institutions are already weak aid may lead to the collapse of such institutions.as the emphasis given to that in the design of foreign aid strategy. IV Foreign Direct Investment And Other Private Capital Flows . Morocco. where institutions are both weak and vary across countries. graduating from aid dependency requires an examination of not only the short run external financing of resource gap but also the long run possible negative impact of such flows. aid effectiveness is also a major problem. It is estimated that a typical poor country receives 9 percent of its GDP but the poorest quintile of the population consumes only about 4 percent of the GDP (World Bank and Others 2000). according to World Bank and others (2000): support provided to ‘trusted allies’ even when they pursue poor policy. Ghana and Cote d’Ivoire who accounted over 67 percent of FDI to Africa in 1996. inter alia. donor preference on aid objective and delivery mechanisms that usually face accountability problems as well as debt overhang. Azam and others (1999) noted such outcome as symptoms of aid dependence. representing only 1.5 percent of the global investment flows.5 billion in 1996. Foreign Direct Investment (FDI) 28. according to a recent study (See World Bank and others 2000) requires. Ghana. Algeria. 1999) . should be differentiated according to there institutional capacity’. 27. Morocco. This list includes. emphasizing capacity building as opposed to technical assistance. Angola. South Africa. In general it can safely be concluded that aid could be important in good policy environment but can be even harmful in bad policy environment (See Ali and others. Angola. The policy implication of these authors’ analysis is quite striking: ‘foreign aid strategies. Uganda and Zambia) received . Apart from the productivity issue. transferring accountability to Africans and strengthening the institutions to run aid by themselves. recipients ownership of policies and programs. with the main recipients being Nigeria. The way ahead for aid effectiveness and transiting from aid dependency. emphasizing on sustainability (in particular by working through national budget) and transparency as well as focusing on regional rather than country programs per se are few among many (See Section IX for detail). The distribution of this flow is extremely skewed. Tanzania. even for countries with similar per capital incomes. It was mere US$ 5. 26. 32. this school of thought has formed the basis for a whole strand of the literature. as discussed above. 1. 29. if foreign firms were able to compete and succeed in the host country. by the second half of the 1990s. presented in reaction to The MacDougal model. summarized in the classic article by MacDougal (1960). there is a surge of FDI in some countries (Kasekende others 1995. 1969. risk free capital movement.7 billion) and 2. hypothesized that capital flows across countries are governed by differential rates of return. economies of scale. emphasizes not only return differential. metals and other extractive industries (ADB. Bhinda and others 1999). Germany and US while the favorite sector are oil. 1998). 1935 and Tobin. The main sources countries being France. marketing and managerial skills.1 and 4. gas. entry and exit barriers (Kindleberger. some advantages of the competitive foreign firm include cheaper sources of financing. during this period has been 0.3 billion) in 1990 has increased to 0. which was 0.61 (US$ 2.76 billion). the use of brand names and patent rights. An exploration of the literature on the determinants of FDI leaves much to be desired. by moving from a simple capital movement/ portfolio theory to a broader production and industrial organizational theory. Fernandez-Arias and Montiel 1996. This analysis also focuses on the micro foundations of FDI. A related . both over local firms. Recently.4 percent (US$ 4. 31. then they must be in possession of a specific and transferable competitive advantage. Although FDI. According to this line of thinking. Whenever it has a positive trend it is largely related to investment in countries with new resource discovery.2 in Appendix I). the average share of FDI in GDP was not only very small but also was declining. both cited in Agarwal.3 in Appendix I).almost 90 percent of such flows with Nigeria alone absorbing a third of this flows. Hymer (1960. excluding South Africa. respectively (See Tables 4. 1980).2 percent (US$ 6. Similar trend is observed when individual country data is used (See Table 4.56 percent (US$2. in the hope that this may help to explain why this type of investment has not been so important in the continent and why there is a surge in the recent past. The portfolio approach to FDI.41 (US$0.8 billion). This is strengthened by a theory that emphasizes the positive relationship between FDI and output (sales in host country). does not comprise a major component of external flows to low income countries of Africa. and. 30.29 percent (US$ 1. published in 1976) and Kindleberger (1969) argue that. Agarwal 1980). The MacDougal model assumes perfect competition. In general. this section will briefly summarize the major canons of the theories of the determinants of foreign direct investment. however.7 billion) in 1995 and jumped to 1. Indeed. mobility in factors of production and no risk of default. 1958.3) in 1998. UK. 1980). along the lines of Jorgenson’s (1963) model (see Agarwal. but also risk (Iversen. The early neoclassical approach. nevertheless. For all Africa the share of FDI in GDP. A major criticism of these theories relates to the question of perfection in markets. technological. and other potential entrants into the local market. The comparable figure for SSA. the pure capital theory does not work since the assumptions simply do not hold. This approach attempts to understand flows of FDI by multinational firms desire to minimize transaction costs. Lall 1973). 1980. a la Coase (1937). in general. 1989: 1253).has led to the development of alternative explanations grounded in the theory of industrial organization (see Agarwal.1 for econometric results).and that such investment includes a package of other inputs. which he terms the ‘eclectic paradigm’. achieve economies of scale. 1993). 33. Helleiner (1989) notes that ‘this "eclectic" theory of FDI. product cycle. The recent works of Dunning (1993). and ensure advantageous transfer pricing (Hymer. to tackle risk and uncertainty. the concentration of Multinational Corporations in the mining sector of most African countries and. industrial organization. the importance of the colonial history in determining their spatial pattern might be taken as lending support to the importance of the ‘eclectic’ approach. represents a culmination of this trend towards a refinement of theories of FDI. building upon Hymer’s original contribution. 36. the theory of determinants of FDI covers a range of explanations: the pure capital movement. (See Technical Appendix 4. in explaining spatial distribution of multinational firms. relative market size. 35. In sum. 1976. More importantly. drawing on firm-specific attributes. Without departing much from the Heckscher-Ohlin-Samuelson theory of trade. 1976. 34. An empirical assessment of the determinants of FDI in Africa using this theoretical insight reveals that. the stagnation thesis as well as other political consideration. location and internalization’ (OLI) framework (see Dunning.is widely accepted’ (Helleiner. Dunning. combined with the debt crisis. The deterioration in terms of trade. increase control and market power. mining activity and the historical pattern of FDI together determine the flow of FDI to Africa. in explaining the African context. . 1966) and its extension in Krugman (1979). In the African context. The fact that decision-making about foreign direct investment (FDI) takes place within the context of oligopolistic firm structures. The importance of some of these factors in explaining FDI flows is also shown in . will greatly undermine the relevance of this theory. to a good degree. Dunning’s paradigm summarizes this strand of theory under an ‘ownership-specific. 1993). Buckley and Casson. .micro-based theory of FDI has also emerged with the development of the Vernon’s product cycle theory (Vernon. The most relevant theoretical explanation seems to be found in ‘industrial organization’ and the ‘international firm’ . came with the emergence of explanations based on the ideas of ‘international firm’ and ‘industrial organization’. Neither is Krugman’s hypothesis workable. location and internalization advantages . A second wave of refinements to the neoclassical capital movement/ portfolio theory of FDI.‘eclectic’ explanations. since it is more relevant to countries with a good industrial base and infrastructure such as East Asia. Helleiner 1989:1452. such as intermediate imports and capital flows. in the existing global economic framework.3). bond and other flows). 37. however. private equity flows and private loans. other private capital flows such as portfolio flows. Thus. the best example being Uganda. 41. Bhattacharya and others (1997) grouped the African FDI recipients into three categories: (a) countries which are long term recipients (Botswana. This fairly accords with the popular perception about such flows to the continent. An in-depth study on sources and destination of FDI using country case studies from micro perspective. What is interesting in examining such private capital flows to Africa is their trend (as opposed to their sheer magnitude). influencing FDI flows using conducive monetary and fiscal polices is important if a surge in flows of FDI in the short run is sought. however. 40. Madagascar. In the medium to long run. resource discovery and enabling conditions for high level of growth.6 percent of such flows in the period 199095. Apart from FDI. A recent study by Bhinda and others (1999) came up with the interesting observation . This sharp fall is chiefly attributed to the sharp deceleration in private loans starting from mid 1980s (See Bhattacharya and others 1997). The main conclusion that can be drawn from the existing body of knowledge (both theoretical and empirical) is that much of the preconditions for sustained flow of FDI to Africa. Guinea. and a cross-country analysis using timeseries macro data need also to be taken as an agenda for future research. 38. Gabon. Namibia. Nigerian and Zimbabwe) and finally (c) countries that have low and/or declining level of FDI but with encouraging turnaround. Seychelles. This trend and perception is changing in the recent past. Table 4. Mauritius. bringing structural change in the economy by growth enhancing and growth enabling policies (which could be both market and non-market in nature) as well as joint-venture based exploitation of resources is an important area that need to be looked at (See Section IX for detail). At the end of the 1970s and early 1980s there was a surge of private capital flows (FDI. Mozambique. (b) countries that recorded large increase in the 1990s (Angola. SSA accounting for 8. the later in turn comprising bank.the descriptive analysis of Bhattacharya and others (1997). Ghana. Lesotho. Cameroon. relies on the structural transformation of the African economies which will have a positive effect on market size. Notwithstanding an extreme inconsistency of data obtained from various international data source (See Appendix I. Other Private Capital Flows 39. Swaziland and Zambia). . the available data shows that such flows do not constitute important flows to the continent. . bank flows and bonds are also important in financing development. It accounted only for 1.9 percent of total private flows to developing countries. South Africa has received higher than all four countries taken together (90 percent of total SSA since 1992) in absolute terms. however. the total SSA portfolio investment stock ranges from US$ 10. the other countries have levels (10 .1 percent (See Bhinda et al 1999 for details). Recently. Cote d’Ivoire. Mauritius. Portfolio equity flows. Table 4.SSA excluding South Africa having 35.that international data sets were not tracking the sharp increase in private flows to Africa. Uganda and Zimbabwe.5 billion (4 to 10 percent of world total is in SSA).3 to 12. are growing in recent past. for Uganda –21 million (as opposed to 30 million in BIS). The operation of these funds is expanding from the initial focus on South Africa to Botswana. When we look closer at the Pan African funds around 18 percent of it is invested in North Africa. show that the magnitude is not only very small but also erratic. This is because.5 to 3. However. Thus. country data shows that such flows in South Africa are 2.3. this surge in portfolio flows to Africa is highly inaccurate if one follows the international data. Tanzania. the actual magnitude is in general higher in the latter data set. Bank flows: again the different international sources do conflict on the size of such flows to Africa (See Appendix I. According to Bhinda and others (1999) study. there are three important equity funds with SSA exposure: (a) ‘Pan-African funds’ with an exposure of US$ 692. however. When country data is used for sample of countries. This data and the inconsistency problem are reproduced in Appendix I.9 million (as opposed to 13 million in BIS data). 42.8 billion in BIS. for Tanzania 27. (b) South African dedicated funds with an exposure of US$ 8. 44. first.3 billion since 1995. For 1996 (for which there is comparable figure for all sample countries) for instance. this erratic feature is still there. Kenya. Zambia. In general all data show that such flows are not really picking except in South Africa and to some degree in Tanzania. second. This is partly attributed to the wish of lenders to change exposure following economic trends. Zambia and Zimbabwe (Bhattacharya and others 1997) 43. From 1994 to 1997 more than 12 African-oriented funds have been setup with a total size of more than US$ 1 billion. the rapid increase of foreign exchange holding in Africa . data).8 million (as opposed to 28 million using BIS data) and for Zimbabwe –8 million (as opposed to 35 million in BIS). Table 4. Bank of International Settlement.057 billion and (c) emerging market global funds with an exposure of US1.9 millions. while South Africa received only 4 percent (Bhinda and others 1999). The case study countries for this study include South Africa. though insignificant in magnitudes (except in South Africa). 70 percent in SSA . there is huge underestimation of inflows through equity funds.15 percent) as high as the fastest growing Southeast Asian and Latin America countries. relative to GDP. Ghana.2 billions (as opposed to 1.3). All the sources. Portfolio equity flows: two important categories of ‘other private flows’ (excluding FDI) are portfolio equity and bank flows. they fail to reflect data from stock exchange and foreign participation in primary and secondary markets such as in Zambia and Zimbabwe. for Zambia 235. Solink. However. There are various factors behind the recent surge of portfolio (the most important component being equity flows following by bonds. which need to be taken into account. most African countries are sovereign borrowers (with sovereign risk) and systemic explanation might be derived from such an approach.2 billion using IMF data and 586 billion using World Bank data (see Table 4.for an empirical study of credit rationing see Feder and Uy. 1993).following financial sector liberalization. Bardhan. A further weakness is the assumption that theories based on micro behaviour may readily be carried over to the macro/ international level.3 in Appendix I). 46. The first explains how capital is allocated across countries and generations in order to equate return differentials. The important question then is what can we draw from highly limited ability of the theory to explain such flows and their erratic trend that we observe form the data? 48. and Stiglitz and Weiss. Such flows in 1996 were 1. This low and erratic nature is partly attributed to low credit rating of most African countries. 1974) and theories of credit rationing (See Sachs. domestic financials sector problems such as debt overhang and domestic payment arrears as well as the perception of high country risk. tailored to a neoclassical framework. 45. These factors resulted either in the decline or increasingly very short-term nature of bank flows. 1981. In international finance literature there are a number of systemic explanations for bank and portfolio flows. with the aim of achieving optimal borrowing. but also incorporates a constraint based on market imperfection. A common problem in applying these approaches is their implicit belief in the workings of a competitive market. These include static/dynamic capital movement theories (MacDougall. This theoretical underpinning greatly limits the relevance of these approaches for countries in Africa where risk. the portfolio theory is essentially governed by the same motives as the first approach. Neither is it reasonable to assume that fully developed financial markets are available in all African countries. The important question relevant for policy is to understand the determinants of such flows. All of these are essentially microeconomic explanations. Whenever such flows are increasing this is explained by the dominance of foreign banks in those African countries where this trend is observed (See Bhinda and others 1999 for details). 1967). uncertainty. 1960. The credit rationing theory builds on both of the above approaches. Having such theoretical explanations it is also insightful to examine the determinants of such flows from empirical studies. The second approach adopts a portfolio choice method. 1985 and Lee. Indeed. 47. instability and market segmentation all represent significant factors. 1984. albeit with some reservations in the case of the credit rationing theory. owing to the emphasis it places on the evaluation of risk and uncertainty. 1983: 182192. the portfolio theory of capital movement (See Williamson. which in African context is taking a form of . Bond flows: in terms of magnitude such flows are also extremely unimportant in SSA. with non-equity flows (bonds and treasury bills) liberalization of the economies. 1999: 69-84). debt management. (b) perception of SSA by investors. 1997). African policy makers need to understand the extreme volatility associated with such flows. V Domestic Resource Mobilization 50. This is largely determined by investors information about Africa. (c) there are also national factors such as political and macroeconomic stability. These determinant factors can be grouped as (a) global or push factors – the trend in OECD to invest in emerging markets and growing institutional (usually pension) investors faced with low interest rate and slow down in economic activity at home. This ranges form Lewis’ classic assertion in early 1950s about the importance of savings (Lewis 1954) to the neoclassical growth models of the . This finding is consistent with previous studies of Calvo and others (1993. The emphasis on domestic resource mobilization to bring development has been the preoccupation of economists drawn from the different strands of the profession. standardized regional structure of banks and developed stock markets with positive performance. 49. in particular. Moreover. For such investors SSA is found to be attractive because its yields have low correlation with other emerging markets. good credit rating. The policy implication of this should be apparent. economic growth and regional integration. proper financial regulation and supervision and transparency (See Bhinda and others 1999 and Section IX below for detail). Apart from designing appropriate policies that could positively influence the afro-mentioned factors. As Bhinda and others (1999) rightly noted ‘Africa has no ‘big brother’ to facilitate a bailout in the first place’. . good governance. policy makers might be confronted with the policy dilemma of a trade-off between high flows owing to increased regional integration and high volatility.Treasury bills) flows. 1996). high domestic interest rate and development of capital markets are important factors for the recent upsurge (See Bhinda and others. possibility of holding dollar denominated accounts in banks and hence low risk nature of such flows. as well as the existence of motivated labour force (d) finally. capacity building on the management of the financial sector. A recent empirical study using a dynamic modeling approach on the determinants of such flows in Asian and Latin American developing countries underscored that both global and country-specific factors have roughly the same level of significance in influencing such flows. This is in particular true given the huge cost of bailing out countries when they are faced with financial crisis associated with such flows. this requires appropriate exchange rate policy. bond flows are found to react predominantly to global factors while equity flows to country-specific factors (Taylor and Sarno. However. which ranges from a perception of the region as ‘the final frontier’ to negative bias is also an important factor. This requires. External sector related factors are also important in determining the level of domestic saving. which requires high level of saving. Elbadawi and Mwega. even if saving is the result and not the cause of economic growth. Other studies (Dooleey. raising national saving to maintain a high rate of investment and hence growth is essential. However. Elbadawi and Mwega’s (1998) work shows that the foreign aid ratio significantly Granger-causes a reduction in . Second. 53. rather than current income. These characteristics include poor and large household. 52. focusing on policies that enhance private saving is important for at least two reasons. According to Deaton’s (1990) survey. all cited in Deaton 1990). 1998). Main stream theories of saving such as the permanent income hypothesis as well as the life-cycle hypothesis that are based on the assumption that consumption is determined by life time resources that are directed at consumption smoothing. for instance). the direction of causality between saving and output growth is far from clear (Schmidt Hebel and others. In the context of SSA. the dominance of agriculture and uncertainty of income flows. This is chiefly because the characteristics of households in developing countries are quite different from those in developed countries. Musgrave for Latin America. Summers 1998.1950s and 1960 and the recent endogenous growth models (See Romer 1986. It is argued that savings in developing countries are largely explained by precautionary motive as well as by the need to finance investment as own finance dominates such economies (See Bridsall and others 1999. Another important dimension widely cited in the developing countries context is the relationship between saving and economic growth. In Sub-Saharan Africa. cited in SchmidtHebble et al 1996) find that there is a strong correlation between investment and saving both in developed and developing countries. First. Elbadawi and Mwega (1998) argue that regardless of the direction of causation. 1998). Lucas 1988). 51. Similar results are also reported in the study by Carroll and Weil (1994). 1980 for India. 54. growth found to Granger-cause both saving and investment (Elbadawi and Mwega. are increasingly being questioned in the context of developing countries. empirical evidence suggests that sustaining a high rate of growth requires a high level of accumulation of capital. The implication of this latter body of knowledge is that in order to raise domestic saving it is not only growth but also its sustainability that policy makers need to focus on. Frankel and Mathieson 1987. Most importantly. Elbadawi and Mwega’s (1998) empirical study shows that saving rate significantly Granger-causes the investment rate although the relationship between saving rate and economic growth is non-significant. the literature on household saving in LDCs has almost uniformly found that saving will increase with ‘permanent income’ (See Bhall 1979. due to Sub-Saharan African countries’ limited capacity of mobilizing external resource. Berancours 1971 for Chile’ and Paxson 1989 for Thailand. Muellbauer 1982 for Sri Lanka. 1996. demographic structure as well as binding liquidity constraints (See Deaton 1989). Commenting on such evidence SchmidtHebbel and others (1996) noted that the empirical results do widely vary depending on difference in sample. estimation method as well as the extent of fungibility of the foreign resources (See also Mwega. especially when it is transitory. On the other hand. Another open-economy based variable widely used in the empirical literature is the terms of trade. the evidence is not conclusive. Thus. An extreme result of negative terms of trade effect is reported in Mwega’s (1997) study. One way of augmenting public saving is through taxes. For the sample of LDCs they found negative and statistically significant effect of public saving on private saving. Edwards 1995. 1997: 208). 1992. model specification. Corbo and Schmidt-Hebbel. This has supporting empirical evidence (See Ostry and Reinhart 1992. Macro policy issues relevant to enhance domestic resource mobilization are also examined in some of the African empirical literature on the issue. A related fiscal issue is the impact of public investment on private investment and hence saving. Terms of trade are expected to have a positive effect on private saving. Corbo and Schmidt-Hebble 1991. all cited in Schmidt-Hebble and others (1996) and Masson and others (1995)).saving rate. Most empirical studies for industrial countries reject the Ricardian equivalence. 1991 cited in Mwega (1997). if saving and investment have positive relationship. This is largely related to the fact that such incomes are windfalls that result from fluctuation in commodity prices (Deaton 1990). This ‘aid-saving debate’ has been carried for nearly three decades and is still an unsettled issue (see White. In SSA the Global Coalition for Africa (1993). 55. Studies for developing countries also dismiss it in its pure form and agree that public saving offsets some private saving (Haque and Monties 1989. government consumption is found to have a positive and significant effect in Mwega’s (1997) and Elbadawi and Mwega’s (1998) studies. Bevan et al 1992. These results show that public saving is an effective tool to raise national saving (Schmidt-Hebble others 1996: 99). Serven and Solimano (1993) have examined the impact of public investment on private investment in developing countries and reported a positive and significant correlation in the panel data of developing counties. claims a negative and significant effect of foreign aid on domestic saving. It is argued that this situation brings about what is called the Ricardian Equivalence. 56. in Masson and others (1995) the terms of trade are found to be statistically insignificant. The widely cited work of Bevan et al (1992) on Kenya noted that 60 per cent of proceeds from the Kenyan coffee boom in the mid-1970s is saved. In Elbadawi and Mwega’s (1998) study a growth in the terms of trade has a positive and significant effect on saving rate. This can broadly be categorized as fiscal policy (in particular public saving and issue of crowidgn-out/in) and monetary policy. Similar results are also reported in Alemayehu (2000). as well as in . 57. for a comprehensive survey). Mwega (1997) and Elbadawi and Mwega (1998) have used public saving as explanatory variable in their saving equation. Easterly. and Azam 1995). However. 58. Rodgigues and Schmidt-Hebble 1994. Empirically. It is also noted that there are certain categories of public investment such as investment in infrastructure. In SSA there is evidence that macroeconomic stability leads to a rise in deposit rates and depositors react positively to this rise as noted earlier (Nissanke and Aryeetey 1998. appropriate credit policy and ensuring low level of . In line with the mixed result in many studies of LDCs. 59. Moreover. Aryeetey and Udry noted that the real deposit rates have risen far slower than lending rates in many countries. However. citing the case of Ghana and Nigeria. A related financial variable used in the empirical studies is the degree of financial depth (usually measured by M2 to GDP ratio). Similar stylized fact is found across many developing countries (See Taylor 1991). such examination shows that infrastructure investment generally has a positive impact while investment by public enterprise does compete with private investment (See Easterly and Rebelo (1993) cited in Schmidt-Hebble and others 1996). Mwega (1997) also reported similar result for Sub-Saharan Africa. 61. The empirical evidence of the effect of macro-economic instability on saving rate in developing countries is mixed and inconclusive. real deposit rates have not significantly increased in many African countries (see Aryeetey and Udry 1999). Macroeconomic stability is another area that is usually emphasized to strengthen domestic resource mobilization. in Elabadwi and Mwega’s (1998) recent study. Giovannini (1985). this evidence is not conclusive. the empirical evidence in Sub-Saharan is not conclusive either. However. human capital and law and order that tend to crowd-in private investment. they added. In general as noted by Azam and others (2000) the evidence is mixed. For instance. cited in Aryeetey and Udry. 60. when there is some stability in macro-economic conditions and deposit rates rise. What the empirical evidence suggests about the impact of public investment is that different types of public investment are likely to have different kinds of effect. Macroeconomic stability is also related to institutional measures such as financial liberalization. Thus many in Sub-Saharan Africa entered in financial liberalization since the 1980s. Despite such reforms however. it turned out to have significant positive effect when a fixedeffect model is used. Both fiscal and monetary policies are related to macroeconomic stability. This has got prominent status following the Mckinnon and Shaw’s work on ‘financial repression’ that informed much of the design of SAPs in Africa. But Mwega’s (1997) result shows that inflation (as one of the indictors of macro instability) has no significant effect on saving. depositors react positively. 1999). there appear to be lower (uppers) threshold below (above) which public investment may not be effective (See Azam and others 2000). For instance in Elabadwi and Mwega’s (1998) study this variable is found to be non-significant for a sample of LDCs.separate studies of Latin America and East Asia. Schmidt-Hebbel and others (1992) found no significant impact of real interest rate on saving. However. A monetary policy that is important in the empirical literature of domestic saving is the (real) interest rate. while Ogaki and others (1995) found positive effects that are small and very sensitive to income levels. cited in Aryeetey and Udry (1999) have noted that an average travel time of over an hour is required to reach a bank in rural Northern Ghana and the cost to such travel is about the equivalent of the prevailing minimum wage. 1991. all cited cited in Aryeetey and Udry 1999). This result becomes insignificant. Aryeetey and Gockel (1991). For a sample of developing countries. cited in Aryeetey and Udry 1999) attributed the low scale of a number of micro finance arrangements in West Africa in part to the low population density in many of the rural areas . for SSA the dependency ratio emerged as the most important and robust contributor that differentiate the performance of high performing Asian economies from SSA. by low presence of formal institutions. cited in Aryeetey and Udry 1999) argues that institutional and structural constraints to saving are the major reasons for weak saving mobilization in Africa. The dependency ratio has negative contribution especially in middle income SSA (Mwega. In the pooled model both variables have negative and statistically significant effects. Aryeetey and Udry (1999) though agree with this notion emphasize that most studies of fund utilization by such association shows that the funds are usually spent on consumer durables and for providing working capital (Miracle et al. Finally demographic characteristic of the household are also taken as important factors that could influence domestic resource mobilization. Another structural/institutional feature noted to be important in the African context is the transport cost. Nissanke and Aryeetey (1998 cited in Aryeetey and Udry 1999) have also suggested that the fragmented nature of financial markets in Africa tend to increase the transaction cost of moving from one segment to the other and hence could act as a disincentive for saving mobilization in Africa. 62. 64. 1999). although financial asset in general is relatively a small component of the portfolio asset held by households (See Aryeetey and Udry. Deaton (1989) suggested that saving in such set up is intended to smooth consumption. Elbadawi and Mwega (1998) used two demographic variables: the young-age dependency ratio and urbanization. Aryeetey and Gckel. Comparing their estimation for LDCs with that of SSA.indicating the importance of location to access credit. This is compounded. Masson and others (1995) also found that demographic factors have significant negative effect for all but middle income LDCs. Extension of commercial bank branches to rural areas in five African countries covered in his study turned out to have the strongest effect on savings. Chpeta and Mkandawire. Ikhide (1996. 1998: 19). 1980. they noted. This suggests that the incentive to save could easily be offset by the transport cost as long as the cost exceeds the return on saving. 63. however. Webster and Fdler (1995. 1997: 214. This informal financial sector is important because the available evidence indicate that the value of formal sector financial assets is less than half of the financial assets held by households in Africa.income inequality as the experience of East Asian countries shows (See Birdsall and others 1999 for details). 1991. One predominant institutional feature of saving in Africa is the importance of informal saving. Elbadawi and Mwega. when the fixed effect model is used. Others (See . he argues. .Harrigan. In the context of Africa this potential is enormous. . The discussion in this section. 1995. This points to the need to carry out an indepth research in these areas. The identification of different factors that affect each of the saving determinants. a recent study using a rather large data set based on 22 countries from SubSaharan Africa concluded that the continent has the highest incidence of capital flight. clearly demonstrates the challenge of domestic resource mobilization in Africa. return differential incentives and relative risk incentives. would provide some handle on designing relevant policies geared to domestic resource mobilization (See section IX for detail). in particular the exploration of myriad of saving determining factors. More important. constitutes nearly half of the external resource requirement estimated by Amoako and Ali for 1999/2000. the private capital stock would have increased by around 64 percent (Collier and others 1999). One important area that increasingly attracting the attention of researchers and policy makers is the potential of capital flight reversal in financing development. According to Collier and others (1999) capital flight arises from portfolio diversification incentives. The weakness of the life-cycle model in developing countries is also noted by Collins (1991) based on a study that used a sample of ten developing countries (See Aryeetey and Udry. Ajayi’s 1997 estimate of capital flight from severely indebted low-income countries of Sub-Saharan Africa. is the inconclusive nature of most empirical studies both in developing countries in general and in Africa in particular. which stood at 22 billion. Notwithstanding the measurement problem associated with such studies. it is hoped. 65. 67. Mwega (1997) reported that adverse effect of high dependency ratio on private saving appears to have little support for the sample of LDCs in his study. despite the continent’s capital scarce . Similarly. The risk associated with domestic capital may range from expropriation to wide range of implicit taxes such as inflation or exchange rate depreciation (Collier and others 1999). Deaton (1989) has shown that for developing countries actual age-composition profiles are not consistent with the predictions of life-cycle theories. however. Recent African literature on the topic touches a number of issues to understand determinants of capital flight. VI Issues Of Capital Flight 66. cited in Mwega 1997) noted that empirical evidence is conflicting and has not resolved the issue. exceeding even the Middle East. The empirical analysis of this study revealed that the high level of capital flight from Africa. 39 per cent of private portfolios were held outside the continent. Were Africa able to attract back this component of private wealth. 1999). thereby undermining the empirical importance of the mechanism. a larger share of official debt is now disbursed on concessional terms. 69. the fact that it is rated as the riskiest continent by international investors. . Notwithstanding the inconclusive findings about capital flight. Generally. 70. The major component being outstanding long-term debt. unfavorable macroeconomic environment. they have found positive and statistically significant coefficients. it can be read that bilateral debt comprises the largest share. The major finding of Ajayi’s examination of African capital flight points to the importance of ‘trade-faking’ (over and under invoicing of imports and exports). it is possible to identify preliminary pointers. IMF credits were increasingly used. Over period. with private inflows declining overtime.1 (See Appendix I). exchange rate overvaluation and exchange rate adjusted interest rate differential as explanatory variables. Some of these inconclusive results indicate the importance of further study on these issues. Our experiment with similar equation using Hermes and Lensink type of specification using 18 African countries could not result on significant coefficient for the coefficient of the debt creating flows – thus supporting Ajayi’s result. The Collier and others (1999) findings also basically accord with this view (See section IX for detail). The finding about debt is. which constitute nearly a quarter of the external debt burden. From Table 7.characteristics. in 1971. Except the last item that is found to be statistically insignificant. problems of political instability (including the abuse of power). 68. It can also be noted that the debt problem is being aggravated by capitalization of interest and principal arrears. contradicts to the finding of Ajayi (1997) who argued that there is no relationship between debt and capital flight. however. The total external debt of Africa has raised nearly twenty-five folds from a relatively low level of US $14 billion. This is followed by multilateral debt. Changes in the structure of African debt can be described in terms of creditor patterns.1 in Appendix I). with ‘Structural Adjustment’ and ‘Enhanced Structural Adjustment’ facilities comprising an ever-important component of flows to Africa (See Table 7. VII Africa’s External Debt . . 71. and the level of indebtedness of the continent (Collier and others 1999). to more than $300 billion now. This basically accords with Collier and other’s (1999) recent finding. is explained by overvalued exchange rate. and lack of economic growth as important areas that African countries need to work on so as to ensure the reversal of flight capital and maintaining what is reversed (See Ajayi 1997 for details). An earlier study by Hermes and Lensink (1992) on capital flight from Africa used debt-creating flows. Finally. from the late 1970s onwards. The actual size of indebtedness does not usually represent an economic problem in itself. three inter-related implications of the debt problem deserve mention. a trend away from concessionality to nonconcessionality and an increase in the importance of interest and principal arrears (usually capitalized through the Paris and London clubs) as a component of long-term debt. respectively (See Table 7. in the 1990s it is worth pointing out that nearly 35 per cent of grants to Africa. since this debt may usually be mitigated by rescheduling and similar short-term arrangements. 1986. coupled with a mounting debt burden. Although the share of African debt as a proportion of the total debt of developing countries is low.e. in particular their export sectors. This has led to the ‘import compression problem’ in the past. these ratios stood at 64 per cent and 19 per cent.5 billion in 1998. This debt is generally long-term in character. do represent a serious problem for African countries. relative to capacity. went to ‘technical experts’ that usually came from donor countries (See Table 7. it can be seen that net transfers since 1990 have. in fact were negative (i. and. which might otherwise be available for purchase of imports. the size of accumulated debt.72. in which shortage of foreign exchange adversely affected levels of public and private sector investment (See for instance Ndulu. both foreign and domestic. First. In 1998. from US$ 3. 75. may partly be attributed to this factor (See for instance Elbadawi and others .2 in Appendix I). which tends to undermine the confidence of private investors. and subsequent impacts on the economy. 73.2 in Appendix I. the level of such transfers (outflow) has increased. Further more. the relative debt burden born by African nations remains high. in 1971. servicing of the external debt erodes foreign exchange reserves.2 in Appendix I). in fact. Thus. Second. A decline in levels of private investment as a share of GDP. flowed from Africa to the developed nations). grants and net foreign direct investment inflows. to a high of 68 and 23 per cent during the late 1980s. Africa’s debt burden may also be assessed by examining net transfers. most African countries have been subjected to net financial outflows (of debt related flows) since the mid 1980s.6 billion in 1985 to nearly US$ 12. the last three decades have witnessed an unprecedented increase in the level of African debt. respectively. if we exclude from Table 7. In this respect. Indicators of the debt burden also reveal that African debt is extremely heavy compared to the capacity of the African economies. The performance of these economies. there is a growing importance of debt owed to bilateral and multilateral creditors. let alone addressing issues of poverty alleviation outlined in this paper. surely indicates that African countries are incapable of simultaneously servicing their debt and attaining a reasonable level of economic growth. Moreover. The debt to GNP and debt service ratios rose from 21 per cent and around 9 per cent.. However. 1991 and Ratso 1994). In summary. the last year for which we have data. the accumulation of a debt stock results in a ‘debt overhang’ problem. 74. one may not expect to get much from this second phase (See Oxfam. a reduction in levels of public investment will tend to have adverse consequences for physical and social infrastructure. To sum up. The Bank and the Fund have also announced a major expansion of the HIPC initiative in 1999. VIII The New Financial Architecture And Its Implication 78. Except the recent gesture shown to Uganda (a 20 percent debt stock reduction).1997). an 80 per cent debt stock reduction. the debt issue is a crucial element of the overall economic crisis facing Africa. These are defined as a 20 to 25 per cent debt service ratio and present value of debt to export ratio of between 200 and 250 per cent. this finding is reflected in the decline in the share of public investment in GDP from late 1970s onwards as well as high level of fiscal deficit. Since it is widely believed that few African countries are likely to reach this phase in the foreseeable feature. servicing of debt is placing an enormous fiscal pressure on many African nations. Finally. including multilateral. Naturally. Such pressure has had an adverse effect on public investment and provision of social services. This leads to the decision point for acceptance into the HIPC initiative. Phase two of the new initiative comprises the implementation of another three-year IMF program and. (b) commencing debt relief from decision point. The recent turbulence and crisis in the financial sectors of emerging economies and to some degree in developed countries has prompted a . broader and faster debt relief by (a) qualifying countries when their present value of debt to export reaches 150 percent (as opposed to 200-250 per cent noted above). This initiative comprises two phases. This reduction is applied to all types of debt. it is very difficult to count on its realization and hence its financing development prospects as can be read form the recent resolution of the (July 2000) G-7 meeting in Japan. the much-discussed issue of the HIPC initiatives is not realized yet. and (c) basing the length of the interim period on achievements of key development objectives rather than on pre-specified period. . Another new dimension emphasized is the idea of linking the debt reduction to poverty alleviation programs (See World Bank and others 2000). 1997 for a critical review of this issue). if accepted within the HIPC category. Acceptance requires having indicators that show the country is beyond debt sustainability thresholds. Although this new extended initiative seems promising. under which they are entitled to a two-third reduction in debt stock. This effect is significant given the empirical finding that public sector investments. in particular in low income countries of Africa does crowd-in private investment (See Alemayehu 2000). 77. If countries find themselves above these thresholds they are eligible for the Naples terms. Phase one requires a threeyear record of compliance with an IMF program. The new expanded HIPC initiative is believed to provide deeper. 76. There seems to be a consensus that the problem is global and systemic implying the need to go beyond national boundaries to address this issue. In particular. hedge funds and other institutional investors is required. 1998). exchange rate management . 82. 1998). 79. specific standards of supervision and regulatory framework (Akyuz 2000). risk (including liquidity risk) management and safety net arrangements. 80. At practical level. Finance Ministers and Central Bank Governors form 22 countries. the Asian crisis underscored the need to carry structural policy reforms both at the national and international levels to restore financial stability and to mitigate and if possible avert future crisis (See Bossone and Promisle. Akyuz 2000). In particular. The major issues that need to be addressed are categorized under the following themes: (a) enhancing standards and transparency. 81. The domestic financial sector is also believed to be strengthened by cooperation of national and international institutions engaged in supervision and regulation of financial institutions (IMF. liquid capital flows through market based measure such as taxes and reserve requirements. (d) surveillance of national policies. This may be carried along the standards based on Basle Capital Accord that need to be applied by national authorities. Adherence to transparency is believed to enhance the performance and accountability of international financial institutions too (IMF. (e) provision of international liquidity and (g) orderly debt workouts (See IMF 1998. Moreover. Managing International financial crisis: the working group set up to examine this issue stressed the need to encourage better management of risk by private and public sectors. it wants to see governments’ limiting the scope and clarifying the design of guarantees that they offer. In particular information on the international exposure of investment bank. 1999). Bossone and Promisle 1999. including transparency of governments fiscal and monetary policy (Akyuz 2000). following the Asian crisis. These Ministers and Governors identified three key areas where immediate action is needed: (a) enhancing transparency and accountability. In this proposal the international community will set the standards for and improving the timeliness and quality of information on key macroeconomic variables. (c) management of capital account and exchange rate regimes. frequency and timeliness with which data on reserves. gathered to work on a new international financial architecture spearheaded by the Bretton Woods institutions. (b) strengthening national financial systems and (c) managing international financial crisis (IMF 1998). external debt and financial sector soundness are published. controlling short term. This accord has various requirements such as provision for risk and.renewed emphasis on examining the operation of the international financial system. Strengthening financial systems: this relates to principles and polices that foster the development of a stable and efficient financial system in areas of corporate governance. Transparency and Accountability: this relates to the importance of improving the coverage. which are significant players in the international financial system. (b) financial regulation and supervision. the rule developed for market based capital flows could hardly be relevant to such segmented market. (See section IX for detail). Even when it is believed.  A recent study by World Bank noted: (a) care must be taken to design appropriate policies at the initial stage of surge in capital flows as this .  Many of the proposal are focused on marginal reforms and incremental changes such as standards. which carry the supervision and regulation of national economies (such as credit rating agencies). Experience in Asia shows that selfsurveillance is much more important (See section IX for detail). Implications of this new financial architecture for developing countries in general and Africa in particular are many.(such as targeting the real exchange rate). provision of liquidity (to pre-empt large currency swings) by an international institutions such as IMF. Moreover. 83. it might have detrimental impact on flows to Africa or the interest rate spread of flows destined to Africa since private investors notoriously lack information about individual African countries. This list may include. For instance. This in turn has implication for reforming the rules of the international financial infrastructure such as the IMF quota system. Jha and Saggar 2000). This is in particular important in developing countries where the welfare consequence of financial instability is extremely harmful (See FitzGerald 1997a 199b). transparency etc instead of systemic instability issues raised in the wake of the Asian crisis – the focus is toward self-defense and market based solution. This gives industrial countries an excessive discretionary power since they have leverage on international financial institutions.  African countries need also to carry an in-depth study of the implication of internationally based rules and regulation to a region that is marginalized and perhaps participating in a segmented capital market. most of the debt owed to Africa is publicly guaranteed and in general based on sovereign risk. and an orderly debt workout (such as temporary standstill on debt servicing and provision of seniority status to new debt and similar arrangements) are tools that can be used in managing financial crisis in the context of the new financial architecture (See Akyuz 2000: 5-14). Thus. IMF surveillance over the policies of creditors as well as debtors. In particular the international financial architecture need to develop in the direction where the role of international financial institutions such as IMF is to reduce demand for liquidity ex ante (preventing collapse) and increase supply of liquidity ex post (organizing bailout) by designing appropriate strategy to tackle possible moral hazard problems. Public disclosure of financial and macro information may enhance instability. in particular if there are no asymmetric action/transparency by creditor countries and institutions such as IMF (See Akyuz 2000. may create a problem. Such solution is not sustainable (See Akyuz 2000)  Explicit rule based operation is generally resisted by industrialized countries.  The credibility of institutions. Such tools do also allow examining policy responses to such shocks (See section IX). Policy . annual average of 32 percent (26 % if S. Official Development Assistance (ODA) 3. 2001-2005 and 2006-2010. IX POLICY IMPLICATIONS 1. fiscal flexibility (in indebtedness). is very small if the implication of HIV/AIDS. In order to realize this. The theoretical and empirical analysis about determinants of ODA flows shows that donor interest. and 10 percent (8% excluding S. and (c) developing countries need to develop shock absorbers such as international reserves that varies with variation in capital account (as opposed to simple import cover). building up of cushions in the banking system and the like (See World Bank. The major conclusions that emerge from the resource gap analysis is that the continent needs an estimated external resource that amounts to 46. Africa) in the period 1999/2000. The geo-political interest of donors as well as the actual/bureaucratic process of aid delivery are specifically singled out as important. 4. 2. is much more important. policy makers need to design policies relevant for each category of (possible) source of external finance. The observed declining trend also strengthen the case for efficient use of the existing level of ODA more than ever. Africa is excluded). This figure. Africa is excluded). (b) development of well functioning capital market reduces potential instability.5 percent reduction in GDP is factored in. rather than recipient needs. 1997) Finally.8 percent of its GDP (40 % if S. largely determines success in dealing overheating and potential vulnerability. estimated to bring about 1 to 1. although apparently seems large. African countries need to develop tools (such as global models) that could be used to analyze the impact of Northern polices and external shocks on their region. The fall in percapita ODA and its declining trend needs to be a real concern since it is the main source of financing the resource gap of African countries. Mobilizing such high level of external resource is a formidable task. policy makers need to design ways of reversing this trend by working both collectively and at specific country level. Thus. The latter is believed to reduce poverty by half by year 2015. The rest of this section will outline such policy guidelines organized by each financing category. to attain 8 percent growth in GDP. This section attempts to bring together the policy implications of issues discussed in this paper. respectively. need to find ways of influencing these variables to bring about meaningful change in such flows. Aid dependency is also found to have long-term detrimental effect on existing institutional capacity of African countries that are already weak. 6. At specific level. makers. More specifically. the international community has also its share of the task such as: ensuring ownership of policies by recipients. aid effectiveness is also another policy direction. This requires specific polices and strategies aimed at (a) raising capital efficiency. Foreign Direct Investment (FDI) . The latter may include capacity building both at country and regional level. 9. (b) understand the budgetary/bureaucratic process of aid delivery from the supply side. donors need also to give at least equal significance to regional or continental undertakings. Policy making. African governments may need to put collective pressure on international donor institutions to realize the afromentioned objectives. which may help to create long run enabling environment. (b) transiting from aid-dependency in the medium to long run and (c) a strategy to tackle the terms of trade deterioration which is increasingly offsetting the aid inflow. thus. Finally. The modality of aid need also be based on partnership and shared vision of donors and recipients. with clear defined nation wide program (such as medium term budget or expenditure framework) with focus on social sectors. Thus. need to focus on insulating existing institutions from such effect by designing appropriate strategy. thus. Such capacity building needs to go beyond economic management to issues of governance.5. capacity building in the formulation and maintaining of medium term planning and budgeting approaches such as the Medium Term Expenditure Framework (MTF) which is increasingly informing macroeconomic management in many African countries. policy makers need to creatively design policy instruments that can positively influence these variables. policy makers need to identify and examine (a) the geo-politics of their country/regions so as to creatively use them. This may take the form of export diversification and developing collective bargaining position at regional and continental level. and (b) pursue growthoriented strategies from the demand side. In the face of the declining trend of ODA. which is central in aid management. 7. the pre-Lome association of African countries with Europe and their economic performance are much more important in influencing aid flows than humanitarian considerations. 8. Moreover. 13. In the long run. Drawing policy implications about other capital flows requires appropriate data. This is helpful both to positively influence them and to regulate their operation when such regulation is invaluable. Moreover. The recent surge in FDI in extractive sectors of African economies might be explained by the profitability of such sectors owing to the existence of fairly secured world market for such commodities (such as oil) and the relative (low) cost of creating an enabling environment for such industries (such as security and site-to-port infrastructure). mining activity as well as the historical pattern of FDI flows in attracting FDI. and analyzing such data both at regional and specific country level is central to make . Other Private Capital Flows 14. 12. In the short to medium term appropriate macro policy is important. a concerted effort to direct FDI flows to other sectors that have a potential world market through appropriate (and graduating) incentive structure is important. . availability of skilled labour force and enabling infrastructure is vital to attract FDI. From a long run perspective. Thus. This may include dealing with the development of an enclave sector. structural transformation to bring about meaningful change in market size. countries need to encourage joint ventures to strengthen local entrepreneurs and domestic technological capacity. The policy implication is that recipients need to offer enabling condition by investing on public goods such as security and infrastructure so as to make investing in their country less costly. detrimental transfer pricing and possible adverse effects of FDI on the infant and often less competitive domestic producers. These findings have two policy implications. they also need to develop appropriate regulatory framework to counteract possible adverse effects of FDI. FDI related empirical studies in Africa underscore the importance of relative market size. Critical analysis of the theoretical literature on FDI in African context suggests the importance of understanding Multinational Corporations (MNC) to understand FDI flows to Africa. policy makers need to invest in understanding on how MNC do operate. This is a major problem with regard to private capital flows. Finally.10. compiling. however. 11. Thus. as much as African countries need FDI. attracting such flows need to be carried cautiously. This is because of the notorious impact of such flows in destabilizing economies when investors suddenly pull them back. African policy makers. 15. need to bridge this information gap in a sustained manner. Moreover. This can be done by designing appropriate macroeconomic and financial policies. Studies also show that equity flows to developing countries are much more affected by country specific factors (while bond flows by global factors). 17. encouraging such flows is important. thus. In the face of this acute shortage of external resources. The policy implication is that African countries need to closely monitor the trend and pattern of push factors in source countries and exploit (or design ways of exploiting) such opportunities. To develop prudential regulatory and supervisory body at central banks and relevant regional bodies. At regional level. low repayment arrears and investment guarantees as well as provision of accurate (unbiased) information about Africa are important instruments. Finally. 18. competitive interest rate policy. regional integration and standardization of financial sector operations across regional groupings are important policy instruments to attract private capital flows. provision of foreign currency account facilities and a framework for appropriate financial sector supervision and regulation (see below). In the short to medium term the following policies could be very important: a. The empirical literature also points to the importance of push factors (such as trends of opportunities in home country of the investors) in influencing private capital flows to developing countries in general African countries in particular. This requires developing the capacity to monitor and analyze such trends both at country and regional level. 16. .informed policy. This may include creating stable exchange rate regime. policies aimed at improving the credit rating of African countries such as proper debt management. Investing on capacity building in such area could attain this. Recent studies also show that suppliers of such capital flows have no information about opportunities in Africa (because of partly negative media coverage). The observed low correlation between yields in African and emerging markets is an advantage to Africa since such funds can find their way in Africa when such yields are low in emerging markets. Notwithstanding the importance of domestic saving. Expansion of saving mobilizing institutions such as banks. such as family planning and basic (female) education. Finally. and d. according to the existing empirical evidence. Capital Flight and External Debt . Domestic Saving Mobilization 19. implementing fiscal and financial polices aimed at discouraging sudden withdrawals of such funds (as has been done in some Latin American countries) from recipient countries. and d. as well as encouraging labour-intensive and offfarm employment are instrumental to raise domestic saving. b. Thus. The existing African empirical evidences also emphasize institutional and structural factors that could determine the level of domestic saving. 20. We this caveat. the following pointers are singled out. there is a policy dilemma of raising external resources (in particular aid) and its negative impact on domestic saving. coming up with specific recommendation is difficult. thus. Second. demographic and social polices aimed at reducing dependency ratio. 22. Developing basic infrastructure. the empirical evidence about the determinants of saving is largely inconclusive. First. Structural transformation of the economy. This points to the need for conducting further research on the issue. 21. Gradual (step-by-step) implementation and appropriate sequencing of financial sector liberalization programs (especially the liberalization of the capital account). 23. This list includes: a. c. need to find creative ways of neutralizing the possible negative impact of aid on saving. especially transport. c. Policy makers. In the medium and long term. Tapping the potential in the informal saving which comprises the bulk of household saving in Africa.b. To develop the human capital required to carry out point (a) above. policy makers need to focus not only on growth but also (and perhaps more importantly) on its sustainability so as to bring about a positive impact on domestic saving. African countries. This may not that relevant to African countries where Asian-type volatile flows are not created yet. local ownership of technical assistance as well as raising productivity of public expenditure) needs to be an integral part of such strategy. appropriate policy designed to mitigate debtcreating flows is important in the long run. efficient use of such flows (e. In terms of debt. The New International Financial Architecture 27. since trade in primary commodities is the main source of debt repayment problems and indebtedness. This may be a medium term target. 26. polices aimed at macroeconomic and political stability. preferably collectively. 28. Moreover. In the immediate future.g. its content and relevance for African countries need to be a priority for formulating a common position by African countries. This system . The high incidence of capital flight in Africa is explained by return differential. risk (such as nationalization. Thus. 25. Such rules need to be agreed upon by all members of the international community so as to avoid the risk of discretionary power that is often exercised by developed countries. implicit taxes for instance inflation and overvaluation of the currency) and indebtedness. An in-depth study of the reason for the new initiative (such as the Asian crisis).24. 29. need to push for explicit and transparent rules applicable to all countries depending on their specific condition. debt management and appropriate incentive structure as well as provision of foreign currency denominated banking services are important. Moreover. African policy makers need to articulate their own need and attempt to bring such issues on board when a new financial architecture is being designed. setting up of standards of regulation and supervision of financial institutions. although collective voice for debt cancellation is important. Addressing these problems may have a positive impact on reversing capital flight. however. Such body also needs to engage in transparent and democratic (with full participation of member state) manner when it evaluates the financial performance of individual countries. There is also a need for having democratic and transparent body responsible for credit rating. a structural transformation of African trade is fundamental to tackle the debt problem. In the long run. The impetus for designing the new international financial architecture came from the Asian crisis and focused on problems specific to that region. for Africa need to be critically examined. the implications of the rules of the new international financial architecture. .9 -1. of Goods and NFS as share of GDP (%) .1 -0.2 -1.6 1.4 2.8 -2 0.5 1.2 0.6 1.1 2.7 1.8 -1.4 -0.8 -1. South Africa] [Sub-Saharan Africa excl.4 [North Africa] [West Africa] [All Africa] [Sub-Saharan Africa] [Sub-Saharan Africa excl.2 -1.1 -0. South Africa and Nigeria] 0.9 2.4 -4.2 -1.5 -1.2 1.1 -2 -0. APPENDIX I: DATA APPENDIX I: DATA Table 2. This is because Africa is participating in a segmented international capital market where lending is characterized by sovereign risk.6 -2.4 1 0.9 -4. Finally. Table 2.8 Source: World Bank (2000).5 0.1 -0.5 -0.9 4.6 0.7 1.needs to rely more on self-surveillance so as to minimize external control and develop local capacity.1 -3. which is being build up in the context of competitive capital market-based system.4 0.9 -0.9 0.4 0. World Bank African Database CD-ROM.9 2.5 2.2 -1.2 -1.1 Real GDP per capita growth (%) 1990 1991 1992 1993 1994 1995 1996 1997 1998 [East and Southern Africa] -2. The implication of this market differentiation is important because rules developed in the context of an integrated capital market.8 0.2 -0.2 0.2 Exp. 30.7 1.3 -1 -1.4 -1.5 -1.5 -0.7 -2.5 1 -0.6 1.9 -3.5 -4. may entail marginalization of African countries from benefits of the international system (such as international bailing-out or stabilization) simply because they are participating in segmented portion of that market with asymmetric structure and rules.3 2.6 -2. though relevant for countries that operate in such market.3 1. 1 Source: World Bank (2000).7 15.1 16.9 28. 36.5 34.8 27.3 Gross Domestic Investment as share of GDP (%) 1990 1991 1992 1993 1994 1995 1996 1997 1998 [East and Southern Africa] 13. World Bank African Database CD-ROM.8 29.9 20.6 16 20.8 34.8 28.7 1994 16 18.9 17.1990 1991 1992 1993 1994 1995 1996 1997 1998 [East and Southern Africa] 24.2 13.4 33.1 22.3 20 12 22.3 23.4 19.1 24.2 Source: World Bank (2000).5 .8 19.5 19.1 18.5 18 18.1 25.6 16.8 17.7 16.5 28.1 29.8 15.4 18 18.2 16.5 [North Africa] [West Africa] [All Africa] [Sub-Saharan Africa] [Sub-Saharan Africa excl.7 17.9 19.1 17.1 26.7 28.9 23.8 17.8 26.7 15.6 31. South Africa] 17.5 18.7 15.2 26.8 30.8 26.2 23.4 31.7 18.7 20.3 27.5 26.5 1996 15.2 32 29.3 17 23 19 19.4 Gross Domestic Savings as share of GDP (%) 1990 1991 1992 [East and Southern Africa] 1993 14.6 32..5 14.7 17.4 18.7 20. South Africa and Nigeria] 18.2 25.1 21. South Africa] [Sub-Saharan Africa excl.7 18.6 17.4 1995 16 18.1 32.2 17.9 16.6 16.3 17.5 15. South Africa] [Sub-Saharan Africa excl.8 33.2 18.3 20 18.4 30.1 27 23.8 19.1 16.2 28.9 19.9 29.2 31.2 36.5 24.7 27.3 [North Africa] [West Africa] [All Africa] [Sub-Saharan Africa] [Sub-Saharan Africa excl.1 25.1 17.8 27.6 17.1 27.3 19 23.5 19.5 30.8 19. Table 2.1 14.1 13.1 17.8 31. World Bank African Database CD-ROM.9 24.8 26.7 32.7 17 15.7 .4 17.4 19.8 25.8 17 17.7 18.9 32.7 12.9 16.5 27. South Africa and Nigeria] 28.4 14.6 16.4 23. Tables 2.9 20.9 27.2 17.9 35.6 24.9 30.7 25.7 32 38.2 [North Africa] [West Africa] [All Africa] [Sub-Saharan Africa] [Sub-Saharan Africa excl.8 16.8 20.4 19.1 29.4 14.2 18.4 22.8 26.1 13 10.2 17 15.7 18.2 1997 1998 15.1 28.3 21.2 34.2 18 13.7 18.5 11.9 14.5 15 17.9 18.2 29.8 19.5 16.2 17.9 20.1 33.4 18. 9 5.6 1.8 14..2 5.4 14.6 12.1 13 9.2 4. World Bank African Database CD-ROM.5 10 8.3 .8 10.8 4. Tables 2.7 1993 12.9 8.9 6. 4. 5.5 15 12.6 13.7 12.321. Source: World Bank (2000). 1998 11 10.70 1.7 14..6 9..1 1994 13. World Bank African Database CD-ROM. US $ in Million 1990 1991 1992 1993 1994 1995 1996 1997 1998 [East Africa] [North Africa] [West Africa] -71.9 12.1 1995 4..4 4.7 16.3 14.10 1.308.7 1.6 14.4 13.6 7.1 14.5 16 8.2 5 7.229.3 Source: World Bank (2000). South Africa and Nigeria] 11.8 15 13.8 12.5 1996 3.8 1995 13.8 2.6 13.50 2.00 1.30 1.1 14. South Africa and Nigeria] 5.7 8.7 18.7 13 1991 15. Table 3.281.9 6.4 11..811.415.8 5.7 1992 9.6 .3 12. 3.3 7 11.4 . as share of GDP (%) 1990 [East Africa] [North Africa] [West Africa] [All Africa] [Sub-Saharan Africa] [Sub-Saharan Africa excl.5 11. Tables 4.90 1.3 12. cur.740.4 16.585.6 10.1 9..5 5.6 12.5 17. South Africa] [Sub-Saharan Africa excl. 7 .054.8 19 16.[Sub-Saharan Africa excl. 1.6 2.4 8.8 5.00 -32 -264.8 1.3 20.3 1992 5. Savings as share of GDP (%) 1990 [East and Southern Africa] [North Africa] [West Africa] [All Africa] [Sub-Saharan Africa] [Sub-Saharan Africa excl.053.1 Net ODA from all donors.4 13.80 726.6 13.2 1997 3.. World Bank African Database CD-ROM.6 .4 1991 4.4 5.5 563.4 1.20 1.697. OECD source.10 1.7 -313.330.352.1 6.40 647.2 14.30 1.8 1.8 1997 1998 12.8 17.8 13.253.5 827 969.9 3.5 16.8 10.2 1993 4.6 .1 5.2 10 11.6 11.20 2.9 13.3 14.396.90 2. South Africa] 14.2 9.1 1.6 9.4 10.50 2.9 [Sub-Saharan Africa excl.7 14.6 7 10.00 2.321.8 12.6 16.1 .8 4.1 18.1 Foreign Direct Investment (Net.6 5.3 12.1 10.5 12.8 17.5 Gross National.3 4 6.2 14.6 5.5 10 1994 4.2 5.7 7. South Africa and Nigeria] 15 16.20 .699.7 Source: World Bank (2000).30 3.831.8 9.8 1996 12. 2 1.88 0.039.70 5.868.70 3.022.38 0.09 -0.03 0.02 1.60 857.17 1.180. South Africa and Nigeria] 1.32 1.09 2.76 2.005.90 0.6 1. World Bank African Database CD-ROM.655.61 -0.54 -0.91 0.571.2 Foreign Direct Investment (as % of Recipient’s GDP) 1990 1991 1992 1993 1994 1995 1996 1997 1998 [East Africa] [North Africa] [West Africa] [All Africa] 0.642.067.76 0.08 0.56 0.333.90 0.[All Africa] [Sub-Saharan Africa] [Sub-Saharan Africa excl.40 -361.608.52 0.45 1.43 1.40 2.342.90 1.29 0.682.50 4.05 1.38 1. South Africa] [Sub-Saharan Africa excl.40 755.00 3.40 1.9 1.50 1.642.36 0.60 760.07 2. South Africa and Nigeria] Source: World Bank (2000).3 2.462.343.30 0.18 [Sub-Saharan Africa] [Sub-Saharan Africa excl.80 3.40 1.921.57 0.2 1.60 158.61 1. South Africa] [Sub-Saharan Africa excl.1 729.23 1.25 0.310.59 1.83 2.83 0.13 1. World Bank African Database CD-ROM.695.00 2.017.79 1.58 0.90 1.56 0.35 1.28 2.72 2.00 4.69 0.01 1. Tables 4. Table 4.40 2.86 0.734.96 1.04 2.10 1.22 0.2: Private Capital flows to Sub-Saharan: Comparison of International and Country Data (In Millions of US Dollars) 1990 1991 1992 1993 1994 1995 1996 1997 1998 FDI UNCTAD 1132 2078 1547 2049 3667 4792 4275 4604 Portfolio Equity IMF 4 -852 -799 882 231 1477 1426 World Bank Bank (MLT net) 0 0 144 174 174 860 4868 2012 1507 BIS/OECD 814 -2568 -1100 -1400 -1100 -400 600 4000 .70 3.319.483.12 0.10 0.870.35 0.33 0.108.30 Source: World Bank (2000).50 5.46 0.80 2.05 0.45 0.76 1.80 1.065.68 0.13 0.41 0.00 6.70 2.46 0.9 1.60 1.50 3.60 990.346.426.10 2.813.70 3.00 8. 0 40.4 UNCTAD 203.0 45.0 Uganda Country Data UNCTAD 0.0 55.0 -3.0 -6.0 3 3.0 150.8 15.0 760.0 3.0 148.0 3.0 Zambia Country Data 203.0 49.0 34.1 31.IMF 5400 700 2500 1300 1700 1700 -900 World Bank -762 85 -1104 261 -503 -458 -1996 -1399 Bonds IMF -264 486 2548 260 1507 1420 1211 World Bank -941 215 237 -30 1473 851 586 1193 Data Comparison of FDI Flows South Africa Country Data 1990 -69.0 918.0 157.0 212.0 -19.2 121.0 68.0 172.0 67.0 98.3 35.1 1995 981.7 1992 -24.8 12.7 1991 184.0 70.0 16. Portfolio: .5 29.0 121.0 56.0 1996 760.1 125.0 121.0 UNCTAD -12.0 210.9 104.0 Tanzania Country Data UNCTAD -3.0 250.0 3.9 120.5 1993 -14.7 1994 295.0 168.0 70.2 2.0 52.0 10.0 Zimbabwe Country Data -12.0 54.0 34.0 97.0 75.- 121.0 1.0 20.0 50.1 50.0 1.0 -42.4 1997 1998 UNCTAD -5.6 55.0 38.0 175.0 Source: Bhinda et al (1999) Notes: FDI UNCTAD World Investment Report 1996-8 (SSA total is calculated as ‘Other Africa’ plus South Africa).2 88.9 20.0 88.0 117.0 118.0 250.0 1705.0 338.0 58. 9 9.5 315.4 335.7 54.2 4.2 57.0 10.1 61. Global Development Finance 1999.7 1.2 60.3 51.9 3.6 26.0 37.4 23.9 124.5 0.8 38.5 98.9 94.2 25.2 19.8 39.6 70.4 75. 2.0 75.0 85.3 107.4 36.0 49.0 253.2 33. Global Development Finance 1998/99.0 266.9 91.1 176.6 18.9 13.0 39.4 36.4 12.7 .7 72.3 37.6 40.1 11.9 28.5 14.5 24.9 183.7 74.7 231.4 21.9 8.5 12.8 46.5 112.1 37.4 3. Balance of Payments Statistics Yearbook 1997.7 112.5 13.2 13.4 40.7 13. All Africa) Multilateral (DOD).1 13.6 104.3 4.1 91.4 38.6 23.0 103.9 64.9 28.2 0.2 35.6 23.1 35.4 182.2 234. Vol.7 8.7 73.2 103.2 44.6 33.9 18.2 68.3 324.6 33.1 182.2 84.6 21.7 29.’ various Issues Bonds: World Bank.2 1. IMF.5 22.3 50. unless otherwise stated) 1971 Total External Debt Stock (EDT) East and Southern Africa (ESA) North Africa (NA) West and Central Africa (WCA) Sub-Saharan Africa All Africa Long-term External Debt (total. East and Southern Africa North Africa West and Central Africa Sub-Saharan Africa All Africa Bilateral East and Southern Africa North Africa West and Central Africa Sub-Saharan Africa All Africa Private creditors (DOD) East and Southern Africa North Africa West and Central Africa Sub-Saharan Africa All Africa 1.2 80.4 21.. Global Development Finance 1998/99.6 10.1 230.7 31.3 51. IMF.4 22.7 13.2 27.2 256.0 14.1 227.9 17. Balance of Payments Statistics Yearbook 1997.3 55.6 4.7 98.6 20.3 57.4 79.7 194.2 93.2 26.8 49.2 94.6 1975 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 4.3 8.6 3.3 235.4 69.0 3.8 18.1 35.4 19.7 43.2 37.0 38. Tab B-29 Table 7.1 36.0 25.8 16.6 1.4 281.0 98.2 2.6 36.9 260.0 94.8 13.7 231.3 17.0 28.0 27.9 34.1 88.9 5.7 131.8 42.4 15.7 39. Vol 2 Tab B-28 Bank: IMF.4 38.4 269.0 29.6 51.5 0.9 94.5 50.8 329.8 20.6 60.3 30. World Economic 5/97.3 14.7 32.1 2.7 18.7 12.1 74.4 25.0 1.9 101.0 88.0 4.0 6.3 11.3 12.8 90.2 38.0 223.7 77.8 16.0 73.0 4.8 221.1 3.3 34.0 2.6 125.6 53.2 107.1 13.6 55.Equity: World Bank.1 56.2 7.1 11.1 99.8 51.2 8.5 27.1 17.8 2.9 27.6 140.8 20.6 7.2 50.6 12.9 26.0 2.2 90.1 1.6 3.2 48.1: Major Debt Indicators for Africa (In billions of US dollars.2 57.7 23.6 7.6 33.9 249.9 18.7 53.7 5.8 61.8 17.5 34.9 12.7 10. BIS/OECD Statistics on External Indebtedness: Bank and Trade-Related non-Bank External Claims.5 6.8 13.2 271.7 41.2 66.9 10.7 94.6 111.5 37.8 274.0 18.0 17.7 93.9 8.3 37.7 227.0 129.1 315.3 92.2 111.4 0.6 34.7 107.1 54.6 32.2 21.1 40.3 14.9 70.4 106.5 1.4 12.4 60. World Bank.7 101.9 41.6 5.9 7.4 27.0 132.6 11.2 0.8 36.7 80.5 28.4 86.8 82. 2 17.3 1.5 23.4 n Africa 9 9 8 2.66 5.2 25.48 2.04 0.13 2.0 Africa 0 2 1 1.5 2.8 26.4 21.5 22.5 3.0 2.6 27.9 3.28 SubSahara 1.68 1.3 4.01 2.74 2. unless otherwise stated) 197 197 198 198 199 199 199 199 1994 199 199 199 199 1 5 0 5 0 1 2 3 5 6 7 8 Net Transfe r on Debt East and Souther 1.86 5.5 16.57 0.5 n 1 6 0.57 4.2 18.2 4 8 5 0.1 Souther 8 0 8 5.46 5.55 6.4 6.6 3.02 0.5 18. Table 7.83 2.77 5.32 2.53 5.06 5.49 2.85 2.57 1.4 1.98 3.0 2.6 35.62 7.6 0.9 3.9 26.0 8.5 25.3 19.1 10.80 2.9 1.3 14.7 2.0 28.15 4.27 2.07 0.89 0.2 12.0 17.18 0.2 3.7 25.0 0.3 19.1 25.4 0.6 5.2 14.2 0.4 3.47 0.5 19.3 9.86 4.7 0.65 1.6 2.3 0.7 21.5 12.4 32.0 7.3 6.1 21.15 6.64 3.55 1.71 5.32 6.1 4.84 0.32 North Africa 0.5 4.0 0.8 1.4 1.1 36.49 3.57 7.2 0.9 8.8 12.2: Major Debt Indicators for Africa (in Billions of US dollars.3 10.4 34.37 7.6 15.58 4.39 5.97 West and Central 0.33 0.48 Africa 0 All Africa Aggreg ate Net Transfe r East and 1.45 0.9 10.22 2.1 6.6 Source: World Bank ‘Global Development Finance’ (2000).76 3.80 3.3 17.Interest and Principal Arrears (Percent of total external debt) East and Southern Africa North Africa West and Central Africa Sub-Saharan Africa All Africa 0.37 4.1 2.5 24.45 1.5 0.31 3.6 34.80 0.4 4 9 1 0.33 3.2 35.71 5 .3 18.78 1.4 0. 3 25.49 4.6 8.04 1 9.n Africa North Africa 0.2 70 33 53 1 1 0 9 1 5 9 4 2 5 West and Central 51.8 51.4 94.1 55.0 30.9 24.7 115.77 2. 42. n Africa 87 12 32 6 5 1 66 12 51 18 93 40 55 North 29.3 67.3 33.6 26.4 5.8 32.6 25.6 40. 35. 39.2 1.19 5.0 31.3 22. 44.60 3. 57.68 Africa 3 All Africa 1.08 8.1 Africa 9 4 6 1. 31.39 1.52 1. 32.4 28. 103. 141.4 52.6 31.0 43.5 28.9 75.5 29.20 West and Central 0.54 0.6 68.2 24.41 4 1 8.8 28.9 36.3 n 1 1 4.7 35.3 58.9 31. 49.80 1.75 1. 16.6 99.1 1.0 24. 58.7 15. 111.7 32.7 20.3 13. 116.3 27.44 9.43 1 4.23 8.54 0. 23.6 37.28 2.95 SubSahara 1. 133.7 61.05 2.5 31.6 30.9 n Africa 81 39 77 6 1 1 4 4 6 6 8 5 4 North Africa 38.2 11.3 37. 114. 84.83 1 5 6 8.23 0.1 13.1 10.1 26.4 5.8 50.0 32.8 Africa 54 90 37 1 4 8 2 8 1 6 1 3 6 SubSahara 61.3 30. 36.80 0.66 3 6.4 3.45 3.7 31.9 6 9 5 2.1 2.7 32.08 0.29 2.4 30.3 12.48 Technical cooperation grants (as percentage of total grants) East and Souther 61. 37. 32.6 0 0 6 7.2 71.0 69.97 8.0 12.1 32. 54. 36.2 38.0 27.51 8.0 33. 36. 77.1 40.8 n 6 9 1 6 5 0 9 0 2 Africa 36 23 60 2 All Africa Debt (EDT)/ GNP (%)* East and Souther 19.0 33. 50.5 03 78 57 1 4 4 0 4 5 4 6 1 3 . 46.9 8.2 43.8 13.1 68.9 33.32 1.2 29. 1 18.5 69.4 29.0 94 54 26 2 0 9 1 0 3 6 9 4 7 West and Central 5.3 15.3 n 1 8 1 9 7 7 2 4 2 Africa 55 52 45 7 All Africa Debt service Ratio (%)* East and Souther 8.Africa 33 56 07 7 8 1 0 2 8 5 6 5 1 West and Central 21.8 22.7 18.9 70. .2 15.2 17.9 12.8 21. 7. 70.0 19.8 14.. 15.1 67. 23. .8 21.2 36.5 24.3 67.1 15.5 77.2 6.7 14.5 73 1 4 2 4 4 1 8 9 1 3 .. 30.8 17. 23. 145. .1 73.4 18.5 21. .7 22.5 37.5 15.3 77 2 27 4 6 8 1 9 6 8 5 0 8 21.. Africa 35 61 61 68 16 89 63 20 63 95 27 02 SubSahara 14.3 15. 8. 121.7 17. 22.5 22.5 12.8 13.4 21.2 12.9 22.0 76. 21. 163.5 14.7 72.9 64.20 7 9 2 2 8 14. 59.8 24.4 12.2 18.6 69.2 14. 23.0 Africa 8 8 16 8 9 2 3 2 2 8 9 2 8 SubSaharan Africa . 106. 167.6 14. 158.8 67. .6 17.9 82.2 19. 127. 147.6 62. 27.0 63.8 20. 40. 56.1 22.5 9. .5 73.9 18. All Africa .9 23. . .3 63.6 0 8 2 6 8 9. 146. .2 32.2 14.5 62. .9 17.3 65.1 20.2 14..4 n Africa 4 3 23 9 7 3 9 5 6 6 6 9 9 North Africa 21.9 34. . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . debt restructuring may entail overstatement of such flows by the amount of what are termed ‘inferred flows’. which are to be distinguished from cash flows. .. . . Data relating to such flows are generated by examining the change in the stock of such debt. from principal arrears. * Simple arithmetic mean (based on those countries that have relevant data Source: Based on World Bank ‘Global Development Finance’ (2000). .1 Determinants of Official Capital Flows to Africa: Econometric Results This section details some econometric results relating to the determinants of official capital flows to Africa. To a degree. Technical Appendix 3. However. say. rescheduling of principal was negligible in most African countries. This derivation has the advantage of making stocks and flows consistent. this overstatement may also be offset by debt forgiveness. APPENDIX II: TECHNICAL NOTE APPENDIX 2 TECHNICAL NOTE . . The remaining data is obtained from the World Bank’s World Tables and World Debt Tables as well as from the Inter-American Development Bank’s ESPLA dataset (various years). . On the other hand. Net transfer = Loan disbursements less amortization and interest payment [as defined in World Debt Tables]Aggregate net transfer = Aggregate net resource flows (Loan disbursements less amortization) plus official grants (non-technical) and foreign direct investment (FDI) less interest payment and FDI profit [as defined in World Debt Tables] . These inferred flows. might result. up to the mid-1980s. since a higher ratio is the result of a higher relative value of the numerator. based on the same line of thinking. This is switched on if SAP policies are being applied in the country in question and switched off if they are not. PY percapita income. A further important feature of official capital flows to Africa relates to the fact that the budgetary considerations in the North will have an influence on such flows. A related economic self-interest argument is the debt service ratio (denoted below as D). in keeping with the World Bank definition. The developmental/humanitarian argument (denoted below as PY) is assumed to reflect the ratio of per-capita income in other regions in the South relative to that of Africa. is difficult. FDI is foreign direct investment. The dummy (Dum SAP) shows the structural adjustment related flows. as South Asia and Latin America) is given below. The import ratio (denoted below as M) and the FDI ratio (denoted below as I) are assumed to support the economic self-interest argument. M is import. from the donor's perspective. because proper evaluation of aid's impact. The subscript ot and A stand for Other South and Africa. as well as by developmental and humanitarian considerations (a blend of the two schools noted in the main text). The official flows to Africa are assumed to be determined by economic.A simple model of the determinants of allocation of official capital flows between Africa and the rest of the South (defined here. this relative position is explicitly defined. Unlike other studies. The latter is hypothesized to imply lower levels of flows to Africa. DSR is the debt service ratio and DumSAP is the structural adjustment dummy active since 1985. All parameters. political and strategic self-interest arguments. with due consideration given to making corrections for previous mistakes. The assumption behind the former argument is that most imports come from the North. the underlying determinants of budgetary allocation for the previous period may well influence the current budgetary process. which are likely to shape the flow of resources from the 'mother' country. The estimation is then undertaken for the three regions in Africa using the following final general form of the estimated model: Where: Fbm is Bilateral and Multilateral flows to Africa. Thus. This is captured by the Error . respectively. b 2 and b 4. The FDI ratio is also used. except b 0. at least in the short run. The Fbm is denoted by F. This choice is made based on the assumption that most mining sectors in South are dominated by Northern companies. are expected to be negative. which may also indicate repayment capacity of borrowers. which may also be interpreted as the political/strategic self-interest argument. aid inflows from the North are geared towards strengthening the export sector of the donor countries. The relative share of the mining sector in GDP of Africa (MINA) vis-à-vis other regions in the South (MINOT) is also used. Indeed. based on aggregate flows. and so was excluded. The debt service ratio is also found to be highly correlated with the import ratio.62) BG=1. this ratio has been omitted since an alternative equation to 3. However. + 5% and ^10% level of significant.32 Jarque-Bera 0. this estimation has been chosen and reported above.1_ESA. hence. The short-run coefficients are not found to be statistically significant. which are based either on a time series estimation. the best estimated equations for the three regions in Africa (using the ECA classification) are given below.30) Sample 1970-92. (a) East and Southern Africa (ESA) [3. having a simple correlation coefficient of 0. The estimation of 3. using the debt service ratio. However.3* Reset 0. However.99. Nevertheless. following an exhaustive search process.26(0. its inclusion would result in multicolinearity. the relative (to other South) level of imports and FDI flows . without a formal test for non-stationarity (see the survey by McGillivray and White 1993). Values in bracket are t-values. yields an average value and. which separately use bilateral and multilateral flows as dependent variables.1_ESA] R2-adj = 0. The estimation is based on the data that ranges from 1970-92.70.01(0.Correction Model (ECM) adopted. This data is too short to undertake a fully-fledged co-integration analysis and the result should be taken cautiously. performed comparatively less well. were also attempted. Thus. the potency of the parameters decreased when we used bilateral flows and increased with multilateral flows. Two other estimations. However. rather than the import ratio. neither of these was found to be statistically significant. We have identified that most series are I(1).1_ESA we have experimented with the ratio of value added from the mining sector as well as a structural adjustment dummy. having a lower level of significance. in the long run. this estimation is comparatively better than existing empirical studies. These equations have also been tested for cointegration and a null hypothesis of no co-integration is rejected for all.2(0. * implies 1%.1_ESA. LM is a hetroscedasticity test while BG is the Breuch-Godfery test for serial correlation. In the estimation for equation 3. This should cast doubt on simple OLS time series studies conducted so far. or on a cross-sectional analysis only (See Anyadike-Danes and Anyadike-Danes 1992). while for diagnostic test P-values.93) LM 0. The result shows that 89 per cent of any deviation from this long-run equilibrium in the previous period is made up for in the current period. The 5% (2 degrees of freedom) value for Jarque-Bera is 5. which also tackles the non-stationarity problem of the series used. Signs remained unchanged from the aggregate form. Hence. 3(0. (b) North Africa (NA) [3. a further estimation. LM is a hetroscedasticity test while BG is the Breuch-Godfery test for serial correlation.3_WCA is undertaken once the null hypothesis of no co-integration has been rejected. nevertheless. within this region.27) Sample 1971-92.14(0. separately. The variables I. Neither is the per capita ratio. yields a nearly identical result. although some serial correlation . it is included within the estimation. while for diagnostic test P-values. LM is a hetroscedasticity test while BG is the Breuch-Godfery test for serial correlation.86(0.99. the import ratio (although needs causality test) has relatively the more important influence.2^ Reset 3.07) LM 0. since its t-value is closer to one. Values in bracket are t-values. a simple OLS estimation is made. + 5% and ^10% level of significant. Of these.07) Sample 1972-92.64 Jarque-Bera 1. Hence. Per capita income and debt service ratios are found to be statistically insignificant.17 Jarque-Bera 3. * implies 1%.within the ESA region determine the official flows to that region.3_WCA] R2-adj = 0. Neither does the separate use of bilateral and multilateral flows significantly change the result.97) BG=4(0. Indeed. Within the WCA region the individual series are I(1).1 * Reset 0. while for diagnostic test P-values. Moreover.71) BG=1. However. using bilateral and multilateral flows. (c) West and Central Africa (WCA) [3. YP and D are found not to be statistically significant. to an acceptable level of around 30 per cent. based on a specification test.2_NA] R2-adj = 0. The 5% (2 degrees of freedom) value for Jarque-Bera is 5. Hence this ratio could be excluded from the estimation. In fact.37) LM 0.00(0. The individual series within the NA region are found to be stationary.99. The 5% (2 degrees of freedom) value for Jarque-Bera is 5. The statistical significance of the adjustment coefficient may. Imports are fond as important arguments. humanitarian and structural adjustment related arguments are not found to be statistically significant. however. * implies 1%. + 5% and ^10% level of significant. be taken as showing the importance of the past budgetary practice of donors in influencing current allocations. The estimation 3. in all cases. the inclusion of these flows actually improves the RESET value. Values in bracket are t-values.91(0. for example. It is noted here that imports are important in WCA region too. such as the mining sector. and the dummy by DumSAP. The higher this ratio. This estimation is undertaken for three African regions using data 1970-1992: Where: The subscript ot refers to other South (South Asia and L. nevertheless. America World Bank definition) and A indicates the African region in question (East & Southern [ESA]. This is inferred from the error correction part in the Error Correction Model (ECM). Technical Appendix 4. the log of the mining ratio by M. which summarizes aggregate official flows. the result of the Error . electronic) as well as the Inter-American Development Bank’s ‘Economic and Social Progress in Latin America (ESPLA)’ (various years). The lagged level of FDI aims to show the historical pattern of FDI flows (taking account. The ratios used as regressors are computed from their respective index (1990=100). The null hypothesis of no co-integration is rejected. a simple model of FDI determination. A co-integration test is conducted for the ESA and WCA regions. Denoting the log of FDI by I. there has been a tendency for such flows to increase in recent years (Kasekende and others 1995. The second argument (Ming) gives the ratio of the value added of the mining sector. the log of the GDP ratio by Y. by examining the pattern that this has taken.3_WCA.problems are exhibited. Fernandez-Arias and Montiel 1996. Indeed. In general. The data is obtained from World Bank World Tables (1994.1 Determinants FDI Flows to Africa: Econometric Results The level of FDI flows to African countries is extremely low. we may be able to make useful inferences about the future of these flows. equation 43. will now be formally estimated. Although FDI does not represent an important financial flow to Africa. in the recent past. Bhinda and others 1999). but have not found this to be statistically significant. Thus. as representing an alternative indicator of market size. is found to be preferable when all properties are taken into account. the lower the relative size of African markets and hence the lower the level of FDI flows to these markets. All of the variables in each of the equations are found to be an I(1) series using the ADF test at a 5 per cent significance level. we have experimented with similar ratios for imports. Before arriving at this parsimonial form. with the aim of showing the relative size of the market. North [NA] or West & Central [WCA] Africa) The first argument (GDP ratio) is included. The existing flows are also concentrated within a small number of export enclaves. based on the major features of the ‘eclectic’ approach. of colonial ties). Other notes as given in equation 4. the GDP ratio for the ESA .99 (b) North Africa (NA) [4. and the OLS for the NA region is given below.76(0. Other notes as given in equation 4.92) LM 0.7+ Reset 0.71) BG=0. as can be inferred from the non-stationarity observed here.07) Sample 1970-92. which severely limits the ECM model adopted.21) LM 1.09(0.3(0. + 5% and ^10% level of significant. we have experimented with a number of different estimations. For equations relating to the ESA region.4 + Reset 0. Of these.01(0.1_ESA.4(0.Correction Model (ECM) for the ESA and WCA regions. This is particularly the case since such OLS estimations might. Nevertheless. The 5% (2 degrees of freedom) value for Jarque-Bera is 5.1_ESA. the results remain better than might be arrived at through a simple OLS based estimation.1_ESA] R2-adj = 0.92) LM 0. the result given above is found to be relatively the best. in fact be spurious.2_NA] R2-adj = 0.31 Jarque-Bera 4. (a) East and Southern Africa (ESA) [4.01(0. * implies 1%. the major one relating to the absence of a long enough time series. LM is a hetroscedasticity test while BG is the Breuch-Godfery test for serial correlation.14 (0.45 Jarque-Bera 4. (c) West and Central Africa (WCA) [4.30 (0.61 Jarque-Bera 2. These results throw up a number of problems.60) BG=4(0.5+ Reset 1.12) Sample 1970-92.26) BG=2. Based on this equation.3_WCA] R2-adj = 0. Values in bracket are t-values.77) Sample 1970-92 (Of which only 11 observations are used). while for diagnostic test P-values. investment in mining representing a case in point. if the GDP per capita figure is used. in fact. FDI within the home country (or credit) is used as a dependent variable. it is essential to undertake such an analysis. Hence. then such a relationship may be identified. ADB (1998). cointegration is true. the length of available time-series remains short and so. should be taken as good approximation.C. African Development Report 1998. the estimation is based on a simple OLS. . However.P. (1980) ‘Determinants of Foreign Direct Investment: A Survey’. and hence is dropped from the estimation for this region. only within this region. References: African Development Bank. is the structural adjustment dummy found to be important. which may suffer from spurious regression unless the assumed. the estimation for the WCA region is comparatively sounder. D. levels of FDI within the NA region are.: International Monetary Fund. Washington. which limits the scope for use of a cointegration analysis. Therefore. coming in the form of credit. instead. found to be negative. Finally. 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