Corruption and Pro-Poor Growth Outcomes: Evidence and Lessons for African Countries

There is growing consensus that corruption hurts economic performance by reducing private investment, adversely affecting the quantity and quality of public infrastructure, reducing tax revenue, and reducing human capital accumulation. In addition to inefficiency effects—lower growth for a given endowment in factors and technology—corruption also has adverse distributional effects as it hurts the poor disproportionately. For a given level of government budget and national income, high corruption countries have lower literacy rates, higher mortality rates, and overall worse human development outcomes. Corruption deepens poverty by reducing pro-poor pubic expenditures, creating artificial shortages and congestion in public services, and inducing a policy bias in favor of capital intensity, which perpetuates unemployment. High levels of corruption in African countries constitute one of the factors behind slow growth and limited progress in poverty reduction. Eradicating corruption in African bureaucracies is a challenging task, especially because it is a systemic phenomenon with effects that often lag far behind the causes. Therefore, explicit strategies are necessary to change the incentive structure by modifying the payoffs and sanctions that govern the interactions between bureaucrats and private economic operators. Strategies to fight corruption include measures to increase transparency in the management of public resources, establishing an incentive structure that rewards honest behavior among civil servants, enforcing transparency in international contracts and equal penalties to all parties to corrupt deals, and promotion of a free and responsible media.Corruption; pro-poor growth; rent-seeking; African countries

Financial Development, Financial Structure and Domestic Investment: International Evidence

Does it matter for domestic investment whether a country’s financial system is bank based or stock-market based? This paper posits that financial intermediation affects domestic investment notably by alleviating financing constraints, allowing firms to increase investment in response to increased demand for output. The key result is that the structure of the financial system has no independent effect on investment, in the sense that it does not enhance the response of investment to changes in output, while financial development makes investment more responsive to output growth. Consequently, rather than promoting a particular type of financial structure, countries should implement policies that reduce transactions costs in financial intermediation and enforce creditor and investor rights. This will facilitate the development of banks and stock markets, which will stimulate domestic investment.domestic investment; financial development; financial structure; bank-based systems; stock-market-based systems

Distributional conflict, the state, and peace building in Burundi

This paper examines the causes of conflict in Burundi and discusses strategies for building peace. The analysis of the complex relationships between distribution and group dynamics reveals that these relationships are reciprocal, implying that distribution and group dynamics are endogenous. The nature of endogenously generated group dynamics determines the type of preferences (altruistic or exclusionist), which in turn determines the type of allocative institutions and policies that prevail in the political and economic system. While unequal distribution of resources may be socially inefficient, it nonetheless can be rational from the perspective of the ruling elite, especially because inequality perpetuates dominance. However, because unequal distribution of resources generates conflict, maintaining a system based on inequality is difficult because it requires ever increasing investments in repression. It is therefore clear that if the new Burundian leadership is serious about building peace, it must engineer institutions that uproot the legacy of discrimination and promote equal opportunity for social mobility for all members of ethnic groups and regions. JEL Categories: 00Burundi; conflict; Africa; distribution; institutions.

Distributional Conflict, The State, and Peacebuilding in Burundi

This paper examines the causes of conflict in Burundi and discusses strategies for building peace. The analysis of the complex relationships between distribution and group dynamics reveals that these relationships are reciprocal, implying that distribution and group dynamics are endogenous. The nature of endogenously generated group dynamics determines the type of preferences (altruistic or exclusionist), which in turn determines the type of allocative institutions and policies that prevail in the political and economic system. While unequal distribution of resources may be socially inefficient, it nonetheless can be rational from the perspective of the ruling elite, especially because inequality perpetuates dominance. However, because unequal distribution of resources generates conflict, maintaining a system based on inequality is difficult because it requires ever increasing investments in repression. It is therefore clear that if the new Burundian leadership is serious about building peace, it must engineer institutions that uproot the legacy of discrimination and promote equal opportunity for social mobility for all members of ethnic groups and regions.Burundi, ethnicity, civil war, distributional conflict

The Economics of Civil War: The Case of the Democratic Republic of Congo

This study analyzes the causes of civil wars in the Congo since independence and investigates how the Congo case fits the model of civil war proposed by Collier and Hoeffler. Five conclusions arise from this case study. First, the level and growth rate of national income increased the risk of war by reducing the cost of organizing rebellions and the government’s ability to counteract the rebellions. Second, while regional ethnic dominance served as a basis for mobilization of rebellions, ethnic antagonism was also an obstacle to the expansion of civil wars beyond the province of origin. Third, while natural resource dependence was a significant determinant of civil wars in the DRC, it is the geographic concentration of natural resources and their unequal distribution that made the Congo particularly prone to civil war. Fourth, the government’s ability to counteract rebellions depended more on external support than on the government’s military and economic capacity. Fifth, discriminatory nationality laws, disruptions in the ethnic balance of the eastern region caused by the influx of Rwandan Hutu refugees in 1994, and shared ethnicity between rebels and neighboring regimes—variables which are not included in the Collier-Hoeffler model—were significant determinants of the outbreak of civil wars in the 1990s.

Financial Markets and Economic Development in Africa

The role of financial markets in economic development continues to attract increasing attention both in academia and among policy-makers.1 Evidence from recent empirical studies suggests that deeper, broader, and better functioning financial markets can stimulate higher economic growth (Levine, Loayza and Beck 2000; Beck, Levine, and Loayza 1999; King and Levine 1993a, 1993b). Although evidence on Africa is still limited, the results from existing empirical work supports the view that financial development has a positive effect on economic growth in African countries (Ndikumana 2000; Allen and Ndikumana 2000; Gelbard and Leite 1999; Odedokun 1996; Spears 1992). The discussion of strategies for enhancing African economic development must therefore take into account the role of the financial sector in economic development

Reserves Accumulation in African Countries: Sources, Motivations, and Effects

African countries have accumulated substantial foreign currency reserves in recent years, mostly from higher commodity exports as well as aid flows. In the context of macroeconomic stabilization, which remains at the forefront of national economic policymaking and aid conditionality, African countries are induced to hold reserves to allow monetary authorities to intervene in markets to control the exchange rate and inflation. Adequate reserves also allow the country to borrow from abroad and to hedge against instability and uncertainty of external capital flows. However, reserve accumulation can have high economic and social costs, including a high opportunity cost emanating from low returns on reserve assets, losses due to reserve currency depreciation, and forgone gains from investment and social expenditures that could be financed by these reserves. Therefore, African countries need to have a better understanding of the determinants and economic costs of reserve accumulation and to design optimal reserve management strategies to minimize these costs and maximize the gains from resource inflows. This study uses panel data from 21 African countries to examine the sources, motivation and economic implications of reserve accumulation with a focus on the impact on the exchange rate, inflation, and public and private investment. While the level of reserves remains adequate on average, some countries have accumulated excessive reserves especially in recent years. The empirical analysis in this paper shows that the recent reserve accumulation cannot be justified by portfolio choice motives (in terms of returns to assets) or stabilization objectives. At the same time it has resulted in exchange rate appreciation while it has yielded little benefits in terms of public and private investment. The evidence suggests that African countries, especially those endowed with natural resources, need to adopt a more pro-growth approach to reserve management. JEL Categories: E22; E51; F31; F41external reserves; exchange rate appreciation; sub-Saharan Africa; private and public investment; macroeconomic stabilization.

The Linkages between FDI and Domestic Investment: Unravelling the Developmental Impact of Foreign Investment

Despite the recent increase in foreign direct investment (FDI) to African countries, these resources have not had a meaningful impact on economic development because of limited effects on domestic factor markets, especially domestic investment and employment. In this context, this study analyses the two-way linkages between FDI and domestic investment in Sub-Saharan Africa. The results suggest that firstly, FDI crowds in domestic investment, and secondly, countries will gain much from measures aimed at improving the domestic investment climate. Moreover, there are alternatives to resource endowments as a means of attracting foreign investment to non-resource rich countries. JEL Categories: E22; F21; F23FDI; private investment; public investment; Africa

Is There a Case for Formal Inflation Targeting in Sub-Saharan Africa?

This working paper examines the question of whether inflation targeting monetary policy is an appropriate framework for sub-Saharan African countries. The paper presents an overview of inflation targeting, reviews the justification for the regime, and summarizes some major critiques. Monetary policy responses to inflation depend on the source of inflationary pressures. Therefore, the determinants of inflation in African countries areinvestigated, using dynamic panel data, and the implications for inflation targeting are discussed. These issues are examined in greater detail for the two African countries which have formally adopted inflation targeting, South Africa and Ghana. The analysis is placed in the context of the global economic crisis. The paper concludes with a discussion of alternative approaches to monetary policies and the institutional constraints that would need to be addressed to allow central banks to play a stronger developmental role in sub-Saharan African countries.Sub-Saharan Africa, inflation, development, monetary policy, finance

Is Africa a Net Creditor? New Estimates of Capital Flight from Severely Indebted Sub-Saharan African Countries, 1970-1996

This paper presents estimates of capital flight from 25 low-income sub-Saharan African countries in the period 1970 to 1996. Capital flight totaled more than $193 billion (in 1996 dollars); with imputed interest earnings, the accumulated stock of flight capital amounts to$285 billion. The combined external debt of these countries stood at $178 billion in 1996. Taking capital flight as a measure of private external assets, and calculating net external assets as private external assets minus public external debts, sub-Saharan Africa thus appears to be a net creditor vis-à-vis the rest of the world.