Economic Growth, Entrepreneurship and the Business Environment in Africa

Research on causes of underdevelopment traps and economic growth can be traced back to the work of Young (1928), Rosenstein-Rodan (1943) and Nurkse (1953). The seminal work of Kormendi and Meguire (1985), Grier and Tullock (1998), Barro (1991), Abramovitz (1986) and Baumol (1986), revived the debate on causes of economic growth. Later work by Quah (1997), Salai-I-Martin (1987,2004) has sought to identify the factors driving economic growth across various regions around the world in a manner that would explain why various regions are growing at such different rates. A stark example is the vast di¤erences in growth rates between Africa and Asia. Asia, on one hand, was at the same level of development withmost African countries in the early sixties, but has since overtaken Africa in the pace of economic growth. Explanations and solutions for Africa’s poor growth are found in the research work by Collier (2004), Berthelemy and Varoudakis (1996), Berthelemy and Soderling (2001), and Sacks, et al (2004). The “big-push†initiative, which argues for financial transfers in developing countries especially, Africa has been pushed heavily by Sacks, et al (2004) and is also linked to the African Commission Report driven by the British government, and accompanied by proposals for debt forgiveness for poorer countries.

Working Paper 134 - Inflation Targeting, Exchange Rate Shocks and Output: Evidence from South Africa

This paper derives the inflation equation to search for a possible transmission channel between the real interest rate, inflation rate, exchange rates, real output growth rate using a Bayesian VAR sign restriction approach. Our findings show that the real interest rate reacts negatively to inflation rate shocks and the Fisher effect holds in the long run. We show that strict inflation targeting approach is not compatible with significant real output growth. However a flexible inflation-targeting framework which attaches a large weight to the role of real effective exchange rates results in a significant real output growth given the Central Bank desire to accumulate more foreign exchange reserves and high oil price inflation. Thus real effective exchange rate measuring competitiveness against trading partners matters more than domestic currency and nominal effective exchange rate depreciations.

Working Paper 133 - Monetary Policy Transmission, House Prices and Consumer Spending in South Africa: An SVAR Approach

The study used a structural vector autoregressive approach to estimate and quantify the percentage decline in consumption expenditure, which can be attributed to changes in housing wealth, after monetary policy tightening. The effects are separated using a disaggregated Absa house price data, namely all-size, large-size and medium-size and small-size house prices.The results suggest that at the peak of the interest rate effects on consumption the combined effect of housing wealth and credit extension changes, following a monetary policy tightening, was a decline of 9.8 per cent in all-size, 3.7 per cent in small-size, 4.7 per cent in medium-size and 5.3 per cent in large-size houses. The findings indicate heterogeneity in the transmission of interest rate effects operating through housing wealth and the credit channel. Moreover, we reached the same conclusion after modifying the baseline model by adding the restrictions that house price also respond to both aggregate demand and aggregate supply variables. Lastly, the differences between the counterfactual consumption and the baseline consumption responses, provided little support for the assumption that the housing wealth channel is the dominant source of monetary policy transmission to consumption.This paper thus provided an understanding of the indirect channels through which monetary policy influences real variables by focusing on monetary policy transmission to consumption via house prices. We showed interest rate effects, working through both housing wealth and the credit channel, influence real spending. Thus, interest rate effects operating through housing wealth and the credit channel are felt differently by the four house categories. Moreover, the differences between the consumption impulse responses from the counterfactual and baseline scenarios provide little support that combined house wealth and credit effect channels are the dominant sources of monetary policy transmission to consumption. These findings suggest that the direct effects of high interest rates on consumption appear to be more important in transmitting monetary policy to the economy than through the indirect effects. Hence, monetary policy tightening can only marginally weaken inflationary pressures arising from excessive consumption operating through housing wealth and the credit channel.

The Dynamics of Trade and Economic Relations in Southern Africa: Current Status and Options for the Future

A Department of Economics working paper in economic co-operation and trade relations in Southern Africa.The aim of this paper is to discuss economic and trade relations in Southern Africa, both the current status and options for the future. The region considered covers eleven countries, namely, Zimbabwe, Zambia, Botswana, Lesotho, Tanzania, Angola, Mozambique, Malawi, South Africa, Namibia, and Swaziland. The analysis will cover both trade in commodities and labor. Trade in labor, as a factor of production, will be analyzed between South Africa and the rest of the countries. The implications on both commodity and factor trade are analyzed in a post-apartheid South Africa. Special attention is also given to relations pertaining to the transport, energy sector, financial sector and capita! markets development in the region. We should put it clear at this stage that one broad objective is to analyze how and why the relations among countries will change when the situation in the powerful South African economy normalizes. The paper proposes that SADCC would have to be to substituted by a larger region organization that includes South Africa and Namibia. This new organisation we refer to as the Southern Africa Common Market Area (SACMA). The increasing organization of the world into trading blocs is one compelling raison detre for a new regional organization. The paper also discusses the main impediments to regional trade and proposes policies for trade improvements. The rest of this paper is organized as follows. Section II compares and contrasts the different economies in Southern Africa and Section III looks into the trade issues. In Section IV we shall discuss the trade flows among the countries, noting the most active trade linkages. Trade in factors of production in the form of migrant laborers in South Africa is considered in Section V. The current and future state of the transport and communication sector receives attention in Section VI, while regional energy policies are discussed in Section VII. Policy issues for improving regional trade in Southern Africa are analyzed in Section VIII, and Section IX is the conclusion

Option Pricing Model with Time-Varying Volatility

The paper extends the option pricing model of Merlon (1973) with lime-varying volatility of the underlying security. We develop the theoretical option model. Time-varying volatility is constructed by fitting a lime-polynomial to implied volatility values where the order of the polynomial is approximated by the number of options considered. We then predict the option price one day forward and compare the results with the standard Black and Scholcs model. When applied to PT-SE 100 index European options the new model was found to be more accurate titan the Black and Scholcs. Key words: Omion. Time-Varying. Volatility, Black and Scholcs

Infrastructure Deficit, Financing Needs and the Post?2015 MDG Framework in Africa

This article examines the infrastructure deficit and financing needs in Africa within the context of the Post?2015 Development Agenda. The article explains the extent of the infrastructure deficit across key categories and regions of Africa. The constraints and impact of the infrastructure deficit are discussed, especially the impact on productivity and growth. Innovative sources of funding are also discussed. The article shows the link between infrastructure development and poverty reduction, the current MDGs, and the post?2015 MDG agenda. The article concludes by arguing that an agenda for infrastructure development is coterminous with that of achieving the MDGs and poverty reduction

Corporate Governance, Manager Behavior, and Analyst Behavior as Determinants of Mergers and Acquisitions

The literature on Mergers and Acquisitions activity has espoused various explanations for M&A activity. Some of this captures the nature of defence mechanisms again takeovers. In all the expositions the agency conflicts and degrees of collusion among the claimants to the firm’s cash-flows, are apparent. In this paper we add to the literature by presenting an integrated framework that classifies manager behavior and corporate governance, and show how a manager can use M&A bids as a vehicle for maximising their own benefits, rather than shareholder value. The M&A bid targeted by the manager could simply be for diversionary reasons that seek to enable the manager to hold on to his employment and benefits, even though he may be a poor manager. We also consider M&A activity that benefits both managers and shareholders. In this analysis, M&A activity is driven by the manager’s appetite for M&A activity, both beneficial and unbeneficial. The analysts, who are employed by investment banks, that advise on the M&A activity, collude with management. The analysts forecast inflated earnings for a company because the fees they earn as a portion of what the investment bank earns, are related to the size of the transaction which in turn is determined by the inflated future earnings. The agency conflicts between shareholders, investment banks and their analysts, and managers of the company, are central to our framework.

Governance, Incentives and Elections as Determinants of Economic Performance, Aid and Investment Flows

Scholars have focused their efforts to explain poor growth and development in regions such as Sub-Saharan Africa, and parts of Asia, Eastern Europe, and Latin America, using arguments based on quality of institutions and geography and the structure and process of resource allocation and endowment. This paper presents a different argument based on an incentive compatibility and asymmetric information framework. We characterize the decision-making problem in government and public sector as being fraught with mis-information about the true state of economic performance. Misinformation can also result in a legal liability which may depend on probability of losing elections, income, and attitude to risk. The agency conflicts between the elected politicians and career-bureaucrats contribute to the mis-information problem, resulting in poor policy choices that may lead to poor economic performance. The role of international financial aid flows is examined and the paper argues that such aid flows may only serve to subsidize the inefficiencies of political leaders and reduce the economic gap created by poor policy choices. More financial aid flows may not be a panacea for poor economic growth and its insurance characteristics may cause recipient governments to choose even riskier policies. We also examine why Foreign Direct Investment (FDI) flows to poor regions, such as Sub-Saharan Africa, are low. We show that the risky policy choices create conditions that increase the value of the option-to-wait on investment decisions, thus reducing the flow of FDI. We undertake empirical analysis on some African Countries and show that the quality of governance influences GDP growth, Employment Creation, and Poverty Reduction in Africa.Governance, Incentives, Asymmetric Information, Elections, Economic Performance, Aid Flows, Insurance, Moral Hazard, Foreign Direct Investment (FDI), Option-to-Wait, Real Options