2012

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Working Paper 163 - Food Prices and Inflation in Tanzania
26/12/2012 18:53
Working Paper 163 - Food Prices and Inflation in Tanzania
This paper presents an econometric model of headline Tanzanian inflation and its principal components for the period since 2000.  Inflation is modeled in terms of deviations from a set of ‘anchors’ reflecting long-run demand-side and monetary determinants, on the one hand, and supply-side and open economy factors on the other.  Five main conclusions derive from our analysis. In the last five years Tanzania, along with the other major economies of East Africa, has experienced a period of high and volatile inflation.  In mid-2008, year-on-year headline inflation edged above 10 percent per annum for the first time since the early 1990s, and while it dropped back to low single digits in 2009 it rose again sharply towards the end of 2010, reaching close to 20 percent per annum in the final quarter of 2011. Much of this rise in inflation and inflation volatility reflects developments in the global economy, most obviously the sharp rises in global food and fuels prices in 2008 and again in 2011. With food accounting for 51% of the consumption basket in Tanzania and energy and transport costs accounting for a further 9 percent each, these global developments may be expected to have a powerful impact on overall inflation, both directly and, in the case of energy prices, indirectly through the high share of transport and distribution costs in retail prices. First, money growth and hence the stance of monetary policy matters for inflation both in the long run and in the short run.  The transmission from the monetary stance, through aggregate demand, to headline inflation is principally through core inflation but not exclusively so; monetary or demand-side effects also feed food and fuel price inflation, particularly in the short run.  Second, however, the principal component of overall inflation -- food price inflation -- is predominantly driven by supply-side factors including both domestic agricultural output shocks and by the pass-through from world prices for food and fuel.  The inflation transmission from world food prices is, however, relatively weak and attenuated, and is much stronger when world prices rise than when they fall.  This is consistent with an environment in which retailers and distributions enjoy significant market power and are able to pass on price rises to consumers but to cushion their own margins when world prices fall. Third, the effect of domestic supply conditions on food price inflation points to the asymmetric effects of trade policy in Tanzania; while food imports appear to respond reasonably rapidly to domestic production short-falls, the capacity to export surplus food production is much more muted so that market adjustment in this case occurs through falling prices, other things equal.  This result has important implications for trade policy and production incentives in agriculture although, as noted below, a much closer analysis of cross-border prices is required before firm policy conclusions can be drawn. Fourth, headline inflation exhibits strong seasonality, consistent with weak price-stabilizing effects of trade and incomplete storage.  Non-food inflation is, by contrast, broadly non-seasonal.  Finally, prices in Tanzania in general are flexible, more so for the food and energy sub-components but even in the traditionally sticky-price domain of core inflation there is little evidence of inflation persistence overall.  Some channels of price adjustment are take time – notably the effects of monetary disequilibrium -- but in general inflationary shocks dissipate rapidly with half-live being little more than one month. The analysis points to three priority areas for further research.  First, a better understanding of the supply-side (cost-push) determinants of core inflation is required.  Second, and related, the role of movements in the nominal exchange rate remains poorly understood.  Once the effects operating through the pass-through from world food and fuel prices – and the role it plays in determining the equilibrium demand for money – there appears to be only a surprisingly weak independent short-run role for the nominal exchange on any of the principal components of inflation.  Finally, the concept of ‘world food prices’ used throughout this analysis needs to be revisited to reflect the impact of cross-border food prices, particularly in Kenya to the North and Zambia and Malawi in the South West of the country. At present, our models include measures of the deviation of domestic food and fuel prices from world price indices derived from the World Bank global commodities database.Lire la suite
Working Paper 164 - Closing the Education Gender Gap: Estimating the Impact of Girls’ Scholarship Program in The Gambia
26/12/2012 15:37
Working Paper 164 - Closing the Education Gender Gap: Estimating the Impact of Girls’ Scholarship Program in The Gambia
Universal primary education and the elimination of gender gap in enrollment rates are two of the targets in the Millennium Development Goals (MDGs). Achieving these goals has been a high development priority for sub-Saharan African countries over the past decade. The challenges in this sector remain significant. Approximately 32% of primary school age children do not attend school and 34% of all youths do not attend secondary school in sub-Saharan Africa (UNESCO 2012). In addition, the adult literacy rate in Africa is 62%, which is far lower than the global average (84%). The ratio of female to male enrollment at secondary level is 79%. The reality in The Gambia is a microcosm of the situation in the region as a whole. While enrollment rates have risen recently in The Gambia, they have been historically low. Average net enrollment rates in the country between 1999 and 2007 for primary, middle and high school levels were on average 61%, 30% and 16% respectively. These low enrollment rates have persisted despite the high rate of returns to education in the country (Foltz and Gajigo 2012). This paper estimates the schooling impact of a nation-wide scholarship program for female secondary school students. The program is funded jointly by the Gambian government, UNICEF, World Bank and the IMF (though the HIPC program) to help the country reach the MDG targets of reducing gender disparity in secondary school enrollment. In the regions where the scholarship program was implemented, all girls attending public (government-run) middle and high schools were exempted from paying school fees, which used to be mandatory. The program started in 2000 in few districts and then expanded across the country geographically (from east to west). This gradual expansion of the program in the initial implementation phases provides a unique opportunity to rigorously assess the causal impact of the scholarship program on educational outcomes. We use two nationally representative household surveys that were carried out in 1998 and 2002/03. In 1998, the program had not been implemented while in 2002, about half of the districts in the country had benefited from the project. This makes it possible to analyze the schooling impact of the program using difference-in-difference strategy – an impact evaluation strategy that is almost ideal to this setting. The results show that the program had a significant enrollment effect on female students of all student-age groups. Specifically, the program led to approximately 8 to 9 percentage point enrollment increase in middle and high school female students. In addition, the enrollment effect of the program on girls at primary level is significantly positive (about 9 percentage points), suggesting that the removal of school fees caused households to further increase female primary school enrollment in anticipation of lower future costs. Years of schooling attained increased by 0.3 to 0.4 for female students. We found no significant schooling effect (enrollment and years of schooling attained) of the program on male students at any level (primary, middle or high school). The estimated results are robust to policy changes that occurred in the country during the period of the scholarship program implementation that could have affected student enrollment. For example, there was a significant expansion in school construction in parts of the country. This possibly confounding effect is addressed by controlling for the number of schools at the district level.    This paper contributes to our understanding of the impact of abolishing school fees on enrollment and schooling attainment in Africa by providing precise estimates of the effects of user fee elimination for female students. This paper provides the first impact evaluation of enrollment of an almost nation-wide female scholarship program in Africa. More precise estimate of the impact of reducing schools is important for policy since it will enable governments to better assess the trade-offs involved in implementing similar policies.Lire la suite
Working Paper 162 - Planning to Fail or Failing to Plan: Institutional Response to Nigeria’s Development Question
10/12/2012 09:00
Working Paper 162 - Planning to Fail or Failing to Plan: Institutional Response to Nigeria’s Development Question
Planning simply involves the process and actions taken to drive economic outcomes to expected levels. It involves the State, which is responsible for sharpening institutions to attain the expected economic outcome. The bane of the planning regime of many African countries is the inability of the state to put in place appropriate institutional framework to ensure the attainment of economic plans. Nigeria has witnessed some planning regimes ranging from the 5-year development planning models to the post democratic plans inclusive of vision 20:2020. However, adequate institutions to ensure the attainment of such plans are lacking. This is based on the fact that institutions are expected to be dynamic and should be shaped to ensure a given objective is met. This has not been the case of Nigeria and hence, bogus planning with poor economic outcomes has been the resultant effect. Based on this, the paper compares the planning regime of Botswana and South Korea with Nigeria in order to make inference for the Nigerian situation and recommend policies for actions. Botswana and South Korea was selected because they both have similar planning regime with Nigeria but they have achieved more economic outcome as a result of the strength of their institutions. The paper emphasized this using the scores for measures of institutions across the three countries. Institutions are frameworks, policies/guidelines and regulations designed to ‘make things work’. It includes mechanisms created to shape relationships among economic agents. Using Nigeria as a case in point and comparing the positional values of institutions using some indicators with those of Botswana and South Korea that have been reputed as having strong institutions, Table 1 reveals that Nigeria has performed far lower with negative values all through the period. The role of institution in ensuring the attainment of planned objectives include efficient management of resources, accountability to enhance checks, reduction in corrupt practices, independent judicial system to enforce the set policies. With these in place, the government is able to de-emphasize on ‘elite capture’ and focus on national loyalty and better service delivery. Botswana and South Korea have experienced sustainable planning paradigms that have yielded some commendable economic outcomes. This is with no prejudice of possible ‘black spots’. However, their governments have shown commitment to tenets of plans, which include:  consultations before making national plans. They have also shown sound institutional development that will foster the attainment of their plans. Some of their plans are corroborated with fiscal discipline and sound financial controls. For instance, the government of Botswana at some point ensured that their spending was not initiated by the increase in revenue. South Korean government ensures that short-term plans are interconnected with perspective plans targeted at related objectives. Going forward, efficient planning should be corroborated with strong institutions and coverage. Institutions in this wise are those reforms and policy revealing the commitment of political leaders to a course. Institutions should be married with proper consultation. We imply that planning in isolation will not result to efficient economic outcome despite institutions been in place. This is because comprehensive planning takes into consideration the subject of the plan and that includes economic agents. It is imperative that strengthening of the institutions to meet the planned objectives, corroborated with proper consultation will deliver expected economic outcomes. Institutions are not static but should be progressive to meet up with current challenges, arising from the voices of the people. This is fundamental as a guide for ‘plan implementers’ and guard against abuses. Therefore, institutions guided by government commitment and views of the people, should ‘police the policy document’ of emanating from the planning process’. Thus, it is not that the carrot is insufficient but the sticks are rather too short or weak to keep the carrot from the mule.Lire la suite
Working Paper 161 - The Impact of Euro Area Monetary and Bond Yield Shocks on the South African Economy: Structural Vector Autoregression Model Evidence
10/12/2012 08:58
Working Paper 161 - The Impact of Euro Area Monetary and Bond Yield Shocks on the South African Economy: Structural Vector Autoregression Model Evidence
The study investigates the various channels through which an unexpected positive shock in euro area bond yields and expansionary monetary policy are transmitted to South Africa using structural vector autoregression models. This investigation is motivated by the adoption of large-scale balance-sheet tools by various central banks and the on-going sovereign debt problems in the euro area. It is important for South African policymakers to understand how these effects are transmitted to the domestic economy. First, we find evidence consistent with the predictions of capital flow effects on asset prices, which includes depressed bond yields, stock price re-valuation and exchange rate appreciation due to monetary stimulus in the euro area. These responses affirm the importance of the asset price channel in transmitting shocks from the euro area to South Africa.  Second, we assessed the negative effects of the large economy’s monetary policy stimulus on the small economy as predicted by the Mundell–Fleming model. We find a significant drop in broad money supply growth, a decline in interest rates and a muted trade balance reaction. Hence, we conclude that there is weak evidence of the trade balance channel.  Third, we find that a positive shock on euro area long-term bond yields leads to a significant, but delayed, effect on the exchange rate of the rand to the euro. Extending the sample to include the current period of global economic instability and applying the counterfactual analysis shows that the exchange rate was overvalued between 2010 and 2011. First, we found that South African nominal bond yields decline on impact, a revaluation in real stock prices and a significant rand–euro exchange rate appreciation. This is evidence consistent with predictions of the effects of capital flows on asset prices due to the euro area monetary policy stimulus. All these responses confirm the importance of the asset price channel in transmitting shocks to the South African economy and are consistent with the predictions of the effect of capital inflows.
Second, we assessed the negative effects of the large economy’s monetary policy stimulus on a small open economy as suggested by the Mundel-Fleming model. We find a significant decline in M3 growth, while interest rates decline over the same period. In addition, we find a muted trade balance reaction, which possibly reflects the opposing effects of the exchange rate appreciation and lower interest rates on the trade balance. Finally, we find that a positive euro area long-term bond yield shock leads to a significant, but delayed rand–euro exchange rate depreciation. There is also evidence of a positive response of South African nominal bond yields to euro bond yields, which suggests some degree of interconnectedness between these markets and the role of the risk premium. The persistent goods price inflation and prolonged exchange rate depreciation also point to the increased risk premium demanded by investors to hold South African bonds.Lire la suite
Working Paper 160 - Infrastructure Investment and Economic Growth in South Africa: A Granger Causality Analysis
10/12/2012 08:52
Working Paper 160 - Infrastructure Investment and Economic Growth in South Africa: A Granger Causality Analysis
The objective of this study is to examine the causal links between the public sector economic infrastructure investment, economic growth and public and private sector employment using (i) pairwise Granger casualty analysis, and (ii)  autoregressive distributed lag (ARDL) or bounds test approach for cointegration analysis to investigate long term equilibrium relationships among the variables in question.   This paper conducted pairwise Granger causality tests between economic growth, economic infrastructure investment, and employment in South Africa for the period 1960-2009 using bivariate vector autoregression (VAR) model with and without a structural break. The result indicates that there is strong causality between economic infrastructure investment and GDP growth that runs in both directions implying that economic infrastructure investment drives the long term economic growth in South Africa while improved growth feeds back into more public infrastructure investments. We also found a strong two way causal relationship between economic infrastructure investment and public sector employment reflecting the role of such investments on job creation through construction, maintenance and the actual operational activities, while increased employment could in turn contribute to further infrastructure investments indirectly through higher aggregate demand and economic growth. Further, there is strong unidirectional causal link between economic growth and public sector employment that runs from the former to the latter; and a strong one way causal link between private sector employment and economic growth that runs from the former to the latter. Economic growth appears to be one of the main drivers of public sector jobs but not the private sector ones and that while the private sector employment remains one of the key drivers of growth, the latter does not seem to have translated into more jobs, reflecting the much criticized scenario of jobless growth in the economy. The pairwise causality test results were assessed further using the ARDL or bounds testing approach for cointegration to assess both the short-and long-run relationships among the variables in question. The bounds test results indicate the presence of steady-state long-run equilibrium relationship between economic growth, economic infrastructure investment, formal employment, and exports and imports of goods and services providing a theoretical foundation for the empirical results of the pairwise Granger causality tests. Public infrastructure investment is found to be a strong driver of economic growth and public sector employment in South Africa. Therefore, the South African government needs to increase and sustain high level of economic infrastructure investment into many more years in the future in order to ensure sustained reduction in current inequalities in income distribution and high level of poverty and unemployment ravaging the economy. On the other hand, the apparent lack of casual link that runs from economic growth to private sector employment implies that enhanced economic growth may not directly translate into more job creation in the private sector, despite strong contribution of the latter to economic growth.  The scenario of jobless growth has already been recognized in the economy and appropriate policies must be formulated to ensure that economic expansion is geared towards more labour intensive or inclusive growth than more capital intensive growth path.Lire la suite
Working Paper 159 - Why do some Firms abandon Formality for Informality? Evidence from African Countries?
29/11/2012 08:54
Working Paper 159 - Why do some Firms abandon Formality for Informality? Evidence from African Countries?
The informal sector is a significant part of the modern economy. This is particular true in African economies that are characterized by a relatively high degree of activity in this sector. While the share of the informal economy has been going down, it remains relatively high with an average of approximately 40% across the continent. There are several factors that account for the presence of such a large number of firms and workers that are not formally registered by local or central governments. Irrespective of the reasons, the continued presence of a large number of enterprises in the informal economy is a major concern for policy makers given its implications for the productivity of the enterprises, efficacy of government policies and finance, and effects on workers’ welfare. Formal firms are significantly more productive than their informal counterparts. By operating in the informal sector, governments are less able to levy taxes on these enterprises. This is a major concern given the limited tax base of most African countries, which has implications for the adequate financing of infrastructure and other public goods. There is also a general efficiency argument for increasing the percentage of firms with formal status. For instance, making the process formality easier can lead to greater competition in the private sector. This ease of entry leads to lower product prices, greater efficiency, and increased welfare. Employees may also benefit from higher labor standards in the formal sector. This paper assesses the determinants of formality by analyzing a new and original dataset of start-up firms in Ivory Coast, Kenya, Nigeria and Senegal. This unique and original dataset captures information not only on the current registration status of firms but also whether they were registered at start-up. This enables us to determine whether or not firms have changed status either way and for what reasons. Our results show that approximately 5% of firms that registered at start-up later became informal. This effect is significantly associated with the amount of informal payments to government officials by firms to “get things done”. In other words, bribe payments encourage the withdrawal of firms from formal status after registering at start-up. On average, firms use 3% of the annual sales for informal payments or bribes.  Our results therefore support one of the key findings in the literature that corruption increases the cost of doing business, and has adverse effects on the likelihood of formality. We also analyzed the determinants of formality in a way that is similar to the approach that is commonly done in the literature by examining firms that use to be informal but are now formal. We found that access to finance, higher education, size at start-up and previous experience of the firm owner in working for a formal firm increase the likelihood of formality. On the other hand, higher bribe payments lower the likelihood of going into formality. Given the size of the informal sector and benefits of formalization, many countries have initiated major reforms to streamline bureaucratic processes. Some countries such as Rwanda have made major strides in this process that is reflected in their rapidly rising investment climate rankings. The government of Mali streamlined its tax payment system to reduce its burden and increase efficiency. Nevertheless, the proportion of informal firms remains significantly high in the sub-Saharan region, and therefore the scope to understanding the contributing factors remains important.Lire la suite
Working Paper 158 - Tackling Graduate Unemployment through Employment Subsidies an Assessment of the SIVP Programme in Tunisia
29/10/2012 11:28
Working Paper 158 - Tackling Graduate Unemployment through Employment Subsidies an Assessment of the SIVP Programme in Tunisia
It is widely agreed that the level of unemployment among university graduates in Tunisia contributed to the rise of social unrest that culminated in what is popularly dubbed as ‘the Arab Spring’. While the number of university graduates in Tunisia increased fivefold, so did the graduate unemployment rate. In 2009/10, one year prior to the Tunisian revolution, nearly one is four university graduates were unemployed.  High levels of unemployment are not unique to Tunisia. Countries in the MENA region including Egypt, Morocco and Algeria faced unemployment rates in excess of 18 percent, 19 percent and 21 percent, respectively. Although the causes of graduate unemployment in Tunisia are likely to be more frictional and solving the problem will require long-term interventions and structural change to the economy, active labor market policies were thought to alleviate some of the pressure in the short to medium term. Until recently, the main policy intervention aimed at promoting paid employment for graduates was the Stage d’ Initiation à la Vie Professionelle (SIVP). The program provided a wage subsidy ranging between TND equivalents of (€50 - €125) depending on qualifications. Firms receive exemption from taxes and national insurance contributions and can top up the graduate’s salary with tax free supplements. Eligibility for support requires registration with the national employment agency (ANETI) and actively seeking employment. Similarly, eligible firms should be part of the social security system and have intern-to permanent staff ratio not exceeding 40 percent. This paper assesses the impact of SIVP by addressing the non-random nature of selection into the program. The paper uses a variety of matching methods to estimate the welfare effect of the program. The dataset considered is a graduate tracer survey of over 4000 graduates who qualified for the program in 2004 and were interviewed in both 2005 and 2007. In spite of the non-random nature of selection into the program, graduate who benefited from the program are expected to have better labor market outcome that those that did not. The data show that women were slightly less likely than men to have benefited from SIVP in the first three and a half years after graduation. The distribution of SIVP by governorate of residence in 2004 shows a bias towards large urban areas (e.g. Tunis, Ariana, Nabeul and Bizerte). Those with ‘good’ or ‘satisfactory’ degree are more likely to benefit from SIVP as opposed to those with just a ‘pass’ or a ‘very good’ degree. At the level of discipline, those with Social Science, Law and Language degrees are considerably less likely to benefit from SIVP than those with Finance and Management degrees.   The study found that SIVP has a positive outcome on the likelihood of having a job (especially for those at high risk bracket of unemployment), but there is less strong evidence that the program has any effect on the likelihood of having a contract, or on salaries. SIVP beneficiaries are less likely to find employment with a large firm, and are more likely to enter the private sector. The multivariable analysis slightly lowers the estimate of the effect of the program on joblessness and unemployment but they remain statistically significant and stable across all specifications. SIVP participation results in an estimated reduction in the likelihood of joblessness of around 7 percentage points. However, although the program appears to increase the likelihood of obtaining a job, it does not appear to have any impact on the quality of that job.   One out of four individuals who spent zero or one month of unemployment in the first six months of graduation benefited more from the program than other individuals in their cohort. Similarly, one out of four individuals who spent five or six months of unemployment after the first six months of their graduation benefited more from the program than other individuals in the same cohort. The study finds that the program is poorly targeted and is therefore poorly targeted. Although the program should probably be kept, the targeting of the funds should be improved in order to minimize deadweight loss. The subsidy should be restricted to job-seekers who have been registered with ANETI and who, despite demonstrating job-seeking effort, have been unable to find work for a considerable period of time. The program should be better targeted geographically by removing the requirement that the company should be part of the social security system so that smaller, informal enterprises also become eligible to recruit SIVP interns.Lire la suite
Working Paper 157 - How are the US Financial Shocks Transmitted into South Africa? Structural VAR Evidence
08/10/2012 14:23
Working Paper 157 - How are the US Financial Shocks Transmitted into South Africa? Structural VAR Evidence
This paper investigates the transmission of unanticipated US bond yield increases, monetary policy stimulus and the federal funds rate tightening shocks into South Africa using small open economy structural VAR models. We intend to inform policy-makers about the channels impacted on by external developments, which may make policies designed and targeted at dealing with domestic macroeconomic issues, ineffective. First, the US monetary stimulus shock leads to low inflation, rand-dollar appreciation, revaluation in stock prices, depressed bond yields, a decline in monetary aggregates and real interest rates in South Africa. Despite a weaker trade channel result, all other findings are consistent with the predictions of the Mundell-Fleming model of a small open-economy. Second, an unexpected increase in US medium-term bond yields leads to depreciation in the rand-dollar exchange rates and a rise in bond yields, in line with the portfolio balance approach. In addition, a significant stock price decline occurs after two quarters and supports the idea of portfolio re-allocation or rebalancing driven by a change in the return from bonds. Third, we find that the unexpected US federal funds rate tightening leads to a significant increase in SA bond yields, depreciation in the rand-US dollar exchange rate and a delayed response in consumer price inflation. Overall these findings suggest that the South African economy is highly responsive to external shocks, which may destabilise the economy and limit the effectiveness of policies designed to deal with domestic macroeconomic problems. In the absence of regional and bilateral trade agreements, the policies impacted by the exchange rate encompass those directed at enhancing export performance and achieving higher levels of and sustainable growth. An exchange rate appreciation will reduce exports through a decline in  competitiveness. In the absence of good hedging strategies, a strong exchange rate makes manufactured goods expensive and reduces receipts of key exporters such as the mining sector, in turn, this may lead to increased production costs and job losses. The elevated stock prices are possibly not reflecting economic fundamentals and may indicate instead that capital is being misallocated and the levels may not be sustainable. This implies an imminent threat to the soundness of the economy and with finacial stability consequences. While an unexpected rise in bond yields due to unexpected foreign developments indicates possibly unexpected increases in debt service costs, this may require the re-allocation of resources to alternative projects and, therefore, different outcomes relative to initial projections. In addition the repayment costs driven by high debt servicing costs may be compounded by the depreciation in the exchange rate.  The latter also has an impact on the South African Reserve Bank’s (SARB’s) foreign reserve accumulation strategy and can reduce foreign reserve accumulation and therefore impact on its ability to adequately cover external foreign short-term debt and imports.Lire la suite
Working Paper 156 - Macroeconomic Shock Synchronization in the East African Community
08/10/2012 14:22
Working Paper 156 - Macroeconomic Shock Synchronization in the East African Community
This paper evaluates empirically the readiness of the East African Community (EAC countries for monetary union. The EAC pronounced its intention to adopt a single currency in 2015. In assessing the region’s readiness to form a single currency union we analyse the structural similarity of the EAC countries in terms of similarity of production and exports. Second, the symmetry of shocks among the EAC members is examined with structural vector autoregression (VAR) model. The lack of macroeconomic convergence speaks against a hurried transition to a monetary union. Both methods point to a low macroecnomic shock synchronization in the EAC, suggesting that the move to EAMU should not be rushed, but would need a thorough evaluation and preparation. Integration measures in the East African Economic Community (EAC) regained momentum in 2005. Over the years, the members have established closer economic links through a Free Trade Area (2001), a Customs Union (2005), and a Common Market (2010). These efforts have paid off: a deeper regional integration and trade within the EAC than in other African sub-regions have contributed to East Africa’s resilience during the global financial crisis (GFC) in 2009 and 2010 and to overall fast growth. The Optimal Currency Area framework suggests macroeconomic convergence as a precondition for forming a monetary union. The EAC convergence process, measured mostly through macroeconomic criteria, has three stages: looser macro stance during 2007-10; tighter one during 2011-2014, and the monetary union from 2015. Macroeconomic convergence is crucial, but research on monetary integration suggests that structural similarities among monetary union members are also important for the unified impact of their joint monetary policies. For the EAC members, meeting the convergence criteria has so far been elusive. An analysis of the performance of the EAC member countries’ performance since 2000, relative to the convergence criteria, reveals significant variations. The revealed shock asymmetry also cautions against hasty implementation of a joint currency. The asymmetry underscores the importance of developing broader adjustment mechanisms other than monetary and exchange rate policies. Labor and product market flexibility, and integration of financial markets are critical before establishing the EAMU. These mechanisms are crucial not only for the EAC’s monetary integration, but also the creation of a prosperous and economically well connected region that could compete in the global economy. The lack of macroeconomic convergence gives evidence against a hurried transition into a monetary union in the EAC. Given the divergent macroeconomic outcomes in the EAC countries, structural reforms, including closing infrastructure gaps, and harmonized macroeconomic policies that would raise synchronization of business cycles need to be in place before a move to monetary union. In that context, the role of appropriately prudent and coordinated fiscal policy cannot be emphasized enough. As the example of the Eurozone shows, a well-functioning fiscal transfer system (or union) may be needed for the longer-term viability of monetary union. Strengthening institutions charged with coordinating the regional integration agenda and increased information sharing within the region are needed. In light of the shock asymmetries in the EAC, policy coordination as currently pursued bodes well for achieving macroeconomic convergence. However, the approach to deepening regional integration needs to take into account circumstances of individual countries. First, the economies are structurally different and at different stages of development. Second, intraregional trade within the region is still very low, which in itself could be a reflection of structural asymmetry. Strengthening institutions and improving the infrastructure that supports a competitive production system and trade is therefore central to deepening regional integration. Also, recent experience from the euro zone demonstrates that besides fiscal union, banking union with joint supervision and regulation of systemically important financial institutions is important for preventing currency crises. Recent debates among the EAC policymakers indicate a preference for establishing a regional central bank that would control all the financial institutions in the region. These topics, so far unexplored for the EAC, could be addressed in future research.Lire la suite
Working Paper 155 - Youth Jobs and Structural Change: Confronting Africa’s “Employment Problem”
08/10/2012 14:22
Working Paper 155 - Youth Jobs and Structural Change: Confronting Africa’s “Employment Problem”
Africa has enjoyed over a decade of sustainable growth where regional growth has exceeded the global average and per-capita income for the region is steadily increasing. During the past decade sub-Saharan Africa was home to six of the ten fastest growing economies in the world. However, there are signs that this growth turn-around has not resulted in robust growth of ‘good’ jobs particularly for the young whose share has been rising over time. The share of the youth in Africa is now higher than any other part of the world. This demographic transformation offers the possibility of a growth dividend, as in the case of Asia, if a rapidly growing work force can be combined with capital and technology. However, it can also present a major challenge. The continent is not creating the number of jobs required to absorb 10-12 million young people entering the labour market each year and as recent events in North Africa have shown, lack of employment opportunities in the face of rapidly growing young labour force can undermine social cohesion and political stability. According to a recent projection, Africa will have the largest workforce in the world by 2040, surpassing both China and India. The paper argues that sub-Saharan Africa does not face a severe employment problem but that of the absence of decent job opportunities. It argues thatAfrica’s employment problem is symptomatic of its lack of structural change –the shift in resources from lower to higher productivity uses. In spite of rapid growth, Africa has undergone very little structural transformation. While unemployment rates in most African countries are low, they also tend to have very large informal sectors, with a bulke of the employed langushing in vulnerable employment and working poverty. There is quite a bit of evidence that since 1990 structural change has moved in the wrong direction in Africa where labor has moved from higher to lower productivity employment.    Youth unemployment rates in Africa compare favourably compared to regional and world averages. Worldwide there is a fairly regular relationship between the overall rate of unemployment and the rate of youth unemployment. However, at 1.9 the ratio of sub-Saharan Africa’s total unemployment to youth unemployment rate is below that which would be predicted from the region’s overall rate of unemployment. The global ratio of total unemployment to youth unemployment is higher (at 2.7). However, North Africa’s youth unemployment rate substantially exceeds its predicated value. The African Development Bank’s 2012 household and labour force survey with its coverage of 16 countries provides the most comprehensive picture to date of the performance of African labour markets. The survey finds considerable heterogeneity in Africa’s labour markets. These results confirm that neither overall nor youth unemployment rates in sub-Saharan Africa stand out globally, while variations across countries is significant.  African countries with well-structured labour markets and a large formal sector tend to have higher unemployment rates. This is especially true in southern Africa where unemployment exceeds 15 percent in Botswana, Namibia, and South Africa. Unemployment is also high by international standards in North Africa – especially in Algeria and Tunisia. Unemployment is relatively low in lower income countries while the informal sector is large (Ethiopia, Ghana, Tanzania and Uganda). A third group comprises of countries with large informal sectors and unemployment rates in the range of five to 15 percent.    In most African countries job search periods are longer for those with higher education levels and therefore tend to constitute a larger cohort of the unemployed. Except for Niger and South Africa, youth unemployment rates tend to be lowest among those with either no or basic education. In 6 of 14 countries for which data were available, the unemployment rate for those with tertiary education was the higher of all. In many African countries, self and informal employment accounts for a majority of young workers. With some country specific exceptions, less than 20 percent of Africa’s young workers find wage employment and over 70 percent of workers in Congo, DRC, Ethiopia, Ghana, Malawi, Mali, Rwanda, Senegal, and Uganda are either self-employed or find themselves in family work. The paper argues that the key to reducing unemployment and informality in all levels including the young is the rapid growth in good jobs as a result of substantial structural change. Industrialization can boost formal job creation through labour intensive growth. Nevertheless, critical changes in the labour market and in the education system will also be needed to increase the employment intensity of growth in the formal economy. In the short run a number of interventions can be undertaken to improve the employment prospects of new labour force entrants.
  • Addressing open unemployment and helping the young find better jobs: Governments can target young workers in employment intensive activities, such as tourism and construction with programs that offer cash for work. Public works programs provide opportunities for young workers with low skills to acquire work experience and subsequently find more permanent work. 
  • Building relevant skills: Increased emphasis on post-primary education through education budgets, improving the quality of teachers and instruction in public schools are critical. In the long-term it is essential to restructure education systems to teach the skills needed to succeed in a global marketplace.  
  • Reform of labour legislatives and institutions: pertinent changes in labor regulations that set minimum wages determine social insurance contributions and protect job security need to be changed. In some countries high level of wages relative to productivity are deterrents to growth in outward-oriented manufacturing. In many countries procedures for laying-off workers for economic and technological reasons are complex and seldom used. Separating social insurance from formal job status and social contributions from formal sector wages should be an important long-term goal.
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Working Paper 154 - Credit Bureaus and Registries and Access to Finance: New Evidence from 42 African Countries
08/10/2012 14:22
Working Paper 154 - Credit Bureaus and Registries and Access to Finance: New Evidence from 42 African Countries
Access to finance is a major challenge, especially in emerging and developing economies. A key factor behind the persistence of this problem is the information asymmetry between lenders and borrowers that encourages adverse selection and moral hazard. To address this information asymmetry, credit registries and bureaus have been established around the world to serve as information brokers. The reduction of information asymmetry has positive implications for relaxing credit constraints, increasing competition in the credit market and the efficient allocation of capital. The two main kinds of institutions for collecting and sharing information on credit transactions are private credit bureaus (PCBs) and public credit registries (PCRs). PCBs are usually created by the private sector, while the PCRs are largely public institutions. This distinction is important. PCBs are likely to be created due to demand in the market for reliable credit information on borrowers. As such, their presence in an economy is in response to demand by lenders where the benefits from sharing credit transaction data exceeds the gains to relying solely on the information rent specific to one lender (Pagano and Jappelli 1993). PCRs, on the other hand, are usually public institutions created with the main goal of supervising the banking sector (Powell et al. 2004). This is particularly relevant when assessing their effects in Africa. The objective of this paper is to assess the effects of PCB and PCR availability as well as PCR design on corporate access to finance. Limited access to finance in Africa is particularly acute (Beck et al. 2011). This has repercussions on firm’s growth and productivity (Beck et al. 2006; Dinh et al. 2010; Bigsten and Söderbom 2006) and consequently on the overall level of private sector development. To the best of our knowledge, this paper provides the first empirical evidence on the effects of PCRs’ design on firm’s access to finance. The paper combines data describing firms’ access to finance from the World Bank Enterprise Surveys with hand-collected data describing the availability of PCRs/PCBs and PCR characteristics to perform tests. The dataset covers 42 African countries, which represents a significant improvement in coverage of this region. For instance, only 9 African countries are covered in Barth et al. (2009), 4 in Love and Mylenko (2003) and 0 in Galindo and Miller (2001). Our results show that firms in countries with PCBs report relatively smaller obstacle in access to finance relative to those in countries with a PCR. However, this effect is not robust to controlling for GDP per capita and the private credit to GDP ratio, which suggests that the presence of a PCB is not exogenous. In other words, the level of financial sector development and the creation of a PCB may be simultaneously determined. We also document significant heterogeneity in PCR design among African countries. This heterogeneity has implications for the degree to which these institutions are able to reduce information asymmetry, and consequently on firms’ access to finance. Specifically, PCRs that collect both negative and positive credit information on borrowers are significantly associated with greater access to finance for firms. Likewise, we show that reducing the minimum cut-off amount for loans covered by PCRs helps soften the financing constraint only when positive and negative information is reported. Similarly, provision of online information by PCRs is only beneficial when the internet penetration rate in the country is high. Our findings are robust to controlling for GDP per capita, institutional quality and private credit to GDP ratio. The implications of our results for the design of PCRs are particularly relevant for African countries without PCBs because they highlight the essential characteristics of credit registries relevant for reducing information asymmetry, and consequently relaxing financing constraints. Overall, we could formulate the following policy recommendations based on our findings:
  • Credit registries and bureaus should be encouraged in Africa to soften the financing constraints faced by SMEs. Particular attention should be given to their design as the mere presence of such institutions will not be sufficient if they are poorly designed.
  • African countries that have limited resources should start by improving the features of their credit registries, mainly by offering positive and negative information. Yet, the final goal should be to establish private credit bureaus as the latter are more efficient to alleviate the financing constraint.
For credit bureaus to deliver their full benefits, they should be accompanied by reforms aimed at enhancing financial sector development and initiatives to improve internet infrastructure. A holistic approach is therefore needed.Lire la suite
Document de travail 153 - L'accés aux marchés obligataires domestiques pour le financement des infrastructures : Enseignements à tirer pour l'Afrique
12/06/2013 09:55
Document de travail 153 - L'accés aux marchés obligataires domestiques pour le financement des infrastructures : Enseignements à tirer pour l'Afrique
The main objective of this paper is to look at international experiences in financing infrastructure and the financing possibilities that are available to African countries that are planning to increase infrastructure investment substantially. Physical infrastructure projects normally require large scale and long-term financing in a mix of local and foreign currencies, infrastructure project bonds (also known as revenue bonds or specific purposed bonds, etc.) have recently started to receive attention. They are structured in such a way that they securitize future cash flows from infrastructure projects as a promising product in local currency bond markets, and act as means of private infrastructure financing. Infrastructure bonds: local currency infrastructure bonds usually have the following characteristics:  Financing is raised to fund a specific infrastructure project(s);  The issuer can be a special purpose vehicle (SPV) established for the project, or a project company; shareholders include private investors, often in a PPP arrangement; Financing is non- (or limited) recourse; Investors debt is serviced by project level cash flows and security limited to project assets; Issuance is in local currency to match the cash-flows generated by the project and meet the appetite of local capital markets. Challenges for implementation of Infrastructure bonds: the following legal, regulatory and economic factors must be addressed for the implementation of an infrastructure bond: Changes in Agreements with Concessionaires; Macroeconomic Instability; Project Economics and Sustainability; Insufficient Information Disclosure; Under-developed Capital Markets. International experiences: Project bonds have been broadly used in other countries most notably USA, Canada, Chile, Malaysia and Korea. In each case the government implemented reforms in the pension and insurance sectors to unlock long-term capital. This created a deep pool of institutional investors with demand for low risk, long dated assets in domestic currency. This investor base is ideally suited to buying project bonds or infrastructure investments. Lessons for African countries. For the issuance of infrastructure bonds to be successful, the following reforms need to be undertaken:
  • Macro fundamentals: Fiscal and monetary policies need to be stabilized; inflation needs to be tackled very strongly; there needs to be a level of stability in interest rates; and domestic savings rate need to significantly improve.
  • Capital Market: Public securities market should be put in place; effective independent regulation should be crafted; and bond listing rules and procedures need to be well established.
  • Pension Sector: There is need to incentivize citizens to contribute into pension schemes; the use of professional asset management needs to be encouraged; effective independent regulation needs to be established; and there should be flexible sector allocation of portfolio.
  • Issuers: The forms of bonds in the market should include long-term government bonds; parastatals and municipal bonds; corporate bonds in different sectors; and innovative structures such as Asset Backed Securities (ABS);
  • Infrastructure: Infrastructure needs to become a policy priority; regulation and tariff reform need to be implemented; Independent Power Producers (IPPs) need to be encouraged; and enabling law for concession/PPP need to be enacted.
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Catégories: Infrastructures

Working Paper 152 - Dynamics of Inflation in Uganda
10/09/2012 23:00
Working Paper 152 - Dynamics of Inflation in Uganda
In October 2011, East Africa witnessed a considerable surge in inflation reaching on average 20%. In Ethiopia inflation rate reached 34%, and Kenya experienced record inflation levels in excess of 18.5% in the same month. Tanzania was not an exception to the rule. It witnessed a sharp rise in inflation to a maximum of 17.9. Uganda recorded the second highest level of inflation in the region hitting 30.5% during the same period. This remarkable rise in price has been an issue of concern for policymakers and the general public. Such dramatic increases in inflation are bound to have significant welfare implications for the poor. Recent studies have identified several factors underpinning sudden rise in inflation in developing countries, namely, external factors, internal factors, and accommodative policy in the form of exaggerate rise in money supply. This paper attempts to determine the main drivers of inflation in Uganda using a single-equation Error Correction Model (ECM), proposed by Durevall et al. (2012), which includes, besides money aggregate, domestic and foreign variables by extending the model to include the role of agriculture in inflation dynamics. The paper acknowledges the structural differences of agrarian economies, in general, and Uganda, in particular; these economies are characterized by underemployment, large informal sector, and a low degree of unionization of the labor force. In this setting, the quantity theory of money provides a more appropriate framework for analysis rather than the Phillips curve approach that is more suited to developed economies. This framework accounts for the role of money as a major determinant of inflation, along with supply shocks. Data for the domestic prices, the real effective exchange rate, and monetary aggregate (M3) are obtained from the Bank of Uganda. The paper interpolates annual real GDP to obtain monthly series of output. In addition, we use cereal production as a proxy of agricultural production-data on cereal production was obtained from the FAO. The monthly components of cereal are imputed from annual data. In addition, we de-trend cereal production, using the Hodrik-Prescott filter, to compute their cyclical component. Similarly, we de-trend components of relative prices. Data cover the period starting from January 1999 to October 2011. This paper draws three major findings. First, over the long-run domestic and foreign variables are important determinants of inflation in Uganda. The monetary aggregate portrays an equilibrium relationship with Inflation and therefore expansionary policy that drives up money supply is inflationary over the long-run. There is evidence of considerable rise in real money growth, attaining a maximum of 36% in November of 2010, prior to recent rise in inflation. The results support previous findings by previous studies pointing to agricultural supply shocks as crucial for inflation in Uganda. Constraints on agricultural production together with high demand both domestically and from neighbouring countries push domestic food price and hence creates a rise in overall price levels, given the high percentage share of food price in Consumer Price Index (CPI).  The paper identifies external factors, mainly world food price and energy prices, as key factors in explaining equilibrium inflation in Uganda. Like most of countries in the region, Uganda is not an exception, in that movements in world food and energy prices are directly transmitted to countries via import prices or prices of internationally traded goods. Secondly, similar to the long-run, internal and external factors drive inflation in the short-run. The study identifies Ugandan food prices and monetary growth as key domestic drivers, while global food prices also affect inflation in short-term. Lastly, the paper finds evidence of inflation inertia due possibly to persistence in expectations of agent, since they are backward looking, and price and wage stickiness. The study proposes a close monitoring of dynamics in world food and energy prices in order to curtail their secondary effects. Policymakers should push for massive investment in the agricultural sector in order to mitigate the effects of adverse climatic conditions which most countries in the region have been subject to.Lire la suite
Working Paper 151 - The Dynamics of Inflation in Ethiopia and Kenya
08/09/2012 23:00
Working Paper 151 - The Dynamics of Inflation in Ethiopia and Kenya
Ethiopia and Kenya have experienced strong economic growth during the last decade. However inflation, which was thought to be under control, reached 40 per cent in Ethiopia and 20 per cent in Kenya during 2011. The rise of inflation in Ethiopia and Kenya was not an isolated event; other African countries also experienced increased inflation. There are many potential causes for these increases, but recent swings in international food and energy prices are likely to have affected inflation in countries that depend on agricultural production and imported energy. Yet, there is no consensus on the causes of the rise in inflation: a common view is that expansionary monetary policy, primarily due to large government expenditures, is the main cause, possibly in combination with negative domestic food supply shocks. This paper presents an econometric analysis of the main drivers of inflation in Ethiopia and Kenya during the last decade. The approach is to apply vector error correction models to different sub-sections of the economies, which in the end are combined into a single inflation equation for each country. The data is monthly and spans 1999:11 to 2010:05 for Ethiopia and 1999:01 to 2011:11 for Kenya.    The contribution of this paper is that it takes into account key sources behind the increase in inflation. There are, in principal, three potential drivers of inflation. The first is excess supply of real money balances. This can be caused by expansionary monetary policy or through central bank financing of government bonds. The second is external (imported) inflation and its effect on domestic prices: rapid surges in international food and energy prices are likely to spill over into domestic prices. The third is domestic supply shocks that create deviations between the current output and the optimal long-run growth path. In developing countries, such as Ethiopia and Kenya, agricultural supply shocks can create large disturbances to the domestic economy and inflation rates.    Our approach is to investigate these three sources separately for each country; first by identifying deviations from long-run equilibrium relations and then bringing the results together in one model of consumer price inflation. For each of the three sub-sectors we formulate vector autoregressive models to test for long-run economic relations. After identifying long-run relations, we use single-equation error correction models to empirically determine the sources of inflation. Our models embed different theoretical propositions through the inclusion of the estimates of deviations from long-run equilibrium relations. This procedure allows us to test various hypotheses concerning the sources of inflation. Two key variables are agricultural production and GDP. Since they are not available at a monthly frequency, we interpolate yearly and quarterly observations to monthly observations. The Hodrick-Prescott filters are used to separate short-run cycles from long-run trends in GDP and agricultural production. The outcome of interpolation is that we can measure trends and annual swings in output gaps (but not within-season changes) and their effects on inflation. To identify the role of money market imbalances we test for basic long-run money demand equations. There exists a long-run money demand expression for Ethiopia but we failed to estimate one for Kenya. Yet, excess money supply does not affect inflation in the final model. Foreign price shocks are investigated through testing for parity conditions between domestic price indices and world market food and energy price indices in local currency. For international food prices, there are strong effects on the inflation rates in both Ethiopia and Kenya. In Ethiopia there is a long-run relationship between the domestic consumer price index for cereals and world grain prices. In Kenya there is a long-run relationship between the domestic consumer price index for food and world food prices. We do not find a significant effect from international energy prices on local inflations rates. This is possibly because the impact is already captured by world food prices, or because the link between world and domestic energy prices is weak due to market regulation and market inefficiencies. Domestic food supply shocks are clearly important in Ethiopia, where large harvests reduce inflation through their effects on domestic food prices. The evidence for Kenya is not as strong, which probably is due to market integration: when the error correction term for world food prices is removed from the model for Kenya domestic food supply shocks become significant. Our results point to a lack of anchor for inflation in both countries, arising from clear and well-functioning monetary or exchange rate policies. This could be due to the manner in which the authorities have chosen to deal with inflationary shocks historically. In both countries there have been periods without firm policy responses. For example, in Kenya the monetary authorities seem to have expected that the commodity price increase in 2011 would soon revert and therefore delayed policy responses. Another possibility is that traditional monetary policy has little power, as might be the case in countries that lack well-functioning financial markets. For example, in Ethiopia bank-to-bank credit ceilings had to be introduced to rein in money supply as some banks had large excess reserves. The main messages of the study are that food price shocks are significant drivers of inflation and that improvements in monetary policy, and possibly financial sector reform, are required to reduce feedback effects and anchor inflation expectations. The differences between Ethiopia and Kenya should be acknowledged. Financial sector reform is needed in Ethiopia, since the monetary policy transmission mechanism is weak due to high concentration among banks and holdings of large excess reserves. In Kenya the Central Bank increased its policy interest rate sharply in late 2011, and the tight monetary policy seems to have reduced inflation, indicating that the monetary authorities have some clout.Lire la suite
Working Paper 150 - South Africa’s Quest for Inclusive Development
28/05/2012 14:26
Working Paper 150 - South Africa’s Quest for Inclusive Development
The end of apartheid and the coming to power of the African National Congress (ANC) redefined the development paradigm in South Africa. The new government, after many years of social and economic malaise, adopted a neoliberal view on economic development.  As a first step, prudent macroeconomic policies combined with political stability had positive effects on investment and GDP growth. To foster inclusion, the government launched the Black Economic Empowerment (BEE) program in order to redress racial economic inequality inherited from the apartheid regime. However, neither neoliberalism nor the BEE and a few other social protection initiatives could redress poverty and inequality that remain entrenched to this date. In the last two decades, South Africa has faced a very low standard of education and one of the highest unemployment rates in the World. Compared to other emerging countries such as Chile, South Africa’s GDP growth could have been much higher with a more inclusive growth policy. The objective of this study is to show experiences that have shaped South Africa’s path of development in the pre and post –apartheid eras. It evaluates the change in the development paradigm as well as the socio-economic performances since the apartheid’s regime. Second, it focuses on the shortfalls of the neoliberal paradigm and South Africa’s challenges in achieving high and inclusive growth. Lastly, it provides a review of growth inclusiveness for the future of South Africa’s social democracy and draws some lessons from the Chile’s experience in implementing this concept. It evaluates South Africa’s attempt to reconcile neoliberal practices with the agenda of inclusive development in its adoption of the New Growth Plan (NGP) to accelerate balanced growth. The study shows that South Africa's successful transition from apartheid to a full-fledged democracy in 1994 is a successful demonstration that a peaceful shift from political conflict to cooperation was possible. The country has moved from segregation, marginalization and exclusion to cohesion, inclusion and opportunity. The new institutional framework provided political rights, freedoms and property rights to the previously disadvantaged population, generating political stability. Transparency and predictability have been key features of fiscal policy. The economy has also gone through a rapid opening to the rest of the world. The interactions between growth, policy and institutions have been crucial. Nevertheless, the GEAR strategy adopted in 1996 based on neoliberal theory sidelined poverty as a problem. Only few sporadic initiatives took into account social inequalities and well-being from 1996 to 2003. Social performances showed deficiencies in the labor markets and progress stagnated in terms of education, skills development, health care and poverty and inequality reduction. A comparison with Chile makes it clear that South Africa has not released its full economic potential. Despite modest rates of growth and unemployment, persistent inequality lingered. In the past decade, the sources of growth in South Africa have shifted from agriculture and mining to services, which in relative terms are skill intensive. As a result, unemployment, particularly among the young stood at 40%, one of the highest in Africa and perhaps in the world. More recently, the government introducing a New Growth Path (NGP) largely based on a notion of a developmental state which in some ways is a departure from its neoliberal stance of the early years. The NGP plans to generate at least 500,000 jobs every year for the next decade by focusing on what the government calls sectors with high employment potential including infrastructure, agriculture, mining, industry and tourism. The NGP also lays out plans to reform land ownership, minerals reserve rights, business regulations, etc. to improve efficiency of the utilization of natural resources. In its sectoral and structural focus, the NGP is comprehensive in what can be done. Although the Finance Ministry affirms that priority programs required for implementing the NGP are funded, it lacks on how it can be achieved given the fiscal implications of such a huge public investment. Particularly intriguing is the lack of clear export promotion strategy which seems a natural source of sustained growth for South Africa. In spite of a strong democracy, good macroeconomic performances and clear engagement in regional and global affairs, South Africa faces serious development challenges. Levels of income inequality and unemployment are among the highest in the world. South Africa’s well-developed economy coexists with an underdeveloped and marginalized economy. Violent crime and the HIV/AIDS pandemic still constitute considerable social challenges.Lire la suite
Working Paper 149 - Accounting for Poverty in Africa: Illustration with Survey Data from Nigeria
14/05/2012 14:28
Working Paper 149 - Accounting for Poverty in Africa: Illustration with Survey Data from Nigeria
Apart from presenting the poverty profile, this paper examines the correlates of poverty with multivariate models that predict the probability of being poor using data from the Nigerian National Consumer Survey (NCS) of 2003/2004. The probability of a household being poor was examined for the nation as a whole, as well as for male-headed and female-headed households and for urban/rural geographical areas. The analysis is useful, first, to verify the relative role of the various factors in determining poverty status, and second, to recommend policy changes to reduce poverty incidence in the country. The probability of a household being poor was examined for the nation as a whole, as well as male-headed and female-headed households and for urban/rural geographical areas. It is argued that poverty increases at old age as the productivity of the individual decreases and the individual has few savings to compensate for this loss of productivity and income. It is also posited that women are more prone to poverty due principally to low education and lack of opportunity to own assets such as land. The literature shows evidence that large households are associated with poverty while showing that education lowers poverty. Location of residence also matters. In particular, due to more job opportunities in urban areas, poverty tends to be lower in urban than rural areas. It has been posited that a long-term marital relationship may mean higher permanent income and a larger build-up of consumer durables, reducing poverty while religion affects poverty since it embodies a great deal about a person's general approach and outlook to the world. To what extent these are relevant in Nigeria is an empirical question investigated in this paper. We present important stylized facts on trend oil wealth and democratic development in African counties. Africa’s oil reserves have maintained an upward trend, rising from 53.4 trillion barrels in 1980 to over 130 trillion barrels in 2012. Also, while most African countries legalized opposition parties and held competitive, multiparty elections, which, though, have often not met the minimal democratic criteria of freeness and fairness: they have therefore been "pseudo-democracies" or “virtual democracies”, with North Africa being mired in the trap of liberalized autocracy. We apply a multivariate analysis, using a logistic regression in accordance with the basic principles of discrete choice models on the 2004 data in order to explore the correlates of poverty in the country. The dependent variable is a dichotomous variable of whether the Nigerian household is poor (1) or not poor (0). Our results show that, in particular, the variables that are positively and significantly correlated with the probability of being poor nationally are: household size, lack of education, residence in the North Central zone, being single, and being a Moslem. The variables that are negatively and significantly correlated with the probability of being poor are: age of the household head, quadratic of household size, residence in an urban area, post-secondary (tertiary) education attainment, being a Christian, and residence in the south south, southeast, south west, and north east zones of the country. We recommend a number of policy interventions necessary to reduce poverty in Nigeria and similar African countries. These include: the continued intensification of the “solidarity” (a form of “social security”) with the Nigerian family system; intensification of family planning services efforts and activities to improve knowledge, acceptance and practice (KAP) of family planning; increase in human capital development through quality education; introduction of conditional cash transfers and expenditures (for education, for example) as effective safety nets;  encouraging productivity and access in both farm and non-farm occupations; designing policies to promote long-term employment; geographic targeted programs (especially in the Northwest and rural areas); multi-dimensional empowerment of the poor; and an effective broad policy framework that will increase opportunities, enhance capabilities, promote security, and engender empowerment and participation.Lire la suite
Working Paper 148 - Role of Fiscal Policy in Tackling the HIV/AIDS Epidemic in Southern Africa
14/05/2012 14:19
Working Paper 148 - Role of Fiscal Policy in Tackling the HIV/AIDS Epidemic in Southern Africa
This paper investigates the impact of  fiscal policy on reducing the HIV/AIDS  incidence rates in  Southern Africa. In particular, it studies the welfare impact of different taxation and debt paths in these countries in reducing the HIV/AIDS prevalence rates. Our results show that, acting  optimally has not  only positive societal welfare effect but also positive fiscal effects. There is evidence from that region that antiretroviral therapy (ART) dramatically slows down the progression of HIV infection and AIDS by sharply depressing viral load, improving the cluster of differentiation (CD4) cell counts, and delaying clinical progression to AIDS and fatal complications. However, financing these ART programs is very challenging. The question then is: if these countries use public revenues to fund the intervention against HIV/AIDS, will there not be increase in their debt burden or some negative externalities on other public funded programs? We use a calibrated model, an extension of Robalino et al (2002), in order to capture the fiscal implications of government interventions against HIV/AIDS epidemics. Capital stock level as well as labor force are assumed to be optimally chosen by a unique representative firm. HIV/AIDS affects the economy through the labor force and labor productivity. The government raises taxes to finance its intervention against the HIV/AIDS epidemics and chooses the optimal reduction in the prevalence rate that maximizes the inter-temporal societal welfare. Data on demographic, epidemiologic and macroeconomic indicators used in this study are from the World Bank’s 2011 World Development Indicators (WDI). The main contribution of this paper is that it demonstrates the cost-effectiveness of the fiscal tool in the fight against HIV/AIDS if optimally used during the next decade. By acting optimally, Lesotho, Botswana and Swaziland could respectively alleviate their debt burden by around 1%, 5% and 13% of GDP, respectively, while maximizing simultaneously the inter-temporal societal welfare. This suggests that their governments should not be reluctant in using the fiscal tool to fight HIV/AIDS due to fear of an increase in public debt. One of the most important implications of our results therefore is that African countries can make much better use of their own resources to fund development projects, by increasing tax revenues. This doesn’t necessarily mean increasing tax rates, but making the tax collection system more efficient, improving general tax administration and extending the tax base. Second, optimal intervention leads to early sharp reductions in the prevalence rate, stressing the urgency of increasing expenditures on the expensive but cost-effective ART programs. Traditional fight against AIDS includes mother to child transmission prevention, condom distribution, information campaigns and counseling. But implementing these “cheap” interventions without the ART interventions is fiscally worse than the no-intervention and less macro-economically efficient than the full ART intervention case. Again, the global health agenda in the coming decade will also be about sustainable delivery of the high-impact interventions that were previously supported by development partners. It is worth noting that we have been pessimistic about intervention costs and that our approach to measuring societal welfare omits some important negative consequences of HIV/AIDS for Southern Africa such as increases in the number of orphans and human suffering of the infected. Thus estimates of welfare gains from HIV/AIDS reductions in our paper are likely to be underestimated, underscoring further the importance of immediate and optimal government interventions.Lire la suite
Working Paper 147 - Gold Mining in Africa-Maximizing Economic Returns for Countries
03/04/2012 10:47
Working Paper 147 - Gold Mining in Africa-Maximizing Economic Returns for Countries
How to ensure that mineral resource wealth contributes to sustainable economic development has been a perennial topic concerning many African countries. It is an especially pressing issue in countries that are rich in resources, but perform poorly on a host of development indicators. Too many countries export resources, often through multinational firms, while the citizens enjoy little of the resource endowment. This occurs mainly due to unfair concession agreements and/or the mismanagement of the resources revenues.   This paper focuses on the gold mining sector, and how to ensure that the sector better contributes to development. Development Finance Institutions (DFIs), including the African Development Bank (AfDB), have important roles to play in reducing the 'resource curse' phenomenon in Africa. Specifically, as multilateral institutions that engage governments as development partners and serve as financiers to some private sector projects, the AfDB and other DFIs are in a unique position to ensure both that concession agreements in the mining sector are fair to governments and that the revenues received from those concessions are allocated to proper expenditures. Our paper analyses the gold mining sector in Africa with an emphasis on policy reforms that enable regional countries to better benefit from the sector. We provide some background on why the sector’s contribution to development has been limited. A key factor is the prevalence of unfair concession agreements, which severely limit the share of resource rent that remains within countries. We pay particular attention to royalty rates, which bring in one of the largest shares of government revenues from the taxation of the gold mining sector in African countries. We also perform some analysis of data from gold mines to examine whether the current royalties increase the cost of production to the extent of affecting mine profitability or decreasing the likelihood of investment in the sector in Africa. Our analysis shows that royalties, as a share of production cost, are small in Africa. Other factors such as mine grade have a much more significant effect on cost and profitability. In fact, the level of royalty rates that would significantly reduce profit per ounce of gold produced is far above the prevailing rates in most gold-producing African countries. The result of our analysis actually suggests that there is a case for increasing royalties, above the current modal rate of 3%, to enable countries to gain a higher share of the mineral revenues.   Ensuring that governments receive a larger share of the mineral rent is a necessary but not sufficient condition for the gold mining sector to contribute positively to development in the region. Without good governance, the resource revenues are unlikely to be spent appropriately even if a higher share of the rent somehow manages to accrue to governments. This paper therefore discusses a selected number of policy reforms to ensure that countries not only receive a fair share of the resource rents generated from the gold mining sector through greater transparency, but to increase the likelihood that they would be properly allocated to development-enhancing expenditures.Lire la suite
Working Paper 146 - Bank Financing to Small and Medium Enterprises in East Africa: Findings of a Survey in Kenya, Tanzania, Uganda and Zambia
26/03/2012 13:56
Working Paper 146 - Bank Financing to Small and Medium Enterprises in East Africa: Findings of a Survey in Kenya, Tanzania, Uganda and Zambia
Various studies have shown the contributions of SMEs to exceed 60 percent of total formal employment in the manufacturing sector in both advanced and developing economies. In Africa, the contribution of the SME sector to job opportunities is even more important with SMEs accounting for about three-quarters of the total employment in manufacturing (including the informal sector). In spite of the importance of the topic, relatively little research exists on the role of bank finance in SMEs around the world. This is partly due to the absence of comprehensive data on SME finance. Nonetheless, existing studies show that, contrary to the conventional perception that financial institutions shun SMEs, banks consider the SME segment strategically important. This paper contributes to the growing literature on SME finance. Its purpose is to shed light on current trends and practices in bank financing of SMEs in four East African countries, i.e. Kenya, Tanzania, Uganda and Zambia. The comparison among these countries is interesting because they are neighbours, they are all growing, emerging economies and they have implemented a number of financial reforms in recent years, with their banking systems becoming increasingly integrated. In particular, this paper forms part of a broader African Development Bank regional project on this topic, whose objective is to identify best practices in SME lending as well as constraints that impede growth in the SME finance market so as to draw relevant policy implications. The study uses tabulated questionnaires followed by on-site interviews with banks’ senior management. The format and the questions of the questionnaire were drawn from previous surveys developed for analysis in different markets and slightly adapted to cover topics not included in the previous surveys but which may have an impact on SME bank financing in East Africa such as micro-prudential regulation. The questionnaire solicits response to 90 questions divided in three broad analytical areas, which are described in detail in this paper. The first area deals with banks’ involvement in SME lending. The second area focuses on the determinants of banks’ involvement with SMEs such as corporate strategy, market structure, government policy and regulation. The third area attempts to understand how banks engage in lending to SMEs, with a special emphasis on the nature of their business models and risk management systems.   The study found SME segment to be of strategic priority to banks in the region. SMEs are considered a profitable business prospect and provide an important opportunity for cross-selling. Banks consider that the SME lending market is large, not saturated and with a very positive outlook. A number of obstacles are, however, constraining further engagement with the SME segment, including SME-related factors such as the lack of adequate information and collateral as well as their largely family-owned structures. Macroeconomic factors, business regulation, the legal and contractual environment, the lack of a more proactive government attitude towards the segment, some areas of prudential regulation and some bank-specific factors are also perceived to negatively affect the SME lending market in the sample countries. Even so, the study shows, banks have adapted to the environment and developed mechanisms to cope with it through innovation and differentiation. Most banks have dedicated units serving SMEs, to which they offer largely standardized products though the degree of personalization is growing. And albeit advanced transaction technologies based on scoring and risk-rating systems remain relatively underdeveloped, banks are gradually automating their risk management frameworks to achieve efficiency gains. On the whole, the findings are broadly consistent with similar studies in other geographical contexts and those suggesting that the strategic interest of East African banks in the SME segment can make an important contribution to closing the “SME financing gap” in the region compared to other developing countries. The growing engagement of formal finance institutions and SMEs should be encouraged through reforms to soften the negative impact of obstacles hindering the involvement of banks SME financing.Lire la suite
Working Paper 145 - Assessing the Returns to Education in the Gambia
16/02/2012 15:41
Working Paper 145 - Assessing the Returns to Education in the Gambia
The importance of education in development is a perennial topic in economics especially in the context of sub-Saharan Africa’s development experience. The connection is not surprising since the region stands out both in its low level of schooling and its low average rate of economic growth. In the macroeconomic growth literature, evidence shows that education is positively associated with economic growth, a result that accords well with many previous studies. Micro-level research on private rates of returns to education has shown disparate estimates in sub-Saharan Africa in the private benefits to education.  Our work focuses on private returns to education in The Gambia, a small country in West Africa with very low levels of schooling. Like other countries in the region, it also has achieved little economic growth since independence in 1965. It is therefore not surprising that the country is not on schedule to achieve one of the Millennium Development Goals: universal primary education by 2015. This work adds to the large literature that provides a range of estimates on the private rate of returns to education in Africa. What has been found to date is that there is a great deal of heterogeneity in estimates of returns to education in Africa. It could be the case that there are indeed very large differences between countries in the rates of returns to education since there has been very little replication of estimates within a single country. However, part of the difference in estimates may also be due to the use of improved econometric techniques among recent papers. Some of these new approaches have addressed issues such as ability bias and selection - problems that were not always addressed in many earlier papers.   Another possibility is that differences in estimation strategies can also produce different results since the estimates may be specific to only a subset of the population in a given country.  Specifically, the estimates from using an instrumental variable approach may not be comparable across different studies that employ different instruments since such an estimation strategy produces the local average treatment effects.  Typical estimates using instrumental variables, in which the most common instrument measures access to schooling, provide measures of the returns to schooling for those who would have continued in school but did not have access to schooling.  Given that in the African context there is great variation across countries, ethnic groups, religions, and the proclivity of parents to send their children to school even when it is available and affordable, one should also expect great variation in estimates of returns based on that population. This work contributes to the literature by providing the first estimates of the private rate of returns to education for The Gambia and among its regions. Our estimates rely on the exploitation of the exogenous variations in the availability of schools across the country at the district level and its interaction with year of birth of individuals to control for ability bias. In addition, we use exogenous rainfall shocks to control for selection bias. Like many instrument variables, ours are not perfect. We discuss the possible violation of the exclusion restriction and provide further robustness checks to mitigate them. Our study uses three nationally representative household surveys from 1992, 1998 and 2003 that provide a very high coverage rate for the overall population of The Gambia.  The results show high and significant private rate of returns to education for individuals in the wage sector. We estimate private rate of returns to education of 23% overall, using instrumental variable estimation. In addition, we found that returns were higher for men and urban residents. The results also demonstrate large significant differences in the rate of returns to education across regions, with poorer regions registering higher rate of returns. It is worth stressing that all sub-regions and sub-groups experience high rate of returns to education. What these finding suggests is that barriers to schooling in terms of both direct and indirect costs are substantial in The Gambia. Therefore, government policies should be geared towards lowering the cost of education in the country.Lire la suite
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