Journal Issue
Working Paper Summaries (WP/94/77 - WP/94/147)

Summary of WP/94/98: “Effects of Macroeconomic Stability on Growth, Savings, and Investment in Sub-Saharan Africa: An Empirical Investigation”

International Monetary Fund
Published Date:
February 1995
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This paper contributes to the debate on the factors that have accounted for the generally poor economic performance of sub-Saharan Africa. It provides a detailed assessment of economic performance during 1986--93 of sub-Saharan African countries as a group, and of selected, analytically interesting subgroups of countries. The analysis focuses on the evolution of sectoral savings, investment, and net financial balances and is supported by an econometric investigation of the impact of macroeconomic policies, exogenous factors, and structural reforms on growth, savings, and investment performance, as well as by an assessment of the impact of foreign assistance. The paper thus extends to sub-Saharan Africa the econometric analysis of the impact of macroeconomic stability on economic performance already undertaken by several researchers for developing countries generally, and for those in Asia and Latin America in particular.

The paper’s analysis indicates that the unsatisfactory overall economic performance of sub-Saharan African countries during 1986--93 was due to inappropriate policies pursued by a number of countries. The countries that have cushioned the impact of large, cumulative losses in their terms of trade, through improvements in their external competitiveness and the implementation of broad-based structural reforms, have done better than others. These countries achieved higher rates of government savings and private investment, as well as positive per capita real GDP growth and lower inflation, during this period. Countries with positive per capita real growth were characterized by positive government savings, increases in government investment, and strong increases in private savings and investment. In contrast, countries with negative per capita real growth were characterized by declines in savings and investment by both the government and the private sector.

These findings are supported by the results of the econometric investigation undertaken in this paper. The sub-Saharan African countries that experienced a relatively more stable macroeconomic environment achieved higher rates of growth, domestic savings, and private investment. In addition, progress toward implementing structural and institutional reforms, by providing the necessary environment for private sector development, led to better economic performance. Macroeconomic stability is found to contribute to sustainable growth through its beneficial effects on the efficiency of private investment. Other important factors that are adjudged to influence economic performance include human capital development, the level of government investment, the level of foreign assistance, the state of financial intermediation, and exogenous shocks.

A policy implication of the findings of this paper is that progress toward macroeconomic stability and the removal of structural rigidities would have sizable and immediately realizable regional payoffs in terms of accelerated growth in real per capita incomes.

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