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IMF Working Paper Summaries (WP/95/1 - WP/95/61)
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Summary of WP/95/19: “Public Policies and Private Savings and Investment in Sub-Saharan Africa: An Empirical Investigation”

Author(s):
International Monetary Fund
Published Date:
August 1995
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Economic performance in sub-Saharan Africa as a whole has lagged behind that of other developing regions during the past two decades. Nonetheless, the performance indicators have masked noticeable differences among subgroups of countries in the region; countries that have effectively implemented broadly based adjustment policies have done better than the others. The adjustment experience of sub-Saharan Africa during 1986-92 demonstrates that expanding private savings and investment is essential for achieving gains in real per capita GDP. The divergence in the private sector and overall economic performance among the various country groups primarily reflected differences in their policy response to the deterioration in the terms of trade--in particular, in the progress made toward promoting macroeconomic stability, improving external competitiveness, and alleviating structural and institutional impediments to private sector activity.

Total and private savings and investment in sub-Saharan Africa are still too low to facilitate a sustainable expansion in output at a satisfactory rate. Furthermore, in view of the modest share of foreign direct investment currently channeled to sub-Saharan Africa and the increasing competition for direct investment, more of the resources needed to boost economic growth would need co be generated by the domestic private sector of the countries in the region. In this context, the domestic private sector would have to play a major role in accelerating output growth and gradually narrowing the gap in per capita incomes relative to other developing countries.

Accordingly, public policies would need to be aimed at creating an environment that is conducive to private sector development. Therefore, a critical question is, to what extent would changes in public policies be effective in stimulating the rates of private savings and investment in the region? This paper attempts to answer this question by empirically investigating the relationships between public policy indicators on the one hand and private savings and investment on the other, using pooled data for a large sample of sub-Saharan African countries during 1986-92. It finds that public policies can indeed promote private savings and investment in the region, particularly policies aimed at maintaining low inflation, reducing macroeconomic uncertainty and the external debt burden, and promoting financial intermediation. The empirical results also indicate that, although efforts to lower the budget deficit would help stimulate private investment, achieving this objective by lowering government investment would be counterproductive, given the complementarity between government and private investment. Thus, alternative ways of reducing budget deficits to sustainable levels would have to be considered, such as lowering unproductive current expenditure and strengthening revenue mobilization.

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