ANNEX I: Senegal - Empirical Investigation of the Determinants of Growth, Savings, and Investment
This annex describes the results of an empirical investigation of the determinants of economic growth, as well as nongovernment investment and savings in Senegal.
Barro, Robert, “Economic Growth in a Cross-Section of Countries”, NBER Working Paper No. 2855 (Cambridge, Massachusetts: National Bureau of Economic Research, February 1989).
Fisher, Stanley, “The Role of Macroeconomic Factors in Growth,” Journal of Monetary Economics. Vol. 32 (December 1993), pp. 485–512.
Hadjimichael, Michael, Dhaneshwar Ghura, Martin Mühleisen, Roger Nord and E. Murat Ucer, Sub-Saharan Africa: Growth. Savings. and Investment. 1986–93, IMF Occasional Paper No. 118 (Washington: International Monetary Fund, January 1995).
Hadjimichael, Michael, and Dhaneshwar Ghura, “Public Policies and Private Savings and Investment in Sub-Saharan Africa: An Empirical Investigation”, IMF Working Paper WP/95/19 (Washington: International Monetary Fund, February 1995).
Heller, Peter, Richard Haas and Ahsan Mansur, A Review of the Fiscal Impulse Measure, IMF Occasional Paper No. 44 (Washington: International Monetary Fund, 1986).
International Monetary Fund, “Common Policy Issues of the CFA Franc Countries,” EBS/94/151 (Washington: International Monetary Fund, July 29, 1994).
Kormendi, Roger and Philip Meguire, “Macroeconomic Determinants of Growth: Cross-Country Evidence,” Journal of Monetary Economics, Vol. 16 (September 1985), pp. 141–63.
Mankiw, Gregory, David Romer, and David Weil, “A Contribution to the Empirics of Economic Growth,” Quarterly Journal of Economics. Vol. 107 (May 1992), pp. 407–37.
World Bank, (b) Senegal: Stabilization. Partial Adjustment and Stagnation, Report No. 11506-SE (Washington: World Bank, September 1993).
The first stand-by arrangement for Senegal was approved on March 30, 1979.
Recent theoretical and empirical studies of economic growth, based on endogenous growth models, have attempted to explain growth by linking it to initial economic conditions and policies that affect physical and human capital accumulation and factor productivity growth. Exogenous factors, such as weather conditions and changes in the terms of trade, also play a key role. For a survey of the literature, see Hadjimichael et al., 1995.
Other statistical weaknesses are discussed in Appendix VI to the staff report for the 1995 Article IV consultation and midterm review under the first annual ESAF (EBS/95/80).
Until 1991/92, the fiscal year ended on June 30. Starting 1993, the fiscal year shifted to calendar year basis. For the purpose of this study, fiscal data is presented on a calendar year basis.
In 1986, Senegal adopted its first SAF-supported program, which was followed by several SAF and ESAF arrangements.
See World Bank (1993 a and 1993 b).
Developments in the share of fixed investment in GDP measured at constant and current prices diverge during the period under review. The investment rate shows, on average, a small but steady increase of 1 percentage point of GDP between 1978–84 and 1989–93, when measured at constant prices. By contrast, the investment rate, measured at current prices declined, on average, between 1978–84 and 1985–88, before recovering in 1989–93.
Adverse weather conditions were experienced in 1978, 1980, 1981, 1984, 1991, and 1992.
However, measures of competitiveness were found to influence investment which suggests that the same would be true for movements in the terms of trade affecting profitability (see Annex I).
The shock is calculated as the change in the U.S. dollar export price index multiplied by the export volume, less the change in the U.S. dollar import price index multiplied by the import volume.
Trend GDP is calculated by applying a univariate Hodrick-Prescott filter to actual GDP for 1970–93. The filter calculates trend GDP by minimizing the variation of actual GDP around the trend, subject to a (specified) constraint on the variations of the growth rate of the trend. Agricultural production in Senegal exhibits a relatively flat trend, and therefore the mean volume of output for 1977–93 is used instead of a trend. Supply shocks in the agricultural sector also generate second round contractionary impulses through their impact on agro-processing industries. Because these are not captured by output deviations in the agricultural sector, this measure will understate the impact of supply shocks.
The measure is similar to that for industrial countries in the World Economic Outlook; see Heller et al. (1986) for a description of the methodology. The measure of potential output is identical to that used in estimating the output gap.
The Information Notice System CPI-based REER index for Senegal is calculated with reference to bilateral trading partners and does not take into account other countries competing in Senegal’s export markets. Also, the CPI index for Senegal is outdated; its weights are based on a 1960–61 household survey, and it coverage is limited to Dakar. Moreover, the CPI index has not reflected movements in domestic wage costs.
Competitiveness of the CFA franc countries is discussed in detail in EBS/94/151.
See World Bank (1993 a and b).
Monetary policy in the WAEMU has been conducted on the basis of an annual monetary program geared toward protecting the foreign reserves of the BCEAO. The conduct of monetary policy in the Union underwent significant reforms over the period 1989–93. Prior to the initiation of these reforms, the BCEAO relied largely on: (i) quantitative credit ceilings; (ii) limits on central bank financing; (iii) a discount rate; (iv) an interbank money market to maximize the retention of funds within the Union and the effective use of the liquid assets of the commercial banks; and (v) a minimum liquidity ratio and two solvency ratios. The principal objective of the reform of monetary policy instruments in October 1993 is to foster a more efficient and flexible monetary policy by gradually replacing administrative Controls over money and credit with more indirect and market-oriented instruments, including: (i) the liberalization of banking conditions; (ii) a major reform of money market operations; (iii) the establishment of minimum reserve requirements; (iv) the promotion of an active regional interbank market; and (v) the strengthening of prudential regulations.
Products subject to price Controls were: sugar, rice, cotton, groundnuts, vegetable oil, tomatoes, tomato paste, wheat flour, wheat bread, pharmaceutical drugs, health care services, imported milk, imported instant coffee, soap, bottled gas, charcoal, soft drinks, cement, reinforced steel bars, petroleum products, urban transport, and water, electricity, and telephone utilities.
The enrollment rates in 1960 were used, rather than the average for the entire period, because returns to investment in education materialize with long lags.
All variables, except REERPCH are lagged one period. T-statistics of the estimated coefficients are given in parentheses; the symbols *** and * next to the estimated coefficients denote statistical significance at the 0.01 and 0.10 levels, respectively.
Using a similar equation in a panel regression and focusing in particular on growth in sub-Saharan Africa, Hadjimichael et al. (1995) found a stable and positive relationship between macroeconomic stability and growth. In addition, their results show that private and government investment have a positive effect on growth.
The REER index uses the INS CPI-based index, but with the average earnings index for civil servants used for Senegal as a proxy for domestic costs, instead of the CPI index.
T statistics of the estimated coefficients (in parentheses) were computed using White’s heteroskedasticity-consistent-variance-covariance estimator. The symbols ***, **, and * next to the estimated coefficients denote statistical significance at the 0.01, 0.05, and 0.10 levels, respectively.
The small size of the estimated coefficient may reflect the substantial share of public enterprises in nongovernment investment. Public enterprises received substantial subsidies, that contributed to the government’s overall borrowing needs.
A 10 percentage point rise in inflation would reduce the investment ratio by almost 1 percentage point (evaluated at the sample mean), while, for example, a 10 percent increase in the external debt to GDP ratio would lead to a 1 percent decline in the investment rate, which is equivalent to a decrease of only 0.1 percentage points of GDP from the investment ratio in 1993.
T-statistics of the estimated coefficients are given in parentheses; the symbols *** and ** next to the estimated coefficients denote statistical significance at the 0.01 and 0.05 levels, respectively.
All variables were lagged, except the change in CPI.