Essays in economic stabilisation and long term growth in Sub-Saharan Africa

Abstract

The thesis consists of three papers. The first paper evaluates the macroeconomic effect of IMF stabilisation programs in a panel of non-oil exporting countries in Sub-Saharan Africa. We make use of the “generalised evaluation estimator” and we correct for selection bias as well as potential endogeneity biases. We found that based on our chosen sample, the presence of IMF programs showed a lagged effect on the current account, inflation and real GDP growth. The rate of inflation responds contemporaneously, hence we argue therefore that IMF stabilisation programs probably bite, however, the issue of sustaining the gains remains.

The second paper explores the issue about the effect of nominal shocks on the current account of the balance of payments, in a small open economy. Developments in the theoretical literature, particularly the New-Keynesian macroeconomics and the New Open Economy macroeconomics have brought such issues to the fore. The contribution by Lane [2001a] showed that nominal shocks could have persistent real effects through the current account of the balance of payments. Such findings might be relevant to the debate about the stabilisation frameworks across developing countries. A related issue is about the use of monetary policy for macroeconomic objectives other than price stability. If unanticipated monetary policy actions could have persistent real effects, then such a policy could be directly designed to help achieve real objectives. Particular reference is made to the debate on the usefulness of restrictive monetary targets and other qualitative targets embedded in IMF stabilisation programs. We explored the empirical question, “Could nominal innovations have persistent real effects through the current account in the context of typical developing countries?” We examine the evidence for a set of six countries in Sub-Saharan Africa using the structural vector autoregression methodology. We found that nominal shocks explain a very significant participation of long run forecast error variance decomposition of the current account in some, but not all countries. We also found that there are differential responses of the current account to nominal innovations. These might suggest that stabilisation frameworks need to incorporate the peculiarities of each country.

The third paper explores long run growth in Sub-Saharan Africa, in view of the fact that growth and poverty reduction programs have assumed centre stage in IMF/World Bank lending policy. Specifically, we explored the convergence argument, as well as the key variables that potentially influence the dynamics of long run growth in the sub-region. Using dynamic panel data methods, we found that Sub-Saharan Africa is not an example of a convergence club. Rather, countries conditionally converge to their own steady states, and this could explain the increasing heterogeneity converge to their own steady stages, and this could explain the increasing heterogeneity in economic conditions across the sub-region. In addition, we found that variables - such as openness, the extent of financial development, and foreign direct investment - have beneficial marginal effects on long run growth in the sub-region. On the contrary; distortionary government consumption, inflation, and excessive money expansion have a negative effect on long term growth.

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