Understanding the growth process in sub-Saharan Africa : some empirical estimates

The system includes as endogenous variables the annual growth rates of real income, investment, prices (i.e., inflation), the exchange rate, real exports, and real agricultural output. Exogenous variables in the system include the growth of money, change in foreign aid, foreign inflation, and population growth. The estimation procedure is three-stage least squares (3SLS), which is applied to time series data from 33 countries in SSA over the period 1970 to 1998. Section 2 briefly discusses several recent studies that illustrate key features of attempts to explain Africa"s economic performance on the basis of single equation growth regressions. Section 3 outlines the simultaneous system used in the present study to capture some of the main interactions between income growth and other key macroeconomic variables. Section 4 presents the econometric results and discusses their implications. Section 5 has concluding comments, including suggestions on how study results might help Africa"s policymakers promote and sustain growth and development. The study shows that income growth cannot meaningfully be determined by a dozen or more macro-level variables that are presumed to be independent of income growth. Three specific findings are noteworthy: (1) The impact of foreign aid on economic growth is indirect, operating through the growth of investment. (2) Over the sample period, the growth of the non-agricultural sector has been associated with a significant reduction in the growth of agriculture. (3) There is evidence that exchange rates are highly responsive to both domestic and foreign inflation and that, over longer periods, they have changed in ways consistent with trends in relative purchasing power parity.