Financing economic growth and development in Africa

African Journal of Economic and Management Studies

ISSN: 2040-0705

Article publication date: 16 September 2013

3609

Citation

Kuada, J. (2013), "Financing economic growth and development in Africa", African Journal of Economic and Management Studies, Vol. 4 No. 3. https://doi.org/10.1108/AJEMS-06-2013-0056

Publisher

:

Emerald Group Publishing Limited


Financing economic growth and development in Africa

Article Type: Editorial From: African Journal of Economic and Management Studies, Volume 4, Issue 3

Economists generally recommend the use of domestic savings rather than external borrowing to finance investments in developing countries. Several reasons account for this recommendation. First, domestic finance is less volatile than most sources of external finance and do not increase a nation’s vulnerability to external shocks that may lead to debt crises. Second, it is politically sound to rely on domestic resources because they increase a country’s ownership of public policy and tie accountability to the citizens rather than external investors and donor organizations (Culpeper and Bhushan, 2010). Third, unlike official development assistance, domestic finance is not subject to “conditionalities” which tend to limit the policy choices and instruments that are available to governments.

In spite of these obvious advantages, the available evidence suggests that African countries tend to rely a lot more on external sources of finance than mobilizing domestic capital resources (Adam and O’Connell, 1997). The reasons are partly the low levels of domestic savings in Africa, the political sensitivity of increasing tax revenues (Fjeldstad and Rakner, 2003), and the poorly developed domestic capital markets (Aryeetey and Senbet, 2004). One of the consequences of this reliance on external financing is the heavy debt burden that many African countries have experienced to date. As an example, the external debt for African countries was estimated to be US$300 billion in 2009 and about 16 per cent of the continent’s export earnings were spent on servicing it that year (NEPAD-OECD, 2010).

All the six papers in this volume focus on different aspects of financing economic activities in different African countries and provide us with additional insights into the challenges of financial management and economic growth. In the first paper, Kevin Odulukwe Onwuka and Augustine Obiefuna examine the relationship between saving and investment in selected African countries. The results show that the low levels of domestic savings in the countries covered by the study did not appear to constrain investments since most of them tended to finance their investments with foreign capital.

The implications of excessive reliance on foreign savings for investment in African countries are examined in John Pastor Ansah and Muhammad Azeem Qureshi’s paper which compares debt problems in Ghana and Pakistan. His objective in the study is to identify leverage points that may be utilized to slow down the debt accumulation processes in the two countries without slowing down economic growth. His analysis (using system dynamics method) showed that with the current investment policies adopted in the two countries, their debt-GDP ratios are likely to increase to unsustainable levels by 2030. He therefore suggests that macroeconomic policy makers in both countries should consider a combination of the following options to bring their debt-GDP ratios to tolerable levels without sacrificing investments:

  • increase tax rates;

  • reduce government expenditure;

  • increase public investment;

  • increase propensity to save; and

  • capping debt servicing.

His analysis suggest that policy intervention that emphasizes increase in revenue will be more effective in attaining economic growth objectives in the two countries than engaging in interventions that aim at economizing on government expenditure.

Zouhair Mrabet and Charfeddine Lanouar examine the consequences of trade liberalization and technology import for skill upgrading in Tunisian manufacturing industries. Economic theory holds that liberalization promotes internationalization of local firms which, in turn, enhances competition, technology upgrading and positive externalities that promote economic growth. The results of their study show that trade liberalization positively impacted the demand for skilled labour and imported technology in Tunisian manufacturing companies. Their explanation for this relationship is that since Tunisian trade is mainly with Western Europe, technologies used in the manufacturing sector are similar to those used in the developed countries and are therefore biased in favour of skilled workers.

Just as macroeconomic activities depend on capital accumulation, enterprise formation and growth require capital as well. It has been argued that private enterprise formation is a more effective means of making a real dent in poverty in sub-Sahara Africa and microfinance is one of the key requirements in such an endeavour. This argument is predicated on the assumption that microfinance will enable poorer segments of the populations to start or expand their microenterprises, thereby increasing their self-reliance and, thus, commence a process of upward social mobility. This is the focus of Nixon Kamukama’s and Bazinzi Natamba paper which examines the role of social intermediation in improving Ugandan households’ access to microfinance. He argues that the promotion of social intermediation in microfinance industry is capable of creating new attitudes and self-perceptions as well as new systems and institutions, which in turn can promote self-reliance, confidence, trust and empowerment amongst the clients. Results of the study indicate that positive and significant relationship exists between social intermediation, social capital, managerial competence and access to financial services in the microfinance industry. This suggests that an improvement in social intermediation is associated with high levels of access to financial services. He therefore recommends to the Ugandan Government and other stakeholders in the microfinance industry to embark on building human capacity of clients through social intermediation and create opportunities that promote social capital among the groups.

The link between alternative sources of finance and productivity of small enterprises is the focus of Eric Osei-Assibey’s paper. His motivation for the study derives from the view that microenterprises tend to have restricted access to formal bank financing and therefore tend to rely heavily on their owners’ past savings and informal sources of credit from family members, friends, and money lenders. He uses a survey data-set on nonfarm microenterprises from Ghana to measure the technical efficiency of these enterprises under different sources of finance. The results show that where an entrepreneur used loan or debt finance (instead of grant) to establish the business there was a higher likelihood that productivity would be high. Donations or charity as a source of start-up capital did not produce a similar productivity effect.

The last paper by Gabriel Babawale is about valuation accuracy. Its relevance to the discussions of finance and economic growth must be seen in the light of the robust growth experienced by the housing market in various African countries due to economic growth and increasing middle income segment in a number of countries. His objective is to examine the extent to which valuations should be relied on to provide reliable performance measurement for investment properties. The paper reports the results of an empirical investigation of Nigerians’ perception of acceptable levels of accuracy for different types of valuations and different property types. The results show that the valuers in Nigeria expect greater accuracy in valuations of residential and commercial properties while a much lower level of accuracy is expected for industrial, agricultural, and recreational properties. The reasons are that residential and commercial properties are more frequently traded making the available market evidence relatively richer.

Put together, the six papers provide useful insights into how different sources of finance impact economic growth and poverty alleviation in Sub-Sahara Africa. The clear message is that the financing gap problems in general and external debts in particular, remain major economic problems in Africa. Furthermore, domestic resources provide nations with a more solid grounding for sustainable growth by mobilizing both capital and social resources that facilitate a people-centered development process. Such resources also free governments and policy makers from the “conditionalities” and externally-generated vulnerabilities associated with external sources of finance. In addition to these, they provide them with greater variety of policy choices and scope of maneuver. But the main challenge is to raise African citizens’ preparedness to sacrifice the fulfillment of some of their short-term needs in order to save to achieve the long-term gains of economic growth.

John Kuada

References

Adam, C.S. and O’Connell, S.A. (1997), “Aid, taxation and development: analytical perspectives on aid effectiveness in sub-Saharan Africa”, Working Papers Series 97-5, Centre for the Study of African Economies, University of Oxford, Oxford

Aryeetey, E. and Senbet, L. (2004), “Essential financial market reforms in Africa”, Technical Publication No. 63, Institute of Statistical, Social and Economic Research, University of Ghana, Accra

Culpeper, R. and Bhushan, A. (2010), Domestic Resource Mobilization in Africa: An Overview, The North-South Institute, available at: http://www.nsi-ins.ca/content/download/DRM_Synthesis_V5.pdf (accessed 21 June 2013)

Fjeldstad, O.H. and Rakner, L. (2003), Taxation and Tax Reform in Developing Countries: Illustrations from Sub-Saharan Africa, R 2003:6, Chr. Michelsen Institute, Bergen

NEPAD-OECD (2010), “Africa investment initiative ‘external debt in Africa’”, Policy Brief No. 3, available at: http://www.un.org/africa/osaa/reports/2010_Debtbrief.pdf

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