Macroeconomic pressures and their implications for business development in Africa

African Journal of Economic and Management Studies

ISSN: 2040-0705

Article publication date: 20 September 2011


Kuada, J. (2011), "Macroeconomic pressures and their implications for business development in Africa", African Journal of Economic and Management Studies, Vol. 2 No. 2.



Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

Macroeconomic pressures and their implications for business development in Africa

Article Type: Editorial From: African Journal of Economic and Management Studies, Volume 2, Issue 2

The papers brought together in this issue of African Journal of Economic and Management Studies address the complex relationships between macroeconomic pressures, savings, investments and business development in Africa. Economists have generally argued that financial liberalization and the existence of robust financial sectors are essential for savings and investments in Africa (Harris et al., 1994). Recent contributors to the debate on the financial liberalization in African countries have also drawn attention to the need for policy changes that can promote the development of vibrant stock markets, stimulate the capitalization of the banking systems, and ensure the effective management of exchange rates in Africa (Yartey, 2007). Some countries have followed these suggestions. African financial systems have been liberalized and some economies have witnessed an upsurge of stock market activities during the last three decades. But the debate on the direction of the relationships between saving and investments as well as the effects of exchange rates on domestic investment remains unsettled. Critics argue that African economies may not be able to promote stock markets given the huge costs and their poor financial structures (Singh, 1999).

Four of the papers in this volume have contributed directly to this debate. Building on the financial liberalization literature Pierre Roche Seka’s article examines the direction of causality between investment and savings. Using time series data analysis such as co-integration, decomposition of variances and dynamic panels, the study shows that domestic savings cause investment in the West African Economic and Monetary Union (WAEMU) countries, and weak domestic savings constitute a significant constraint on investment in these countries. Thus, government policies that strengthen the mobilization of domestic savings are necessary for accelerated growth in WAEMU countries.

Charles K.D. Adjasi ,Nicholas B. Biekpe, and Kofi A Osei have also contributed to the debate with their investigation of the relationship between stock prices and exchange rate movement in seven African countries, using vector autoregressive cointegration and impulse response analysis to determine the long- and short-run linkages between stock prices and exchange rates. They based the study on the predominant theoretical viewpoint in the existing literature that exchange rate regimes are linked to domestic financial structures. That is, variations in exchange rate may affect investment – increasing or decreasing investment depending on specific industry, political and economic conditions (Woodford, 2003). Their findings indicate a long-run relationship between stock prices and exchange rate in Tunisia, where exchange rate depreciation have been found to drive down stock prices. Furthermore, an impulse response analysis for Ghana, Kenya, Mauritius and Nigeria showed that stock returns in these countries were reduced under exchange rate shocks.

The consequences of exchange rate volatility is further explored in Eria Hisali’s paper entitled “Regime switching behavior of the nominal exchange rate in Uganda”. The results of the study showed that central bank interventions can reduce the probability that the exchange rate process remains in an unstable regime for a long time. This is an interesting result in the light of the frequent disruptions in exchange rate processes in African economies. The message from the study is that the failure of central banks to intervene in exchange fluctuations may cause rational panic among investors, resulting in a higher level of exchange rate volatility over a long period of time.

Central banks are also required to oversee the manner in which banks manage their capital. Previous studies have shown that if investment banks engage in risky and morally hazardous business decisions, the survival of an economy may be at jeopardy. However, risky investments may produce higher returns than safe ones (Obstfeld, 1994). There is therefore a need for a judicious balance in the investment portfolio of low-income countries.

An instrument for regulating bank investment behaviour is the imposition of bank capital requirements. Higher capital requirements reduce bank managers’ propensity to over-invest in risky projects. But higher capital requirements may also raise banks’ marginal cost of funding and thereby constrain their abilities to lend for investment purposes.

Olowe’s paper is guided by this theoretical understanding. The author has studied stock price reactions to changes in capitalization requirements introduced by the Nigerian Central Bank in 2004. The results of the study suggest that many quoted companies in Nigeria do not comply with the Stock Exchange listing requirements as regards submission of quarterly, interim, and annual reports. Thus, much of the inefficiencies within the Nigerian stock market can be attributed to inadequate information as well as poor access to the available information. The study further showed that when the Nigerian Central Bank introduced its bank capital requirements in 2004, it had a positive impact on quoted securities on the stock market since this improved the reliability of information that guided trading activities within the financial sector. The author therefore advises central banks in Africa to vigorously enforce their capitalization requirements and impress on financial institutions to provide information that are demanded of them by law.

The remaining three papers in the volume have dealt with various aspects of business development and economic growth process. Satwinder Singh, Ruth Simpson, Chima Mordi, Chinonye Okafor have studied Nigerian women’s motivation and decisions to become entrepreneurs. The study is predicated on the understanding that entrepreneurial activities constitute the pivot on which capitalist economic systems hinge. The authors draw on rational choice theory to explore factors underpinning the decision by female entrepreneurs in Nigeria to engage in self-employment. The findings suggest that four sets of factors have significant impact on female entrepreneurship in Nigeria:

  1. 1.

    levels of education;

  2. 2.

    availability of family capital;

  3. 3.

    an internal orientation to social recognition; and

  4. 4.

    a business, friendly external environment that is characterised by deregulation.

Women covered in this study have proved themselves as competent business owners. Thus, gender-specific obstacles to entrepreneurship appear to disappear once the business is established.

Entrepreneurial activities must be managed efficiently and effectively to ensure economic growth. Previous studies have lamented on the inability of African economies to raise productivity in their manufacturing sectors and ensure a sustainable development. The share of Africa in global manufacturing value added in 2005 was estimated to be 0.7 per cent as against 5.1 per cent in Latin America and 18.4 per cent in South-East Asia (UNIDO, 2006; The World Bank, 2009). These challenges have inspired Bbaale’s study. He investigated firm-level interactions between productivity and exporting in Uganda’s manufacturing sector. The study was designed to test the self-selection and learning-by-exporting hypotheses. The results provide support for both hypotheses. They also showed that knowledge spillovers to exporting firms increased with the level of exports.

Productivity relates to human resource management and career development. In the last paper, Afam Ituma informs us that the extant literature on careers revealed a dearth of knowledge on career dynamics in Africa. He discusses two of the most dominant theoretical approaches (the culturalist and the institutionalist approaches) usually invoked in studying career dynamics within and across national contexts. He then argues strongly that career scholars should move beyond cultural explanations of career dynamics and embrace a more institutionalist approach in the study of career dynamics in the African context.

All the seven papers published here have made significant theoretical and empirical contributions to the literature on economic growth and management practices in Africa. They have also provided pointers at new areas of research on the subjects addressed.

John Kuada


Harris, J.R., Schiantarelli, F. and Siregar, M.G. (1994), “The effect of financial liberalization on the capital structure and investment decisions of Indonesian manufacturing establishments”, World Bank Economic Review, Vol. 8 No. 1, pp. 17–47

Obstfeld, M. (1994), “Risk-taking, global diversification, and growth”, The American Economic Review, Vol. 84 No. 5, pp. 1310–29

Singh, A. (1999), “Should Africa promote stock market capitalism?”, Journal of International Development, Vol. 11, pp. 343–65

UNIDO (2006), International Yearbook of Industrial Statistics, UNIDO, Vienna

Woodford, M. (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press, Princeton, NJ

(The) World Bank (2009), Swimming against the Tide: How Developing Countries are Coping with the Global Crisis, The World Bank, Washington, DC

Yartey, C.A. (2007), “The institutional and macroeconomic determinants of stock market development in Africa”, in Okpara, J. (Ed.), Management and Economic Development in Sub-Saharan Africa: Theoretical and Applied Perspectives, Adonis & Abbey, London