Determinants of economic growth in africa

DETERMINANTS
OF ECONOMIC
GROWTH IN AFRICA

Edited by

Almas Heshmati


Determinants of Economic Growth in Africa


Almas Heshmati
Editor

Determinants
of Economic Growth
in Africa


Editor
Almas Heshmati
Department of Economics, Jönköping
International Business School
Jönköping University
Jönköping, Sweden
and
Department of Economics
Sogang University
Seoul, Korea

ISBN 978-3-319-76492-4
ISBN 978-3-319-76493-1  (eBook)
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Contents

1

Introduction to Determinants of Economic Growth
in Africa and Summary of the Contributions1

Almas Heshmati

Part I  Financing Growth
2

The FDI and Economic Growth Controversy
in Sub-Saharan Africa17
Yemane Michael

3

Determinants of Foreign Direct Investment
Inflows to Africa55
Alemayehu Geda and Addis Yimer

4

Impact of Foreign Direct Investment on Economic
Growth in Eastern Africa95
Biratu Bekere and Mekonnen Bersisa

v


vi    
Contents

5

The Role of Remittances, FDI and Foreign

Aid in Economic Growth in Low and Middle
Income African Countries125
Gutu Gutema

6

The Role of Financial Development
and Institutional Quality in Economic Growth
in Africa in the Era of Globalization149
Kahsay Berhane

Part II  Sources of Productivity Growth
7

The Determinants of the Level and Growth
of Total Factor Productivity in Sub-Saharan Africa199
Yemane Michael

8

Human Capital and Economic Growth
in Developing Countries: Evidences from Low
and Middle Income African Countries237
Jonse Bane

9

Labour Productivity in Kenyan Manufacturing
and Service Industries259
Almas Heshmati and Masoomeh Rashidghalam

Part III  Macroeconomic Determinants of Growth
10 Inferences on the Relationship Between Economic
Growth and the Real Exchange Rate: A Meta-Analysis289
Fentahun Baylie


Contents    
vii

11 The Balance of Trade-Economic Growth Nexus
in a Panel of Member Countries
of the East African Community319
Ferdinand Nkikabahizi, Theogene Rizinde
and Mathias Karangwa
12 Modeling the Effect of Food Price Volatility
and Transmission to Market Efficiency
and Welfare in the East African Community345
Jean Baptiste Habyarimana and Tharcisse Nkunzimana
Author Index373
Subject Index385


Contributors

Jonse Bane  Department of Economics, Addis Ababa University, Addis Ababa,
Ethiopia
Fentahun Baylie  Department of Economics, Addis Ababa University, Addis
Ababa, Ethiopia
Biratu Bekere  Department of Development Economics, Bole Campus, Rift

Valley University, Addis Ababa, Ethiopia
Kahsay Berhane  Department of Economics, Addis Ababa University, Addis
Ababa, Ethiopia
Mekonnen Bersisa Department of Economics, Addis Ababa University,
Addis Ababa, Ethiopia
Alemayehu Geda Department of Economics, College of Business and
Economics, Addis Ababa University, Addis Ababa, Ethiopia
Gutu Gutema Department of Economics, Addis Ababa University, Addis
Ababa, Ethiopia
Jean Baptiste Habyarimana Department of Economics, University of
Rwanda, Kigali, Rwanda

ix


x    
Contributors

Almas Heshmati  Department of Economics, Sogang University, Seoul, Korea;
Jönköping International Business School, Jönköping University, Jönköping,
Sweden
Mathias Karangwa  National Bank of Rwanda, Kigali, Rwanda
Yemane Michael Department of Economics, College of Business and
Economics, Addis Ababa University, Addis Ababa, Ethiopia; University of
Gondar, Gondar, Ethiopia
Ferdinand Nkikabahizi  School of Economics, University of Rwanda, College
of Business and Economics, Butare, Rwanda
Tharcisse Nkunzimana  Joint Research Centre (JRC/European Commission),
Ispra, Italy
Masoomeh Rashidghalam  Department of Agricultural Economics, University

of Tabriz, Tabriz, Iran
Theogene Rizinde  School of Economics, Department of Statistics, University
of Rwanda, College of Business and Economics, Butare, Rwanda
Addis Yimer  Department of Economics, College of Business and Economics,
Addis Ababa University, Addis Ababa, Ethiopia


Abbreviations

2SLS
Two-Stage Least Square
3SLS
Three Stage Least Squares
ADB
African Development Bank
AERC
African Economic Research Consortium
AIC
Akaike Information Criterion
ARAutocorrelation
AR
Adverse Redistribution
ARDL
Autoregressive Distributed Lag
BMI
Broad Market Index
CADF
Cross-Sectional Augmented Dickey-Fuller
CCE
Common Correlated Effects

CES
Constant Elasticity of Substitution
CMA
Comprehensive Meta-Analysis
CRS
Constant Returns to Scale
DEA
Data Envelopment Analysis
EAC
East African Community
ECT
Error Correction Term
ES
Enterprise Survey
FAO
Food and Agriculture Organization
FD-GMM
First Difference Generalized Method of Moment
FDI
Foreign Direct Investment
xi


xii    
Abbreviations

FE
Fixed Effects
FEM
Fixed Effects Model

GCF
Gross Capital Formation
GDP
Gross Domestic Production
GFCF
Gross Fixed Capital Formation
GLS
Generalized Least Square
GMM
Generalized Method of Moments
HC
Human Capital
ICT
Information and Communication Technology
IMF
International Monetary Fund
LDC
Least Developed Countries
LMLagrange-Multiplier
MENA
Middle East and North America
MIS
Market Information Services
MNC
Multinational Corporations
MNE
Multinational Enterprises
MSE
Mean Squared Error
NGO

Non-Governmental Organization
ODA-to-GDP Official Development Assistance-to-GDP
OECD
Organization for Economic Co-operation and Development
OLS
Ordinary Least Squares
PCA
Principal Component Analysis
PMG
Pooled Mean Group
PMG-CCEPMG estimator with a Common Correlated Effects
Correction
PPP
Purchasing Power Parity
PRS
Country Risk Guide
PVAR
Panel Vector Autoregressive
R&D
Research and Development
S&P
Standard and Poor
SACU
Southern Africa Custom Union
SDG
Sustainable Development Goal
SFSyndrome-Free
SPVAR
Spatial Panel Vector Autoregressive
SSA

Sub-Saharan African
TFP
Total Factor Productivity
UNDP
United Nations Development Program


Abbreviations    
xiii

VECM
WDI
WGI

Vector Error Correction Model
World Development Indicator
Worldwide Governance Indicator


List of Figures

Chapter 2
Fig. 1Net FDI inflows as a percentage of GDP
to various regions in the world (Source Based
on the WDI database) 22

Chapter 3
Fig. 1Summary of literature on an analytical basis
for classifications 70

Chapter 4
Fig. 1Net inflows of foreign direct investment (1996–2015) 114

Chapter 6
Fig. 1Financial development indicators
by income group for 40 African countries
(Source Author’s calculation based on the International
Monetary Fund (IMF)) 160
Fig. 2World governance indicators by income group
for 40 African countries (1996–2014) (Source Author’s
calculations based on the WGI dataset obtained from
the World Bank—control of corruption, political stability

xv


xvi    
List of Figures

and absence of violence/terrorism, rule of law,
government effectiveness, regulatory quality
and voice and accountability) 161

Chapter 10
Fig. 1Funnel plot of 45 sample studies
(Source Author’s computation) 306
Fig. 2Funnel plot of sample studies including
missing studies (Source Author’s computation) 307

Chapter 12

Fig. 1Cereal production versus population
(Source Own computation from data sourced
from the FAO database) 347
Fig. 2Average yield and area harvested
(Source Own computation from data sourced
from the FAO database) 348
Fig. 3EAC production of the total world
(Source Own computation from data sourced
from the FAO database) 348
Fig. 4Use of cereals (Source Own computation
from data sourced from the FAO database) 349
Fig. 5Supply of cereals in EAC (Source Own
computation from data sourced from the FAO database) 349
Fig. 6Trends in food price and indices (Source Own
computation from data sourced from the FAO database) 350
Fig. 7 Without spatial effects 360
Fig. 8 With spatial effects 360
Fig. 9 Without spatial effects 360
Fig. 10 With spatial effects 361
Fig. 11 Without spatial effects 361
Fig. 12 With spatial effects 362
Fig. 13 Without spatial effects 362
Fig. 14 With spatial effects 363
Fig. 15 Without spatial effects 363
Fig. 16 With spatial effects 364


List of Tables

Chapter 2

Table 1 Net FDI inflows as a percentage of GDP
in various regions of the world (Source Author’s
calculations based on the World Development
Indicators (2016) database) 22
Table 2 Two-sample t-test of GDP per capita growth
of resource-rich and resource-poor countries
with unequal variance 31
Table 3 Two-sample t-test of FDI inflow to resource-poor
and resource-rich countries with unequal variance 31
Table 4 Estimating the GDP growth rate per capita
using various forms of difference GMM 34
Table 5 Estimation of the GDP growth rate per capita
using various forms of system GMM 36
Table 6 Estimating the GDP growth rate per capita
for SSA using different methods (2001–2015) 42
Table 7 ‘Three-Year Average’ Estimation results of GDP
growth rate per capita using various forms of static
panel data models 45

xvii


xviii    
List of Tables

Chapter 3
Table 1 FDI flows by region in 2011–2014 (US$ billion)
(Source UNCTAD (2014))
Table 2 Result of recent empirical studies on major
determinants of FDI flows to Africa

(and other developing countries)
Table 3 Results of the FDI model
Table 4 An alternative proposed country classification
of African Economies
Table 5 Final analytical country classification for the model
Chapter 4
Table 1 Summary statistics of share of FDI in GDP
by country (Source Authors’ computation using Stata 13)
Table 2 Panel unit root test for all variables
(Source Authors’ computation using Stata 13)
Table 3 Autocorrelation test of variables
Table 4 Cross-sectional dependence test
(Source Authors’ computation using Stata 13)
Table 5 Cointegration test of FDI and GDPGR
(Source Authors’ computation using Stata 13)
Table 6 Long run causal relationship between FDI
and GDPGR (Source Authors’ computation
using Stata 13. Eview 9)
Table 7 Effects of independent variables on GDP growth rate
(Source Authors’ computation using Stata 13)
Table 8 Relationships between FDI and its determinants
(Source Authors’ computation using Stata 13)
Chapter 5
Table 1 Descriptive statistics for African countries
Table 2 Growth regression using the system GMM
Table 3 Foreign direct investment regression using
the system GMM
Table 4 Official development assistance regression using
the system GMM
Table 5 Official development assistance regression using

the system GMM
Table 6 Low and middle income African countries

56
64
83
87
88

113
114
115
116
116
116
117
119
134
136
138
140
141
145


List of Tables    
xix

Chapter 6
Table 1 Description of symbols, definitions of variables

and data source
Table 2 Pair-wise correlation of important variables
for the all 40 African countries
Table 3 Results of Pesaran’s (2004) cross-sectional
dependence test by income category
Table 4 Pesaran’s (2007) Panel Unit Root test results
for the full sample of countries
Table 5 Co-integration tests by income category
Table 6 Long run and short run estimation following
the error correction model
Table 7 Estimates of pooled mean group model with
common correlated effects correction, for entire
sample of 40 African countries
Table 8 Estimates of dynamic common correlated effects
by income level
Table 9 List of countries
Table 10 Hausman test on the MG and PMG models
Chapter 7
Table 1 Estimation results of the level of TFP using various
forms of system GMM
Table 2 Estimation of TFP growth using a GMM model
with various lags of the dependent and explanatory
variables as internal instruments (dependent variable:
TFP growth)
Table 3 Robustness check of the TFP level using deeper lags
of the dependent and explanatory variables as internal
instruments (dependent variable: TFP level)
Table 4 Robustness check of TFP growth using deeper lags
of the dependent and explanatory variables as internal
instruments (dependent variable: TFP growth)

Table 5 Estimation results of the level of TFP using various
methods (2001–2015)

157
159
174
176
178
179
181
182
187
188

217

219
220
221
222

Chapter 8
Table 1 Definitions and descriptive statistics of variables used
in regression analyses (1985–2015) (Source Author’s
computation based on the WDI database) 246


xx    
List of Tables

Table 2
Table 3
Table 4

Role of human capital in economic growth
(Dependent variable—log of GDP) 249
Determinants of health human capital
(Dependent variable—log of health expenditure) 252
Determinants of education human capital
(Dependent variable—log of education expenditure) 254

Chapter 9
Table 1 Summary statistics of key variables
in the Kenyan manufacturing and services
enterprise data (2013), N = 670
Table 2 Summary statistics by firm characteristics
and infrastructure in Kenyan manufacturing
and services enterprise data (2013), N = 670
Table 3 Correlation matrix of the variables, N = 670
Table 4 Ordinary least squares parameter estimates
(with robust standard errors) of labour
productivity, N = 670
Table 5 F-tests for alternative model specifications

272
273
276
278
280

Chapter 10
Table 1 List of proposed moderators by different criteria
(Source DeCoster 2004) 302
Table 2 Test of inclusion for categorical and continuous
moderators (Source Author’s computation) 303
Table 3 Summary statistics of sample studies (45)
(Source Author’s computation) 303
Table 4 Descriptive statistics of effect sizes
(Source Author’s own computation) 304
Table 5 Meta-regression results (excluding irrelevant moderators)
(Source Author’s computation) 305
Table 6 Meta-regression results (excluding insignificant
moderators) (Source Author’s computation) 305
Table 7 Point estimates adjusted for publication bias 308
Table 8 Correlation coefficients of relevant moderators 310
Table 9 Regression results (including all moderators) 310
Table 10 Joint test of publication bias 311
Table 11 Tests of publication bias 311


List of Tables    
xxi

Chapter 11
Table 1 Panel unit root tests 335
Table 2 Estimation results for all models including all variables 337
Table 3 Correlation matrix of residuals 338

Chapter 12
Table 1 Descriptive statistics 353

Table 2 Pearson product-moment correlation coefficients 354
Table 3 Pesaran (2007) Panel unit root test (CIPS) 354
Table 4 Estimation results of PVAR and SPVAR 358
Table 5 Variance decomposition 364


1
Introduction to Determinants of Economic
Growth in Africa and Summary of the
Contributions
Almas Heshmati

1Background and Motivation
A major policy challenge facing African countries is how to achieve and
sustain a higher rate of economic growth that will help them reduce
poverty while also being both socially inclusive and environmentally
sustainable (Acemoglu 2009; Barro 1997; Barro and Sala-i-Martin
2004; Heshmati et al. 2015; Kim and Heshmati 2014; Tausch and
Heshmati 2012; and others). The other challenges facing the continent
include the rapidly increasing population and its ageing, rapid urbanization, increasing need for construction of urban infrastructure, providing
services, recovering from the recent global economic crisis, corruption
and inefficiency of governance and urgency in responding to climate

A. Heshmati (*) 
Department of Economics, Sogang University, Seoul, Korea
A. Heshmati 
Jönköping International Business School, Jönköping University,
Jönköping, Sweden
© The Author(s) 2018
A. Heshmati (ed.), Determinants of Economic Growth in Africa,

/>
1


2    
A. Heshmati

change (AfDB 2016 and 2017; Belshaw and Livingstone 2002; Binns
et al. 2012; Chitonge 2014; Johnson 2016; Ndudu et al. 2008; Robson
and Lury 2011).
Against this background, the Jönköping International Business
School in cooperation with some African national universities like
the University of Rwanda and Addis Ababa University organize yearly
conferences on economic development in the region. This volume is a
collection of selected empirical studies on determinants of economic
growth in Africa. Several of its papers were selected from those presented
at a conference on Recent Trends in Economic Development, Finance and
Management Research in Eastern Africa held at Kigali, Rwanda, on 14–16
June 2017. These selected papers are further complemented by other
invited studies. Following the review process and revisions, 11 papers
were finally accepted for publication in this edited volume.
The core argument for compiling this book is providing an up-to-date
picture of the state and pattern of economic growth and development
in Africa; the focus of attention is on the periods both before and after
the global economic crisis. A main contribution of this volume is identifying important determinants of growth and development on the continent and estimating their effects using up-to-date standardized data,
modelling and estimation methods. The studies jointly provide a comprehensive picture of the state of economic growth, its measurement, the
causal relationships between the key determinants and efficient policies
and practices for achieving progress on the African continent as a whole
and also in selected groups of developing countries.
Growth rates vary in these countries and the low rates in some of

them represent major challenges to governments and organizations
whose aim is achieving higher growth and alleviating deep rooted
chronic poverty in certain countries and regions.
This volume has contributions from 16 authors. The studies are
grouped into three domains that influence financial sources and economic growth; sources of productivity growth; and the relationships of
prices, exchange rates and trade with growth in regions in Africa or on
the continent as a whole. The studies provide a comprehensive picture
of the state of growth, its measurement and causal factors. They investigate heterogeneity by individual countries and efficient policies and


1  Introduction to Determinants of Economic Growth in Africa …    
3

practices in growth and poverty reduction on the African continent as a
whole and also in selected countries. Variations in growth rates are high
in these countries which pose major challenges for governments and
international organizations whose aim is achieving economic growth
and alleviating poverty. The results can have strong implications for economic growth and poverty reduction policies.
For several decades Swedish International Development Cooperation
Agency (SIDA) has contributed to higher education and research in
Africa. This volume is an addition to books edited in recent years on
the subject as a part of the series. These books are the output of recent
years of financial support from SIDA to collaborative higher educational programs and research capacity building in a number of African
countries. This support has resulted in the publication of a number of
academic books related to poverty and well-being (Heshmati 2016a),
entrepreneurship and SME management (Achtenhagen and Brundin
2016), economic integration and currency (Heshmati 2016b), economic growth and development (Heshmati 2017a), poverty reduction
(Heshmati 2017b), management challenges in different types of firms
(Achtenhagen and Brundin 2017) and entrepreneurship in developing
countries (Ramirez-Pacillias et al. 2017). Altogether, these studies have

improved our understanding of the process of economic development
and growth and the challenges facing African countries.

2Summary of Individual Studies
on Economic Growth in Africa
This volume is a collection of selected empirical studies on determinants of economic growth and development in Africa. The volume has
12 chapters (one introduction/summary and 11 contributory chapters) contributed by 16 experts specializing in the fields of growth and
development. The studies are grouped into three domains that influence
financing growth; sources of productivity growth; and macroeconomic
determinants of growth with growth in regions in Africa or on the continent as a whole.


4    
A. Heshmati

2.1Part I: Financing Growth
This first part of this edited volume has 5 chapters on foreign direct
investment (FDI), remittances, foreign aid inflows, the role of financial
development and institutional quality and their impact on economic
growth in Africa.
The first study (Chapter 2) by Yemane Michael, The FDI and economic growth controversy in sub-Saharan Africa, analyzes the impact
of FDI on economic growth in 43 sub-Saharan African (SSA) countries for the period 2001–2015. It develops a dynamic system generalized method of moment (GMM) model to capture the impact
of FDI on economic growth. The method takes care of endogeneity
problems and it alleviates possible biases in estimation and accounts
for time-invariant individual country heterogeneity. The study finds
that there was no meaningful difference in the growth of per capita
gross domestic product (GDP) and also in its ability to attract FDI
inflows. The findings indicate that FDI had a negative and statistically
significant effect on the growth rate of per capita GDP in SSA for the
period under consideration.

The second study (Chapter 3) by Alemayehu Geda and Addis Yimer,
Determinants of FDI inflows to Africa, identifies the main determinants of FDI inflows to Africa. Using a panel cointegration approach
for the period 1996–2012 it finds that market size, availability of natural resources, openness to trade, a stable macroeconomic environment,
better infrastructure and an effective bureaucracy had a strong positive
impact on attracting FDI to Africa while political and macroeconomic
instability and high financial and transfer risks had a negative effect on
attracting FDI to the continent. The effects of these factors varied across
the newly developed analytical country classification. Hence, the new
classification scheme could be an important guide in the working of
continental organizations.
The third study (Chapter 4) by Biratu Bekere and Mekonnen Bersisa,
Impact of FDI on economic growth in Eastern Africa, indicates that
the FDI and economic growth nexus is an intensely debated issue in
developing countries. For East Africa a fundamental challenge is how
to achieve a sustainable increase in output over time. The countries in


1  Introduction to Determinants of Economic Growth in Africa …    
5

this part of the continent have been attracting FDI to bridge the gaps
between domestic savings and investment demands; generating foreign exchange; transferring technology; and enhancing job creation
and human capital skills to achieve sustainable economic growth and
development. The study examines the impact of FDI on economic
growth and its determinants in 14 sub-Saharan African countries over
20 years. It employs the dynamic GMM estimator for the data analysis.
Empirical evidence reveals that FDI had a positive effect on economic
growth in the region. However, while attracting FDI the countries need
to take care of its nature and composition.
The fourth study (Chapter 5) by Gutu Gutema, The role of remittances, FDI and foreign aid on economic growth of low- and middleincome African countries, investigates the relative contribution of FDI,

net official development aid (ODA) and personal remittances to economic growth in 50 African countries during 1985–2015. It uses the
system GMM approach and analyzes the effect of these three external
factors by categorizing African countries into low- and middle-income
countries. The results show that the three factors had a positive impact
on the economic growth of low-income countries but none of them
were significant determinants of economic growth in middle-income
countries. Gross capital formation had a positive and significant effect
on both country groups. Financial depth, expenditure on education and
population growth had a positive effect on economic growth in middleincome countries. Openness positively affected economic growth while
the inflation rate negatively affected economic growth in low-income
countries. The findings suggest the need for promoting policies that
encourage remittances, foreign aid and FDI for enhancing economic
growth in low-income countries.
The fifth study (Chapter 6) by Kahsay Berhane, The role of financial
development and institutional quality on economic growth in Africa in the
era of globalization, examines the short- and long-run impact of financial
development, institutional quality and globalization on economic growth
for a sample of 40 African countries. It examines whether the relationships differed across the sub-groups of low-income, lower-middle-income
and upper-middle-income countries over the period 1980–2014. It uses
a new technique in macro-econometrics panel estimation to control for


6    
A. Heshmati

dynamic heterogeneity and cross-sectional dependence. The findings
show that the presence of cross-sectional dependence, non-stationarity
and cointegration had a long-run relationship with the variables. The
results also show that financial development, institutional quality and
globalization had positive effects on long-run economic growth for the

entire sample of countries.
The findings of most of these studies imply that African countries
need to reform their macroeconomic policies to attain improved macroeconomic performance and for strengthening their macroeconomic
stability. Moreover, African countries should not only focus on investments in physical capital but also make efforts to put in place a framework that enables them to achieve high-quality growth enhancing
investments.

2.2Part II: Sources of Productivity Growth
Part II contains 3 chapters which analyze the sources of productivity
growth. The studies cover human capital, growth of total factor productivity in Africa and single labor factor productivity in Kenya.
The first study in this part (Chapter 7) by Yemane Michael, The determinants of the level and growth of TFP in SSA, investigates the determinants of total factor productivity (TFP) in 43 sub-Saharan African
countries for the period 2001–2015. The study looks at past literature
to explain SSA’s growth slumber and conundrum. It uses the system
GMM’s linear dynamic panel data model to estimate the model. The
empirical findings show that the lagged value of TFP, gross capital formation and macroeconomic stability positively and significantly affected
TFP while FDI and imports had no effect on TFP. The study also incorporates other variables of growth determinants in the models with varying effects and signs. Its results show that an improvement in TFP will
put SSA on a trajectory of sustained growth.
The next study (Chapter 8) by Jonse Bane, Human capital and economic growth in developing countries: Evidence from low- and middleincome African countries, examines the impact of flow and stock of
human capital measured in terms of education and health on economic