nep-afr New Economics Papers
on Africa
Issue of 2005‒12‒14
eighteen papers chosen by
Suzanne McCoskey
Foreign Service Institute, US Department of State

  1. Achieving the Millennium Development Goals in Sub-Saharan Africa : A Macroeconomic Monitoring Framework By Pierre-Richard Agénor; Nihal Bayraktar; Emmanuel Pinto Moreira; Karim El Aynaoui
  2. North-South Asymmetric Relationships : Does the EMU Business Affect Small African Economies ? By André, NYEMBWE; Konstantin, KHOLODILIN
  3. The Marginal Cost of Public Funds in Africa By Michael Warlters; Emmanuelle Auriol
  4. Nonperforming Loans in Sub-Saharan Africa : Causal Analysis and Macroeconomic Implications By Hippolyte Fofack
  5. The Impact of the Strong Euro on the Real Effective Exchange Rates of the Two Francophone African CFA Zones By Ali Zafar
  6. An Analysis of South Africa's Value Added Tax By Delfin S. Go; Marna Kearney; Sherman Robinson; Karen Thierfelder
  7. Teacher Shocks and Student Learning : Evidence from Zambia By Jishnu Das; Stefan Dercon; James Habyarimana; Pramila Krishnan
  8. Poverty Traps, Aid, and Growth By Aart Kraay; Claudio Raddatz
  9. Foreign Aid and Market-Liberalizing Reform By Jac Heckelman; Stephen Knack
  10. Remittances : Transaction Costs, Determinants, and Informal Flows By Caroline Freund; Nikola Spatafora
  11. The WTO Doha Round, Cotton Sector Dynamics and Poverty Trends in Zambia By Jorge F. Balat; Guido G. Porto
  12. Do Donors Get What They Paid For? Micro Evidence on the Fungibility of Development Project Aid By Dominique van de Walle; Dorothyjean Cratty
  13. Multilateral Trade Liberalization and Mexican Households : The Effect of the Doha Development Agenda By Alessandro Nicita
  14. Which Inequality Matters? Growth Evidence Based on Small Area Welfare Estimates in Uganda By Youdi Schipper; Johannes G. Hoogeveen
  15. Improving the Dynamics of Aid : Towards More Predictable Budget Support By Benn Eifert; Alan Gelb
  16. The Performance of Health Workers in Ethiopia - Results from Qualitative Research By Magnus Lindelow; Pieter Serneels; Teigist Lemma
  17. Comparative Review of Microfinance Regulatory Framework Issues in Benin, Ghana, and Tanzania By Joselito Gallardo; Korotoumou Ouattara; Bikki Randhawa; William F. Steel
  18. Economic Impacts of Professional Training in the Informal Sector : The Case of the Labor Force Training Program in Cote d'Ivoire By Dorte Verner; Mette Verner

  1. By: Pierre-Richard Agénor (University of Manchester and Center for Growth and Business Cycle Research); Nihal Bayraktar (The World Bank and Penn State University); Emmanuel Pinto Moreira (The World Bank); Karim El Aynaoui (The World Bank and Central Bank of Morocco)
    Abstract: The authors present an integrated macroeconomic approach to monitoring progress toward achieving the Millennium Development Goals (MDGs) in Sub-Saharan Africa. At the heart of their approach is a macroeconomic model that captures key linkages between foreign aid, public investment (disaggregated into education, infrastructure, and health), the supply side, and poverty. The model is linked through cross-section regressions to indicators of malnutrition, infant mortality, life expectancy, and access to safe water. A composite MDG indicator is also calculated. The functioning of the framework is illustrated by simulating the impact of an increase in aid and a debt write-off for Niger at the MDG horizon of 2015, under alternative assumptions about the degree of efficiency of public investment. The authors' approach can serve as the building block of Strategy Papers for Human Development (SPAHD), a more encompassing concept than the current "Poverty Reduction" Strategy Papers.
    Keywords: Macroeconomics and growth
    Date: 2005–10–01
  2. By: André, NYEMBWE; Konstantin, KHOLODILIN
    Abstract: In this paper we empirically investigate a possible transmission of the European business cycle to Sub-Saharan Africa’s economies. This linkage may be of interest because the EMU is the main trading partner of African countries, and many of these countries use the euro as either the official or a de facto anchor in order to keep the exchange rate fixed or stable. After identifying possible theoretical channels of transmission, we test whether the relevant economic variables in Africa are sensitive to the fluctuations of European economic activity. Using either a Euro area GDP series or a Stock and Watson approach in order to build indicators of economic fluctuations to Sub-Saharan Africa despite the appealing theoretical linkages between the two areas. The most important relationship we manage to disentangle is between the European and African monetary policies.
    Keywords: North-South linkages; Business cycles; EMU; African economies; Sub-Saharan Africa
    JEL: C32 E31 E32 F41
    Date: 2005–08–15
  3. By: Michael Warlters (The World Bank); Emmanuelle Auriol (ARQADE and IDEI, Toulouse)
    Abstract: The authors use a computable general equilibrium model to estimate the marginal cost of public funds (MCF) for taxes on domestic goods, exports, imports, capital, and labor in 38 African countries. The resulting MCF estimates provide directions for tax reform in Africa. The authors investigate the MCFs of hypothetical taxes in the informal sector and the impact of administrative costs. Finally, they investigate the relationship between MCF dispersion and measures of tax system inefficiency.
    Keywords: Infrastructure, Domestic finance, Macroeconomics and growth, Public sector management
    Date: 2005–08–01
  4. By: Hippolyte Fofack (The World Bank)
    Abstract: This paper investigates the leading causes of nonperforming loans during the economic and banking crises that affected a large number of countries in Sub-Saharan Africa in the 1990s. Empirical analysis shows a dramatic increase in these loans and extremely high credit risk, with significant differences between the CFA and non-CFA countries, and substantially higher financial costs for the latter sub-panel of countries. The results also highlight a strong causality between these loans and economic growth, real exchange rate appreciation, the real interest rate, net interest margins, and interbank loans consistent with the causality and econometric analysis, which reveal the significance of macroeconomic and microeconomic factors. The dramatic increase in these loans is largely driven by macroeconomic volatility and reflects the vulnerability of undiversified African economies, which remain heavily exposed to external shocks. Simulated results show that macroeconomic stability and economic growth are associated with a declining level of nonperforming loans; whereas adverse macroeconomic shocks coupled with higher cost of capital and lower interest margins are associated with a rising scope of nonperforming loans. These results are supported by long-term estimates of nonperforming loans derived from pseudo panel-based prediction models.
    Keywords: Domestic finance, Macroeconomics and growth
    Date: 2005–11–01
  5. By: Ali Zafar (The World Bank)
    Abstract: The author estimates the degree of misalignment of the CFA franc since the introduction of the euro in 1999. Using a relative purchasing power parity-based methodology, he develops a monthly panel time series dataset for both the Economic and Monetary Community of Central Africa (CEMAC) zone and the West African Economic and Monetary Union (UEMOA) zone to compute a trade-weighted real effective exchange rate indexed series from January 1999 to December 2004. The author's main finding is that the real effective exchange rate appreciated by close to 8 percent in UEMOA and 7 percent in CEMAC, influenced by volatility in the euro-dollar bilateral exchange rate and conservative monetary policies in the two zones, resulting in a partial loss of competitiveness in export markets. The lower appreciation in Central Africa can be explained by lower inflation in CEMAC than in UEMOA and by the greater trade with higher inflation East Asian countries, partially offset by the peg to the dollar. However, the inclusion of "unrecorded trade" results in an appreciation of only 6 percent in the UEMOA zone and 6 percent in the CEMAC zone due to higher inflation in the two countries with unmonitored cross-border flows, Ghana and Nigeria. Using time series econometrics, an Engle-Granger two stage procedure for cointegration, and an error correction framework, a single equation modeling of the real exchange rate from 1970 to 2005 as a function of terms of trade, economic openness, aid inflows, and a dummy representing the 1994 devaluation, the author finds little statistical evidence of a long-run equilibrium exchange rate that is a vector of economic fundamentals. The dummy explains most of the real exchange rate behavior in the two zones, while openness in UEMOA has contributed to an appreciation of the real effective exchange rate.
    Keywords: International economics, Macroeconomics and growth
    Date: 2005–10–01
  6. By: Delfin S. Go (The World Bank); Marna Kearney (South Africa National Treasury); Sherman Robinson (University of Sussex, UK); Karen Thierfelder (U.S. Naval Academy)
    Abstract: In this paper, the authors describe South Africa's value added tax (VAT), showing that (1) the VAT is mildly regressive, and (2) it is an effective source of government revenue, compared with other tax instruments in South Africa. They evaluate the VAT in the context of other distortions in the economy by computing the marginal cost of funds-the effect of raising government revenue by increasing the VAT rates on household welfare. Then they evaluate alternative, revenue-neutral tax systems in which they reduce the VAT and raise income taxes. For the analysis, the authors use a computable general equilibrium (CGE) model with detailed specification of South Africa's tax system. Households are disaggregated into income deciles. They demonstrate that alternative tax structures can benefit low-income households without placing excess burdens on high-income households.
    Keywords: Macroeconomics and growth, Public sector management
    Date: 2005–08–01
  7. By: Jishnu Das (The World Bank); Stefan Dercon (Oxford University); James Habyarimana (Georgetown University); Pramila Krishnan (Cambridge University)
    Abstract: A large literature examines the link between shocks to households and the educational attainment of children. The authors use new data to estimate the impact of shocks to teachers on student learning in mathematics and English. Using absenteeism in the 30 days preceding the survey as a measure of these shocks they find large impacts: A 5 percent increase in the teacher's absence rate reduces learning by 4 to 8 percent of average gains over the year. This reduction in learning achievement likely reflects both the direct effect of increased absenteeism and the indirect effects of less lesson preparation and lower teaching quality when in class. The authors document that health problems-primarily teachers' own illness and the illnesses of their family members-account for more than 60 percent of teacher absences; not surprising in a country struggling with an HIV/AIDS epidemic. The relationship between shocks to teachers and student learning suggests that households are unable to substitute adequately for teaching inputs. Excess teaching capacity that allows for the greater use of substitute teachers could lead to larger gains in student learning.
    Keywords: Poverty, Rural development, Labor and employment, Education
    Date: 2005–04–26
  8. By: Aart Kraay (The World Bank); Claudio Raddatz (The World Bank)
    Abstract: The authors examine the empirical evidence in support of the poverty trap view of underdevelopment. They calibrate simple aggregate growth models in which poverty traps can arise due to either low saving or low technology at low levels of development. They then use these models to assess the empirical relevance of poverty traps and their consequences for policy. The authors find little evidence of the existence of poverty traps based on these two broad mechanisms. When put to the task of explaining the persistence of low income in African countries, the models require either unreasonable values for key parameters, or else generate counterfactual predictions regarding the relations between key variables. These results call into question the view that a large scaling-up of aid to the poorest countries is a necessary condition for sharp and sustained increases in growth.
    Keywords: Poverty, Macroeconomics and growth
    Date: 2005–06–01
  9. By: Jac Heckelman (Wake Forest University); Stephen Knack (The World Bank)
    Abstract: Market-oriented economic policies-reflected in limited economic activity by government, protection of private property rights, sound monetary policy, outward orientation regarding trade and efficient tax and regulatory policy-have been strongly linked to faster rates of economic growth. Foreign aid is often provided in the belief that it encourages liberalizing reforms in these areas. This paper analyzes the impact of aid on market-liberalizing policy reform, correcting for the possible endogeneity of aid. Results indicate that higher aid slowed reform over the 1980-2000 period, as measured by a broad index of policies. Disaggregating policy into five areas, aid is significantly linked to slower reform in some policy areas but not in others. Disaggregating by decade, aid's adverse impact on policy reform is much more pronounced for the 1980s than for the 1990s.
    Keywords: Private sector development, Governance, Transition, Macroeconomics and growth, Public sector management
    Date: 2005–04–01
  10. By: Caroline Freund (The World Bank); Nikola Spatafora (International Monetary Fund)
    Abstract: Recorded workers' remittances to developing countries have grown rapidly, to more than $100 billion in 2004, bringing increasing attention to these flows as a potential tool for development. But even these statistics are likely to significantly understate true remittances, as a large share is believed to flow through informal channels. Estimates of the importance of the informal sector vary widely, ranging from 35 percent to 250 percent of total remittances. The primary motivation of the authors is to develop the first empirical methodology to estimate informal flows. They use insights from the literature on shadow economies and empirically estimate informal remittances for more than 100 countries using historical data on the balance of payments (BOP), migration, transaction costs, and country characteristics. Their results imply that informal remittances amount to about 35-75 percent of official remittances to developing countries. There is significant regional variation: informal remittances to Sub-Saharan Africa and Eastern Europe and Central Asia are relatively high, while those to East Asia and the Pacific are relatively low. These estimates are supplemented with detailed household survey data on remittance receipts in a number of countries. The results also shed light on the determinants of recorded remittances and the associated fees in the formal sector. The authors find that the stock of migrants in OECD countries is the primary determinant of remittances. In addition, money transfer fees and the presence of dual exchange rates reduce the share of remittances reported in national accounts. In turn, transaction costs are systematically related to concentration in the banking sector, lack of financial depth, and exchange rate volatility. There is also evidence that remittances are misrecorded in the BOP as "errors and omissions."
    Keywords: International economics
    Date: 2005–09–01
  11. By: Jorge F. Balat (The World Bank); Guido G. Porto (The World Bank)
    Abstract: The Zambian cotton sector went through significant reforms during the 1990s. After a long period of parastatal control, a process of liberalization in cotton production and marketing began in 1994. These reforms were expected to benefit agricultural farmers. In Zambia, these are rural, often vulnerable, smallholders. The authors investigate the connection between the dynamics of the cotton sector and the dynamics of poverty and evaluate to what extent cotton can work as a vehicle for poverty alleviation. They find that cotton can indeed act as an effective mechanism for increased household welfare. They also find income gains associated with cotton production, as well as positive impacts on the long-run nutritional status of Zambian children. The impacts, however, are relatively small.
    Keywords: Agriculture, Poverty, Rural development
    Date: 2005–09–01
  12. By: Dominique van de Walle (The World Bank); Dorothyjean Cratty (The World Bank)
    Abstract: Recipient government responses to development project aid have typically been studied at high levels of aggregation, using cross-country comparisons and/or aggregate time series data. Yet increasingly the relevant decisions are being made at the local level, in response to specific community-level projects. The authors use local-level data to test for fungibility of World Bank financing of rural road rehabilitation targeted to specific geographic areas of Vietnam. A simple double difference estimate suggests that the project's net contribution to rehabilitated road increments is close to zero, suggesting complete displacement of funding. However, with better controls for the endogeneity of project placement the authors find much less evidence of fungibility, with displacement accounting for around one-third of the aid. The results point to the importance of dealing with selection bias in assessing project aid fungibility.
    Keywords: Infrastructure, Governance, Transition, Rural development
    Date: 2005–03–01
  13. By: Alessandro Nicita (The World Bank)
    Abstract: Empirical evidence suggests that global trade reforms are unlikely to produce analogous results across countries, especially when analyzing their effect on poverty. This implies that the analysis of trade reform on social welfare cannot be generalized and needs to be conducted on a country by country basis. Moreover, even within the same country, geographic areas, households, and individuals are likely to be differentially affected, some of them benefiting more than others, while others might lose. With this in mind, the author provides a quantitative estimate of the effect on Mexican households from the implementation of the Doha development agenda. His analysis uses a two-step approach for which changes in prices and factors are estimated through a CGE model (GTAP) and then mapped into the welfare function of the household using household survey data. The empirical approach the author uses aims to measure the impact of Doha implementation by tracing changes in the household prices of goods and factors and their impact on household welfare, taking particular account the role of domestic price transmission. The findings suggest that multilateral trade liberalization alone would have a negative effect on Mexican households, even though very small. However, when the implementation of the Doha development agenda is complemented by domestic policies aimed at increasing productivity and improving domestic price transmission, the overall effects become positive. The results point to the importance of domestic price transmission in determining the variance of the effects across households.
    Keywords: Poverty, International economics
    Date: 2005–09–01
  14. By: Youdi Schipper (Vrije Universiteit Amsterdam and The World Bank); Johannes G. Hoogeveen (The World Bank)
    Abstract: Existing empirical studies on the relation between inequality and growth have been criticized for their focus on income inequality and their use of cross-country data sets. Schipper and Hoogeveen use two sets of small area welfare estimates-often referred to as poverty maps-to estimate a model of rural per capita expenditure growth for Uganda between 1992 and 1999. They estimate the growth effects of expenditure and education inequality while controlling for other factors, such as initial levels of expenditure and human capital, family characteristics, and unobserved spatial heterogeneity. The authors correct standard errors to reflect the uncertainty due to the fact that they use estimates rather than observations. They find that per capita expenditure growth in rural Uganda is affected positively by the level of education as well as by the degree of education inequality. Expenditure inequality does not have a significant impact on growth.
    Keywords: Poverty
    Date: 2005–05–01
  15. By: Benn Eifert (The World Bank); Alan Gelb (The World Bank)
    Abstract: This paper considers approaches towards improving the predictability of aid to low income countries, with a special focus on budget support. In order to accelerate progress towards the Millennium Development Goals, the donor community is increasing aid flows while pushing for more coordination and tighter performance-based selectivity. However, these factors may increase the unpredictability of aid from current levels, which are already high enough to impose significant costs. Predictability is a particular challenge in the area of budget support, which will continue to increase in importance as aid is sought to underpin longer-term recurrent spending commitments. Budget support reduces transactions costs and drains on capacity, but it tends to be more vulnerable to fluctuations than multi-year project support. Poor predictability raises the threat of a low-level equilibrium: countries, budgeting prudently within a medium-term fiscal framework, will discount commitments; donors will see few funding gaps, so pledges will fall. With some countries discounting aid commitments in formulating budgets, some already see signs of this happening. To improve predictability, donors must extend their funding horizons. However, even if this can be done, several major issues will remain at country level. First, how can countries deal with residual short-run volatility of disbursements relative to commitments? Second, can donors lengthen commitment horizons to individual developing countries without excessive risk of misallocating aid? Third, within a country's overall aid envelope, how should donors set the shares of project aid and budget support? Finally, the paper considers the other main approach to budget support, the output or outcome-driven approach of the European Union. The paper concludes that many of these issues can be addressed. Simple spending and savings rules built around a buffer reserve fund of 2-4 months of imports can help smooth public spending. Aid can be pre-committed several years ahead with only small efficiency losses, using a strategy of "flexible pre-commitment." Guidelines can be set to limit the volatility of budget support while keeping it performance-based, and past experience can be used more systematically to develop "outcome" norms to better guide aid allocation.
    Keywords: Poverty, International economics
    Date: 2005–10–01
  16. By: Magnus Lindelow (The World Bank); Pieter Serneels (University of Oxford); Teigist Lemma (International Labour Organization)
    Abstract: Insufficient attention has been paid to understanding what determines the performance of health workers and how they make labor market choices. This paper reports on findings from focus group discussions with both health workers and users of health services in Ethiopia, a country with some of the poorest health outcomes in the world. It describes performance problems identified by both health, users and health workers participating in the focus group discussions, including absenteeism and shirking, pilfering drugs and materials, informal health care provision and illicit charging, and corruption. The second part of the paper presents four structural reasons why these problems arise: (1) the ongoing transition from a health sector dominated by the public sector, toward a more mixed model; (2) the failure of government policies to keep pace with the transition toward a mixed model of service delivery; (3) weak accountability mechanisms and the erosion of professional norms in the health sector; and (4) the impact of HIV/AIDS. The discussions underline the need to base policies on a micro-analysis of how health workers make constrained choices, both in their career and in their day to day professional activities.
    Keywords: Social Development, Health and population, Public sector management
    Date: 2005–04–01
  17. By: Joselito Gallardo (The World Bank); Korotoumou Ouattara (The World Bank); Bikki Randhawa (The World Bank); William F. Steel (The World Bank)
    Abstract: The authors investigate the microfinance regulatory regimes in Benin, Ghana, and Tanzania, with a view to identifying key issues and lessons on how the overall regulatory framework affects integration of microfinance institutions into the financial system. The authors find that recognizing different tiers of both regulated and unregulated institutions in a financial structure facilitates financial deepening and outreach to otherwise underserved groups in urban and rural areas. That environment promotes sustainable microfinance under shared performance standards and encourages regulatory authorities to develop appropriate prudential regulations and staff capacity. Case studies of the three countries raise important issues on promoting microfinance development vis-à-vis regulating them. Laws to regulate activities other than intermediation of public deposits into loans can result in disproportionately restrictive and unmanageable standards, even as dynamic microfinance sectors have emerged without conducive regulatory regimes. The authors use the three countries' regulatory experiences to highlight the importance of differentiating when prudential supervision is warranted and when regulatory oversight suffices, and to identify the agencies to carry out regulation. They address an important issue that has received scant attention, measuring and paying for the costs of regulating microfinance, and the need to build technical capacity of supervisory and regulatory staff.
    Keywords: Domestic finance, Private sector development
    Date: 2005–04–01
  18. By: Dorte Verner (The World Bank); Mette Verner (Aarhus School of Business)
    Abstract: The authors address the economic impact of the labor force training program (PAFPA) developed for the informal sector in Côte d'Ivoire. The data contain a subsample of the participants in the agricultural sector, tailoring sector, and the electronics sector, and a comparable control group of nonparticipants. The data have been analyzed using standard program evaluation tools, namely difference-in-difference estimators, in order to detect potential program impacts. The authors find positive economic impacts as a result of training received for some groups, namely women, the agricultural and electronics sectors, firms employing 1-3 individuals, and firms with 10 or more employees.
    Keywords: Governance, Poverty, Social Development, Labor and employment, Education
    Date: 2005–07–01

This nep-afr issue is ©2005 by Suzanne McCoskey. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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