nep-afr New Economics Papers
on Africa
Issue of 2006‒08‒26
twelve papers chosen by
Suzanne McCoskey
Foreign Service Institute, US Department of State

  1. Wage trends in post-apartheid South Africa: Constructing an earnings series from household survey data By Rulof Burger; Derek Yu
  2. Openness, Inequality and Poverty in Africa By Alemayehu Geda
  3. Is Africa’s Skepticism of Foreign Capital Justified? Evidence from East African Firm Survey Data By Todd J. Moss; Vijaya Ramachandran; Manju Kedia Shah
  4. Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data By Benn Eifert; Alan Gelb; Vijaya Ramachandran
  5. Double-Standards, Debt Treatment, and World Bank Country Classification: The Case of Nigeria-Revised November 2004 By Todd Moss; Scott Standley; Nancy Birdsall
  6. The Global War on Terror and U.S. Development Assistance: USAID allocation by country, 1998-2005 By Todd Moss; David Roodman; Scott Standley
  7. Underfunded Regionalism in the Developing World By Nancy Birdsall
  8. What is the Most Effective Monetary Policy for Aid-Receiving Countries? By Alessandro Prati; Thierry Tressel
  9. From Pushing Reforms to Pulling Reforms: The Role of Challenge Programs in Foreign Aid Policy By Steve Radelet
  10. Beyond HIPC: Secure Sustainable Debt Relief for Poor Countries By Nancy Birdsall; Brian Deese
  11. Addressing the Challenge of HIV/AIDS: Macroeconomic, Fiscal and Institutional Issues By Maureen Lewis
  12. New Technologies, Marketing Strategies and Public Policy for Traditional Food Crops: Millet in Niger By Tahirou Abdoulaye; John Sanders

  1. By: Rulof Burger (Department of Economics, Stellenbosch University); Derek Yu (Department of Economics, Stellenbosch University)
    Abstract: This paper examines South African wage earnings trends using all the available post-1994 household survey datasets. This allows us to identify and address the sources of data inconsistencies across surveys in order to construct a more comparable earnings time series. Taking account of the inconsistencies in questionnaire design and the presence of outliers, we find that it is possible to construct a fairly stable earnings series for formal sector employees. We find that claims that workers have on average experienced a substantial decrease in their real wage earnings in the post-apartheid era is based on choosing datasets on either side of Statistics South Africa’s changeover from October Household Surveys (OHS) to the more consistent Labour Force Surveys (LFS), which caused a discontinuous and inexplicably large drop in average earnings. The data actually show an increase in real wage earnings in the post-transition period for formal sector employees, and does not appear to provide strong evidence of decreasing wages in the informal economy. The paper also investigates the change in the distribution of earnings, as well as mean earnings trends by population group, gender and skill category.
    Keywords: South Africa, Earnings, Wages, Labour market trends
    JEL: J31
    Date: 2006
  2. By: Alemayehu Geda
    Abstract: This paper explores the relationships between openness, poverty and inequality in Africa. The analysis begins with a review of social development on the continent since 1980, followed by a discussion of openness and a lengthy exploration of the patterns of trade and finance that link Africa to the rest of the world. The macroeconomic policy framework that guided African policymaking over the last three decades is the lens through which poverty and inequality are further examined. The paper highlights the major factors underpinning openness and social development, and concludes with policy recommendations.
    Keywords: Africa, inequality, income distribution, poverty, social development, globalization, international trade, debt, financial flows, economic growth, structural adjustment, liberalization.
    JEL: D31 D63 F02
    Date: 2006–08
  3. By: Todd J. Moss; Vijaya Ramachandran; Manju Kedia Shah
    Abstract: The world has increasingly recognized that private capital has a vital role to play in economic development. African countries have moved to liberalize the investment environment, yet have not received much FDI. At least part of this poor performance is because of lingering skepticism toward foreign investment, owing to historical, ideological, and political reasons. This wariness has manifested in many ways, including a range of business environment factors that impede greater foreign flows. Although much of the ideological resistance has faded, a number of specific challenges to the purported benefits of FDI have been successful in preventing more active liberalization and in moving to deal with indirect barriers. New data from firm surveys in Kenya, Tanzania, and Uganda suggest that there are important positive effects from FDI for both the host economies and the workers in foreign-owned firms. Based on our three-country sample, foreign firms are more productive, bring management skills, invest more heavily in infrastructure and in the training and health of their workers, and are more connected to global markets. At the same time, foreign firms do not appear to succeed by grabbing market share and crowding out local industry. These results suggest that many of the common objections to foreign investment are exaggerated or false. Africa, by not attracting more FDI, is therefore failing to fully benefit from the potential of foreign capital to contribute to economic development and integration with the global economy. Length: 30 pages
    Keywords: Africa, foreign capital, Kenya, Tanzania, Uganda, foreign direct investment,
    JEL: F21 F33 E22 G15 O15 O19
  4. By: Benn Eifert; Alan Gelb; Vijaya Ramachandran
    Abstract: This paper ties together the macroeconomic and microeconomic evidence on the competitiveness of African manufacturing sectors. The conceptual framework is based on the newer theories that see the evolution of comparative advantage as influenced by the business climate -- a key public good -- and by external economies between clusters of firms entering in related sectors. Macroeconomic data from purchasing power parity (PPP), though imprecisely measured, estimates confirms that Africa is high-cost relative to its levels of income and productivity. This finding is compared with firm-level evidence from surveys undertaken for Investment Climate Assessments in 2000-2004. These confirm a pattern of generally low productivity, and also suggest the importance of high indirect costs and business-environment-related losses in depressing the productivity of African firms relative to those in other countries. There are differences between African countries, however, with some showing evidence of a stronger business community and better business climate. Finally, the paper adopts a political-economy perspective on the prospects for reform of Africa’s business climate, considering African attitudes to business and the fractured nature of African business sectors as between indigenous, minority and foreign investors. The latter have far higher productivity and a greater propensity to export; however, Africa’s difficult business climate and the tendency to overcome this by working in ethnic networks slows new entry and may decrease the incentives of key parts of the business community form constituting an aggressive pressure group for reform. Even though reforms are moving forward in several countries, this slows their impact and raises the possibility that countries settle into a low-productivity equilibrium. The paper concludes with a discussion of the findings for reforms to boost the competitiveness and diversification of African economies.
    Keywords: Africa, manufacturing, private sector, business climate,
    JEL: D5 D2 E3 F2
  5. By: Todd Moss; Scott Standley; Nancy Birdsall
    Abstract: Nigeria is currently classified by the World Bank as a ‘blend’ country, making it the poorest country in the world that does not have ‘IDA-only’ status. This paper uses the World Bank’s own IDA eligibility criteria to assess whether Nigeria has a case for reclassification. Given that the country has not borrowed from IBRD for the past eleven years, such a change would merely recognize what is already de facto the case. Based on our analysis, Nigeria clearly qualifies as IDA-only based on its low income level and lack of creditworthiness. Its record of policy performance appears to be the final barrier, but we show it is no worse on performance than three African comparator groups: the current IDA-only pool, previous reverse-graduates, and the IDA-only oil producers. We also question the logic of this criterion for IDA-only ‘eligibility’ (though not of course for actual allocation or disbursements). Certainly, Africa’s three previous reverse-graduates and Angola’s current IDA-only status suggest that Nigeria is facing a double-standard. We thus conclude that Nigeria does have a strong case for reclassification. Nigeria has good reason to request such a change as it would allow it more equal consideration of its access to IDA grants (restricted to IDA-only countries) including for HIV/AIDS programs and its allocation of IDA loans. Reclassification would also strengthen the case for Nigeria receiving an immediate write-down of a large portion of its debt to bilateral donors (along the lines of concessional Naples terms for IDA-only countries), which we argue is critical to any hope that the current government’s economic and political reform efforts can be sustained. The creditors have good reason for supporting such a change as part of a broader strategy for encouraging progress in Africa’s most populous country, and one that is key to stabilizing a region where internal conflict and Islamic radicalism create threats to global security.
    Keywords: Nigeria, debt, World Bank, IDA, poverty, global security
    JEL: F34 O10 F33 F35 F51
    Date: 2004–11
  6. By: Todd Moss; David Roodman; Scott Standley
    Abstract: The launch of the Global War on Terror (GWOT) soon after September 11, 2001 has been predicted to fundamentally alter U.S. foreign aid programs. In particular, there is a common expectation that development assistance will be used to support strategic allies in the GWOT, perhaps at the expense of anti-poverty programs. In this paper we assess changes in country allocation by USAID over 1998-2001 versus 2002-05. In addition to standard aid allocation variables, we add several proxies for the GWOT, including the presence of foreign terrorist groups, sharing a border with a state sponsor of terrorism, troop contribution in Iraq, and relative share of Muslim population. We find that any major changes in aid allocation related to the GWOT appear to be affecting only a handful of critical countries, namely, Iraq, Afghanistan, Jordan, and the Palestinian Territories. The extra resources to these countries also seem to be coming from overall increases in the bilateral aid envelope, combined with declines in aid to Israel, Egypt, and Bosnia and Herzegovina. We do not find that any of our GWOT proxies (or their interactions) are significantly correlated with changes in country allocation of aid flows to the rest of the world, including to sub-Saharan African countries. Concerns that there is a large and systematic diversion of U.S. foreign aid from fighting poverty to fighting the GWOT do not so far appear to have been realized.
    Keywords: Global War on Terror (GWOT), September 11, foreign aid, terrorism, Iraq, muslim, poverty
    JEL: F35 N45 F51 F52
  7. By: Nancy Birdsall
    Abstract: This paper argues that regional public goods in developing countries are under-funded despite their potentially high rates of return compared to traditional country-focused investments. Regional public goods only receive about 2.0-3.5 percent out of total ODA annually according to the definition used in this paper. The rate of return to regional investments is likely to be high, especially in Africa, where investments in regional infrastructure and institutional integration would reduce the high costs imposed by the region’s many small economies and many borders. There are several reasons for the under-funding of regional public goods. First, to produce regional infrastructure and manage multi-country institutions requires coordination among two or more developing country governments. The recent donor emphasis on countries’ “ownership” of their own priorities is more supportive of national programs. Second, bilateral donors prefer country-based transfers given their potential for providing geo-strategic and political benefits, and the multilateral banks have limited scope for lending for regional programs since their principal instrument is a loan to a single-country government that must guarantee its repayment. Countries could coordinate their borrowing, but that would require reaching agreement on attribution of the associated benefits to allow appropriate allocation of the burden of financing among two or more governments. Combined, these problems of coordination, (lack of) ownership, and attribution make financing of regional programs costlier for donors to arrange, and riskier in terms of their sustainability and benefits. In Africa the under-funding of regional public goods is primarily a political and institutional challenge to be met by the countries in this region. But the donor community ought to consider the opportunity cost – for development progress itself, in Africa and elsewhere – of its relative neglect, and explore changes in the aid architecture that would encourage more attention to regional goods.
    Keywords: development aid, donor community, aid reform
    JEL: F33 F35 O19 H41 R1
    Date: 2004–11
  8. By: Alessandro Prati; Thierry Tressel
    Abstract: This paper analyses how monetary policy can enhance the effectiveness of volatile aid fl ows. We find that monetary policy is effective in reducing trade balance volatility. We propose the following taxonomy, excluding the case of emergency assistance. Monetary policy should slow down consumption growth and build up international reserves when aid is abundant and deplete them to finance imports and support consumption when aid is scarce. If foreign aid also affects productivity growth, monetary policy should take this productivity effect into account in responding to aid flows.
    Keywords: Aid effectiveness, monetary policy, real exchange rate, Dutch disease
    JEL: O11 O4 O23 E5 F35
    Date: 2006–02
  9. By: Steve Radelet
    Abstract: Most donors deliver aid in very similar ways across recipient countries even though recipients vary widely in the quality of their governance, commitment to strong development policies, degree of political stability, and level of institutional capacity. Aid effectiveness could be improved if donor systems were designed to take into account key differences in recipient countries. Proponents of country selectivity argue that donors should provide more aid to countries with better policies and stronger institutions because they are likely to achieve better results. But country selectivity could be used to influence more than the amount of aid. It could also influence the way aid is delivered, including the extent to which recipient countries set priorities and design activities, the mix of project versus program aid, the breadth of aid-financed activities, the length of donor commitments, and the distribution of aid to governments, NGOs, and other groups. Donors could employ a differentiated strategy for aid delivery based on a country’s quality of governance and commitment to development. This approach would create incentives that would challenge recipients to strengthen institutions and policies. The pull or reward for demonstrating stronger governance would be greater national policy ownership, more flexible and attractive aid modalities, and larger, more predictable and longer term resource commitments. This approach differs significantly from traditional aid programs in which donors “push” countries to reform by negotiating aid disbursements in return for specific policy changes (sometimes known as “buying” reforms). This chapter considers what role pull instruments or challenge programs (such as the World Bank's Poverty Reduction Support Credits or the United States' Millennium Challenge Account) could play within the overall framework of foreign aid, asking how they could be designed to function as effective and efficient incentive instruments and how they could best complement other aid modalities. It looks first at how challenge programs differ from more conventional aid approaches, taking the Millennium Challenge Account as an example, and shows how challenge programs fall conceptually within the pull rather than push incentives type. It then develops an argument for differentiated aid strategies across countries based on key characteristics of recipient countries.
    Keywords: Aid effectiveness, country selectivity, governance, and commitment to development
    JEL: F33 F35 O21
  10. By: Nancy Birdsall; Brian Deese
    Abstract: In 1999, the United States and other major donor countries supported an historic expansion of the heavily indebted poor country (HIPC) debt relief initiative. HIPC had two primary goals: reduce poor countries’ debt burdens to levels that would allow them to achieve sustainable growth; and promote a new way of assisting poor countries focused on home-grown poverty alleviation and human development. Three years after the initiative came into existence, we are beginning to see the apparent impact that HIPC is having, particularly on recipient countries' ability and willingness to increase domestic spending on education and HIV/AIDS programs. Yet it has also become clear that the HIPC program is not providing a sufficient level of predictability or sustainability to allow debtor countries (and donors) to reap the larger benefits, particularly in terms of sustained growth and poverty reduction, originally envisioned. An adequate amount of predictable debt relief can be an extremely efficient way of transferring resources to poor countries with reasonable economic management (indeed, more effective than traditional aid). But the full benefits of the transfer, in improved capacity to manage their economies, and in increased investor confidence in an economy's future, require that creditors, investors and committed recipient government officials have confidence that the improved debt situation will be sustained over the medium term. After reviewing some of the main critiques and proposals for change, we offer here a new way forward -- a proposal to deepen, widen, and most importantly insure debt relief to poor countries. We focus on the insurance aspect of our proposal, that would safeguard countries against external shocks for a decade, and on the advantages of financing such insurance by limited mobilization of IMF gold. We see this proposal as a practical way to make debt relief more predictably sustainable in HIPC countries, and a proposal around which international donors could consolidate their efforts in the near term.
    Keywords: heavily indebted poor country (HIPC), debt relief, poverty, sustained development
    JEL: F34 O15 F33
  11. By: Maureen Lewis
    Abstract: After decades of neglect the HIV/AIDS epidemic has rightly become one of the highest priorities on the global agenda. Funding pledges from the donors have doubled resource commitments between 2002 and 2004 to over $6 billion. That surge in funding belies the volatile nature of contributions to HIV/AIDS initiatives at the country level. The paper analyzes the impacts of abrupt HIV/AIDS funding on macroeconomic stability, fiscal health and the development of health institutions. The macroeconomic effects are ambiguous, but depend on the overall level of aid flows, as well as those for HIV/AIDS, the management of foreign exchange inflows, and effective spending policies. The fiscal ramifications revolve around the jump in external funding that reached around 1000% in Lesotho and Swaziland, and 650% in Zambia between 2002 and 2004, and the required rapid scale up if resources are to be used productively. At the same time, the new HIV/AIDS monies are swamping public health budgets in some cases exceeding 150% of the government’s total allocations for health. The vertical HIV/AIDS programs and the set aside funding threaten to undermine the very institutions that will need to carry forward the long term HIV/AIDS prevention and treatment agenda for each country. Health systems are already fragile, and governance problems and uneven productivity compound the challenges. Health institutions require funding and attention to strengthen them in the fight against HIV/AIDS. While the committed funds are desperately needed, solutions to the dilemma will require creative options to ensure the flow of funds, manage the economic implications and ensure effective service delivery. These are explored in the concluding section.
    Keywords: HIV/AIDS, health institutions, aid flows
    JEL: E0 E6 I11 I18 O11
  12. By: Tahirou Abdoulaye (INRAN/DECOR); John Sanders (Department of Agricultural Economics, College of Agriculture, Purdue University)
    Abstract: New technology introduction in this semiarid region of the Sahel is hypothesized to be made more difficult by three price problems in the region. First, staple prices collapse annually at harvest. Secondly, there is a between year price collapse in good and very good years due to the inelastic demand for the principal staple, millet, and the large changes in supply from weather and other stochastic factors. Thirdly, government and NGOs intervene in adverse rainfall years to drive down the price increases. Marketing strategies were proposed for the first two price problems and a public policy change for the third. To analyze this question at the firm level a farm programming model was constructed. Based upon surveying in four countries, including Niger, farmers state that they have two primary objectives in agricultural production, first achieving a harvest income target and secondly achieving their family subsistence objective with production and purchases later in the year. Farmers are observed selling their millet at harvest and rebuying millet later in the year. So the first objective takes precedence over the second. A lexicographic utility function was used in which these primary objectives of the farmer are first satisfied and then profits are maximized. According to the model new technology would be introduced even without the marketing strategies. However, the marketing strategies accelerated the technology introduction process and further increased farmers’ incomes. Of the three marketing-policy changes only a change in public policy with a reduction of the cereal imports substantially increases farmers’ incomes in the adverse years. In developed countries crop insurance and disaster assistance is used to protect farmers in semiarid regions during bad and very bad (disaster) rainfall years. In developing countries finding alternatives to the povertynutritional problems of urban residents and poor farmers to substitute for driving down food prices in adverse years could perform the same function as crop insurance in developed countries of facilitating technological introduction by increasing incomes in adverse rainfall years.
    Keywords: inventory credit, marketing strategy, inorganic fertilizers, fertility depletion, farm level programming, micro-fertilization, sidedressing
    Date: 2005–08

This nep-afr issue is ©2006 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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