CSAE CONFERENCE 2010, 21-23 March 2010, OXFRD (U

Saving, Investment and capital mobility: lessons from African countries and implications for economic growth

Second Congress of African Abidjan, Côte d’Ivoire November 24-25, 2011 Chrysost BANGAKE Jude EGGOH Laboratoire d’Economie d’Orléans

Motivations of the paper

The degree of international capital mobility determines the efficience of capital allocation in the world economy.

African countries keep significant legal restriction over capital movements and have limited financial markets. Consequences: low saving rate, weak economic growth, capital flight from the region.

Understanding the extend to which domestic saving finances domestic investment in Africa is an important aspect for economic policy makers and firms One test proposed by Feldstein and Horioka (1980) for capital mobility is to examine the relationship between saving and development

Motivations of the paper

Most previous studies focused on cross section and times series of data. Problems with these studies: - low power of conventional univariate unit root tests - Further, the traditional cointegration has also the problem of low power Analyse consistently the relationship between saving and development using a battery of new heterogeneous panel unit root and cointegration tests. We use Full Modified OLS (FMOLS), Dynamic OLS and Pool Mean Group (PMG) estimators to analyse long-run relationships. The results allow us to make economic policy for African countries

Outline

Related emprirical literature Methodology Data and results oo Conclusion and key policy implications

Related empirical literature

Feldstein and Horioka (1980) proposed assessing the degree of capital mobility by measuring the correlation between saving and investment. They estimate the following cross-section regression : where and are respectively the saving and investment rates of country i, is the saving-ratio retention and is the error term.

Related empirical literature

Some recent empirical literature on OECD countries or developed countries: Krol (1996), Coiteux and Olivier (2000), Jansen (2000), Ho (2002), Coakley and al. (2003), Kim and al. (2005).

However, there is a limited number of empirical attempts to verify the presence of capital mobility using the FH approach for African countries. Among these studies: Payne and Kamazawa (2005), De Wet and Van Eyden (2005), Adedeji and Thornton (2006). Bangake and Eggoh (2011).

Unfortunately, These studies have several shortcomings.

Methodology

Panel unit root tests

We used first generation tests of panel unit due to Im, Pesaran and Shin (2003) and Maddala and Wu (1999) and second generation of unit root of Pesaran (2005).

Panel cointegration tests

We apply Pedroni’s cointegration tests methodology Panel cointegration estimation.

Although Pedroni’s methodology allows us to test the presence of cointegration, it could not provide estimation of long-run relationship.

In this paper we consider three estimators with error correction: Fully Modified OLS (FMOLS), dynamic OLS (DOLS) and Pooled Mean Group (PMG) estimator.

Data and results

The data are taken from the World Development indicators (WDI, 2008) CD-ROM for 37 African countries for the period 1970-2006.

Saving is defined as gross domestic saving as a percentage of GDP while investment is measured by gross fixed capital formation divided by GDP The three panel unit test root tests reveal that the null hypothesis cannot be rejected in level. However, this hypothesis is rejected when series are in first difference. These results imply that saving and investment in level are non-stationary and stationay in first difference The results of Pedroni’s cointegration show that the ratios of saving and investment are cointegrated for the panel of all countries and for the panels of country groups.

Data and results

Panel cointegration estimation

Countries FMOLS DOLS PMG

All FCFA NCFA OIL NON OIL FRENCH ENGLISH 0.38 (11.66) *** 0.46 (8.78) *** 0.33 (8.01) *** 0.52 (8.04) *** 0.30 (8.55) *** 0.42 (9.56) *** 0.30 (6.36) *** 0.58 (12.29) *** 0.78 (27.34) *** 0.48 (7.32) *** 0.82 (39.95) *** 0.29 (3.70) *** 0.85 (35.07) *** 0.32 (4.33) *** 0.36 (8.34) *** 0.46 (6.60) *** 0.31 (5.54) *** 0.53 (4.77) *** 0.33 (7.00) *** 0.44 (7.06) *** 0.29 (4.74) *** Notes: the value in parenthesis denotes the t-value for zero coefficients. *** significant at 1%.

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The saving retention coefficients estimated by FMOLS, DOLS and PMG are respectively 0.38, 0.58, 0.36 for the pool of all countries.

This results imply that capital is relatively mobile in Africa.

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There are marked differences in retention ratios between country groups (CFA versus non CFA; oil versus non-oil countries ; common versus civil law countries).

Data and results

Mobility of capital and growth: comparison in African Mean Std.

Min Max N Fcfa 0.281

1.086

-1.521

1.585

13 Non Fcfa 1.122

1.957

-3.356

7.024

24 Oil producing 1.074

1.704

-3.356

3.183

13 Non-oil producing 0.692

1.770

-1.521

7.024

24 French 0.375

1.503

-3.356

3.183

20

Analyse of variance (ANOVA)

F-value P-value 4.040

* 0.081

0.400

0.529

4.170

** 0.053

English 1.469

1.880

-0.980

7.024

16 -

The non CFA experienced higher economic growth than CFA countries during the period 1970-2006.

- The growth performance was slighty lower in civil law countries compared to common law countries.

- The volatility of growth is also higher in countries with higher economic growth.

Conclusion and policy implications

The prevalence of capital mobility relatively high has several policy implications.

- These results could be due to economic reforms and structural adjustments, which are aimed at liberalization of markets, taking place in many these countries during the two decade. Such reforms must be pursed.

- The prevalence of moderate capital mobility also implies that in the countries, the prospects for economic growth need not to be severely constrained by the prevailing low level of domestic savings.