Is Investment in Africa Too Low or Too High? Macro and Micro Evidence

36 Pages Posted: 20 Apr 2016

See all articles by William Easterly

William Easterly

New York University - Department of Economics

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Howard Pack

University of Pennsylvania - Management Department; University of Pennsylvania - Business & Public Policy Department

Date Written: November 30, 1999

Abstract

Many analysts decry the level of investment in Africa, saying it is too low. But there is no evidence, in cross-country data or in microeconomic data from Tanzania, that private and public capital is productive in Africa. In that sense, investment in Africa may be viewed as too high.

Devarajan, Easterly, and Pack investigate the relationship between weak growth performance and low investment rates in Africa. The cross-country evidence suggests no direct relationship. The positive and significant coefficient on private investment appears to be driven by Botswana's presence in the sample. Allowing for the endogeneity of private investment, controlling for policy, and positing a nonlinear relationship make no difference to the conclusion.

Higher investment in Africa would not by itself produce faster GDP growth. Africa's low investment and growth rates seem to be symptoms of underlying factors.

To investigate those factors and to correct for some of the problems with cross-country analysis, Devarajan, Easterly, and Pack undertook a case study of manufacturing investment in Tanzania. They tried to identify why output per worker declined while capital per worker increased. Some of the usual suspects - such as shifts from high- to low-productivity sub-sectors, the presence of state-owned enterprises, or poor policies - did not play a significant role in this decline. Instead, low capacity utilization (possibly the byproduct of poor policies) and constraints on absorptive capacity for skill acquisition seem to be critical factors. If Tanzania is not atypical, the low productivity of investment in Africa was the result of a combination of factors that occurred simultaneously, not any single factor.

What does this tell us? First, we should be more careful about calling for an investment boom so that Africa can resume growth. Unless some or all of the underlying problems are addressed, the results may be disappointing. We should also be more circumspect about Africa's low savings rate; it may be low because returns to investment were so low. The relatively high level of capital flight from Africa may have been a rational response to the lack of investment opportunities at home.

Second, there is probably no single key to unlocking investment and GDP growth in Africa. All of the factors contributing to low productivity should be addressed simultaneously.

This paper - a joint product of Public Economics and Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to study growth and development in Africa. The authors may be contacted at sdevarajan@worldbank.org, weasterly@worldbank.org, or packh@wharton.upenn.edu.

Suggested Citation

Easterly, William and Devarajan, Shantayanan and Pack, Howard, Is Investment in Africa Too Low or Too High? Macro and Micro Evidence (November 30, 1999). World Bank Policy Research Working Paper No. 2519. Available at SSRN: https://ssrn.com/abstract=632589

William Easterly

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Shantayanan Devarajan

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

Howard Pack (Contact Author)

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

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