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
rates of country i,
term.
are respectively the saving and investment
is the saving-ratio retention and is the error
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%.
- 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.
- 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
Non Fcfa
0.281
1.086
-1.521
1.585
13
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
English
0.375
1.503
-3.356
3.183
20
1.469
1.880
-0.980
7.024
16
Analyse of variance (ANOVA)
F-value
P-value
4.040*
0.081
0.400
0.529
4.170**
0.053
- 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.