The Harrod –Domar Growth Model

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Chapter 2 BACKGROUND OF SUB SAHARAN AFRICA

Sub Saharan Africa consists of 48 countries from Africa and some of these countries are within the de-sert (intra Saharan) area. Based on the World Bank report (2011), this region has an estimated popula-tion of 819 million. Sub Saharan Africa have the highest poverty levels among other regions in the world with an estimated population of 300 million people living on less than $1.25 dollar a day in 1990 and this number increased to 388 million in 2005. Over the period 1970 to 2007, growth was attained in every regional economy of the world, even though some economies grew faster and others at a slower pace. Sub Saharan achieved modest growth in the 1980s. This period was therefore referred to as a lost decade in the development process of this region (Ghali 1998). Consequently, structural adjustment pro-grams were designed by the World Bank and International Monetary Fund which included macroeco-nomic stabilization measures to restore confidence in countries in SSA (World Bank 1990a). The United Nations Development Programme multi-dimensional poverty index report (2011) indicates that the re-gion has made modest progress in poverty reduction over the years. The assertion is also confirmed by the IMF regional outlook report on SSA.
Johnson, Ostry and Subramanian (2007) suggest that countries in SSA have achieved considerable im-provement in economic performance due to the macroeconomic stabilization measures that were imple-mented in the 1990s. However, SSA still lags behind other regions in the level of economic and human development (WDI 2010). Major concerns that have deterred this region from catching up with the rest of the world are weak infrastructural development, low level of education, huge foreign debts and a high poverty level, moderate growth and corruption

Infrastructural Development

Based on the findings of The International Bank for Reconstruction and Development and The World Bank (2010) on Africa’s Infrastructure edited by Vivien Foster and Cecilia Briceño-Garmendia, weak infrastructural development is the major constraint deterring the expansion of private investment. Key among other infrastructural development is the energy sector. The power sector is paramount for all sec-tors of the economy and its limited supply is holding back the expansion of businesses. The World Bank estimates that power supply is a hindrance for half of firms in half of the region. Most SSA countries power supply cannot generate the required generation capacity, coupled with frequent power cuts. The inadequate power generation is limiting firm productivity by 40%. The lower income countries among this group are the ones most affected.
SSA has not constructed enough roads that match its gigantic size. Its roads are sparsely located and one third of its population residing in the rural areas is within two kilometers from main access roads.
The information and communication technologies sectors are much established than the power supply sector. Over the last decade, there has been a steady increase in GSM connections throughout the region. SSA experienced as increase in GSM connections from 5% in 1999 to 57 % in 2006. Within the same period, an estimated 100 million people in Africa became mobile subscribers. It is documented that the negative effect of underprovided infrastructure in SSA is almost at the same level with corrupt practices, crime and financial market constraints.

Education

This region also lags behind on primary school completion rate. The World Bank African development indicators shows that only 60% of children from SSA completed primary school in 2006, lagging behind by 20 percentage points lower than other regions. (World Development Indicator 2009 and IMF; Re-gional Outlook of SSA 2010)

Foreign debts

The external debt burden of SSA increased from $172 in billion in 2006 to $195 billion in 2007, which is equivalent to 25% of the region’s gross national income (GNI). The region’s external debt to GNI is 41% percentage points lesser than the level in 2000 and then experienced a decline in the debt service ratio to exports ratio from 12 percent in 2000 to 5 percentage point in 2007.This development was achieved due to numerous factors including the increase in GNI and export revenues, debt relief under the highly indebted poor countries (HIPC) initiative and the multilateral debt relief initiative (MDRI). A total of 29 highly indebted poor countries (HIPCs) in SSA benefitted from the program. The debt can-cellation for (HIPCs) in SSA amounted to $45.5 billion at the end of 2007. In addition, another 20 high-ly indebted countries (HIPCs) in SSA received debt relief by the end of 2007 through the (MDRI). The-se programmes are implemented to reduce the debt burdens of highly indebted poor countries, especially SSA and help create an enabling business environment that attracts investment and to put the region back on the path to economic recovery and growth (World Development Indicator 2009)

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 Poverty

Poverty reduction continues to be serious challenge for developing countries in SSA. The end of pov-erty by Jeffrey Sachs (2005), states that poverty trap is an issue brought about by man and therefore can be solve by man. Richer countries have to increase the amount of aid resources that is contributed to-wards poverty reduction in poor countries.
The table below shows the multidimensional poverty index from the United Nations Development Pro-gramme from 2010 for 30 countries in this study. It also includes the standard of living index and other issues that are used to measure living standards across the world which includes the accessibility to clean water and environmental sanitation
The economies of countries in the medium human development group including Gabon, Ghana, Cape Verde and Botswana have performing remarkably well over the last decade. Countries characterize in the class of low development on human development and poverty index and at the bottom are Burundi, Niger and the Democratic Republic of Congo. These countries have faced numerous challenges includ-ing civil war, famine and political unrest and Niger among others continues to be threatening by famine William Easterly (2006) “The White Man’s Burden” states that a problem with regards to aid and devel-opment policies from the West to the rest of the world and poverty gap between rich and poor is grow-ing. Therefore, the West should increase and continue to provide aid to only poor countries that have embraced political reforms and are in a democratic process.
Such countries should be practicing good governance, transparency, accountable to their own people, freedom of the press and speech, free markets reforms to attract investments political tolerance. A poor country that makes these reforms should be provided aid.
In addition, poor countries should be allowed to design their own development strategies. Development strategies like the PRSP which IMF and the World Bank are now supporting in developing countries like Sierra Leone. Finally, there should an increase in project support to nongovernmental organizations in agriculture, health and education since it does directly benefit the poor

Rate of Growth of Gross Domestic Product

It is widely acknowledged amongst economists that a rebound in growth for developing countries would help to create jobs, increase savings, and reduce poverty. The IMF SSA regional outlook report (2011) indicates that the region achieved a growth rate of % from 2000 to 2010 compared to % from 1980 to 1995. There are positive indications that the region is on track towards economic recovery and development.
Table 2 below shows the rate of growth percentage of gross domestic product (GDP) in 30 coun-tries from SSA from the period 1990 to 2008. There is a missing value for Djibouti for the year1990.
The table shows that in the early 1990s, countries including Democratic Republic of Congo, Zam-bia, Central African Republic, Togo, Cameroon and Djibouti experienced a negative rate of growth in their GDP. The dropped in the rate of growth for some of these countries can be at-tributed to civil war, political instability and inappropriate microeconomic policies. Congo Demo-cratic Republic had a prolonged civil war that seriously incapacitated the growth of the economy. As the economy struggled to cope with the challenges it faced, there was also high inflation which still continues as the country recovers. The world saw a similar problem in Zimbabwe in early 21st century. There was a higher inflation in this country that brought the country’s economy to its knees. Investors lost confidence in the economy, businesses closed down and we saw a mass exo-dus of Zimbabweans to other African countries as economic refugees.
A majority of countries in the table managed to grow at an average growth rate of 4.5% overall during the period 1990-2008. The weak economic performance of these countries can be attributed to the unsteady growth pattern they experienced; with fluctuations in the rate of growth as can be noticed from the table above. However, the economies of some these countries have been making positive economic gains over the years, despite the economic down turn in 2008 that originated from the United States, World Bank (2011). Some of these countries including Benin, Botswana, Cape Verde, Ethiopia, Kenya, Lesotho, Mauritius, Uganda, Tanzania, and The Gambia and Ghana etc.
The Regional outlook on Sub Saharan Africa 2011 suggests that modest gains have been achieved by the region over the past decade. The table below shows the macroeconomic aggregates from 2004 to 2012 Table shows a percentage change in the rate of growth achieved by SSA from 2004 to 2008. The achieved a modest growth from 2004 to 2008 by 6.5 percentage point .There was a rebound in 2009 with a growth rate of 2.7% This figure doubled itself in 2010 to 5.4 and a slight drop by 0.2% in 2011. Although the drop by 0.2 % in 2011, there are positive indicators that growth rate in the region is stronger in 2012 and up to 5.8%.
Inflation is another cause for the weak performance of the economy of SSA. Based on the table above one can conclude that inflation was much higher in 2009 and 2011.The table show a change from 6.9% in 2010 to 9.4% in 2011percent of GDP, indicating a percent change of 2.5%. The fiscal balance, excluding grants are all negative except for 2004 to 08.This explains that the government revenues do not match expenditures. Hence, the region needs budgetary assistance in the form of grants to compensate for the budgetary gap. The region’s current account balance for 2009 and 2012 are negative and positive for 2004/ 2008 and 2011. The commodities that are exported from SSA are mainly unfinished products since its manufacturing sector is underdeveloped and therefore, its im-ports more commodities than exports.

Corruption

Corrupt practices in public sectors are one of the major factors responsible for backwardness for countries in SSA. It can affect service delivery in the health, education, agriculture and infrastructural development sectors. Transparency International (2010) conducted surveys and assessment in coun-tries through the administering of questionnaires to the public by asking questions relating to the bribery of public officials, kickbacks in public procurement, embezzlement of public funds, and questions that probe the strength and effectiveness of public-sector anti-corruption efforts. The scores are given over 10. Countries with higher score show a lower level of corruption and countries with lower score indicates higher level of corruption. Corruption in public sectors of SSA countries is one of the underlying factors for its underdevelopment. Corruption in the public sector affects service de-livery in all sectors of government including health, education, agriculture, and infrastructural devel-opment etc. In recent years, governments of SSA countries have taken bold steps to combat corrup-tion, by creating anti-corruption commissions. In addition, majority of SSA countries have introduced governance reform activities in order to minimize or eradicate corruption in the public sector. Cor-ruption in a country affects investment in both the public and private sectors of an economy. Public officials in a corrupt system create longer than usual business application processing times waiting to be bribe. In addition, frequent visits to private business owners, unnecessary demands documents.
The table above shows the Transparency International perceptions index report 2011 for SSA coun-tries in this study, showing the rank and score in the overall world corruption perceptions index.

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2.1 Infrastructural Development
2.2 Education
2.3 Foreign debts
2.4 Poverty
2.7 Corruption
2.8 Policy Recommendations by the IMF Chief Economist for
3.1 The Harrod –Domar Growth Model
3.1The Neoclassical Growth Model
3.3 New Growth Model
3.4 A Model on Investment.
3. 5 Relationship between Private Investment and the Growth Models
3.6 Empirical Literature Review
4.1 Data and Estimation Technique
4.2 Model Specification
4.3 Data Estimation Procedure
5.1 Hausman Test Result
5.2 Unit Root Test Results
5.3 Table of Summary Statistics
6.2 What Needs To Be Done for Countries In Sub Saharan Africa In Order To Attract Foreign
References
APPENDICES
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