Macroeconomic Factors and Investment in Africa

Abstract

After more than a decade of implementing economic reform programmes aimed at improving the overall economic environment, investment in Africa is yet to show a robust improvement. This paper suggests that the standard macroeconomic policy variables, such as the exchange rate, trade policy, fiscal and monetary policies, and overall uncertainty explain the sluggish response of investment behaviour to reforms. The paper estimates quadrennial panel data regressions covering the period 1970–96 to study the relationship between macroeconomic policy variables and private investment in Africa. The results show that fiscal, financial and monetary policy, macroeconomic uncertainty and trade variables had a significant impact on private investment. Additionally, the study finds that investors are strongly influenced by the underlying political framework. Thus, political stability matters for investment. Further, the paper shows that Africa remains significantly vulnerable to external shocks, which have had a negative impact on private investment recovery, and suggests the need to diversify the export base as a cushion, especially against terms of trade shocks.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 85 citations exist upstream.