Showing papers in "African Review of Economics and Finance in 2018"

Does financial development mean financial inclusion?. A causal analysis for Eswatini

Abstract: The purpose of this paper is to undertake a causal analysis for Eswatini, which examines whether financial development causes increased financial inclusion. Through Engle & Granger (1987) cointegration analysis, the existence of a long run relationship between the dependent variable, financial inclusion, and the independent variables: financial development and economic growth is investigated. The results indicate unidirectional Granger causality from financial development to financial inclusion and that the variables have a longrun relationship. The results imply that financial development causes financial inclusion in Eswatini. Policy recommendations from these results advise that financial inclusion strategies include policy decisions that are geared to increased financial development. Keywords : Financial Development; Financial Inclusion; Eswatini.

Agenda 2030 in sub-Saharan Africa: What the Millennium Development Goals’ narrative teaches about poverty eradication

Abstract: More than a year after the Millennium Development Goals (MDGs) deadline, experts and social commentators are divided on the outcome of the goals on poverty reduction. The UN Secretariat and its agencies, while acknowledging that the business of ending poverty is ‘unfinished,’ described the goals as globally successful notably for mobilising the world toward a global agenda; a claim sharply dismissed by many economists. Critics point to the persistent high levels of poverty in sub-Saharan Africa (SSA), and argue that the fall in global poverty is largely due to the significant reduction of poverty in China, India and East Asia. The MDGs’ mixed success has been attributed to conceptual, methodological and implementation incoherence. These challenges, some of which are inherent in the new Sustainable Development Goals (SDGs), partly account for the high rate of poverty in SSA notwithstanding the MDGs’ efforts. Meeting the SDGs target of ending poverty in SSA by 2030 will require a deeper understanding of the methodological and practical challenges that characterised the MDGs. Keywords : Poverty eradication; Africa; Inequality; Millennium Development Goals; Sustainable Development Goals.

Consolidating inclusive housing finance development in Africa: Lessons from Kenyan savings and credit cooperatives

Abstract: How can Sub-Saharan Africa consolidate inclusive housing finance development? Conventional urban economic approaches have had limited success for housing finance throughout the region. Community-based funds are a possible alternative to expand accessible and affordable financial services towards meeting the housing needs for lower-income and slum dwellers. We probe this approach using qualitative content analysis and quantitative data assessment methodologies, and analyse the unparalleled development of Kenya’s financial cooperative societies, commonly referred to as savings and credit cooperatives (SACCOs). The article finds SACCOs are positioned to promote access to affordable housing finance in Kenya. The Kenyan experience with SACCOs has many commonalities with other countries in the region and can inform African policymakers seeking to strengthen their financial sector, especially in terms of housing credit.Keywords: Community savings; Affordable housing finance; Savings and Credit Cooperatives (SACCOs); Credit unions; Kenya; Africa.

Formal property titles or more? Perspectives from Ghana's financial institutions

Abstract: The dead capital thesis of de Soto has raised a lot of debate on the relationship between formal property titles and access to credit. Various authors have argued that overconcentration of policy efforts on providing formal property titles could be overly simplistic. The argument has largely been made along the logic espoused in the ‘dead capital theses’. However, more than a formal title is required to access credit from formal financial institutions by small businesses. The aim of this paper is to examine the critical factors inhibiting credit access by SMEs and assess the relative importance of formal titles amongst the other factors responsible for the financing gap. Surveys were conducted amongst officials of various financial institutions using structured questionnaires. The data was analysed using factor analysis. The results show that formal lenders perceive the absence of formal property titles to be a factor inhibiting SMEs credit access albeit the exact effect is very marginal relative to other factors. Keywords: Access to credit; Dead capital; Financial institutions; Formal property title; SMEs.

Changing Africa’s impoverishing economic model: Towards a rewarding sustainable specialization model with a new factor of production

Abstract: This paper highlights the impoverishing character of Africa’s economic model in its world merchandise trade. With a view to reduce the ousting of the wealth of the continent by its trading partners, we develop a neo-factorial specialization model in which we introduce technology and raw materials as endogenous factors of production of manufactured goods. In addition, we distinguish between skilled labor and unskilled. Considering raw commodities as a factor production (natural capital) and making technology and skilled labor factors endogenous allows us to understand why Africa is historically specialized in raw material exports. We show how Africa can, thanks to its advantage in natural resources, accumulate technology and human capital necessary to its industrialization in the second phase of the model, allowing it to eliminate the impoverishing effects of trade. The model predictions are quite optimistic in the second phase of Africa's opening process to the world. Calibrating the model on real data, results are consistent with some goals of sustainable development particularly in its economic and social dimensions. The environmental dimension is however difficult to reconcile with both others. Keywords: Impoverishing specialization; African economies; Neo-factorial model; Natural resources; Values' chain.

Predictors of food insecurity in Eswatini: Lessons from the 2015/16 El Niño induced drought

Abstract: The study investigates the predictors of food insecurity among households in Eswatini given the 2015/16 El Nino induced drought. To identify the geographic and socioeconomic factors that predict food insecurity during a drought in Eswatini, the study uses a logistic regression. The logistic regression results show that households that have a deteriorated health and disability status are three times more likely to be food insecure during a drought than households that have no health or disability impacts. In contrast, high quality vegetables, meat, and fish can be considered luxury food items that significantly predict food security among households in the country. The study also finds that the prices of maize and rice are good predictors of food insecurity among households given that maize is a staple food in Eswatini. A major finding on the predictors of food insecurity is that all incomes above E1,000 significantly reduce the chances of food insecurity among households compared to those households that have no form of income. The regression reveals that E3,500 is the optimal level of monthly income to cushion households from severe food insecurity. Therefore, the study recommends that Government (Ministry of Labour and Social Security) should investigate the suitability and sustainability of a E3,500 monthly minimum income (wage) in Eswatini. Furthermore, in the event of drought, the Government of Eswatini should prioritise intervention programmes such as food distribution on households living with disabilities and those with deteriorated health status. In terms of building drought preparedness and mitigation for future droughts, implementation of the 2005 Food Security Policy should deliberately target the following constituencies; Lomahasha, Mthongwaneni, Matsanjeni North, Ngudzeni, Sigwe, Hlane, Mandlangempisi, Sandleni, Mkhiweni, Sithobela, Ntontozi, Lubuli, Dvokodvweni, Mayiwane, Siphofaneni, Mafutseni, Ndzingeni, Mahlangatane, Matsanjeni South, Mahlangatja, and Nkwene.Keywords: Drought; Food Insecurity; Predictors; Food Insecurity Vulnerability

Determinants of foreign exchange reserves in Eswatini: An ARDL approach

Abstract: Using the autoregressive distributed lag (ARDL) bounds testing cointegration method, the paper models the behaviour of Eswatini’s foreign exchange reserves over the period 1990-2014. An augmented buffer stock model is applied and the results indicate that foreign exchange reserves in Eswatini are driven by GDP per capita, developments in the current account, government expenditure and movements in the exchange rate. With the growth in Eswatini’s foreign exchange reserves lagging behind the growth rates observed in other emerging economies, the findings from the study imply that monetary authorities should increase efforts to build reserves in order to boost confidence in the currency peg to the South African rand and enhance financial stability in Eswatini. Keywords : ARDL; Cointegration; Foreign exchange reserves; Eswatini.

Economic benefits of technical vocational education and training in the Kingdom of Eswatini: A case of the national handicraft training centre

Abstract: This study estimates the economic benefits of the Government of Eswatini and its development partners’ investment into the National Handicraft Training Centre (NHTC). Using NHTCs student database from 1995 to 2015, the study tracks graduates from the Centre to assess the demand and absorbability of their skills into the economy. Data on employment, self-employment status, and the level of skills upgrading with institutions of higher learning after graduating from the NHTC was collected. Employment earnings, self-employment, and part-time profits was collected to calculate their annual average incomes. The study finds that the NHTC return on investment calculated as the benefit-cost ratio of the graduates’ incomes against the money spent on NHTC is 1: 4.66. This means for every E1 invested on NHTC, the economy generates E4.66 in the income generating activities of NHTC TVET graduates. Keywords : Economic Benefits; Skills Utilisation; Youth Employment.

Real exchange rate misalignment and macroeconomic implications: Recent evidence from Ghana

Abstract: We evaluate the degree of real exchange rate (REER) misalignment and its macroeconomic implications for the Ghanaian economy using quarterly data (2000Q1-2015Q3). Our results uncovered a clear misalignment of the actual REER from its equilibrium level throughout the sample period, although the REER was close to its equilibrium level at the end of 2012. The study also revealed a weak positive undervaluation-economic growth nexus for Ghana. Overvaluation was observed to exert disinflationary pressures, while undervaluation tends to increase inflationary pressures in Ghana. The study thus suggests that the use of REER undervaluation as a deliberate industrial policy instrument for sustained economic growth may be counterproductive in the context of Ghana, as such policy may potentially undermine price stability objective of the central bank. Keywords : Equilibrium Exchange Rate; Misalignment;Ghana.

Non-Linear Relationship between Financial Development, Economic Growth and Growth Volatility: Evidence from Nigeria

Abstract: The relationship between economic growth, growth volatility and financial sector development continues to attract attention in the theoretical and empirical literature. Over time, some studies hypothesize that finance has a causal linear relationship with growth. Recently several other authors contradict this claim and argue that the relationship that exists between finance and growth is nonlinear. We investigate these claims for Nigeria for the period between 1970 and 2015, using semi-parametric econometric methods, Hansen sample splitting techniques and threshold estimator. We observed no evidence of ‘Too much finance’ as claimed by many researchers in recent times. We show that the relationship between financial development and economic growth is U-shaped. This is equally true for the relationship between financial development and growth volatility. We also discuss policy implications of our findings and recommend financial innovations and decentralization of stock exchanges to boost access to financial services, in addition, improved regulation to enhance financial market efficiency.

The South African rand, fundamentals and commodity prices

Abstract: This paper revisits the exchange rate-fundamentals debate for the case of the South African Rand; emphasising the role of commodity prices. The exchange rate determination puzzle has been at the heart of exchange rate studies since the Meese-Rogoff (1983) seminal paper. We use floating nominal exchange rate data for South Africa and find evidence in support of a long-run relationship in the commodity-price augmented PPP and monetary models for South Africa. We demonstrate that inclusion of commodity prices improves the in-sample fit of canonical exchange rate model specifications. With respect to out-of-sample short-horizon forecasts, inclusion of commodity prices does improve accuracy although this result is not robust to model and horizon specification. Keywords : Commodity prices; Exchange rates; Structural models.

Evolution of trade in Eswatini from 1968 to 2015: A developmental perspective

Abstract: Using data from 1968 to 2015, this paper presents an assessment of the evolution of trade in the Kingdom of Eswatini, tracking changes in the composition of both import and export commodities. These changes are viewed in light of the institutional development, trade relations, and infrastructure development in the Kingdom of Eswatini. The paper examines the trends of selected economic indicators such as the imports, exports, and trade balance. The paper also presents changes in shares of different commodities to total exports or imports. Significance of trading partners, in terms of how much commodities they provide to or absorb from Eswatini, is also presented. The study provides evidence that, even though the country has put in place institutional frameworks to facilitate trade, trade balance has been negative for the most part of the review period, the export basket and export destinations have experienced minimal changes, and imports sources showed insignificant changes. Based on these observed trends, it is apparent that Eswatini had not been able to take advantage of most of the trade agreements, at least not to their full potential. It is therefore a recommendation of the study that efforts to improve the country’s comparative advantage should match the strides to build trade relations for trade arrangement to benefit the economy. Increasing investment into research and development is one of the strategies that the country can employ in order to widen the range of commodities in which it has comparative advantage. Keywords : Trade Evolution; Trade-Gross Domestic Product ratio; Trade balance.

Construction institutions and economic growth in sub-Saharan Africa

Abstract: The construction sector in developing countries has propelled economic growth in the most recent period, yet analysis of growth performance has failed to take this into account. This article is a comparative analysis of the relationship between the construction sector and aggregate output for a panel of sub-Saharan African countries using a panel generalized methods of moments (GMM). After accounting for the effects of institutional set up, cross sectional heterogeneity and non-linearity, our results revealed that the construction sector affects growth positively and most importantly, developing the right institutions could further enhance this impact. The intrinsically non-linear relationship between the construction and output growth is very mute in our sample, suggesting that, sub-Saharan African countries have not yet reached the stage of development where construction growth becomes trivial. We further show that East Africa experienced a robust impact of construction on economic growth compared to West and Southern Africa.Keywords: Construction; Output growth; Institutions; Endogeneity.

A subjective measurement of the determinants of quality of life in Kumasi

Abstract: The measurement of quality of life (QoL) can be used as an urban planning tool to address challenges confronting the management of urban centers. The results of such measurements may provide the required basis for formulating future spatial and urban planning policies. Using the city of Kumasi, this paper examines the determinants of QoL of residents. This study surveyed 500 households. A subjective residents’ assessment of QoL and a Factor Analysis are performed to explore the determinants of QoL and their relative importance. The results show an acceptable goodness of fit, supporting the view that the main determinants of QoL are health, housing, economic status and neighborhood.Keywords: Quality of life; Subjective quality of life; Domain satisfaction; Factor analysis; Kumasi.

Decolonizing Africa and African Development: The Twenty-First Century Pan-Africanist Challenge

Abstract: Anthony Victor Obeng, Lucy Melville and Peter Lang (2017). AG International Academic Publishers, Bern, 278 pp ISBN: 978-3-0343-0758-1. Reviewed by Franklin Obeng-Odoom

Foreign bank inflows: Implications for bank stability in sub-Saharan Africa

Abstract: Foreign banks play progressively important roles in the banking sector in many developing countries. In sub-Saharan Africa (SSA), foreign ownership of banks is above 50% of the domestic banking sector and given the crucial role banks play in the domestic economy, the effect of their entry is questioned, especially in relation to domestic banking stability. We examine the impact of foreign bank inflows on the banking sector stability in SSA, using available data for the period 1995 to 2009. The study employed two econometric estimators: the multivariate logit and the two-step system generalised method of moment (GMM). The results from the two methods indicate that the presence of foreign banks in the domestic banking sector robustly reduces the probability of bank crisis. Finally, the study revealed that improvement in political institutions also reduces the probability of bank crisis.Keywords: ECOWAS; SADC; Financial development; Multivariate logit; System-GMM.

Mapping the National System of Innovation in Eswatini

Abstract: This study maps the national system of innovation (NSI) in Eswatini using national research and experimental development (RD expenditure on RD Science, Technology; Eswatini.

Book Review- Decolonizing Africa and African Development: The Twenty-First Century Pan-Africanist Challenge

Abstract: Anthony Victor Obeng, Lucy Melville and Peter Lang (2017). AG International Academic Publishers, Bern, 278 pp ISBN: 978-3-0343-0758-1. Reviewed by Franklin Obeng-Odoom

The economic costs of electrical power outages in Eswatini

Abstract: Eswatini has been experiencing power outages that have muted the country’s efforts to increase access to electricity. As it stands, electricity supply is unreliable which has resulted in harsh penalties and costs to the economy. Using a sample of customers from both the residential and business sector, this study assessed the economic costs of power outages in Eswatini. The costs of power outages on the residential sector as a proportion of Eswatini’s gross domestic product were found to be 1.67% using the Direct and Indirect Cost Method. Using a binary logistic regression, the study identifies weekly frequency of power outages, perception of current price of electricity, possession, and maintenance cost of back-up equipment to be associated with consumers’ willingness to pay for improved supply. Under the business sector, the industrial sector reported the highest direct costs compared to the other sectors, which shows that it is the sector which is mostly affected by power interruptions. It is clear that the challenges experienced by the Eswatini electricity sector have resulted in high costs to the economy. The paper therefore recommends the need for policy attention towards improving the electricity sector through investments in electricity generation by renewable energy sources, expedite the promotion of decentralised electricity generation to vulnerable areas, and setting of standards for the generation and distribution of electricity. Keywords : Energy; Power Outages; Economic Costs; Eswatini.