Browsing by Author "Dunne, J Paul"

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    Current account dynamics and macroeconomic policy
    (2016) Makanza, Christine Selina; Dunne, J Paul; Peters, Amos C
    This thesis focuses on the growing current account imbalances in South Africa and how these imbalances are influenced by macroeconomic policy. These issues are dealt with in three related studies. Even though literature argues that fiscal policy may be more capable of attaining current account stability if supported by monetary policy measures, only a few studies actually address the potential of both monetary and fiscal policy to stabilise the current account (Herz and Hohberger, 2013). As a result, our first study establishes stylised facts about the interaction of fiscal policy and the external balance by analysing the fiscal determinants of the current account. The second study establishes stylised facts about the interaction of monetary policy and the external balance by analysing global and domestic monetary determinants of the current account. The third study considers the structure of the economy in South Africa in terms of the share of traded goods vis-à-vis non-traded goods in production and consumption. The study calibrates a Dynamic Stochastic General Equilibrium(DSGE) model that analyses the role of non-traded goods in the determination of the current account and exchange rate. These three studies help to develop an understanding of the current account in South Africa.
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    Financial innovation and money demand in sub-Saharan Africa
    (2016) Kasekende, Elizabeth; Dunne, J Paul; Nikolaidou, Eftychia
    Financial innovations are considered important factors in the development of the financial sector and economic growth. Following the 2007/2008 financial crisis, their effects, both positive and negative, have become an issue of considerable debate, especially in industrialised countries. While a number of empirical studies on the effects of financial innovation have been undertaken for industrialised countries, few developing country studies exist. This is surprising, given the remarkable growth of financial innovation in some developing economies. In particular, mobile money (M-PESA), a technology first developed in Kenya that enables individuals to transfer, deposit and save money using cell phone technology without necessarily having a bank account, has quickly spread to several developing countries and is expected to continue to expand. This thesis contributes to the limited literature by undertaking a panel study of the effect of financial innovation on money demand in Sub-Saharan Africa as well as a case study of the home of mobile money, Kenya. A third study considers how mobile money has influenced household consumption behaviour using data from Uganda. In chapter two, the effect of financial innovation on money demand in Sub-Saharan Africa is investigated in 34 countries for the period 1980 to 2013 using dynamic panel data estimation techniques. Money demand is found to be relatively stable in the region with financial innovation significant with a negative sign. While the coefficients on the other relevant variables are significant with expected signs, the size of the coefficients change with the inclusion of financial innovation. This suggests that exclusion of financial innovation may have led to biased or misleading estimates of the money demand equation in previous studies, and that financial innovation plays a significant role in explaining money demand in Sub-Saharan Africa. Given the potential importance of this form of financial innovation, a case study of the impact of mobile money on money demand in Kenya is undertaken in chapter three. Using time series analysis on a quarterly basis for the period 2000–2014, the results suggest a positive relationship between mobile money and money demand. The Kenyan demand for money is found to be stable when mobile money is taken into consideration. These results are robust even with the use of alternative measures of mobile money and imply that this particular financial innovation has important implications for the effectiveness of monetary policy in Kenya and possibly in other similar countries. While mobile money has been found to have important macroeconomic effects, there is little research on how it affects the real economy. Chapter four investigates the way this type of financial innovation can alter household behaviour, particularly household consumption patterns. Since data was not available for Kenya, Uganda was used as a case study. It is one of the countries that has been successful in mobile money usage since its introduction in 2009. The Financial Inclusion Tracker Surveys (FITS) household level survey conducted in 2012 also provides valuable data. Using ordinary least squares and seemingly unrelated regression estimation techniques, the results suggest that mobile money users spend less on food, a necessity, and more on luxury goods, than non-users. In addition, mobile money users are more likely to receive more remittances, and as a result, they are able to spend more efficiently on particular commodities than non-users. This suggests that mobile money could potentially improve individuals' livelihoods. Finally, chapter five concludes with a discussion of the summary of the findings from the thesis, the policy implications, and the suggestions for future research.
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    Foreign direct investment and economic growth in Africa
    (2017) Kargbo, Santigie Mohamed; Dunne, J Paul; Peters, Amos C
    Abstract Foreign direct investment (FDI) is a valuable source of external finance to complement domestic savings, enhance domestic investment and increase employment in developing countries. It can potentially promote long-term growth and development through knowledge and technology transfers from foreign firms to domestic agents in host countries. With these benefits in mind, especially in relation to low-income African countries characterized by underdeveloped domestic financial markets, this thesis investigates the determinants of FDI, evaluates how well local firms can be integrated in FDI projects to enhance productivity growth and determines whether these investments have contributed to increasing productivity growth of host African countries. These issues are analysed in three constituent chapters of the thesis. The first study explores whether FDI from the different group of economies, stratified into the Organization of Economic Cooperation and Development (OECD), non-OECD emerging markets and intra-African economies, are driven by market-seeking, natural resource-seeking and efficiency-seeking motivations into host African countries. Evidence suggests that market-seeking and efficiency-seeking FDI are more growth enhancing than natural-resource seeking FDI. This study exploits recent bilateral FDI data to examine the underlying motivations and determinants of FDI into African economies. In doing so, the study contributes to the empirical literature by providing evidence on the specific factors that influence FDI into resource-rich and non-resource rich African economies. The study finds that the size of host markets and presence of natural resources have important influence on FDI into resource-rich countries, with market size determining FDI into non-resource rich countries, while investments from non-OECD emerging markets economies are also explained by the presence of lower labour costs. It is also evident that there are significant differences in determinants of FDI into African countries, between investors from African economies and counterparts from the OECD and non-OECD emerging markets. The results show significant differences between the drivers of FDI to South Africa and other African countries. The second study complements the first in analysing the determinants of FDI activity, by determining the sectors through which foreign affiliates and local firms are more likely to undertake joint activities in FDI projects. This is important in light of the growing need to promote knowledge and technology transfers from FDI in order to boost productivity in host sub-Saharan African countries. Over the years, FDI in sub-Saharan Africa were mostly undertaken in high technology sectors, which are presumably capital-intensive, by jointventure firms formed between transnational corporations and domestic firms. This pattern of investment has called into question whether foreign affiliates and local firms have greater propensity to jointly engage in FDI projects in capital-intensive activities. Considering this question, the study contributes to the empirical literature by determining the sectors through which such integration is more likely to occur. In trying to understand this relationship, the analysis used a large survey dataset on manufacturing and services firms for 19 sub-Saharan African countries. The survey was conducted by the United Nations Industrial Development Organization (UNIDO) in 2010. This data allows us to evaluate the integration decisions of firms, considering how physical capital intensity of foreign affiliates and skill intensity of the local workforce affect such decisions. The results reveal remarkably consistent finding that there is a higher likelihood that these firms will integrate production through capital-intensive than labour-intensive activities in sub-Saharan Africa. The third study investigates the growth enhancing effects of FDI into African countries, considering whether such impact depends on human capital capacity across countries. This study contributes to the empirical literature by exploiting host country heterogeneity in human capital capacity in explaining whether there are differences in the effect of FDI on productivity growth across countries. To consider such differences, recent country level data on total factor productivity growth and human capital stock, which is used as proxy for host country absorptive capacity, were used in a panel of 25 countries over the period 1996-2011. The analysis employed the Panel Smooth Transition Regression (PSTR) which allows for host country heterogeneity in human capital capacity to determine whether the relationship between FDI and productivity growth is nonlinear. The results strongly support the nonlinearity between FDI and productivity growth. This suggests that the impact of FDI on productivity growth differs across African countries. The heterogeneity is explained by the variation in human capital capacity across these economies. The study reveals a minimum threshold of 6.94 average years of schooling for FDI to accelerate productivity growth in host African countries. The analysis suggests that FDI will raise productivity growth in countries which have attained or exhibited human capital capacity closer to this threshold, when further efforts are applied to enhance such capacity. Countries with human capital capacity far below the threshold, however, will not experience productivity gains from these investments.
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    The impact of foreign direct investment on productivity and growth in the Southern African Development Community (SADC)
    (2015) Masiyandima, Nicholas; Dunne, J Paul
    This thesis focuses on the impact of foreign direct investment on productivity and growth in the Southern African Development Community (SADC), which is dealt with in three related studies. The first study undertakes an investigation of the existence and nature of technology and productivity spillovers from foreign direct investment to domestic firms in the region, while the second investigates the role of the spatial density of economic activities in speeding up the productivity externalities and impact of foreign direct investment in FDI host countries. In the last study, we investigate the role of intra-regional bilateral foreign direct investment between South Africa and countries in SADC in influencing growth and income convergence in the region. The three studies are subjects of chapters 2, 3 and 4, respectively. The first study uses firm level data from the World Bank Enterprise Surveys and employs alternative techniques to identify and estimate the within and intra-industry productivity impact of firm foreign ownership. It uses output per worker to measure firm productivity and employs sector fixed effects to identify the impact of foreign firm ownership on productivity. We find results that strongly suggest the existence of positive within firm and intra-industry FDI productivity spillover effects for the firms in the region; with both small and large firms experiencing productivity gains from more foreign firm ownership, although the productivity gains are larger for small firms than for large firms. Individual country productivity estimations suggest that relatively more developed countries have larger intra-industry spillover gains while less technologically endowed countries have lager within firm gains. In overall terms the chapter concludes that the region has productivity gains from FDI. In the second study we employ macro time series data over 1980 to 2011 to estimate the separate and joint productivity effects of agglomeration and FDI externalities in the region. In order to achieve these objectives, we develop a theoretical framework that fuses together the roles of agglomeration and FDI productivity spillovers to be able to identify both individual and joint impacts of FDI and density on aggregate productivity growth. An instrumental variables estimation technique is employed, allowing for country fixed effects to identify the impacts of critical variables on productivity. Using an index of density constructed from the interaction of population density and urbanization to measure density of economic activities, we find results suggesting positive and complementary effects of agglomeration and FDI externalities on aggregate productivity in the region. The finding is robust to controlling for other alternative channels through which FDI and agglomeration productivity externalities can be transmitted to productivity such as human capital and human capital density. Consequently, we conclude that there are synergies between FDI and agglomeration that magnify productivity externalities from foreign direct investment in the region. The third study is devoted to investigating the productivity and income convergence implications of bilateral FDI between South Africa as the leading FDI and technology source country in SADC and the rest of the countries in the region within the leader follower model of international technology diffusion and convergence suggested by Barro and Sala-i-Martin (2004). Using country per capita income data over the period from 1980 to 2011, we find evidence suggesting that countries with high levels of bilateral FDI between themselves and South Africa converge faster both on the region average income and on South Africa's per capita income than those with low bilateral FDI stocks. The finding is robust to estimating countries' income gaps to South Africa conditioned alternative potential sources of technology and productivity growth, including trade, FDI from the rest of the world and domestic capital formation. There are, therefore, prospects of technology and income convergence driven by South Africa as the major FDI country and technology leader in the region.
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    Macroeconomic dynamics in low income economies
    (2016) Bangara, Bertha Chipo; Dunne, J Paul; Peters, Amos C
    This thesis investigates the dynamic effects of two interrelated characteristics of low income economies: Commodity concentration of exports, and foreign exchange constraints on the behaviour of key macroeconomic variables. The literature defines the problem of export fluctuations with reference to commodity concentration of exports, the ability to forecast the fluctuations, and the availability of foreign reserves to meet the effects of fluctuations. When a country's exports are concentrated in a single commodity or a few commodities, price fluctuations may lead to low export earnings and low reserves. This has implications for the macroeconomic environment, since low levels of reserves may not adequately mitigate the effects of price fluctuations. Therefore, we first explore the macroeconomic effects of price fluctuations in low income economies with a high commodity concentration of exports. Specifically, we examine the dynamic response of selected macroeconomic variables to tobacco price shocks in Malawi, using quarterly time series data from 1980 to 2012. Using innovation accounting in a structural vector auto regressive (SVAR) model with short-run restrictions, we find that a positive tobacco price shock increases gross domestic product (GDP), reduces consumer prices, and induces an appreciation of the real exchange rate. These results are also robust to SVAR in differenced data and co-integrating vector autoregressive (CVAR) models. The CVAR confirms the existence of a long run-relationship among the variables, with causality running from tobacco prices to the three variables. Second, we provide an empirical analysis of the effect of shortage of foreign exchange in an import dependent, low income economy. It has become clear from the existing literature that low income economies tend to suffer from foreign exchange shortages exacerbated by their exports. Because of the concentration of their exports, these countries are susceptible to international price fluctuations which affect the level of foreign exchange. In addition, these countries tend to overvalue and fix their exchange rate, which worsens their terms of trade and leads to low levels of reserves. This causes foreign exchange shortages and leads to excess demand for foreign exchange by importers. We therefore investigate the implications of foreign exchange constraints on the dynamic behaviour of key macroeconomic variables in low income, import dependent economies.