Fuentes de Crecimiento AFRICA

ANALYSING THE SOURCES OF ECONOMIC GROWTH IN AFRICA USING GROWTH A
ACCOUNTING AND A PANEL VAR APPROACH

Author(s): Boopen Seetanah and Sawkut Rojid
Source: The Journal of Developing Areas, Vol. 44, No. 2 (Spring 2011), pp. 367-390
Published by: College of Business, Tennessee State University
Stable URL: http://www.jstor.org/stable/23215257
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ANALYSING THE SOURCES OF ECONOMIC
GROWTH IN AFRICA USING GROWTH A
ACCOUNTING AND A PANEL VAR APPROACH
Boopen Seetanah
University of Mauritius, Mauritius
Sawkut Rojid
The World Bank'
ABSTRACT
Using growth accounting framework and panel data analysis, while accounting for
endogeneity issues in growth modelling, this paper analyses the sources of growt
COMES A member countries. The growth accounting suggests a moderate level of TFP
contribution of capital and labour has been more or less the same. The resul
econometrics study are also along the same line with capital accumulation, openness
observed to be among the most important ingredient of growth. The econometric
shown the importance of some other variables like political and institutional stabil
development, IMF assistance funds and spill over effects as potential factors that
growth.
JEL Classifications: E25, 055,047

Keywords: Economic Growth, Africa, Growth Accounting, Panel VAR
Corresponding Author's Email Address: b.seetanah@uom.ac.mu
INTRODUCTION
There exist a number of studies (see OECD, 2003 for a comprehensive r

growth literature that documents the sources of growth for both country
sets. Many authors have focused on growth accounting to decompose t
growth namely Collins and Bosworth (1996), Senhadji (2000), Jones (20
and Collins (2003) and Bosworth, Collins, Virmani (2006) among othe
earlier studies have concentrated mostly on developed country case st
samples, it is only lately that some researches (O'Connell and Ndulu,
Ghura, Akitoby, and Brou Aka, 2004 among others) have been performed
countries and particularly Africa at large. A second set of studies (with ea
from Barro 1991, 1998; Mankiw, Romer and Weil, 1992; Levine and
Islam, 1995; Krueger and Lindahl; 2001 and Easterly, 2001) have based
econometric regression analysis within varying growth frameworks. This
by an upsurge of studies focusing on particular ingredients of growth. Am
observed ones feature investment in physical (see Delong and Summers, 19
Reinhart, 1989 and more recently Arin, 2004) and in human capital
Romer, and Weil, 1992; Barro, 1998 and more recently Temple, 2001), invo
international trade and openness (Dollar, 1992; Sachs and Warner, 1995
368
1998,sound macro policies (Fischer, 1993; Levine and Renelt, 1992 and Barro, 1995),
financial markets (Levine and Zervos, 1993 and King and Levine, 1993), sound
government policies (Barro, 1995; Hall and Jones, 1997), Foreign Direct Investment
(Borenstein, Gregorio and Lee, 1998; Bende-Nabende and Ford, 1998 and Li and Liu,
2005 among others). The list is not exhaustive. Few works from the African region
following the above avenue can be found from Nyatepe-Coo (1998) Fosu (1999), Tahari,
Ghura, Akitoby, and Aka (2004), Akinlo (2004) and Khadaroo and Seetanah (2007,
2008).
However, the overwhelming number of research has focused on developed and
newly industrialised countries (NIC) cases (and samples) with very few studies on
developing countries, particularly for Eastern and Southern African region and trading
blocks. Even then the issue of dynamics and endogeneity in growth modelling has been
largely ignored until only recently. Empirical results and policy implications from the
existing literature based on panel sets of developed countries and NIC are not readily
applicable to developing countries given the own specificities and constraints of such
countries. This study aims at investigating the sources of growth for the African region,
particularly the COMES A block. COMES A, the 19-nation African trade bloc, in the
context of globalisation of markets, launched its FTA on October 31, 2000 with nine of
its members initially participating in the project, which dismantled trade barriers and
guaranteed free movement of goods and services in the region . It provides a good case
study as COMESA includes the major African nation in the Eastern and Southern Africa
and most of the countries in COMESA have experienced an annual GDP constant growth
rate of at least 5 % in 2006-2007, outperforming the rest of the continent. It is pushing
ahead with its plan to create a Common External Tariff and Custom Union, to adopt a
common currency for regional members by 2025 and to ultimately promote growth
within the region. Moreover, at a broad highly aggregated level it can be said that
COMESA members are of a homogeneous type when it comes to the composition of the
economy.
In the first instance, we employ a growth accounting analysis to decompose the
sources of growth for 14 countries using yearly data over the period 1978-2007. In a
subsequent analysis, to account for the dynamic and endogenous nature of growth,
Generalised Methods of Moments in a Cobb Douglas and Panel VAR methods in a
Solow Growth model are also used to identify econometrically the potential ingredients
of growth for the a sample of COMESA members, based on data availability. Results
from the above analysis are believed to supplement the scant literature on African growth
and can provide insightful policy implications for governments.
The rest of the paper is organised as follows. Section 2 discusses the growth accounting
method (which is also augmented to account for human capital) and analyses the results
thereof. Section 3 probes into the econometric specifications and estimation of the
potential determinants of growth using both Cobb Douglas and Solow Growth
specifications and Section 4 concludes.
369
DECOMPOSING THE SOURCES OF GROWTH USING A

STANDARD GROWTH ACCOUNTING FRAMEWORK
We initially use the growth accounting framework to decompose the contrib

capital, labour and TFP in economic growth of firstly a sample of COME
states and secondly for selected country cases.
The Growth Accounting Framework
Growth accounting allows the decomposition of the economic growth rate o

into contributions from different factors. Interestingly although growth a
essentially an empirical tool (providing a perspective from which economic d
interpreted) it is also well grounded as far as theory is concerned and has it
assumptions. The growth accounting approach goes back to Solow who sugge
the GDP growth can be decomposed into three shares: the capital, the labour a
shares. The latter is computed as the residual of GDP growth once capita
contributions were removed. The framework typically adopts a constant ret
Cobb-Douglas production function and shows that the parameter of the funct
to the share of the remuneration of physical capital in aggregate output. Th
basic version of growth accounting, this perspective is provided by an
production function:
Yt = AtK^;a (1)
The aggregate production function links output (GDP) Yt in period

factors of production, the capital stock K, and the size of the labour force Lt,
total factor productivity (TFP) A,. Since there are three factors affecting G
production function, this framework will allow us to decompose observed gr
into contributions from capital, labour, and productivity. Only capital and l
actually observable in the data and productivity serves as a catch-all for anyth
is left unexplained by the other two factors. If GDP goes up by more t
explained through capital and labour alone, the increase is interpreted by pr
Since productivity serves as a residual in this sense, it is computed from th
function (1), as opposed to being inferred from some other source. Solving (1)
get:
Y
A=A V (2)
KL)
By computing productivity in this way, for any values of Y„ K„ and A,, we can
find the "right" productivity values such that all output is accounted for in (1). An
additional step that needs to be taken before we can use 2 in practice to compute values
for ,4/ is to estimate parameter a that enters the computations, and needs to be set in some
fashion. Again, there is no obvious way how a should be chosen. It turns out, however,
370
that a has a simple interpretation under the additional assumption that there is perfect
competition among firms in the economy. To see this, consider the profit maximization
problem of a firm using production function (1) that rents capital at rental rate r, and hires
labour at wage wt:
max {4 K£r-rtK,-WtLt }
K,,L,
The first-order conditions for this problem require that the marginal product of each
factor equals its price:
C J Y"a
Lt
rt =aAt (3)
yK.j
f r \a
Lt
w, = (1 - a) A, (4)
Given these expressions, we can compute the capital and labour shares for the economy
(the fraction of output used to pay capital and labour, respectively) as:
rtKt _
Capital Share = y ^ (5)
*t
WtLt _i
Labour Share= y~ (6)
*t
Therefore, under the assumption of perfect competition, the capital share is a measure of
the parameter a. Once the capital and labour shares have been found, equation 2 can be
used to compute productivity values for any given year.
The Decomposition Equation
To proceed to the goal of decomposing economic growth into separate contributions from
capital, labour, and productivity, we argue that growth rates can be computed as (natural)
log-differences; thus the growth rate of output in a given year, for example, can be
computed as \ogYt+\ - log Yt. Taking logs of the production function (1) gives:
log Yt — log At + a log Kt+( 1 - a) log Lt (7)

The growth rate of output can therefore be expressed as:
371
log Yt+l - log Yt= log 4+1 - log At + a(log Kt+] - log Kt)
+ (\-a)(\ogLt+l - log Lt) (8)
Thus, the growth rate of output equals the growth rate of product
times the growth rate of the capital stock, plus 1 - a the growth rate of t
Intuitively, the impact of any given factor of production on output growth
to its share in output. Assume, for example, that the capital share is one
labour share is two-thirds. If the capital stock increased by three percent
this growth would translate into just one percent growth in output. If ins
force were to grow by three percent, the resulting output growth would b
Changes in the labour force have a bigger impact on output, since la
important than capital in production.
A central element in the above process is to estimate the appropria
capital and labour. The early literature drew on the national accounts of s
countries and set the parameter for the capital share between 0.3 and 0.4 (w
share varying correspondingly between 0.6 and 0.7). Thus the parame
technology, is assumed to be the same across countries and this is qu
general, authors conduct some sensitivity analysis on the value of the para
of them tests the assumption of identical technologies across countries. It
that Senhadji (2000) relaxed the assumption of identical technologies acros
estimating separate production functions for 88 countries and foun
differences across countries.
In fact estimating the capital shares assumes the traditional constant return to
scale Cobb-Douglas production function in per capita form and to measure the relative
contribution of factor accumulation and productivity the following regression can be
estimated (see Senhadji, 2000).
A log; Yu / Lit) = 4 + a A lose Ku / Lu) + ^ (9)

The slope a represents the capital share in output, Y represents real output, K the
capital stock and L labour. Thus, instead of assuming a common value for the capital
share (a), which are in fact mostly based on estimates of industrialized countries or
assumed to be constant for all countries, we used the above regression model based to
estimate each country's share of capital individually (and also for the sample) and these
are presented in table 1. The results confirm the expectation that capital shares differ
significantly across countries. On average the a of our the sample is 0.5 (although
varying across countries) and this is consistent with the ones obtained by Senhadji
(2000). This confirms that applying the same share to all countries may be misleading.
The computed estimates are then used to compute the contributions of capital, labour and
TFP to the growth rate of GDP in 12 COMES A countries. The choice of countries is
imposed by the availability of the data. The contribution of the various factors to GDP
growth is computed for the three sub-periods namely 1980-1990; 1991-2000 and 2001 -
2007. Output is measured by the GDP at constant prices and the labour is approximated
372
by total labour force and both proxies are from the World Bank World Development
Indicators 2008 and from the IMF World Economic Outlook (WEO). The capital stock
series are constructed using the perpetual inventory methodology (PIM). It is assumed
that the initial capital-output ratio in 1980 was 3 and the depreciation rate was set at 5
percent (following Connell and Ndulu, 2000 and Tahari, Ghura, Akitoby, and Aka,
2004). The results from growth accounting exercises for individual countries and for
COMES A as a group over the period 1980-2007 are provided in Table 1.
The Results and Analysis
Table 1 presents growth rates of GDP and the contributions of the various factors to
economic growth for selected COMESA countries as well as for the aggregate sample.
TABLE 1: CONTRIBUTION TO GROWTH: SELECTEDCOMESA COUNTRIES
Coimtrie Periods Growth _K _L TFP Periods Growth _K _L TFP

s Rate Conn Rate
Burundi 1980-90 3.5 2.65 1.4 -0.6 Mau 1980 6.35 3 2 1.35
ritius 1990
1991-00 -1 -1.25 1.5 1991 5.6 2.5 2.1 1.0

1.25 2000
2001-07 3.1 2 1 0.1 2001 4.1 2.5 0.9 0.7

2007
1980-07 1.9 1.3 1.3 -0.6 1980 5.3 2.6 1.7 1

2007
Congo 1980-90 0.8 1 0.5 -0.7 Rwa 1980 2.2 1 2.2 -1

DR nda 1990
1991-00 1.8 1.2 0.8 -0.2 1991 0.8 2 -0.9

2000 0.2
2001-07 4.6 2.6 1.5 0.5 2001 5.9 3.7 2 0.2

2007
1980-07 2.4 1.6 0.9 -0.1 1980 3 1.5 2 -0.5

2007
Egypt 1980-90 4.9 4.7 1.2 -2 Ugan 1980 3.5 2.7 2.5
da 1990 1.7
1991-00 4.4 1.7 1.5 1.1 1991 6.2 2.5 2.5 1.2
2000
2001-07 4.5 1.6 1.9 1 2001 5.8 2.2 1.7 1.9

2007
1980-07 4.6 2.8 1.5 0.3 1980 5 0.9 1.9 1.9

2007
Ethi 1980-90 2.6 -0.2 2.2 0.6 Zam 1980 1.3 1.3 1.5 -1.5
opia bia 1990
373
1991-00 3.2 1.55 2.2 -0.6 1991 0.5 1.2 1.3 -2

5 2000
2001 5.2 2.3 2.7 0.2 2001 - 5.2 2.4 2.2 0.6
2007 2007
1980 3.6 1.2 2.3 0.1 1980 2.4 1.7 1.7 -1

2007 2007
Kenya 1980 4.6 2 1.5 1.1 Zimb 1980 5 2.7 1.8 0.4
1990 abwe 1990
1991 1.75 1.3 1.3 1991 1.6 1.3 1.4 -1.1

2000 0.85 2000
2001 4.3 2.2 1.4 0.7 2001 -5.8 -1 -1 -3.8

2007 2007
1980 3.7 1.9 1.5 0.3 1980 0.5 1 0.8 -1.3

2007 2007
Mada 1980 0.45 1.9 2.2 CO 1980 3.1 1.5 1.7

gascar 1990 2.65 MES 1990 3 3 0.16
A
1991 1.4 -0.9 2.4 1991 2.43 0.7 1.6 0.06

2000 5 0.15 2000 3 4
2001 3.3 2.0 1.5 -0.2 2001 4.53 2.1 1.4 0.95
2007 2007 3 5
1980 1.9 1.1 2.0 -1.1 1980 3.35 1.5 1.6 0.28
2007 2007
An evaluation of economic growth during 1980-2007 shows that average growth

in the COMESA region rose from 3.1 percent during 1980-90 to 4.53 percent during
2001-2007, although a slower rate of 2.34 is registered for the period 1990-2000. Over
the period 1980-2007, COMESA member countries have grown approximately by around
3.3 percent, with members like Egypt, Kenya, Uganda and Mauritius registering the
highest growth (> 4% growth) and Zimbabwe the lowest one. Growth in the region
remained however among the slowest of all other regions in the world (with Asian
economies and China growing at an average rate of about 6% in real terms over the
period), driven largely by the insufficient record of Total Factor Productivity growth
(TFP).
Initially during the period 1980-1990, labour growth, with a higher contribution
value of 1.73, was the major driver of growth as compared to capital and it is should be
observed that the region registered a negative TFP growth during that period (same was
observed by Tahari et al (2004) for the same period for the case of SSA). During the
subsequent decades it is interesting to note the improvement in TFP, especially during the
period 2001-2007, and overall a positive value of TFP for the aggregate period of 0.28 is
calculated reflecting that overall the region has gained in productivity and that the latter is
also a driver of growth, although to the same extent as observed in other regions and
countries of the world. An interesting comparison is that of Tahari, Ghura, Akitoby, and
Brou Aka (2004) work on a sample of around 40 Sub Saharan Countries for the period
1960-2000 where the author reported similar average growth rate for the SSA but with no
374
TFP growth for the region during the period and even negative productivity for the period
1980-2000. Collins and Bosworth (1996) also reported negative growth rate (-0.42) of
TFP for sample of SSA over the period 1960-1994 and Bosworth and Collins (2003)2
confirmed a negative or no TFP growth for a study period 1960-2000. More than half of
the countries in the sample experienced declines or no increase in TFP on average during
1980-2007. Mauritius and Uganda experienced an average TFP growth of more than 1
percent during the period. The increased TFP growth during the latter period are those
countries which benefited from the efficiency gains from the shifts in the policy regime
beginning around 1980, the ongoing process of liberalization and opening up of the
economy and from the implementation of macroeconomic and structural reforms they
embarked on. The associated increases in reliance on markets and reductions in the role
of government would be expected to result in improved economic efficiency.
Although COMESA members appears on the average to outperform fellow SSA
countries at large in TFP, the average TFP growth for COMESA is remains below the
world average and could explain the relatively poor overall growth performance of the
region. It is noteworthy that nearly the East Asian countries and China which are among
the best performers worldwide have TFP contribution of around 1.2 with China alone
reporting around 2.5 (for the period 1960-2005) Bosworth, Collins , Virmani (2006)
recently reported TFP of 1.7 for the case of India over the period 1980-2004.
It should be stressed that Real GDP growth was driven largely by factor accumulation,
and in fact nearly all of the output growth during the first period is associated with
increases in factor inputs, particularly labour. With time capital is also observed to
establish itself as an important driver of growth outpacing the contribution of during the
last decade. This is reflected probably by the massive investment in capital infrastructure
from the part of government coupled by an overall increase in domestic and foreign direct
investment. Over the 1980-2007 period the contribution of labour and capital appears to
be the same. As a robustness check the contribution of the various factors to GDP growth
is computed using the same alpha coefficient (ie the sample alpha Of 0.5) for all countries
and the findings were found robust to that alternative value (the latter corresponds to the
COMESA average) The growth accounting framework can be extended to assess the role
of human capital for the determination of output and economic growth. Up to this point,
potential human capital differences across countries or over time were subsumed in the
productivity term. If information on the stock of human capital is available, we can
incorporate human capital into the production function in order to measure its
contribution to growth. Thus extending the Cobb Douglas function with human capital
term takes the following form:
Yt = AtK?H?Lx;a-p
Thus, there are now three inputs, physical capital Kt, the size of the labour force
Lt, and human capital Ht and we assume that the production function have constant
returns to all three inputs combined. To proceed to the goal of decomposing economic
growth into separate contributions from capital, labour, and productivity, we argue that
growth rates can be computed as (natural) log-differences; thus the growth rate of output
in a given year, for example, can be computed as logTM-1 - log Yt. The growth rate of
output can therefore be expressed as:
375
log Yt+l - log Yt = log At+X - log 4 + a(log Kt+X - log Kt)
+ Alog Ht_x - log Ht) + (1 - or - /?)(log A+1 - log Lt)
Thus, the growth rate of output equals the growth rate of productivity, plus a
times the growth rate of the capital stock, plus fi times the growth rate of human capital,
plus 1 - a~ P the growth rate of the labour force. The measurement of data are as above
and human capital is measured here as the average years of schooling. However given
that such information is available for very few countries as reported below.
TABLE 2: CONTRIBUTION TO GROWTH: COMESA COUNTRIES (WITH

HUMAN CAPITAL)
Countries Periods Growth Capital Labour Human TFP
Rates Capital
Kenya 1980-1990 4.6 2 1.3 0.2 1.1
1991-2000 1.75 1.1 1.1 0.3 -0.85
2001-2007 4.3 2.1 1.2 0.4 0.6
1980-2007 3.7 1.9 1.3 0.3 0.2
Mauritius 1980-1990 6.35 2.9 1.9 0.3 1.25
1991-2000 5.6 2.4 1.8 0.4 0.9
2001-2007 4.1 2.3 0.7 0.5 0.6
1980-2007 5.3 2.5 1.5 0.4 0.9
Uganda 1980-1990 3.5 -1.7 2.7 0.3 2.5
1991-2000 6.2 2.5 2.2 0.3 1.1
2001-2007 5.8 2.1 1.6 0.3 1.8
1980-2007 5 0.9 1.7 0.3 1.8
Zambia 1980-1990 1.3 1.3 1.4 0.1 -1.5
1991-2000 0.5 1.2 1.1 0.2 -2
2001-2007 5.2 2.3 2.1 0.3 0.5
1980-2007 2.4 1.6 1.6 0.2 -1
376
From the above, including human capital reveals interesting results and shows that this
factor is interestingly explaining part of the growth as well (maybe captured in labour
mainly from the previously study). This is particularly true for the case of Mauritius and
Kenya.
Bosworth and Collins (2003) have argued that the growth accounting framework
is a useful tool to understand growth experiences across countries. The same authors
have, however, noted the limitations of this methodology. A key weakness relates to the
interpretation that the measured residual from the growth accounting exercise represents
TFP growth. In practice, in addition to providing a measure of gains in economic
efficiency, the residual may also reflect a number of other factors, including political
disturbances and conflicts, institutional changes, droughts, external shocks, changes in
government policies, and measurement errors. This limitation is particularly important for
sub-Saharan African countries mired in conflicts and subject to significant drought
related and external shocks. Also, the results from growth accounting exercise should not
be misconstrued as providing the fundamental causes of growth (rather than the
proximate sources of growth).
ECONOMETRIC EVIDENCE OF THE SOURCES OF GROWTH

ON THE OVERALL PERFORMANCE OF THE ECONOMY
In this section we attempt to investigate the classical determinants of grow

COMESA case by using panel data analysis for the whole sample. We proceed
estimating a Cobb Douglas production function to consolidate results from
accounting framework and then in the second instance we examine t
contribution of some selected policy variables to growth using an augm
growth model.
The Econometric Specification
Model Specification 1: The Cobb Douglas Production Function Approach
In the first instance, we thus use a Cobb-Douglas production function i

framework in our attempt to investigate the effect of capital and labour on
study is conducted i) on a sample of COMESA countries over the period 1978
follow thus the classic studies of Aschauer (1989), and also more recent rese
Ghali (1998), Pereira and Socales and (2003) among others, we specify a C
production function to represent the production technology of the economy.
Y,=4K,«I>> (io)
The Cobb-Douglas function is both hom
economy's output, A the shift in the pro
which is assumed to be risk neutral, K th
time. The Cobb-Douglas production fu
Parameters (31 and (32 measure the elasti
377
respectively. The parameter A may be regarded as an efficiency parameter, since for

fixed inputs K and L, the larger is A, the greater is the maximum output Q obtainable
from such inputs.
Equation 10 is linearised as follows by applying natural logarithm on both sides.
(11)
By allowing a stochastic disturbance term to enter the production technology, the

following log-linear regression equation is obtained from equation 11.
(12)
The lowercase variables are the natural log of the respective uppercase variable. The
disturbance term Ot is a deviation from the production function relationship. When the
output and inputs time series are unit root processes but the disturbance term is a
stationary process, equation (3) becomes a cointegrating relation implying a long-run
relationship between output, capital stock labour. The slope coefficients /?/, and fi2 are
then interpreted as long-run elasticities and are greater than zero.
A Cobb-Douglas production function necessitates inputs including capital stock and
labour. Labour has been proxied by employment and output by real Gross Domestic
Product at constant price. The data source and definition is the same as for the growth
accounting case in the previous section.
Model Specification 2: The Augmented Solow Growth ModeI
Following the literature, we alternatively adopt similar economic framework (and

selected the classical explanatory variables of model) based on the work of Barro (1991,
1998); Mankiw, Romer and Weil (1992), Levine and Renelt (1992); Islam (1995);
Krueger and Lindahl, (2001) and Easterly (2001) whereby a standard production function
is derived from the augmented Solow-type model. Fosu (1999), Tahari, Ghura, Akitoby,
and Aka (2004) and Khadaroo and Seetanah (2007, 2008) recently used such
specification for their respective works based on Africa.
The following augmented growth model is thus specified,
Y = /{PRI, OPEN, ED U, INF, FD, IMF) (13)
where Y is total output, PRI is the private investment ratio of the country, OPEN proxies
the level of openness of a country, EDU accounts for the quality of labour, FD is
financial development, INF is as measure of inflation and FDI one of Foreign Direct
Investment, and IMF is the amount of IMF financial assistance.
In the growth literature there exist a unanimous consensus (see Delong and Summers,
1990, 1994; Reinhart, 1989 and more recently Arin, 2004) of the role of private
investment (PRI) in promoting economic performance, possibly because technological
378
change is embodied in recent vintages of capital. The gross fixed capital formation as a
percent of real GDP is used as a proxy for investment in physical capital.
OPEN, which proxies for the level of openness of the country is also included in the
economic model following the work of Dollar (1992), Sachs and Warner (1995) and
Edwards (1998). These authors supported the idea that increased trade openness raised
economic growth through access for a country to the advances of technological
knowledge of its trade partners, access bigger markets and encouraging the development
of R&D through increasing returns to innovation and also through providing developing
countries with access to investment and intermediate goods that are vital to their
development processes. In addition, they are likely to have a greater division of labour
and production processes that are more consistent with their comparative advantages,
which enable them to grow faster. Following previous work, this is captured by the ratio
of total trade (Export + Import) to GDP.
We include a measure of education (EDU) to account for the quality of labour.
This follows the arguments and empirical evidences of Mankiw, Romer, and Weil
(1992), Barro (1998) and more recently Temple (2001). Human capital can be thought of
as affecting economic growth in the sense that workers with higher levels of education or
skills should, ceteris paribus, be more productive and more inventive and innovative.
Higher levels of human capital may also encourage capital accumulation, or may raise the
rate of technological catch-up for follower countries (Temple, 2001). The secondary
enrolment ratio is used to proxy for the above. The relationship between inflation and
GDP growth is twofold. In the short run, high inflation can be associated with high
growth in high activity cycles. In the long run, however, high inflation is associated with
macroeconomic policy mis-management and is expected to have a negative impact on
growth (Fischer (1993)3. Fischer and Modigliani (1978) argued that firms and workers
devote productive resources to deal with inflation. They further note that inflation
uncertainty reduces efficiency by discouraging long-term contracts and increasing
relative price variability. A high and unpredictable rate of inflation generally results in
poor performance of businesses and households. While most authors find growth and
inflation to be inversely related (see Fischer 1993, Levine and Renelt, 1992; Levine and
Zervos, 1993 and Barro, 1995) with the implication that inflation is quite costly, there are
exceptions (Sala-I-Martin, 1991). The consumer price index (CPI) has been used to
capture the role of inflation.
The financial system is also known to affect the level of economic growth in a
country. According to Levine and Zervos (1993), economies with more developed and
more efficient financial systems will be able to more effectively allocate savings to the
best investments, which in turn leads to increased productivity, potentially higher savings
rates, and faster growth. Financial development is directly linked with money supply
growth. FD is a proxy of financial development and of money supply growth and is
measured as the ratio of M3 to the country's Gross Domestic Product (GDP). It a typical
measure of 'Financial Depth' and has been widely used (King and Levine, 1993).
A particularity of most COMESA member states is that their budgets are dependent to a
large extent on IMF funds and assistance to accompany them development. For instance
Congo DR assistance amount to about 30% of its budget. To account for this fact, we
have included a measure of the IMF assistance to respective countries and this is
379
measured by the ratio of IMF funds received to GDP (IMF).Data was obtained from the
IMF data base.
Model Specification 3: Alternative Growth and Policy Variables
Other alternative growth and policy variables have also been included in the model
specification (at times in lieu of some existing ones due to the limited amount of
observations and in a bid to get efficient and consistent estimates). These are discussed
below and represented by model specification 3. Barro (1995) argued that government
policies play a very crucial role in determining where an economy will go in the long run.
For example, favourable public policies including better maintenance of law, fewer
distortions of private markets, less non-productive government consumption and greater
public investment in high-return areas - lead, in the long run, to higher levels of real per
capita GDP. Hall and Jones (1997) believe that differences in levels of economic success
across countries are driven mainly by the institutions and government policies and
political stability that frame the economic environment. We thus include (POL), namely,
the political risk rating as provided by the International Country Risk Guide (ICRG
2007)4. The rating awards the highest value to the lowest risk and the lowest value to the
highest risk and provides a mean of assessing the political and institutional framework of
the countries (see ICRG 1999). SPILL is the spatial spill-over effects of the member
countries on the host country. This is introduced to take into account of the growth
impact of countries within the block on the host country economic progress (spill over
effects). This is particularly true given that most countries in the sample share both
physical and trade barriers. Such effects are measured by computing the average growth
rates of member countries in the block (excluding the growth rate of the host country).
Data Sources
The dependent variable output was proxied by the Gross Domestic Product at const
price (OUTPUT) and was generated from IFS. All other variables have been colle
from the World Bank World Development Indicators (various issues) and also from
IMF International Financial Statistics (various issues) and the Penn World Tabl
(updated). The sample size5 and the period of study (1988-2007) have been select
per data availability and it is a known fact that data has often been an important const
for African nations.
The Econometric Model and Preliminary Tests
For the econometric analysis, these model specifications can be expressed as a log-li
regression, where lowercase variables are the natural log of the respective uppe
variables:
Model Specification 1
y» =«,, +PA +Pih +MU (14)
380
yi,=ai, + PPrii,+ Pi0Penit +fredui, + p,M„+p5fdi, + P6imf + /ju (15)
y„ = a„ +AM, +P2openjt + P3eduit + /3,gMjt + pjmf +
P6Pol + P7spUl + nit (16)
We use i to index countries (for the case of panel data)
error term. An often ignored issue before making the ap
the variables are stationary or not. We thus carry o
dependent and independent variables in all the abov
approach of Im, Pesaran, and Shin (IPS) (1995) who deve
the joint null hypothesis that every time series in the
reject a unit root in favor of stationarity (the results we
ADF and Fisher-PP panel unit root tests) at the 5 percen
deemed safe to continue with the panel data estim
specifications.
TABLE 3: PANEL UNIT ROOT TESTS ON LEVELS OF VARIABLES

Variables IPS Statistics
y -3.45
pri -4.76
open -5.43
edii -4.23
inf -4.87
fd -5.11
imf -4.34
pol -3.97
spill -4.01
Variables are in natural logarithmic forms. The test statistic, calculated as the difference between
the average lvalue and the expected value, and adjusted for the variance, has a N (0,1) distribution
under the null of non-stationarity, with large negative values indicating stationarity (Canning
,1999).
Endogeneity Issues and the Panel Vector Autoregressive Model
It is also likely that there may theoretically exists bi-causal (reverse causation) and
indirect effects together with dynamic feedbacks among the majority of variables in a
growth function. Including the above issues are essential to the modelling of our
hypotheses and this has been crucially ignored in the literature. Moreover, there might
still be the possibility of the loss of dynamic information even in panel data framework as
the dependent variable may have something to do in explaining itself as well (Levine et
al, 2000). To account for the existence of the above links related to endogeneity and
causality issues, we use vector autoregressions (VAR) on panel data6 which enable us to
consider the complex relationship between the various growth determinants and output
381
level. Moreover Panel VAR also allows for a firm-specific unobserved heterogeneity in
the levels of the variables. Panel-data vector autoregression combines the traditional
VAR approach, which treats all the variables in the system as endogenous, with the
panel-data approach, which allows for unobserved individual heterogeneity. We specify a
first order VAR model as follows:
z» =r0 +r1z,.,_1 +/ui +e, (17)

where z,, in the case of model 2, is a seven-variable vector (y, pri, open,
and the variables are as defined previously. In applying the VAR procedu
we need to impose the restriction that the underlying structure is the sa
sectional unit. Since this constraint is likely to be violated in prac
overcome the restriction on parameters is to allow for "individual heter
levels of the variables by introducing fixed effects, denoted by //, in th
Zicchino, 2006). Since the fixed effects are correlated with the regress
the dependent variables, the mean-differencing procedure commonly u
fixed effects would create biased coefficients. To avoid this problem w
mean-differencing, also referred to as the 'Helmert procedure' (see Are
1995). This procedure removes only the forward mean, i.e. the mean of
observations available for each firm-year. This transformation preserves
between transformed variables and lagged regressors, so we can use lag
instruments and estimate the coefficients by system GMM7.
Estimation and Analysis
Model 1: Cobb Douglas Production Function (GMM estimates)
TABLE 4: DYNAMIC PANEL DATA ESTIMATION (First Step GMM estimator):

COMESA Sample
Dependent variable dy = (log difference of YH12 countries x 28 years 0980-20071)
Variable GMM estimatesL Cobb Douglas
Model 1
0.643
(3.25)***
0.21
(1.93)*
0.46
(1.88)*
Diagnosis tests
Sargan Test of Overidentifying restrictions prob>chi2=0.23
Arellano-Bond test of 1" order autocorrelation
Arellano-Bond test of 2"d order autocorrelation prob>chi2=0.52
Prob>chi2= 0.57
-*significant at 10%, ** significant at 5%, ***significant at 1%

-The small letters denotes variables in natural logarithmic, d denotes variables in first difference
and the heteroskedastic-robust z-values are in parentheses
Referring to the table above from column 2 (the Cobb Douglas specification), labour appears to
have had a relatively greater influence on growth. It is interesting to note that this reconcile to a
large extent the results obtained from the growth accounting exercise in section above.
382
Model 2 : Augmented Solow Growth Model (Panel VAR)
We estimate the coefficients of the system given in (2) after the fixed effects have been
removed and Table 5 report the results of the model.
TABLE 5: RESULTS FROM THE VAR MODEL (1988-2007)

Response to rt
Response Constant
yt-i pri,-, open,.} •4 inft-1 fdt-i imf.
to
l
y -0.53 0.33 0.46 0.27 0.19 -0.14 0.15 0.12
-(1.53) (2.23)** (2.11)** (2.31)*** (1.98)* -
(1.98)*
pri 0.43 0.23 0.58 0.09 0.12 (1.86)* (2.11)*
(1.86)* (2.15)** (2.21)** (1.01) (1.71)* -0.11 0.30 0.08
open 0.54 0.11 0.07 0.66 0.04 -
(1.82)*
(1.91)* (2.18)** (1.13) (1.99)* (1.78)* (1.89)* (1.98)*
edu 1.12 0.14 0.09 0.04 0.56 -0.11 0.05 0.07
(1.87)* (2.33)** (1.23) (0.55) (1.98)* -(1.21) (0.65)

inf -0.34 0.09 0.03 0.10 0.15 -0.03 (1.32)
(1.23) (1.78)* (1.12) (1.54) (2.15)** -(0.32) 0.04 0.17
fd 0.61 0.12 0.11 0.06 0.15 0.51 (1.02)

(1.69)* (2.25)** (1.94)* (1.24) (1.99)* (1.99)* (1.86)*
imf 0.34 -0.11 -0.065 0.005 -0.08 -0.13 0.06 0.005
(1.76)* (-1.87)* -(1.76)* (1.12) -(0.87) -
(1.01) (1.11)
(2.02)* 0.45 0.08
0.12 (2.15)**(1.11)
(1.99)* 0.13 0.64
(1.15)
(2.01)*
Obs 220
No of 12
countries
The VAR model is estimated by GMM and fixed effects are removed prior to estimation. Reported
numbers show the coefficients of regressing the row variables on lags of the column variables.
Heteroskedasticity adjusted /-statistics are in parentheses. *** indicates significance at 1% level, **
at 5% and *** at 10% respectively. The small letters denotes variables in natural logarithmic and t
values are in parentheses.
The augmented Solow Growth Model (Row 1) reveals that the private
investment remains the major driver of growth with openness level, education and
financial development playing promising roles as well. The key role of investment in
promoting growth is in line with earlier studies of Beddies (1999) for the case of Gambia,
Ghura and Hadjimichael (1996), Rodrik (1998), Calamitsis, Basu and Ghura (1999) for a
sample of Sub Saharan countries and Fosu (2001) for a larger sample of African states.
Noteworthy is that openness is also observed to be another important ingredient of
383
growth in COMES A states. This confirms the results of Sachs and Warner (1997),
Sacerdoti, Brunschwig and Tang (1998), Calamitsis, Basu and Ghura (1999) and Fosu
(2001) and te Velde (2006) for sample of African countries.
As expected, a significant and positive relationship is derived from education,
suggesting its vital role for COMES A. Knight, Loayza and Villanueva (1992) and Barro
(1991, 1995) also obtained positive elasticity for large panel data sets. Beddies (1999),
for the Gambian case, Khadaroo and Seetanah (2007) for Mauritius and Calamitsis, Basu
and Ghura (1999), Sacerdoti, Brunschwig and Tang (1998) and Rodrik 1998 also confirm
such results for the African context. The positive and non negligible impact of FDI on
COMESA performance concur with the findings with that of Nyatepe-Coo (1998),
Bosworth and Collins (1999) and Assanie and Singletone (2002) for the case of
developing countries which include African panel data set. For countries case Obwona
(1999) for Uganda, Akinlo (2004) for Nigeria and Subramanian and Roy (2001) for
Mauritius obtained similar positive effects.
Financial depth is also interestingly observed to have a positive, although a
relatively lower impact on growth of COMESA countries. Allen and Ndikumana (1998)
for the case of the Southern African Development Community (SADC) found some
evidence of a positive correlation between financial development and growth of real per
capita GDP. Such results are confirmed by O'Connell and Ndulu (2000) and Seetanah
and Padachi (2007) for the case of a sample of African countries. As expected IMF
assistance to respective countries appears to have been a non negligible support to these
countries development as judged by its significance and magnitude of the coefficient. As
per theoretical prediction, inflation is seen to have negative influence on economic
performance. The adverse effect of inflation is consistent with pionneering work from
Barro (1995). Te vclde (2006) and Ghura and Hadjimichael (1996) also reported negative
association of inflation for SSA region.
Interestingly the positive and significant coefficient of yt_] also suggests that
lagged income of the countries in the sample contributes positively towards the current
level of y confirming the existence of dynamism and endogeineity in the modeling
framework. This is consistent with recent works from Bende-Nabende, Ford, Sen and
Slater (2000) and Choe (2003) and Li and Liu (2005). In fact the value of the coefficient
of the lagged income is 0.53 implying a coefficient of partial adjustment a of 0.47. This
means that y in one year is 47 percent of the difference between the optimal and the
current level of y. The other explanatory variables are also confirmed to be important
ingredients in explaining growth pattern in these countries.
Panel VaR analysis not only allows us to detect the presence of dynamism in
growth modeling but to also control and investigate important endogeineity issues. From
the table above, the row 2 can for instance be seen as an investment function, row 3 as an
openness equation, row 4 as a human capital function and so on. The presence of these
estimated functions allows us to establish the direction of causation and the presence of
reinforcing effects. Thus from the table it can easily be seen that investment, openness
and trade, education, financial development, inflation and IMF- assisted funds not only
explain growth but vice versa as well ,in other words there are bi-causal (reverse)
relationships with reinforcing effects.
Moreover there also exists indirect effects on growth for example, referring to
the investment equation, it can be seen that the control variables have all significant
384
effects on investment level and since investment in return is a major element of growth,
thus these variables also work indirectly on growth. Similar interpretation can be
obtained for other equations in the system.
Model 3: Augmented Solow Growth Model (Political Stability and Spill over effects)
As far as the third econometric equation is concerned (full results have not been reported)
the additional variable pol, which is a proxy the political and institutional framework of
the countries, turned out to be positive and significant, in line with theoretical predictions
and empirical works of Gynimah-Brempong and Traynor (1999) and Rodrik (1998) for
Africa. Moreover the variable SPILL, the spatial spill-over effects of the member
countries on the host country, is reported with a positive and significant parameter and
this suggest that neighbouring countries do matter in explaining growth of host country.
Broadly the same overall results for the other variables in the model were obtained.
Particularly, political stability and spillover effects are also seen to have reverse causation
on economic growth. Orthogonalised impulse-response functions analysis and variance
decompositions overall produced equivalent results. Details are available from the
corresponding author upon request.
CONCLUSION
This paper investigated the sources of growth in some selected COM

countries, making use of accounting frameworks and econometrics
extended growth accounting frameworks shed light on the importance of lab
influencing output elasticity and of the existence of a moderate TFP. Rigoro
analysis, namely a Panel VAR model, showed that in addition to capital acc
openness and education are among the most important ingredient of growth
region. Financial development, spill over effect, political and institutional
favours growth while inflation has had a retarding effect. It should be em
growth is essentially a dynamic phenomenon and that there are important
effects and bi-causal relations among GDP and growth variables. As such o
suggests interesting indirect effects in growth as well.
As very broad policy recommendations are concerned, to achieve
growth in the future, COMESA countries must take policy measures
substantially enlarge and diversify their economic base. In order to mobilize
of savings, it is also important to have a well-developed capital market. As
term strategy, the COMESA member countries should consider developing
markets and also further developed the money markets by developing
instruments to mobilize savings. In order to attract private investment and
important is to remove all unnecessary obstacles in doing business in
Governments may also provide broad-based tax incentives for R&D. T
investment in capital and technology, including infrastructure development
a need for persistent accumulation in human capital - re-training, multi-s
continuous capacity building. Openness, being an important ingredien
therefore, removal of especially NTBs as far as possible to facilitate and re
international trade would enhance growth.
385
ENDNOTES
1 The views of the authors are not necessarily the views of the affiliated instit
2 Bosworth and Collins (2003) provide a comparison of the growth perf
various sub-regions in the world during 1960-2000 (see appendix 5)
3 Macroeconomic performance plays an important role for growth sustainab
(1993) has shown that growth is negatively associated with inflation, large bu
and distorted foreign exchange markets
4 See International Country Risk Guide (1999, 2007), Brief Guide to the Rati
5 The COMESA countries included in the sample are: Burundi, RD Con
Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Uganda, Zam
Zimbabwe.
6 We also attempted the use of Instrumental Variable (IV) methodology and obtained
similar results on the overall.
7 In our case the model is "just identified", i.e. the number of regressors equals the
number of instruments, therefore system GMM is numerically equivalent to equation-by
equation 2SLS.
8 The constant term reported in Table 2 differs markedly between the OLS and FIML
estimations. Using OLS, the constant term is 1,008.64 for all observations. Using FIML,
the constant terms are adjusted for unobserved heterogeneity; the value in Table 2 (
133.96) refers to the birthweight factor of unobservable type 1 (wy).
386
APPENDICES
TABLE 1: SUB-SAHARAN AFRICA: SOURCES OF REAL GDP GROWTH BY

SUB-GROUP OF COUNTRIES, 1960-2002
Contribution of;
Real GDP Physical Labor TFP
growth 1/ capital 1/ 1. 1/
Sub-Saliaraii Africa 3.2 1.8 1.5 0.0
Low-income countries 2.7 1.5 1.5 -0.3
Middle-income countries 5.0 2.6 1.5 0.9
Oil-producing countries 4.6 2.4 1.5 0.6
Nonoil-producing countries 3.0 2.6 1.5 -0.1
Conflict countries 2.0 1.3 1.5 -o.s
Non-conilici countries 3.6 1.9 1.5 0.2
CFA-franc countries 3.7 1.8 1.4 0.5
Nou-CFA franc countries 3.0 1.7 1.5 -0.3
Nigeria 3.1 1.7 1.6 -0.2
South Africa 3.1 1.5 1.4 0.1
Memorandum item:
Ail low-income
countries in the world 2/ 3.S 2,1 1.3 0.4
Source: Tahari, Ghura, Akitoby, and Aka, 2004
TABLE 2: SUB-SAHARAN AFRICA: SOURCES OF REAL GDP GROWTH BY

SUB-GROUP OF COUNTRIES, 1960-2002
Contribution of:
Real GDP Physical Labor TFP
growth 1 capital 1 1/ 1/
Sub-Saharan Africa 3.2 1.8 1.5 0.0
Low-income countries 2,7 1.5 1.5 -0.3
Miclclle-income countries 5.0 2.6 1.5 0.9
Oil-producing countries 4.6 2.4 1.5 0.6
Nonoil-producing countries 3.0 1.6 1.5 -0.1

Sources: Tahari, Ghura, Akitoby, and Aka, 2004
387
TABLE 3: SSA: SOURCES OF REAL GDP GROWTH, BY SUBGROUP OF

COUNTRIES AND BY DECADES, 1960-2000
Contribution of (to Output per Worker):
Output Output Physical Factor

per worker capital Education productivity
World (84) 4.0 2.3 1.0 0.3 0.9
Sub-Saharaa Africa (19) 3.2 0.6 0.5 0.3 -0.1
China £i) 6.S 4.S 1.7 0.4 2.6
East Asia, excluding China (7) 6.7 3.9 2.3 0.5 1.0
Industrial countries (22) 3.5 2.2 0.9 0.3 1.0
Latm America (22) 4.0 1.1 0.6 0.4 0.2
Middle List (9) 4.6 2.1 1.1 0.4 0.5
South Asia (4) 4.6 2.3 1.0 0.3 1.0
Source: Bosworth and Collins (2003).
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ANALYSING THE SOURCES OF ECONOMIC GROWTH IN AFRICA USING GROWTH A

ACCOUNTING AND A PANEL VAR APPROACH

JEL Classifications: E25, 055,047

There exist a number of studies (see OECD, 2003 for a comprehensive r

DECOMPOSING THE SOURCES OF GROWTH USING A

We initially use the growth accounting framework to decompose the contrib

The Growth Accounting Framework

Growth accounting allows the decomposition of the economic growth rate o

The aggregate production function links output (GDP) Yt in period

The Decomposition Equation

log Yt — log At + a log Kt+( 1 - a) log Lt (7)

A log; Yu / Lit) = 4 + a A lose Ku / Lu) + ^ (9)

The Results and Analysis

TABLE 1: CONTRIBUTION TO GROWTH: SELECTEDCOMESA COUNTRIES

Coimtrie Periods Growth _K _L TFP Periods Growth _K _L TFP

1991-00 -1 -1.25 1.5 1991 5.6 2.5 2.1 1.0

2001-07 3.1 2 1 0.1 2001 4.1 2.5 0.9 0.7

1980-07 1.9 1.3 1.3 -0.6 1980 5.3 2.6 1.7 1

Congo 1980-90 0.8 1 0.5 -0.7 Rwa 1980 2.2 1 2.2 -1

1991-00 1.8 1.2 0.8 -0.2 1991 0.8 2 -0.9

2001-07 4.6 2.6 1.5 0.5 2001 5.9 3.7 2 0.2

1980-07 2.4 1.6 0.9 -0.1 1980 3 1.5 2 -0.5

2001-07 4.5 1.6 1.9 1 2001 5.8 2.2 1.7 1.9

1980-07 4.6 2.8 1.5 0.3 1980 5 0.9 1.9 1.9

1991-00 3.2 1.55 2.2 -0.6 1991 0.5 1.2 1.3 -2

1980 3.6 1.2 2.3 0.1 1980 2.4 1.7 1.7 -1

1991 1.75 1.3 1.3 1991 1.6 1.3 1.4 -1.1

2001 4.3 2.2 1.4 0.7 2001 -5.8 -1 -1 -3.8

1980 3.7 1.9 1.5 0.3 1980 0.5 1 0.8 -1.3

Mada 1980 0.45 1.9 2.2 CO 1980 3.1 1.5 1.7

1991 1.4 -0.9 2.4 1991 2.43 0.7 1.6 0.06

An evaluation of economic growth during 1980-2007 shows that average growth

+ Alog Ht_x - log Ht) + (1 - or - /?)(log A+1 - log Lt)

TABLE 2: CONTRIBUTION TO GROWTH: COMESA COUNTRIES (WITH

1991-2000 1.75 1.1 1.1 0.3 -0.85

2001-2007 4.3 2.1 1.2 0.4 0.6

1980-2007 3.7 1.9 1.3 0.3 0.2

Mauritius 1980-1990 6.35 2.9 1.9 0.3 1.25

1991-2000 5.6 2.4 1.8 0.4 0.9

2001-2007 4.1 2.3 0.7 0.5 0.6

1980-2007 5.3 2.5 1.5 0.4 0.9

Uganda 1980-1990 3.5 -1.7 2.7 0.3 2.5

1991-2000 6.2 2.5 2.2 0.3 1.1

2001-2007 5.8 2.1 1.6 0.3 1.8

1980-2007 5 0.9 1.7 0.3 1.8

Zambia 1980-1990 1.3 1.3 1.4 0.1 -1.5

1991-2000 0.5 1.2 1.1 0.2 -2

2001-2007 5.2 2.3 2.1 0.3 0.5

1980-2007 2.4 1.6 1.6 0.2 -1

ECONOMETRIC EVIDENCE OF THE SOURCES OF GROWTH

In this section we attempt to investigate the classical determinants of grow

The Econometric Specification

Model Specification 1: The Cobb Douglas Production Function Approach

In the first instance, we thus use a Cobb-Douglas production function i

respectively. The parameter A may be regarded as an efficiency parameter, since for

By allowing a stochastic disturbance term to enter the production technology, the

Model Specification 2: The Augmented Solow Growth ModeI

Following the literature, we alternatively adopt similar economic framework (and

Y = /{PRI, OPEN, ED U, INF, FD, IMF) (13)

Model Specification 3: Alternative Growth and Policy Variables

The Econometric Model and Preliminary Tests

yi,=ai, + PPrii,+ Pi0Penit +fredui, + p,M„+p5fdi, + P6imf + /ju (15)

TABLE 3: PANEL UNIT ROOT TESTS ON LEVELS OF VARIABLES

Endogeneity Issues and the Panel Vector Autoregressive Model

-significant at 10%, significant at 5%, significant at 1%

-(1.53) (2.23) (2.11) (2.31)*** (1.98)* -