The Role of the State in Promoting Regional Integration and Private Sector Development By Michael Mbate UN Economic Commission for Africa 4th Annual Conference for Regional Integration in Africa Abidjan, Cote d’Ivoire 4th July 2013

Introduction - Africa’s recent high growth is yet to translate into social-economic development - The private sector can help accelerate economic growth and development by: 1. Increasing productivity and knowledge transfer 2. Promote an efficient allocation of resources and foster competitiveness 3. Create employment opportunities and generate income 4. Complement the public sector in the provision of public goods

Introduction Why private investment is still low in the region? Quality of institutions and policies Infrastructure deficits Unstable macroeconomic and political environment Market size Research Question: What are the main determinants of private sector development? Focus: Policy and Institutional factors Key message: The role of the state is vital in promoting an enabling atmosphere for the private sector

Determinants of Private Investment Market size induces demand for products GDP growth signals better market prospects FDI spurs technology transfer and integrates local economies into global markets Infrastructure lowers the cost of doing business and promotes trade Human capital boosts productivity, R & D and innovation Openness promotes access to markets and positive spillovers Macroeconomic stability promotes price stability Credit availability boosts entrepreneurship by expanding business Institutions design policies and frameworks

Model Specification Baseline cross-country model: Where: y = private investment (% of GDP) Xit = vector of control variables (GDP growth, population, trade, exchange rate, human capital, investment, FDI, inflation) ɳi = represents unobserved country heterogeneity ԑit = represents the error term Sample: 14 West African countries; Period: 1985 to 2011

Identification Strategy Estimation Technique: System Generalized Methods of Moments Justifications: 1. Autocorrelation due to yit-1 2. Control variables are endogenous 3. Time invariant country characteristics Validity of Estimates: 1. Number of instruments count 2. Hansen Test 3. Difference in Hansen Test 4. Auto-correlation Test (AR-2) Two step robust standard errors clusters within countries

Pair-wise Correlations

Fixed Effect Regressions

System GMM Regressions

Summary and Interpretation of Results Governance indicators are highly correlated with private investment Initial levels of private investment significantly affect a country’s future accumulation of investment Trade is an important determinant of private investment FDI promotes private investment (technology and imitation channel) Exchange rate and inflation have a negative impact on the private sector

Policy Recommendations It is important to design effective strategies that ensure FDI benefits are internalized to promote and benefit the private sector There is need to promote trade ( especially intra-African trade ) and promote trade facilitation (CFTA) It is vital to ensure macroeconomic stability through sound governance and high quality institutions There is need for a comprehensive and coordinated regional framework to address infrastructural deficits