Development Finance Nicholas Biekpe • Danny Cassimon • Andrew William Mullineux Editors Development Finance

Innovations for Sustainable Growth Editors Nicholas Biekpe Danny Cassimon Development Finance Centre Institute of Development Policy and UCT Graduate School of Business Management Cape Town, Western Cape, South Africa Universiteit Antwerpen Antwerp, Belgium Andrew William Mullineux Department of Finance Birmingham Business School University of Birmingham Birmingham, UK

ISBN 978-3-319-54165-5 ISBN 978-3-319-54166-2 (eBook) DOI 10.1007/978-3-319-54166-2

Library of Congress Control Number: 2017948035

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This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Preface

Overview

This textbook brings to focus core areas of development finance with special relevance to the strengthening of development finance research and training in an emerging market context. Unlike professional dis- ciplines (e.g. engineering, accounting and economics), development finance (which is simply finance applied in a developmental context) is a relatively new entrant into the wider fields of research and training. Much work still needs to be done to develop and strengthen development finance capacity building and this book is a first crucial step aimed at establishing and strengthening academic and practitioner engage- ments in development finance research and training.

Binding Themes and Tone of Book

The chapters of the book were carefully selected to generate and stimu- late discussions and debates around key knowledge attributes which define development finance research. Even though development finance is generic in content and applications, the book has been successful in conveying specific high level applied research with critical applications in an emerging markets context.

v vi Preface Subject Areas

The areas selected for the book are broadly speciﬁc in content but are closely linked, in their applications, to their applications in the African and other emerging markets settings. The areas covered are as follows:

• Domestic Resource Mobilization in Africa: Capacity Imperatives; • Tax Buoyancy: A Comparative Study Between Kenya and South Africa; • The Impact of Microfinance on Household Livelihoods: Evidence from Rural Eritrea; • Reflections on Microfinance; • A Chameleon Called Debt Relief: Aid Modality Equivalence of Official Debt Relief to Poor Countries; • Foreign Direct Investment and Economic Growth: The Structural Vector Autoregressive Approach for South Africa; • Foreign Capital Flows and Output Growth Volatility in Selected Sub-Saharan African Countries; • Do Remittances Matter in Accelerating Labour Productivity and Capital Accumulation?

Target Audience

The book serves as a reference text with target audience including academic institutions, researchers, postgraduate students in development finance, development economists and other individuals and institutions interested in learning more about the critically important and fast growing area of finance for development. The book will also benefit researchers working in development finance institutions and research staff of central and investment banks. Acknowledgements

Chapters from the book are from the 2015 Global Development Finance Conference which took place on 29–30 October 2015 at Cape Town, South Africa. The Conference was organized by Chartered Institute of Development Finance (CIDEF) in partnership with Africagrowth Institute, partner academic institutions and other private sector institutions. This book has benefitted tremendously from the expert knowledge and experience of academics and researchers with a passion for development finance research and training. Our gratitude is extended to all contributing authors who have worked tirelessly to ensure that quality and the correct content specifications are achieved. Special gratitude goes to the Co-Editors of the book (Professor Nicholas Biekpe, Professor Danny Cassimon and Professor Andy Mullineux) for providing solid mutual collaborative efforts to ensure that the book meets the expected quality parameters prescribed by the publisher. Special thanks to Karel Verbeke and Dr Latif Alhassan for the excellent research assistance and technical support. Last but not the least, hurray to the hardworking CIDEF staff (Dina Potgieter, Kirk De Doncker and Lydia Le Roux) for organising the 2015 Global Development Finance Conference and for ensuring that the conference papers were ready for inclusion into the book.

vii Contents

1 Development Finance and Its Innovations for Sustainable Growth. An Introduction 1 Nicholas Biekpe, Danny Cassimon and Karel Verbeke

2 Domestic Resource Mobilization in Africa: Capacity Imperatives 17 Emmanuel Nnadozie, Thomas C. Munthali, Robert Nantchouang and Barassou Diawara

3 Tax Buoyancy: A Comparative Study Between Kenya and South Africa 51 John Olukuru and Barrack Mandela

4 The Impact of Microﬁnance on Household Livelihoods: Evidence from Rural Eritrea 73 Amine Habte, Kobus Visser and Matthew Koﬁ Ocran

5Reﬂections on Microﬁnance 109 Peter W. Muriu, Victor Murinde and Andrew William Mullineux

ix x Contents

6 A Chameleon Called Debt Relief: Aid Modality Equivalence of Oﬃcial Debt Relief to Poor Countries 161 Danny Cassimon and Dennis Essers

7 Foreign Direct Investment and Economic Growth: The Structural Vector Autoregressive Approach for South Africa 199 Josué Mabulango Diwambuena, Amon Magwiro, Heinz Eckart Klingelhöfer and Martin Kaggwa

8 Foreign Capital Flows and Output Growth Volatility in Selected Sub-Saharan African Countries 225 William G. Brafu-Insaidoo and Nicholas Biekpe

9 Do Remittances Matter in Accelerating Labour Productivity and Capital Accumulation? 251 Gloria Clarissa O. Dzeha, Joshua Y Abor, Festus Ebo Turkson and Elikplimi K. Agbloyor

Index 285 List of contributors

Joshua Y. Abor Professor of Finance, Department of Finance, University of Ghana Business School, University of Ghana, Accra, Ghana. Elikplimi K. Agbloyor Lecturer, Department of Finance, University of Ghana Business School, University of Ghana, Accra, Ghana. Nicholas Biekpe Professor of Development Finance and Econometrics, UCT Graduate School of Business, University of Cape Town, Cape Town, South Africa. William G. Brafu-Insaidoo Senior Lecturer, Department of Economics, University of Cape Coast, Cape Coast, Ghana. Danny Cassimon Professor, Institute of Development Policy and Management, University of Antwerp, Antwerp, Belgium. Barassou Diawara Knowledge Management Expert, African Capacity Building Foundation, Harare, Zimbabwe. Gloria Clarissa O. Dzeha PhD Candidate, Department of Finance, University of Ghana Business School, University of Ghana, Accra, Ghana. Dennis Essers Post-doctoral researcher, Institute of Development Policy and Management, University of Antwerp, Antwerp, Belgium.

xi xii List of contributors

Amine Habte Lecturer, Department of Economics, University of the Western Cape, Cape Town, South Africa. Martin Kaggwa Executive Research Director, Sam Tambani Research Institute, Braamfontein, South Africa. Heinz Eckart Klingelhöfer Professor, Department of Managerial Accounting and Finance, Tshwane University of Technology, Pretoria, South Africa. Diwambuena Josué Mabulango Master student, Department of Managerial Accounting and Finance, Tshwane University of Technology, Pretoria, South Africa. Amon Magwiro Lecturer, Department of Economics, Tshwane University of Technology, Pretoria, South Africa. Barrack Mandela Graduate, School of Finance and Applied Economics, Strathmore University, Nairobi, Kenya. Andrew William Mullineux Professor of Financial Economics, Department of Finance, Birmingham Business School, University of Birmingham, Birmingham, UK. Thomas C. Munthali Director, Knowledge, Monitoring and Evaluation Department, African Capacity Building Foundation, Harare, Zimbabwe. Victor Murinde Professor of Development Finance, Department of Finance, Birmingham Business School, University of Birmingham, Birmingham, UK. Peter W. Muriu Lecturer in Financial Economics, School of Economics, University of Nairobi, Nairobi, Kenya. Robert Nantchouang Senior Knowledge Management Expert, African Capacity Building Foundation, Harare, Zimbabwe. Emmanuel Nnadozie Executive Secretary, African Capacity Building Foundation, Harare, Zimbabwe. List of contributors xiii

Matthew Koﬁ Ocran Professor and Departmental Chair, Department of Economics, University of the Western Cape, Cape Town, South Africa. John Olukuru Lecturer, School of Finance and Applied Economics, Strathmore University, Nairobi, Kenya. Festus Ebo Turkson Senior Lecturer, Department of Economics, University of Ghana, Accra, Ghana. Karel Verbeke Researcher, Institute of Development Policy and Management, University of Antwerp, Antwerp, Belgium. Kobus Visser Dean, Faculty of Economics and Management Sciences, Professor, School of Business and Finance, University of the Western Cape, Cape Town, South Africa. List of abbreviations

AAA Addis Ababa Agenda ACBF African Capacity Building Foundation ACI Africa Capacity Index ACR Africa Capacity Report ADF Augmented Dicker Fuller AEO African Economic Outlook AfDB African Development Bank AIC Akaike Information criterion ARCH Autoregressive Conditional Heteroskedasticity ATT Average Treatment Eﬀect on the Treated AU African Union BoP Balance of Payment C2D Contrats de Désendettement et de Développement CBI Community Based Institutions CIA Conditional Independence Assumption DAC Development Assistance Committee (of the OECD) DRM Domestic Resource Mobilization ECA Economic Commission for Africa (of the United Nations) EITI Extractive Industries Transparency Initiative EL Employee Loan ER Exchange rate EV Economic Value FAO Food and Agriculture Organisation FDI Foreign Direct Investment

xv xvi List of abbreviations

FfD Financing for Development GARCH Generalized Autoregressive Conditional Heteroscedasticity GBS General Budget Support GDP Gross Domestic Product GFDI Gross fixed domestic investment GMM Generalised Method of Moments GMM-IV Generalized Method of Moments-Instrumental Variables GRA Ghana Revenue Authority HH Household HIPC Heavily Indebted Poor Countries IAL Irrigated Agricultural Loan IATF Inter-Agency Task Force on Financing for Development IDA International Development Association IDA-DRF International Development Association’s Debt Reduction Facility IFF Illicit Financial Flows IV Instrumental Variable LR Likelihood Ratio M&E Monitoring and Evaluation MBL Micro Business Loan MDGs Millennium Development Goals MDRI Multilateral Debt Relief Initiative MFI Microfinance Institutions MNCs Multi-National Corporations NDS National Development Strategy NGO Non-Governmental Organisation NSEO National Statistics and Evaluation Office ODA Official Development Assistance OECD Organisation for Economic Cooperation and Development OL Oxen Loan OLS Ordinary Least Squares PPS Public-Private Partnerships PSM Propensity Score Matching PV Present Value RCT Randomized Controlled Trials RDF Rapid Deployment Force (Ghana) SBL Small Business Loan SBS Sector Budget Support List of abbreviations xvii

SC Schwarz-Bayesian Criterion SDGs Sustainable Development Goals SDI Sustainability Dependent Index SE Standard Error SMCP Savings and Microcredit Programme SME Small and Medium-sized Enterprises SSA Sub-Saharan Africa SSAL Small Seasonal Agricultural Loan SVAR Structural Vector Autoregressive TFCA Tropical Forest Conservation Act (US) UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNU-WIDER United Nations University World Institute for Development Economics Research VAR Vector Autoregressive VAT Value-Added Tax VIF Variance Inﬂation Factors VMA Vector Moving Average WC Windmeijer’s Correction WDI World Development Indicators WFP World Food Programme List of Figures

Fig. 1.1 Evolution of different types of external flows. 4 Fig. 2.1 Gross domestic savings (% of GDP) by region, 1970–2013 22 Fig. 2.2 Tax-to-GDP ratio across Africa, 2013 24 Fig. 2.3 Tax revenues in Africa, 1996–2013 25 Fig. 2.4 Illicit financial flows and aid to Africa, 2003–2012 26 Fig. 3.1 Government deficit as a percentage of GDP 52 Fig. 3.2 Tax growth versus GDP growth for Kenya 54 Fig. 3.3 Tax growth versus GDP growth for South Africa 55 Fig. 4.1 Eritrea’s selected financial development indicators 77 Fig. 4.2 Empirical distributions of propensity scores between treated and untreated groups 95 Fig. 7.1 Trend of FDI inflows in South Africa (1960–2014) 201 Fig. 7.2 Trend of LNFDI in South Africa (1960–2014) 202 Fig. 7.3 Trend of Economic Growth in South Africa (1960–2014) 203 Fig. 7.4 Responses of LNGDP, LNGFDI, LNER, LNFDI to LNFDI shock 212 Fig. 7.5 Responses of LNGDP, LNGFDI, LNER, LNFDI to LNGDP shock 213 Fig. 7.6 Variance decompositions graphs of the SVAR system 215 Fig. 9.1 Remittance flows show consistent and steady growth 254 Fig. 9.2 The average growth of labour productivity of the sampled African countries 255

xix xx List of Figures

Fig. 9.3 Shows variability in average labour productivity and average personal remittances 257 Fig. 9.4 Conceptualizing Remittance, labour productivity and capital accumulation 258 List of Tables

Table 2.1 Top 10 African countries for IFFs, 2012 27 Table 2.2 The 2015 Africa capacity index 35 Table 2.3 Percentage of countries by 2015 ACI bracket and by cluster 36 Table 2.4 Acuteness of capacity needs for DRM (% of surveyed countries) 37 Table 2.5 Average tax eﬀort, 1996–2013 38 Table 2.6 An example of presumptive tax in Zimbabwe 42 Table 3.1 Description of the variables that will be used in this study 62 Table 3.2 Stationarity results for Kenya 64 Table 3.3 Stationarity results for South Africa 65 Table 3.4 South Africa buoyancy and speed of adjustment results 66 Table 3.5 Kenya buoyancy and speed of adjustment results 66 Appendix 3.1 Johansen cointergration results for Kenya 70 Appendix 3.2 Johansen cointergration results for South Africa 70 Table 4.1 Comparison of observable characteristics between treated and untreated subjects before matching 86 Table 4.2 Comparison of observable characteristics between treated and untreated subjects after matching based on propensity score 92 Table 4.3 Distribution of propensity scores between treated and control groups for each block 94

xxi xxii List of Tables

Table 4.4 Estimation of ATT using propensity score matching 96 Table 5.1 Summary of empirical findings on performance and direction of impact 135 Table 6.1 A chameleon called debt relief 170 Table 7.1 Variance decomposition results 216 Appendix 7.1 Unit root test 218 Appendix 7.2 Johansen cointegration test 218 Appendix 7.3 Optimal lag length criteria 219 Appendix 7.4 Matrix A and B under Cholesky’s structural factorisation 219 Table 8.1 System dynamic panel regression for output growth volatility 238 Table 8.2 Variance inflation factor estimates for the non-conventional method 240 Table 8.3 System dynamic panel regression for output growth volatility 241 Table 8.4 Variance Inflation Factor estimates for the conventional approach 243 Table 9.1 Descriptive statistics 268 Table 9.2 Pairwise correlation among variables 270 Table 9.3 Results of the impact of remittances on labour productivity 272 Table 9.4 Descriptive statistics 273 Table 9.5 Bivariate correlation between variables 274 Table 9.6 Results of remittance impact on capital accumulation. 275 Appendix 9.1 Sampled African countries and their labour productivity growth 277 Appendix 9.2 Control variables 277