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Title:External Financing of Economic Development in Africa
Author(s):Assefa, Zewdineh
Department / Program:Finance
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Economics, Finance
Abstract:Absence of a general theory of economic development that is applicable to the low income countries is a handicap in analyzing the problem of "underdevelopment". It cannot readily be concluded from this, however, that all partial analyses of specific development problems in the poor countries are futile. On the contrary, much advance has been made in certain areas that allow appreciation of the causes for the lag in economic progress in these countries. One specific area is the limit on productive capacity expansion.
The scarcity of effectively deployable capital (broadly defined) as a major constraint on economic development and progress in low income countries is now well established. It has also been the basis for much of the resource transfers from rich to poor countries. Nonetheless, how much external resources have done to help solve the poverty problem is still an unsettled question.
In the earlier going, the capital scarcity issue seemed to have overwhelmed researchers. For a long time also, empirical research on the subject focused on external resource inflows to low income countries as an aggregate the fungible variable closely related to economic growth and development. This implies that all forms of these inflows are similarly motivated or are readily substitutable, and hence amenable to the same scheme of analysis.
The lack of separation of motives and effects in most of these studies has led to conflicting conclusions. As a result, the issue has now become very controversial.
In view of the dismal growth and development performance of many of the developing countries in the face of continued external inflows to their economies, there has been some reassessment of the earlier propositions surrounding external resources.
In this study, it is submitted that external resource inflows to low income countries originate from different sources and are governed by dissimilar modus operandi. It is argued that, by and large, a good portion of public transfers to low income countries are motivated and allocated on the basis of political considerations and that their economic consequences are unclear. Private investments, mainly in the form of direct investment, on the other hand, are generally governed by profit making motives under less than a fully competitive environment.
The theoretical underpinnings, as they exist today, do not give an unequivocal sense of direction as to the relative effect of consequences expected of these inflows on the economies of the importing countries. The issue becomes, therefore, an empirical question.
The empirical part of the study recognizes the difference in the nature of the various types of external resources in its attempts to analyse past resource inflows to selected African countries. Though suggestive at best, certain interesting results have emerged. (a) Distribution of gains aside, foreign direct investment is found to be positively and significantly related to economic growth and growth in per capita income in the countries analyzed. However, it showed no corresponding effect on capital formation and employment in the urban sector. (b) Bilateral aid and loans to Africa show a strong relationship with import and government cosumption. Their effects on economic growth and growth in per capita income, though not negative, was not significant. (c) Multilateral transfers to Africa show distinct differences from bilateral transfers. They revealed a negative relationship with government consumption and a positive relationship with per capita growth and with capital formation.
In terms of theoretical implications, the need for a separate analysis of resource transfers to the developing countries is borne out in this study. In terms of policy implications for the developing countries, the results strongly suggest that not all foreign resource transfers should be regarded as having identical effects (positive or negative) on the host country's economy.
Issue Date:1980
Description:135 p.
Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 1980.
Other Identifier(s):(UMI)AAI8108440
Date Available in IDEALS:2014-12-14
Date Deposited:1980

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