Assessing marketing and aid strategies to stimulate economic growth in sub-Saharan Africa

Armah, Stephen

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Description

Title

Assessing marketing and aid strategies to stimulate economic growth in sub-Saharan Africa

Author(s)

Armah, Stephen

Issue Date

2013-02-03T19:16:51Z

Director of Research (if dissertation) or Advisor (if thesis)

Garcia, Philip

Doctoral Committee Chair(s)

Garcia, Philip

Committee Member(s)

• Winter-Nelson, Alex E.
• Allen-Smith, Joyce
• Nelson, Charles H.
• Yasar, Mahmut

Department of Study

Agricultural and Consumer Economics

Discipline

Agricultural and Consumer Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• Aid
• growth
• hedging
• market efficiency

Abstract

Stimulating economic development and growth has been difficult in Sub-Saharan Africa (SSA). In this three-essay dissertation, I examine and assess two strategies—market-based risk management through hedging, and growth through aid—that could potentially facilitate growth in SSA. Since many SSA countries derive a considerable portion of their total export revenues and foreign exchange from the exports to highly volatile commodity markets, risk management strategies are viewed as viable methods to reduce the negative effects of risk on development and growth (Razzaque, Osafo-Kwaako and Grynberg, 2007). Here I investigate the usefulness of futures markets for hedging price, production and hence, revenue risk in the cocoa market, a commodity particularly important to SSA countries such as Ghana, La Cote d’Ivoire (CIV), Nigeria, Togo, Uganda, and Cameroon. An ability to hedge commodity-market volatility reduces terms-of-trade risk, leading to a more effective allocation of resources (Ramey and Ramey, 1995). The effectiveness of aid in stimulating growth is controversial (Bruckner, 2011; Naito, 2010; Leeson, 2008; Collier, 2007 and Easterly, 2006). Highly diverse economic situations, economic programs, and political instability make it difficult to identify when aid will have a positive effect on growth. I examine factors that stimulate economic growth in SSA using recent data, while addressing endogeneity problems that typically plague the aid-growth relationship. In particular, I focus on the relationship between political stability, foreign aid and growth because although political stability is a pertinent factor affecting growth in SSA, the empirical literature has largely ignored its influence until very recently. The existing literature concludes that good macroeconomic policy is the crucial factor in determining efficacy of aid in stimulating growth, basing this conclusion on Burnside and Dollar’s (2000) finding of a significant aid-policy effect. Similar to Islam (2005), I challenge the existing view that good policy is sufficient to make aid work. Specifically, I investigate whether political stability is a more pertinent determinant of the aid-growth relationship in SSA. The aid literature has also not critically evaluated the validity (exogeneity and strength) of the instruments used to correct endogeneity bias in aid-growth regressions. Following Deaton (2008), I evaluate the applicability of instrumental variable techniques to the estimation of the aid-growth regressions for SSA. The dissertation consists of three essays. Essay 1 is concerned with the role of political stability in the use of aid as a growth strategy. It characterizes the economic relationship between aid and growth and determines how political stability affects the aid-growth relation in SSA. Appropriate econometric procedures are used to mitigate endogeneity bias due to unobserved, time-invariant country-specific effects and to simultaneity in the aid-growth regression. Essays 2 and 3 focus on the use of market based-strategies to minimize market risk in order to enhance growth. Essay 2 determines whether cocoa futures markets are biased and inefficient either in the long or short run using five and two-month cocoa maturities. The paper also establishes if any short-run bias in the futures forecast of cash prices is due to a risk premium or to informational inefficiency. The presence of a risk premium will result in biased futures forecasts of subsequent periods’ spot prices. The absence of a risk premium in a futures market is thus a favorable condition for using the futures market to manage commodity market risk. Hedging is feasible if a risk premium exists but it may not be practical if returns are low. Finally Essay 3 investigates if hedging revenue risk is utility improving for a sovereign cocoa exporter like Ghana using a five month pre-harvest to harvest hedge. This is done by determining if optimal hedge ratios for cocoa exporter remain positive for a range of relevant risk parameters after transactions costs are incorporated into the cocoa exporter's utility maximization problem. The presence of utility-enhancing hedging may stimulate market returns and create an environment conducive to growth and development.

Graduation Semester

2012-12

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Copyright 2012 Stephen Armah

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