The Determinants of Investment Efficiency in West African Economic and Monetary Union (Waemu)

Abstract

Recently, there has been a noticeable increase in investment in West African Economic and Monetary Union (WAEMU) area. However, economic growth does not necessarily follow the observed increase in public investment. Even within WAEMU region, countries that have higher investment rate do not have the highest growth rate. Moreover, a comparative analysis of the relationship between investment rate and economic growth rate show that WAEMU countries are lagging some Africans countries with similar economic structure (reference countries). The objective of this study is twofold. First, it aims to analyze, comparatively, the efficiency of investment in WEAMU countries and in reference countries. To that aim, the Incremental Capital Output Ratio (ICOR) has been computed and used as a measure investment efficiency. The results show that two groups of countries emerge within WAEMU. The first consists of Burkina Faso, Côte d'Ivoire and Togo with an ICOR of less than 3. In these countries, investment is more effective than in the second group consisting of Guinea-Bissau, Benin, Mali, Niger, and Senegal, which have a combined average ICOR of 5.7. Overall, the average ICOR in WAEMU countries is 4.6, which is significantly higher than the average level of 2.8 observed in the reference countries. This results suggest that investments are relatively more efficient in the reference countries than in WAEMU countries. Botswana, Ethiopia, Mozambique and Rwanda are the countries where the return on investment is the highest. Second, the study seeks to understand the determinants of investment efficiency in a selected group of sub-Saharan African countries by analyzing the causal relationships that can exist between the ICOR and some macroeconomic and institutional variables, including GDP per capita, the real interest rate, the share of exports in GDP and corruption. In that regard, an empirical analysis using Dynamic Ordinary Least Square (DOLS) estimation procedure has found GDP per capita, real interest rate, human capital, the ratio of export to GDP and corruption to be the most important determinants of investment efficiency. The overall results of this article shed some light on how important public investment project management is to their efficiency. In the light of empirical results, the following policy recommendations could be made to improve the efficiency of investment in the WAEMU countries. First, investment should be made on growth promoting sectors or on sectors that can significantly improve the overall productivity of the economy. Second, policy makers in WAEMU Countries should improve transparency in awarding and the execution of public infrastructure contracts. Finally, WAEMU countries should step up their efforts to quantitatively and qualitatively improve human capital in the region.