| This study investigated the quantitative linkages between domestic policies and economic performance in Sub-Saharan Africa (SSA). Data from 33 countries for the period 1970-87 were used. It was found that policies have indeed played an important role in influencing economic performance. Confirmation was obtained on the deleterious effects of economic mismanagement on economic growth, thus lending support to endogenous growth models. Namely, it was found that misalignment in the real exchange rate (RER) has had adverse effects on growth. Also, support was found for the monetarist model of inflation. Money growth has been an important source of inflation. Furthermore, excess domestic credit has been a source of RER appreciation. In addition, increases in the budget deficit to GDP ratio have been inflationary and have adversely affected growth. These findings suggest that domestic policies can be used effectively to control inflation, keep the actual RER near its equilibrium, and spur growth.; However, policy reforms are not a panacea for the resumption of growth in SSA because growth is affected not only by domestic policies but also by a host of other factors such as external forces, political instability and the weather (which are beyond the control of policy makers). Also, the effects of policy and real variables on economic growth were found to be rather complex, as some of the same real variables that affect the RER also affect growth, implying both direct and indirect effects. In addition, although currency devaluation may be a powerful tool in spurring export growth, it is itself inflationary. Furthermore, because the RER is strongly affected by external forces, the use, design and implementation of monetary and nominal exchange rate policies to keep the RER near its equilibrium (to maintain external competitiveness) are non-trivial tasks.; It is clear, however, that policies can be used to stimulate growth in the region even if external conditions do not improve. Indeed, although Botswana, Cameroon and Mauritius experienced severe terms-of-trade losses (more than the average for SSA) over the period 1972-87, their growth performances were outstanding, mainly because of good economic policies. |
