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- Resource Mobilization, Financial Liberalization, and Investment: The Case of
Some African Countries
Mohammed Nureldin Hussain, Nadir Mohammed and Elwathig M. Kameir
Introduction
The role of interest rate in the determination of investment and, hence economic
growth, has been a matter of controversy over a long period of time. Yet, what
constitutes an appropriate interest rate policy still remains to be a puzzling
question. Until the early 1970s, the main line of argument was that because the
interest rate represents the cost of capital, low interest rates will encourage the
acquisition of physical capital (investment) and promotes economic growth. Thus,
during that era, the policy of low real interest rate was adopted by many countries
including the developing countries of Africa. This position was, however,
challenged by what is now known as the orthodox financial liberalization theory.
The orthodox approach to financial liberalization (McKinnon-Kapur and the
broader McKinnon-Shaw hypothesis) suggests that high positive real interest rates
will encourage saving. This will lead, in turn, to more investment and economic
growth, on the classical assumption that prior saving is necessary for investment.
The orthodox approach brought into focus not only the relationship between
investment and real interest rate, but also the relationship between the real interest
rate and saving. It is argued that financial repression which is often associated with
negative real deposit rates leads to the withdrawal of funds from the banking
sector. The reduction in credit availability, it is argued, would reduce actual
investment and hinders growth.
Because of this complementarity between saving and investment, the basic
teaching of the orthodox approach is to free deposit rates. Positive real interest
- rates will encourage saving; and the increased liabilities of the banking system will
oblige financial institutions to lend more resources for productive investment in a
more efficient way. Higher loan rates, which follow higher deposits rates, will also
discourage investment in low-yielding projects and raise the productivity of
investment. This orthodox view became highly influential in the design of IMF –
World Bank financial liberalization programmes which were implemented by
many African countries under the umbrella of structural adjustment programs.
The purpose of this chapter is to provide a theoretical and empirical examination
of the question of resource mobilization in the context of African countries as
envisaged by the theory of financial liberalization. The chapter begins by
developing the conceptual framework for the whole study. This involves the
examination of the theory of financial liberalization, and the development of an
analytical framework which exposes the theory and its critique. The chapter
concentrates on examining the empirical relationship between the real interest rate,
saving and investment. It draws a distinction between total saving and financial
saving and estimates separate functions with special emphasis on the role of the
real interest rate in the determination of each category of saving. For the
relationship between the real interest rate and investment, this section employs a
3-equation investment model which tests for the effect of below equilibrium and
above equilibrium interest rates on investment. The model also allows the
calculation of the net effect of the real interest rate on investment after taking into
account the effect of the real interest rate on the provision of credit and the cost of
investment.
Resource Mobilization and Financial Liberalization
Resource Mobilization and Financial liberalization: A Conceptual
Framework
- The accumulation of capital stock through sustained investment is indispensable
for the process of economic growth. In a closed economy, investment itself can
only be financed from domestic saving. Because the acts of saving and investing
are usually conducted by different people, the financial sector is entrusted with the
functions of channeling resources from savers to investors. The relationships
between domestic saving and economic growth can be examined through the
Harrod-Domar Result:
g = p(S/Y) = p(I/Y) (1)
where g is the rate of growth of real output, p is the productivity of capital and
(S/Y) is the ratio of total domestic saving to income which, in equilibrium, is equal
to the ratio of investment to income (I/Y). Accordingly, given the productivity of
capital, the growth rate should increase the higher the ratio of saving (investment)
to income. Conversely, if the ratio of saving (investment) to income is given, the
growth rate can be increased by improving the efficiency of investment which will
raise the productivity of capital (p). To do this, it is necessary to promote
investment that support efficient production in sectors where rapid growth in
effective demand can be expected (Okuda 1990).
The orthodox approach to financial liberalization suggests that, financial
liberalization will both increase saving and improve the efficiency of investment
(Shaw 1973). By eliminating controls on interest rates, credit ceilings and direct
credit allocation, financial liberalization is said to lead to the establishment of
positive interest rates on deposit loans. This, in turn, is said to make both savers
and investors appreciate the true scarcity price of capital, leading to a reduced
dispersion in profits rates among different economic sectors, improved allocative
efficiency and higher output growth (Villanueva & Mirakhor 1990).
- Figure (1) provides a diagrammatic illustration of the theory backing financial
liberalization programs. The figure exhibits the behavior of savings (S) and
investment (I) in relation to the real rate of interest (r). The savings schedule
slopes upwards from left to right on the (classical) assumption that the rate of
interest is the reward for foregoing present consumption. The investment schedule
slopes downwards from left to right because it is assumed that the returns to
investment decreases as the quantity of investment increases, which means that a
lower real rate of interest is therefore necessary to induce more investment as the
marginal return to investment falls. If the interest rate is allowed to move freely
(i.e., no interest rate controls), the equilibrium rate of interest would be r* and the
level of saving and investment would be at I*. If the monetary authorities impose a
ceiling on the nominal saving deposit rate, this will give a real interest rate of, say,
r1. If this rate is also applicable for loans,1 saving will fall to S1 and investment will
be constrained by the availability of saving to I1. At r1 the unsatisfied demand for
investment is equal to AB. According to the financial liberalization theory, this
will have negative effects on both the quantity and the quality of investment. That
is, credit will have to be rationed, consequently many profitable projects will not
be financed. There will also be a tendency for the banks to finance less risky
projects, with a lower rate of return, than projects with a higher rate of return but
with more risk attached.
If the ceiling on interest rate is relaxed, so that the real interest rate increases to r3,
saving will increase from I1 to I3, and the efficiency of investment also increases
because banks are now financing projects with higher expected returns.
Unsatisfied investment demand has fallen to A1B1 and credit rationing is reduced.
It is argued that savings will be «optimal» and credit rationing will disappear,
when the market is fully liberalized and the real rate of interest is at r*.
- Although it appears convincing, the financial liberalization theory suffers from
major shortcomings. As it has been argued by Warman & Thirlwall (1994), the
financial liberalization theory makes no clear distinction between financial saving
and total saving. To be sure, the saving symbol which appears in equation 0)
stands for total saving and not financial saving. The relationships suggested by the
Harrod-Domer result, between saving, investment and growth, are complicated by
the fact that a significant portion of domestic saving may be held in the form of
real assets (e.g., real estate, gold and livestock), exported abroad in the form of
capital flight, or claimed by informal markets such as the informal credit market,
the underground economy and the black market for foreign exchange. The fact
that financial saving is only one form of saving, raises many important issues
regarding the theory of financial liberalization. In what follows, a simple
conceptual framework is developed to restructure the debate on financial
liberalization and to articulate the arguments against the financial liberalization
theory. It puts into focus some of the worries, criticisms and limitations of the
financial liberalization theory which are important to bear in mind when
evaluating the implementation of policies in the context of African countries.
Total Saving, Financial Saving, and the Leakage
The flow of total national saving can be decomposed into public saving and
private (household and enterprise) saving:
ST = SG + SP (2)
Where ST, SG and SP are total, public, and private savings respectively. The flow
of private saving can be divided into two major components: private financial
saving which comprise the portion of private saving that is kept in the form of
financial assets in the formal financial sector (FP) and private saving residue which
- comprises the portion of private saving which is kept in non-financial forms or put
into other uses (L). That is:
SP = FP + L (3)
Substituting equation (3) into (2), we get:
ST = SG + FP + L (4)
The flow of total financial saving (FT) comprise public financial saving (FG) and
private financial saving (FP). That is:
FT = FP + FG (5)
On the assumption that all government saving is kept in the form of financial
assets (so that FG = SG) and substituting equation (5) in (4), and rearranging we
have:
L = ST — (FG + FP) (6)
and,
FT = ST – L (7)
Dividing equation (6) by ST, we obtain:
FT/ST = 1 – s (8)
Where, s = L/ST, which measures the proportion of total saving that is leaked out
of, or not captured by the formal financial sector. If equations (6), (7) and (8) are
expressed in stock rather than flow terms, they can be interpreted as giving the
condition for the case of what can be called full financial deepening where the
whole stock of total saving is kept in financial forms and the leakage, L, is zero.
- The degree of financial deepening at any point in time, can be measured by
equation (8), where the smaller, s, the higher will be the degree of financial
deepening. The equations can also be used to clarify the confusion in the literature
between total saving and financial saving. Total saving and financial saving are
identical only in the case of a zero leakage (i.e., L=0).
In their flow forms the equations can be interpreted as giving the ‘dynamics’ of the
process of financial deepening. The case of a zero leakage with L = s = 0,
corresponds to what can be called full financial augmentation where all the
additions to total saving are kept in the form of financial vessels (so that ST = FG +
FP in equation (6) and FT/ST=1 in equation (8)). A reduction in the leakage (i.e., s
L0) implies an increase in the process of financial
shallowing. The equations also illustrate the important result that even though total
saving might be stagnant (i.e., s ST=0) financial saving can increase if sL
- is stagnant (i.e., s ST=0), financial saving can still increase — keeping other things
constant — by reducing the stock of saving which is kept in real assets (i.e.,
sR
- positive increases in working capital and output. This depends on which
component of the leakage is reduced and on whether the reduced component will
cause an offsetting reduction in output. Two basic reasons (assumptions) are
usually given to explain the position of the new structuralist: first, the
intermediation of the informal credit market is said to be complete while that of
the formal market is not and; second, the informal credit market is assumed to
support equally productive and efficient activities, while the other components of
the leakage do not. As for the first reason, the funds in the informal market are
said to be transmitted, in full, to production entities with no holding of reserves,
while in the formal sector the transmission is less than full. The required reserve
ratio and the holding of excess reserves constitute another leakage in the flow of
funds between savers and investors. This can be illustrated by assuming that
financial savings are equal to bank time deposits. The relationship between
financial saving and the supply of bank loans may be written as:
BC = (1 – T) FT (10)
where BC is the supply of bank loans, T is the required and excess reserves ratio
held by banks and FT is financial saving. Thus, while reductions in any of the
components of the leakage in equation (9), keeping all other parameters constant,
will bring about an equal increase in financial saving, the supply of bank loans
will not increase by the same amount because of the leakage caused by banks’
holdings of reserves.
As for the second reason, according to Van Wijnbergen’s (1983) new structuralist
model, if the increase in financial saving occurs through the reduction in hoarded
cash balances [-H in equation (9)] and other intrinsic unproductive assets, then it
will have a positive effect on output. If, however, it is at the cost of informal credit
market (-N) it will lead to a fall in total private sector credit, working capital and
output. The loss of informal sector credit without an equal compensating increase
- in formal sector lending, is said to bid up the informal sector lending rate and
reduce net working capital causing a decline in output.
The new structuralist argument rests, therefore, on the contentions that the
intermediation of the formal sector is not full and that informal sector resources,
and not the other components of the leakage in equation (9), are likely to be the
closest substitute for time deposits. However, it has been argued by Serieux
(1993), that less than full intermediation can only occur if we assume away the
money creation capacity of banks. That is, most informal sector loans are
essentially cash loans. It follows that a shift from informal sector resources to bank
resources would imply a surrender of cash to the formal banking sector. This, will
increase banks’ reserves and hence their credit creation capacity. Accordingly,
bank intermediation might be complete or even multiplicative. Also, an increase in
bank deposit rates, may lead to shifts among the components of the leakage such
that the available informal credit remains intact.
The Real Interest Rate and the Determinants of Saving and Investment in
Africa
As outlined in the conceptual framework, the financial liberalization theory, is
based crucially on three postulates concerning the relationship between the real
interest rate, saving and investment:
1. that saving is positively related to the real rate of interest;
2. that investment is determined by prior saving; and
3. that the effect of the real rate of interest on investment will depend on
whether the real interest rate is below or above the equilibrium rate.
- Although the financial liberalization theory places more emphasis on the desirable
effects of raising the real interest rate towards equilibrium, it also postulates that
the impact of the change in the real interest rate on investment depends on whether
the actual interest rate is below or above equilibrium. Below the equilibrium
interest rate, investment is constrained by saving. An increase in the real interest
rate towards equilibrium, will increase saving and investment. Hence, as long as
the equilibrium interest rate is not reached, investment is positively related to the
real interest rate (see Figure 1). Beyond this equilibrium, an increase in real
interest rate will have a negative effect on investment as the economy moves along
the negatively-sloped investment demand curve. The relationship between the real
interest rate and investment as postulated by the financial liberalization theory is
depicted by Figure (2).
Against this theory which is based on classical notions, we have the Keynesian
framework which postulates that saving is positively related to income and
investment is negatively related to the price of credit for which the interest rate
stands as a proxy. However, the proponents of this Keynesian view concede that
the real interest rate might also have a positive effect on investment through the
provision of credit. That is, as financial saving and the rate of interest are
positively related, interest rate may also have a positive effect on investment
through the process of financial deepening and the provision of credit to the
private sector (Warman & Thirlwall 1994). Thus the net effect of the real interest
rate on investment will depend on the relative strength of its negative effect
through the cost of investment and its positive effect through the provision of
credit. In what follows, we discuss the empirical models that we are going to use
to examine the validity of the postulates of the financial liberalization theory.
Total Saving and Financial Saving: Empirical Models
- The financial liberalization theory postulates that saving is positively related to the
real interest rate. The theory, however, does not make clear distinction between
total savings and financial saving. Total domestic saving consists of private and
public savings of which financial savings is a part. While financial saving is the
portion of total saving that is channeled through financial assets which comprise
short and long-term banking instruments, non-bank financial instruments such as
treasury bills and other government bonds and commercial paper. It is prudent,
therefore, to examine the role of the real interest rate in the determination of both
total saving and financial saving. To this end, the following two equations for total
saving and financial saving are specified:
TS = s0 + s1 + s2Y (12)
FS = T 0 + T 1+ T 2 Y + T 3 (C/M1) (13)
It is hypothesized that, total real domestic saving (TS is a function of real income
(Y) and the real interest rate (r). It is expected that total saving is positively related
to real income (Y). Whether the total saving is positively or negatively related to
the real interest rate, will depend on the relative strength of the income and
substitution effects of changes in the rate of interest [see Warman & Thirlwall
(1994)]. The substitution effect of a higher interest rate is to encourage agents to
sacrifice current consumption for future consumption, but the income effect is to
discourage current saving by giving agents more income in the present, and the
two effects may cancel each other out.
As saving is a flow concept, financial saving is measured by the change in the
stock of such financial assets. It is hypothesized that real financial saving (FS is
positively related to real income (Y), and also positively related to the real rate of
interest (r) as postulated by the financial liberalization theory. Also, because of the
important role played by the informal credit market in many African countries, an
- attempt is made to capture its effect on formal financial saving. This is done by
including as an independent variable, the ratio of currency outside banks to narrow
money M1. The proportion of narrow money (M1) held as currency is commonly
accepted as a measure of the size of the informal credit market (see Shaw 1973
and Serieux 1993), on the grounds that the higher this ratio the larger will be the
size of the informal credit market.
An Investment Model
As it has been noted before, the financial liberalization theory suggests a differing
effect of the real interest rate on investment, depending on whether the real interest
rate is below or above the equilibrium rate. It is also noted that, on Keynesian
grounds, the real interest rate might affect investment negatively through the cost
of investment and positively through the provision of credit. The foregoing
arguments suggest the use of a switching regime model which differentiate
between the effect of above and below equilibrium real interest rates. They also
suggest that attempts should be made to separate the positive and negative impact
of the interest rate on investment. To this end, we use a switching investment
model:
I = a0 + a1BC + a2r+ a3 [(r-r*)D] + a4s Y (14)
BC = O0 + O1FS (15)
FS = T 0 + T 1r+ T2Y + T3 (C/M1) (16)
where I is real gross fixed investment; r is the real interest rate; r* is the real
equilibrium interest rate; Be is the supply of bank credit; D is the switching-point
dummy variable which takes the value of zero when the interest rate is below
equilibrium (i.e., r < r*) and the value of unity when the interest rate is above
equilibrium; and s Y is the change in real income as a measure of the income
- accelerator effect on investment. Substituting equation (16) into equation (15) and
the result in (14), and by totally differentiating equation (14) with respect to the
real rate of interest and rearranging, the investment/interest rate (dI/dr) multiplier
will be given as follows:
dI/dr = a2 + a1T 1O1 + a3D (17)
In the case where the interest rate is above the equilibrium with D=l, the negative
effect of interest on investment is assumed to be at work and the effect of the real
interest rate on investment will be given a2 + a1T 1O1 + a3. While below the
equilibrium rate of interest, with D=0, the impact of a3 will disappear and there
will remain only the impact measured by a2 + a1T 1O1.
The product (a1 ?T 1 ?O1) represents the chain effect that goes from the real
interest rate to investment, through the supply of credit. An increase in interest rate
is expected to stimulate saving in financial forms (O1), which is expected to
increase the supply of credit (T 1), which is expected, in turn, to increase
investment (a1). The question of whether the final effect of interest rate on
investment is negative or positive, depends on the relative magnitude of the
parameters a2, a3, T 1, O1 and a1.
Empirical Results: Saving Equations
The saving equations (12) and (13) are estimated for 25 African countries over the
period 1972–1992. A single equation OLS procedure is employed and in the case
of the presence of autocorrelation in OLS estimates, a General Autoregressive and
Moving Average Error Correction Process (GAMAECP), with a first-order
autoregressive and/or first-order moving average is used. Different experiments
with time lags on the real interest rate variable were conducted. Tables 11.1 and
11.2 give a summary of the results for the total saving and financial saving
respectively.
- Table 11.1: Summary of the results of total domestic savings equation in 25
African countries, 1970–1992
Table 11.2. Summary of the results of the financial savings equation (FS) in
25 African countries, 1970–1992
It can be observed from Table (11.1) that of the 25 countries in the sample, the real
interest rate has a positive impact on total saving in the case of 15 countries (60
percent of the total). The coefficient on the real interest rate is, however, positive
and statistically significant, at the 10 percent level of confidence, in only 8 cases
(32 percent of the total), these are Burkina Faso, Gabon, Mauritius, Nigeria,
Swaziland, Zaire, Zambia, and Zimbabwe. This positive and significant
relationship between the real interest rate and total saving, indicates that in the
case of these countries the positive substitution effect of real interest rates
outbalances the negative income effect. This also implies that, in the case of these
countries, there is a strong substitution effect between present and future
consumption. The real interest rate has a negative and significant effect on total
saving in five cases (28 percent of the total). These are Benin, Côte d’Ivoire, South
Africa, Togo, and Tunisia. Thus, in these five countries the implication with
- regard to the substitution and income effects is exactly the opposite to that of the
eight cases above.
In conformity with Keynesian theory, real income proved to be the most important
determinant of saving. The coefficient on income has the expected positive sign in
all cases with the exception of Tanzania, and it is positive and statistically
significant in 18 cases. For some African countries (e.g., Ghana, Senegal, and
Swaziland) the estimated propensity to save is very small not exceeding 0.01 for
one unit of income. The largest propensities to save are recorded by Gabon (0.92)
and Mali (0.61). In the majority of all the other countries, the estimated propensity
to save ranges between 0.10 and 0.35.
Contrary to expectations, the interest rate plays no significant role in the
determination of financial saving (Table 11.2). The real interest rate and financial
saving are positively related in 11 cases. However, this positive relationship is
statistically significant in one case, Mauritius. The relationship between the real
interest rate and financial saving is negative and significant in four cases, namely
Tanzania, Tunisia, Zaire and Zimbabwe. Similarly, the impact of gross domestic
income on financial savings is statistically insignificant in three quarters of the
countries in the sample. It is positive and statistically significant in four cases
(Kenya, Mali, Mauritius, and Togo) and negative and statistically significant in
Gambia and Madagascar. The activities of the informal credit market as proxied
by the ratio of currency outside banks to narrow money, proved to be the most
important determinant of financial saving. The relationship between financial
saving and (C/M1) ratio is negative in 18 cases. This indicates that as this ratio
increases (indicating an increase in the activities of the informal credit market)
financial saving decreases. This negative relationship between financial saving and
the activities of the informal credit market is statistically significant in eight cases.
- These are Burkina Faso, Côte d’Ivoire, Ghana, Kenya, Mali, Mauritius, Morocco,
and Nigeria.
Thus, in so far as the relationship between the real interest rate and saving is
concerned, these results give no strong support to the financial liberalization
theory. The real interest rate does not playa significant role in the determination of
neither financial saving nor total saving. Real income is found to be the most
important determinant of total saving while the activities of the informal market is
found to be the most important determinant of financial saving.
Empirical Results: Investment Model
The investment model [equations (14) to (16)] is estimated for the 25 African
countries in the sample over the period 1971–1992. As in the case of saving
equations, a single equation OLS procedure is employed correcting for the
presence of autocorrelation through the use of a GAMAECP with a first-order
autoregressive and/or a first-order moving average. All the annual data used in the
estimation are obtained from World Bank World Tables with the exception of data
on nominal interest rate which are obtained from the IMF International Financial
Statistics. For the basic investment equation, a similar OLS procedure is used.
Preliminary experiments have also shown that investment in some African
countries is volatile during years of armed conflicts. To capture this effect, we
include in the basic investment equation a War dummy which takes a value of zero
in peace years and a value of unity in the years of armed conflicts.3
Since the equilibrium interest rate (r*) is unknown, it is necessary to search for the
equilibrium rate which minimizes the sum of square residuals using a trial and
error process. That is, different hypothetical values of the real rate of interest that
range from +30 percent to -30 percent are initially assumed. Each value is used to
calculate the switch variable on the assumption that it represents the equilibrium
- rate of interest. Each of these variables are then used, together with the other
explanatory variables to estimate equation (3). The hypothetical real interest value
that yields the estimate with the smallest sum of square residuals is considered as
the true equilibrium real interest rate (see Rittenberg 1991).
Table 11.3 shows the values of the real interest rate arrived at in each country’s
case. The Table reveals that there is a large variations in real interest rate
experienced by the African countries in the sample. In 12 countries, the estimated
equilibrium real interest rate is positive ranging from a rate of 2.0 percent per
annum in the case of Mauritius to a rate of 17 percent in Senegal. In 12 countries,
it is negative ranging from a rate of -0.5 percent for Kenya, Gabon, Madagascar,
and Zambia and a rate of -27.0 percent for Sierra Leone. This variation is evident
even in countries with similar monetary arrangements such as the CFA Franc
Zone. For instance, the estimated real interest rate for Côte d’Ivoire is negative
amounting to about -7.5 percent, while in Burkina Faso it is positive amounting to
9.0 percent.
Table 11.3. Equilibrium interest rates in 25 African countries, 1970–1992
- Table 11.4. Summary of the results of the basic investment (1) in 25 African
countries, 1970–1992
It can also be observed that there is no apparent correlation between high inflation
rates and negative equilibrium real interest rate. For instance, the equilibrium rate
in Zaire ( a country with high inflation rates) is 3.0 percent while in Côte d’Ivoire
(a country with low inflation rates) is -7.5 percent.
The equilibrium interest rates in Table 11.3 are used to estimate the basic
investment equation and the complete results are reported in Table 11.4. Table
11.5, provides a summary of these results and reveals that the supply of bank
credit to the private sector is a very important determinant of investment. The
coefficient on the supply of credit has the expected positive sign in 19 cases and it
is positive and statistically significant in 16 cases. For most of these countries the
size of this coefficient is large (in the cases of both elasticity and propensity
estimates) indicating a large effect of changes in bank credit on investment. In the
case of South Africa and Zimbabwe, for instance a one percent increase in the
supply of credit leads to about 0.97 percent increase in investment. In Benin,
Burkina Faso, and Côte d’Ivoire a one unit increase in bank credit leads to an
increase in investment of about 5 to 7 units.
- However, in certain countries, namely, Gabon, Senegal, Tanzania, and Zaire, the
coefficient on the supply of credit is negative and highly significant. Although this
result is puzzling, but some “African” observations might help to resolve this
puzzle. Because of macroeconomic instability, it is observed that in some African
countries, investors opt to use the funds supplied by banks for the purchase of
foreign exchange which is usually exported and deposited abroad (a form of
capital flight) awaiting a large currency devaluation. After devaluation, part of the
funds deposited abroad is imported and converted into domestic currency to repay
the bank loan and the “profit” is kept abroad. Some investors simply default on the
bank loan. If such an operation is in process for sometime and the level of
investment is generally falling because of the very macroeconomic instability, it
will not be surprising to find a negative and statistically significant relation
between the supply of bank credit to the private sector and the level of investment.
Demand factors as approximated by the income accelerator effect proved to be as
important as the credit supply factor in the determination of investment. The
impact of the change in income on investment is positive in 20 cases and it is
positive and significant in 12 cases. However, the impact of real change in income
is negative and statistically significant in Rwanda only. Out of the five countries
affected by armed conflicts in the sample, the WAR dummy is negative and
statistically significant in the case of Kenya and Rwanda. It is negative but not
significant in the case of Zimbabwe, positive and statistically insignificant in the
cases of Morocco and Tanzania.
We turn now to the subject of primary interest to this study, namely, the effect of
the real interest rate on investment. Table 11.5 shows that the effect of the real
interest rate on investment has the expected positive sign in 13 cases (52 percent
of the total) but it is positive and statistically significant in only 8 cases (32
percent of the total).
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