Financing investment in sub-Saharan Africa: Savings, human development, or institutions?

The role of national and external savings on economic growth in developing countries has received considerable attention in Economics. Recent research has investigated the roles of human capital and institutions in promoting economic growth, with results that show that human development and solid institutions exert important impacts on growth during the process of socio-economic development in developing countries. The question that arises is which variable is of more significance, be it savings, human capital or institutional strength, and whether these variables complement each other. To shed light on this matter this paper presents the results of a Vector Auto-regressive Model, VAR, consisting of the variables: the human development index, a governance indicator, rule of law, net development assistance, national savings, and public and private investment. The VAR is estimated with panel data from a sample of 24 Sub-Saharan African countries, with data from the 2003-2006 period. The results indicate that the human development index and the governance indicator are the main determinants of savings and investment, and both exert negative impacts on external assistance. As well, external savings exert negative impacts on human development and rule of law. These two variables are complementary and both support public and private investment. It is argued that by virtue of its positive impact on the mobilization of savings, human development can decrease developing countries’ external vulnerability. It is postulated that the attention to early childhood education and health can result in a more dynamic economy, one that generates larger tax revenues, such that the additional tax revenues can offset the initial expenditures incurred in promoting social development. The paper ends with a series of considerations on the need to expand the financing of human development as a means to attain social and economic stability and promote dynamic economic growth.