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FDI to Africa: The Role of Price Stability and Currency Instability

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  • Ms. Carmen Reinhart
  • Mr. Kenneth Rogoff

Abstract

Africa lags behind other regions in attracting foreign direct investment (FDI). In some circumstances, there are obvious explanations for the absence of FDI, such as a high incidence of war. In this paper, we examine the role that monetary and exchange rate policy may have played in explaining this outcome. Specifically, we document the incidence of inflationary episodes and currency crashes in order to compare countries within the region as well as to make comparisons with other regions. Furthermore, since monetary policy can range from very transparent to very opaque, we assess Africa's track record with dual and parallel markets. We use the parallel market premia as an indicator of the degree of distortions and extent of transparency. Our findings suggest that this is a promising line of inquiry because Africa does stand apart from other regions in this measure of transparency. We also discuss some of the fiscal underpinnings of Africa's bouts with high inflation.

Suggested Citation

  • Ms. Carmen Reinhart & Mr. Kenneth Rogoff, 2003. "FDI to Africa: The Role of Price Stability and Currency Instability," IMF Working Papers 2003/010, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2003/010
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    References listed on IDEAS

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    More about this item

    Keywords

    WP; CFA franc; monetary policy; central bank; mi fontweight; Parallel markets; inflation; capital controls; conflict; country reform; inflation rate; high-inflation Western Hemisphere region; inflation country; governments desperate; crisis outcome; CFA country; pound sterling; country particular; currency crash; chronic-inflation crisis; government surplus; Foreign direct investment; Quasi-fiscal operations; Currencies; Exchange rate arrangements; Africa; Western Hemisphere; North Africa; Asia and Pacific; Sub-Saharan Africa;
    All these keywords.

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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