Savings, investment and CFA membership: Time-series evidence from a comparison of Côte d'Ivoire with Kenya
In the previous chapter, we saw that there is not complete financial market integration between the CFA and France (and by extension, the rest of the Europe). However, there remains the possibility that the 'degree' of integration is greater within the CFA than outside it. It might be the case that a fraction of investors in the CFA have access to international capital markets, and face an infinitely elastic loanable funds supply curve. Other investors (and consumers) might not have access to these international capital markets, and must borrow and lend on an autarkic domestic financial market with a domestically determined interest rate. Given the extent of financial repression in the typical domestic African capital market, even in the CFA, these investors are likely to be constrained by an exogenous level of savings, net of public sector investment. But at least some part of aggregate private sector investment will be determined by the world interest rate and the risk-discounted marginal rate of return to physical capital. It is unlikely to be possible to distinguish a priori which investors are constrained, but the relative sizes of the elasticities of aggregate private sector investment with respect to savings on the one hand and rate-ofreturn variables on the other ought to provide some information about the relative sizes of the two groups. In particular, it will be possible to compare elasticities estimated in CFA countries with those estimated in other African economies. If the CFA delivers a greater degree of capital market integration (in the sense that a larger fraction of investors
have access to international capital markets) then savings ought to be a quantitatively less important determinant of private sector investment in the CFA, and rate-of-return variables quantitatively more important, compared with the experience of non-CFA Africa.