ABSTRACT
In this chapter I discuss three African economic problems, all deterrents to private investment, in which a central aspect is the difficulty in restraining some agent within the economy. The first is the probability attached to the reversal of economic reforms. Now that many African governments have liberalized their economies to a considerable degree, surveys of actual and potential investors identify the perceived risk of policy reversal as the most potent deterrent to foreign investment. 2 Investment is low because the stated intentions of governments are not sufficiently credible. The second is the prevalence of corruption among public employees. While this is a phenomenon common to many countries, Schleifer and Vishny (1993) argue that the economic costs of corruption are higher in Africa because the abuse of regulations is competitive. Where the government is cohesively corrupt the price it will charge firms for permissions will be set at the point of revenue maximization. Where, as they claim to be the African case, public officials are corrupt in an uncoordinated way, then the attempt by each of several officials to extract the maximum rent from a permission which each must give yields in aggregate a level of charges much higher than consistent with collusive revenue maximization. Investment is low because government lacks the power either to prevent its employees being corrupt or to enforce coordination in such corruption by centralizing it. Mauro (1993) adds an Economist Intelligence Unit index of perceived corruption as an explanatory variable and finds that it significantly reduces investment. The third is the difficulties of contract enforcement and of verification of information between private agents. In some countries the civil legal system does not function well enough to permit assets to be used as collateral for loans, 3 thus curtailing finance for investment. In some countries the accounts produced by firms are too unreliable for reported profits to be used as a basis for the valuation of the firm. If the firm cannot be valued as a going concern it becomes less marketable, so that investment in it becomes illiquid and therefore less attractive.
