How does country X sectors, GDP growth & GDP per capita growth affect invesment into that country?

Question

How does country X sectors, GDP growth & GDP per capita growth affect invesment into that country?

Briefly ~ , like a lower growth in GDP per capita as compared to another country, say , country y.

Answer 1

In economis, most variables depend on each other. That is why macro-economics is about simultaneous eqation system and not single equation systems. Higher per capita GDP would normally mean higher incomes and standards of living and higher savings as well. Higher savings make avilable higher amount of resources for investment in fresh  capacity or higher capacity utilisation or higher productivity by technological upgration. This increases both the capacity to produce as well as the demand for goods and services. As a result the economy grows faster. Per capita GDP growth rate rises, unless the population growth is occurriong at a higher pace. Higher GDP percapita and higher hrowth rate for per capita GDP means faster growth in demand for goods and services that in turn leads to greater demand for raising capacity through higher levels of investment.

So higher investments facilitate higher GDP and GDP per capita grwoth rate and at the same time higher GDP growth or higher GDP per capita growth leads to higher demand for investment and hence investment grows more rapidly.

Read the article below:

Sub-Saharan Africa must increase economic growth to reduce poverty and improve living standards. This article discusses some obstacles to growth in the region, as well as some policy actions that would improve its prospects.

SUB-SAHARAN Africa's long-term growth performance will need to improve significantly for the region to visibly reduce poverty and raise the standard of living to an acceptable level. Appropriate actions will also be needed to ensure that an adequate share of the growing income is devoted to reducing poverty-for example, by improving the delivery of social services. In view of the low level of per capita income in many sub-Saharan African countries, it is difficult to see how redistribution alone could provide a lasting solution to the problem of poverty unless the size of the pie increases markedly. The evidence from empirical studies suggests, in fact, that the income of the poor increases one for one with overall growth and that economic growth is one of the best ways to reduce poverty.

The key policy question for these countries and their development partners is how to spur economic growth . Empirical studies suggest that the contributions to growth of physical investment and total factor productivity (defined as the rate of growth of GDP that cannot be explained by capital formation or labor force growth) in sub-Saharan Africa have been low in comparison with other regions and have declined over time. These trends have reflected inefficiencies in resource allocation, poor delivery of public goods, notably health care and education; and the high risk of doing business in many parts of the region. Moreover, although the labor force has expanded rapidly, its productivity has remained relatively low because of generally poor standards of health and education.

Improving the environment for investment

In the 1990s, the ratio of investment to GDP in sub-Saharan Africa hovered around 17 percent of GDP, well below the ratios attained in the developing countries of Latin America (20-22 percent) and Asia (27-29 percent). The empirical evidence and international comparisons also suggest that the ratio of private investment to GDP is low in sub-Saharan Africa. This is worrisome for two reasons. First, private investment has been found to have a significantly stronger effect on growth than government investment-probably because it is more efficient and, in some countries, less closely associated with corruption. Second, official development assistance, which provides the financing for a large share of public investment in Africa, is declining.

Perhaps the primary reasons for the low level of private investment in Sub-Saharan Africa is the perception, held by both domestic and foreign investors, that the risk-adjusted rate of return on capital is low. Three major sources of risk appear to be particularly relevant macroeconomic instability; inadequate legal systems-in particular, the difficulty of enforcing contracts; and political risk, especially armed conflicts. Reducing risk should greatly improve the attractiveness of holding assets in Sub-Saharan Africa and, therefore, raise domestic investment and saving rates while reducing capital flight-a major problem in many countries in the region.

First, with respect to macroeconomic instability, the countries of sub-Saharan Africa have recently succeeded in cutting their budget deficits and reducing the rate of increase of the money supply and inflation. But arrears, both domestic and external, remain a serious problem in many of them. In recent years, events in Gabon and Zimbabwe, in particular, have shown how quickly monetary and fiscal control can be lost. These countries and their development partners must therefore continue to focus on macroeconomic stability as a key feature in the design of programs.

Second, inadequate legal systems are a major problem. Private investment will not take off in a country where investors and lenders lose their capital because a dysfunctional court system fails to enforce contracts and property rights. Some progress is being made at the regional level-for example, through the work of the Organization for the Harmonization of Business Law in Africa-but much remains to be done.

Third, armed conflicts threaten the viability of growth-oriented programs. This is a difficult problem, but the international community and African institutions like the Economic community of West African States are now finding ways to support countries involved in peacekeeping operations (for example, Nigeria in Sierra Leone) and those that have had to cope with large numbers of refugees (such as Guinea). Organizations like the World Bank and the IMF are also helping those countries emerging from armed conflicts to rebuild their physical infrastructures and restore their ability to collect taxes and deliver essential public services.

High tax rates are another reason for the low level of private investment in sub-Saharan Africa. High tax and import duty rates combined with pressures from special interest groups have resulted in a vicious circle in which rising exemptions erode the tax base and, ultimately, lead policy-makers to further increase tax rates to avoid mounting budget deficits. For this reason and also because they create microeconomic distortions and provide fertile ground for corruption, tax exemptions should be sharply reduced as part of a strategy to boost growth and investment.

The debt overhang that many African countries have accumulated discourages private investment by reducing the expected after-tax rate of return on capital. The World Bank and the IMF's enhanced Heavily Indebted Poor Countries (HIPC) Initiative aims to provide faster, deeper, and broader debt relief to as many as 30 countries, mostly in sub-Saharan Africa, while establishing a close link between debt relief and poverty reduction.

Raising productivity and growth

The rates of return on both capital and labor and the overall productivity of the sub-Saharan African economies remain low because of a variety of distortions and institutional deficiencies. The list of problems is familiar: obstacles to international trade; overvalued exchange rates; poor infrastructure; bad governance and corruption; and insufficient competition and monopolistic structures in many sectors, notably agriculture. These problems can be corrected if public policies are set on the right course, but change will be politically difficult and will take time.

On the first issue, sub-Saharan Africa is less open to international trade than other developing regions. Several studies conclude that trade liberalization should improve the region's trade performance significantly and thus spur the growth of productivity and output. Some African countries have made progress in liberalizing trade over the past several years. For example, the implementation of the common external tariff in the West African Economic and Monetary Union will contribute not only to intraregional trade liberalization but also to a considerable reduction and simplification of the region's external tariff structure. Such progress must now be strengthened and extended to other parts of sub-Saharan Africa.

Although trade liberalization in the region is crucial, it is equally important that African producers be granted better access to the markets of the advanced economies. In particular, the advanced economies should reduce tariffs at all stages of production, with a view to lowering the effective protection on goods of actual or potential interest to sub-Saharan African countries, such as clothing, fish, processed foods, and leather products.

While selected industries in sub-Saharan Africa may have benefited from a protectionist trade policy, overall production and exports in the region have often been hurt by overvalued exchange rates. One motivation for such a policy is the desire to provide cheap imported goods to the urban elite. But the resulting bias against the tradable goods sector has been very costly in terms of lost output and employment.

Fortunately, policy in this area evolved in the right direction during the 990s. The most spectacular example was the devaluation of the CFA franc in 1994, which, following a lengthy period of stagnation in the CFA franc zone, provided a strong boost to growth, investment, and exports in that region.

Another factor that inhabits private investment and growth in sub-Saharan Africa-by increasing the cost of investing in physical capital-is the poor quality of infrastructure, particularly in sectors like communications (ports, roads, and railroads) and electric power generation. The poor quality of the infrastructure imposes heavy costs on producers of tradable goods, on top of the costs stemming from the low population densit