The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa

Specialization in primary product exports reduces growth, but why? Adverse trends in, and the high variance of, primary product prices are possible explanations. The impact on investment and growth of the level and volatility of the terms of trade and the real effective exchange rate is estimated for a panel of 14 sub-Saharan African countries over 1980-1995. Growth is negatively affected by terms of trade instability, and investment by real exchange rate instability. Both growth and investment increase when the terms of trade improve and real exchange rate overvaluation is eliminated. (C) 2001 Elsevier Science B.V. All rights reserved.