The impact of policy reversal on economic performance in Sub-Saharan Africa Milton Yago a, ⁎ , Wyn Morgan b a Department of Economics & International Business, Bronte Hall, Leeds Business School, Headingley Campus, Beckett Park, Leeds LS6 3SQ, UK b School of Economics, Sir Clive Granger Building, University of Nottingham, Nottingham NG7, 2RD, UK Received 31 August 2006; received in revised form 21 August 2007; accepted 22 August 2007 Available online 7 September 2007 Abstract The literature suggests that investment and economic growth respond very slowly to economic reform due to uncertainty about the permanence of reform. Despite clear theoretical underpinnings for the idea that policy reversal significantly impedes economic performance, there is limited empirical evidence on this topic. This paper derives empirical proxies for the probabilities of different types of policy reversal and investigates their impact on investment and growth in Sub-Saharan African countries. The results show that trade, fiscal, savings and financial policy reversals have been very damaging to investment and economic growth. The paper also finds that it is the prediction or expectation that reversal will occur that hurts performance. There is no evidence that exchange rate policy reversal has damaged performance. © 2007 Elsevier B.V. All rights reserved. JEL classification: E22; E61; F13; F41; F43; O11 Keywords: Economic growth; Investment; Economic reform; Policy reversal; Sub-Saharan Africa 1. Introduction Sub-Saharan African countries (SSA) have experienced poor economic growth and performance since the early 1980s, a period characterised by declining national incomes (GNP) per capita and a slowdown in gross domestic product (GDP) growth and decreasing investment 1 (Easterly, 2001a,b; Hillman, 2002 2 ). The period between 1980 and 1996 was characterised by poor economic performances. In terms of investment, the average annual rates of private and gross fixed domestic investments as a percentage of GDP were 12.4 and 20.1 percentage points, which were similar to the rates in Latin America (LAM) 3 and South Asia (SA) but much lower than the 22.5 and 32.6 Available online at www.sciencedirect.com European Journal of Political Economy 24 (2008) 88 – 106 www.elsevier.com/locate/ejpe 1 There has been an attempt by international organisations including the World Bank to help to increase the volume of gross domestic investment in Africa to 23% of GDP by the year 2000 (African Development Bank, 1997). The current volume is only 20% of GDP a year. 2 Hillman (2002) provides a review of Easterly's (2001a) book providing explanations for the development failures experienced in poor countries in Africa and elsewhere in the developing world. 3 The Latin America (LAM) averages are based on data from Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Paraguay, Peru and Uruguay. The East Asian (EAS) averages are based on data from Indonesia, Korea (South), Malaysia, Singapore and Thailand. While the South Asian (SA) nations included are Bangladesh, India, Pakistan, Nepal and Sri Lanka. ⁎ Corresponding author. Tel.: +44 113 812 5364; fax: +44 113 812 8604. E-mail address: m.yago@Leedsmet.ac.uk (M. Yago). 0176-2680/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.ejpoleco.2007.08.004