Productivity and Real Exchange Rate: Investigating the Balassa-Samuelson Effect and misalignment in Five African Countries

The study aims to investigate the validity of the Balassa-Samuelson Effect in a sample of five African countries, the Democratic Republic of Congo, Mauritius, Morocco, South Africa and Tunisia for the period 1991 to 2016. The study first estimates the equilibrium real exchange rate with variables real exchange rate, productivity, terms of trade and net foreign assets. Secondly, real exchange rate misalignment is derived and lastly, the effects of real exchange rate misalignment on economic performance are tested. For the methodology, the Fully Modified Ordinary Least Squares (FMOLS) and pool mean group econometric (PMG) techniques were utilised. The outcomes of the study indicate a valid Balassa-Samuelson effect in all five African countries and a negative effect of real exchange rate misalignment on economic performance. The study contributes to scientific progress by introducing an appropriate measure of total factor productivity in testing for the validity of the Balassa-Samuelson hypothesis.JEL Codes - C32; C51; F14; F3