Interview: DSGE modelling for improved growth strategies in Africa

Prof. Mthuli Ncube

In the interview below, Prof. Mthuli Ncube, the managing director and head of Quantum Global Research Lab, talks about DSGE modelling and what it can do for the African economy.

1. How has macroeconomic research become integral to Quantum Global Group’s investment approach?

As part of the wider Quantum Global Group of companies, the Research Lab is an independent research partner to African countries as well as a valued knowledge and advice hub for clients on various investment related topics. The Research Lab’s unbiased insights on African economies and macro-economic policy analysis is channelled into every aspect of how we conduct business. We have a dedicated team of economists who utilise econometric and statistical methods of forecasting to apply to investment strategies which go well beyond the “classical” approaches of investing in Africa.

Africa’s growth prospects will be underpinned by improved macroeconomic policies, in addition to other equally important factors such as lower public debt and a greater degree of political stability. Through informed decision making the Research Lab will support the development of innovative economic policy development and sustainable investments in Africa.

2. How will strengthening Africa’s economic environment with DSGE modelling encourage growth and development?

Economic growth combined with investment into “human capital” are becoming the most important means of raising the populations incomes and reducing poverty in Africa. DSGE models play a strong role in the use of macroeconomic research for economic policy analysis on African economies, and implementation of new strategies by decision makers. For example, empirically-motivated small-scale structural models of aggregate output, unemployment, the Philip curve, the IS curve and monetary policy can be used by policy-makers for forecasting and policy simulation.

Public sector investment-financing and debt sustainability are also a key issues which many African economies are facing. Using real-cycle models for financing different investment strategies and growth impact analysis, will help policymakers in the design of their medium-term investment plans.

The African continent is seeing impressive levels of growth and many economies have begun to diversify. Policy makers who come from resource-rich countries would benefit largely from using DSGE modelling in the optimal allocation of natural resource revenues.

In the case of sovereign wealth funds (SWF), DSGE models will help to optimise saving-investment strategies, particularly policymakers facing exhaustibility concerns and fluctuations in commodity prices. Analysis of appropriate fiscal and monetary policy conduct for effectively managing exchange rates, in the face of macroeconomic and trade shocks, can also be performed within a DSGE model framework.

Some policymakers operating in a regional economic community environment with a single currency, CFA zone, do not have an independent monetary policy. A DSGE model highlighting these peculiarities will be extremely useful for policymakers and researchers, in regional economic communities.

When looking at African economies, it is important to note that Africa’s informal sector is sizable, and accounts for about three quarters of non-agricultural employment. The presence of such a sector hampers policy action and the transmission of monetary policy. DSGE models which take into account African realities by incorporating the informal sector, particularly in labour markets and through access to credit, is critical to understanding policy effectiveness in African economies.

3. What are the most important elements of fiscal policy that will contribute to improved strategies for economic growth in Africa?

The fall in commodity prices and uneven global growth further underscores the need for sound macroeconomic policy and risk management in Africa. DSGE modelling can help improve the capacity of budgetary processes, ultimately leading to better resource allocation and even poverty reduction.

Other key elements include optimal resource allocation in terms of efficiency, equity, quality, ownership or a combination of these factors, and infrastructure investment financing. Policy-makers can develop an improved understanding of debt sustainability in order to manage investments that can close the infrastructure gap in sub-Saharan Africa.

4. How will enhanced policy development contribute towards inclusive growth in Africa?

Policy makers that have to make appropriate decisions without the right tools, sometimes are taking blind policy decisions without any clear knowledge and anticipation of what the impact will be on economic growth and how they will be felt in the daily lives of people.

For policy changes to have the desired effect, it is important for decision makers to conduct ex-ante economic research which will allow to forecast and anticipate those effects.

DSGE modelling addresses this issue by offering best practice in the context of African economies to African governments. To the best of our knowledge, a DSGE course, like the one being offered by the Quantum Global Research Lab, which takes into account African realities, is the first of its kind.

5. How will macroeconomic tools such as DSGE modelling promote future economic and policy development in African economies?

If researchers and decision makers from African countries can later develop DSGE models, or at least foster the building blocks for developing them, they will be able to partake in policy discussions, identify and understand sources of shocks, undertake macroeconomic forecasting of their respective countries, as well as undertake dialogues around structural change. These are all core elements to promoting inclusive economic transformation in African economies.

To learn more about the DSGE Modelling course being offered by the Quantum Global Research Lab and to download the course brochure, visit

Prof. Mthuli Ncube is the managing director and head of Quantum Global Research Lab. A renowned industry expert in macroeconomics, development economics and finance, and a PhD in Economics (Mathematical Finance) from University of Cambridge, Mthuli has more than 25 years of work experience, including as former chief economist and vice president at the African Development Bank Group. He is also a visiting professor at the University of Oxford, UK. Since joining Quantum Global to head the group’s research activities, the Research Lab has developed a number of pioneering products including piloting the Africa Investment Index, a comprehensive guide for investors on Africa’s most attractive markets; special reports and research papers which analyse topical issues surrounding economic development in Africa; and the quarterly Macroeconomic and Market Outlook, Commodities Outlook and Africa Investment Review which provides in-depth analysis on the economic outlook for Africa.