The model shows a more rapid accumulation of capital stock in the relatively highincome sub-panel of countries, even assuming a constant depreciation rate across income sub-panels. The model also points to the significance of financing costs of investment, public capital stock, and profitability shocks in estimating the determinants of private investments. Profitability shocks include aggregate components and account for macroeconomic variables, including real exchange rate volatility and inflation. Irrespective of the sector, the structure of the model is stable and invariant to sectors' specifics; the difference lies in the parameterization, however. The performance and reliability of the model are assessed by comparing the actual and predicted values empirically derived following the parameterization. The small deviations of actual versus predicted values for the cumulative distributions of private capital stock across economic sectors and income sub-panels support the modeling specification.

The remainder of this paper is organized as follows. The next section focuses on the dynamics of investment in Sub-Saharan Africa and investment uncertainty across the different income sub-panels of countries. Section 3 provides details on the underlying model for estimating private capital accumulation across the different economic sectors. Section 4 discusses the empirical specification of investment functions and the empirical results. The last section provides concluding remarks.

# **2 Investment in Sub-Saharan Africa**

The dynamics of capital accumulation differ markedly across Sub-Saharan African countries, where significant gaps are observed along welfare and income levels. The difference in the capital accumulation process has implications for aggregate investment over time. This section focuses on the pattern and dynamics of investment in Sub-Saharan Africa. In order to highlight the sharp contrast across income levels, we use the welfare function to classify countries into three groupings. The underlined measure of classification is the GDP per capita expressed in constant 2000 US dollar terms. The countries are divided in three subpanels, according to their level of GDP per capita. The sub-panel of low-income countries (LIC) includes countries with estimated average GDP per capita below US$325 over the period.<sup>1</sup> This sub-panel mainly includes conflict-affected countries and some of the poorest heavily indebted countries in the region [World Bank (2005b, 2005c)].<sup>2</sup> Countries in this first panel have an annual average GDP per capita of US$222 (see Table 1 in Annex). The subpanel of middle-income countries (MIC) has a GDP per capita between US$325 (the lower

> 1 The median income for the distribution of annual GDP per capita is about US$384, slightly above the current threshold of US$325, the upper bound for the distribution of income associated with the sub-panel of low-income countries. Exactly 50 per cent of countries in the overall sample have per capita income below the median, and taking a lower threshold allows a more balanced representation and distribution of countries across the three income sub-panels, while at the same time taking into account the significant income gap. That income gap is best illustrated by the mean differences across income sub-panels, as the latter indicator is more influenced by outliers (see Table 2 in Annex).

> 2 There are nine countries in this first sub-panel, of which the conflict-affected and post-conflict ones include Burundi, Central African Republic, Democratic Republic of Congo and Sierra Leone; other countries in this sub-panel include Ethiopia, Gambia, Malawi, Niger and Togo, most of which went through political instability in the reference period as well. One of the common features of these countries is their vulnerability to exogenous and macroeconomic shocks; they are also PRSP and HIPC eligible.

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