Challenges of African growth: opportunities, constraints, and strategic directions.

Challenges of African growth: opportunities, constraints, and strategic directions.
The World Bank
Challenges of African Growth
OPPORTUNITIES, CONSTRAINTS
AND STRATEGIC DIRECTIONS
Benno Ndulu
with Lopamudra Chakraborti,
Lebohang Lijane, Vijaya Ramachandran,
and Jerome Wolgin
©2007 The International Bank for Reconstruction and Development / The World Bank
1818 H Street NW
Washington DC 20433
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E-mail: [email protected]
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TABLE OF CONTENTS
Preface ...................................................................................................................... vii
Acknowledgments ..................................................................................................... ix
Executive Summary ................................................................................................... xi
Chapter 1: Facing the Challenges of African Growth ............................................1
Introduction..................................................................................................................1
Poverty in Africa Largely a Growth Challenge ...........................................................3
Breaking out of the Low-Growth Syndrome—a Daunting Task
but a Real Possibility ............................................................................................9
The Report─Overview...............................................................................................11
Endnotes ....................................................................................................................26
Chapter 2: Africa’s Long-Term Growth Experience in a
Global Perspective ............................................................................................27
Evolution....................................................................................................................29
Benchmarked against Asian Economies ....................................................................31
Diversity across Africa ..............................................................................................33
Sectoral composition..................................................................................................44
Conclusions................................................................................................................46
Endontes ....................................................................................................................47
Chapter 3: Explaining the African Growth Record:
What Appears to Matter Most ........................................................................49
Sources of Economic Growth: Lessons from Growth Accounting ............................50
Doing Business in Africa: The Investment Climate—
Transactions Costs, Risk, Capacity.....................................................................58
Indigenous Entrepreneurs and Minority-Owned Firms .............................................68
Benchmarking Growth Conditions in African Countries...........................................71
Conclusions................................................................................................................79
Endnotes ....................................................................................................................84
Chapter 4: Constraints to Growth .........................................................................87
Africa’s Unfavorable Endowments: A Constraint to Growth
but Not a Predicament ........................................................................................88
Africa’s Growth is Unusually Constrained by Geographical Disadvantages.............89
HIV/AIDS and the Demographic Transition ...........................................................100
Demographic Impacts ..............................................................................................102
Conclusions..............................................................................................................103
iii
CHALLENGES OF AFRICAN GROWTH
Natural Resources—“Curse” and “Potential” ..........................................................103
Risks and Uncertainty ..............................................................................................105
Political Uncertainty and Conflict............................................................................108
Weak Institutional Capacity.....................................................................................114
The Financial Sector as a Constraint to Growth ......................................................116
Low Savings ............................................................................................................123
Conclusions..............................................................................................................127
Endnotes ..................................................................................................................128
Chapter 5: Tackling the Challenges of African Growth.....................................129
Introduction..............................................................................................................129
Lessons from 45 years of Africa’s Growth Experience ...........................................131
Changing Contexts and Emerging Opportunities.....................................................133
The Changing International Economic Environment—New Opportunities
and New Challenges .........................................................................................137
Opportunities and Options for Growth Strategies....................................................139
The Key Strategic Challenges..................................................................................141
Innovation to Underpin Productivity Growth and Competitiveness ........................149
Mobilizing Resources for Growth............................................................................170
Conclusions..............................................................................................................179
Endnotes ..................................................................................................................180
Annex 1 ...................................................................................................................183
References...............................................................................................................197
List of Tables
Table 1.1.
Table 2.1.
Table 2.2.
Table 3.1.
Table 3.2.
Table 3.3.
Table 3.4.
Table 3.5.
Table 3.6.
iv
Regional Growth Comparisons ............................................................25
Growth and Selected Indicators in African Countries
Categorized by Opportunity Groups.....................................................39
Predicted Shares of Economic Structure (Percent) at
Selected Levels of Income per Capita ..................................................46
Sources of Growth, Regions, 1960–2003 .............................................51
Sources of Growth, Africa, 1960–2003................................................53
Productivity of Investment—Returns ...................................................57
Contributions of Individual Components of Drivers of Growth toward
Explaining Deviation of SSA’s Predicted Growth Relative to the Sample
Mean, EAP and SA, for the Period 1960–2004 ...................................73
Evolution of Individual Contributions of Drivers of Growth toward
Explaining Deviation of SSA’s Predicted Growth Relative to the Sample
Mean, EAP and SA, by Periods ...........................................................77
Contributions of Various Factors Influencing Growth
TABLE OF CONTENTS
Table 3.7.
Table 4.1.
Table 4.2.
Table 4.3.
Table 4.4.
Table 4.5.
Table A.1.
at the Country Level .............................................................................81
Evolution of Contribution to Deviation from Sample Mean
at the Country Level .............................................................................82
Interregional Comparison of Geographical and
Sovereign Fragmentation Indicators.....................................................88
Age-Dependency Ratios.......................................................................94
Socioeconomic Indicators, 2004...........................................................95
Fiscal Policy Indicators for Selected Regions ....................................107
Indicators of Financial Development Regional Comparison..............117
Regression Results .............................................................................194
List of Figures
Figure 1.1.
Figure 1.2.
Figure 1.3.
Figure 2.1.
Figure 2.2.
Figure 2.3.
Figure 2.4.
Figure 2.5.
Figure 2.6.
Figure 2.7.
Figure 2.8.
Figure 2.9.
Figure 3.1.
Figure 3.2.
Figure 3.3.
Figure 3.4.
Figure 3.5.
Figure 3.6.
Figure 3.7.
Figure 3.8.
Figure 3.9.
Figure 3.10.
Figure 3.11.
Figure 3.12.
Figure 3.13.
Figure 3.14.
Figure 4.1.
Figure 4.2.
Figure 4.3.
Figure 4.4.
Comparative per Capita Income Growth Paths:
Sub-Saharan Africa vs. Other Regions...................................................5
Per Capita Incomes in 2004 Relative to 1960.........................................6
Similar Opportunities, Different Strategies, Different Results ...............7
Smoothed Average Growth in Real GDP per Capita ...........................28
Average Growth Rates, by Income Categories in SSA ........................30
Average per Capita Growth Rates ........................................................31
Smoothed Average Growth in Real GDP per Capita ...........................32
GDP per Capita—SSA and Other Regions, 1960–2004.......................33
Smoothed Average Growth in Real GDP per Capita ...........................34
Growth Rates in SSA............................................................................35
SSA's Smoothed Average Growth in Real GDP per Capita .................36
Growth Experience of Countries in SSA..............................................37
Energy Costs and Power Outages.........................................................60
Shares of Firms Owning Generators ....................................................61
Days to Clear Imports and Exports.......................................................62
Inspections and Management Time Spent Dealing
with Regulations...................................................................................62
Crime, Unofficial Payments, and Securing of Contracts......................63
Cost Structures, Firm-Level Average by Country ................................65
Net and Gross TFP, Adjusted Prices ....................................................67
Current Firm Size vs. Access to University Education.........................69
Percentage of Firms Receiving Credit..................................................70
Regression-Based Decomposition of Periodical Growth Rates............75
Regression-Based Decomposition of Periodical Growth Rates............75
Regression-Based Decomposition of Periodical Growth Rates............76
Evolution of Contribution of Policy .....................................................79
Evolution of Contribution of Shocks....................................................79
Sub-Saharan Africa Geographical Distribution....................................89
Demographic Transition Information ...................................................97
HIV Prevalence (%) in Adults in Africa, 2005...................................101
Age Distribution of Deaths in Southern Africa ..................................102
v
CHALLENGES OF AFRICAN GROWTH
Figure 4.5.
Figure 4.6.
Figure 4.7.
Figure 4.8.
Figure 4.9.
Figure 4.10.
Figure 4.11.
Figure 4.12.
Figure 4.13.
Figure 4.14.
Figure 4.15.
Figure 4.16.
Figure 5.1.
Figure 5.2.
Figure 5.3.
Figure 5.4.
Figure 5.5.
Figure A.1.
Figure A.2.
Figure A.3.
Figure A.4.
SSA's Smoothed Average Growth in Real GDP per Capita ...............104
Inflation Trends: Regional Comparisons, 1971–2004 ........................105
Regional Inflation: 1971–2004...........................................................106
Countries in Civil War........................................................................111
Financial Development in SSA ..........................................................118
Median Spread—Regional Comparison .............................................119
Access to Finance: Africa Relative to other Regions .........................120
Access to Financial Capital ................................................................121
Portfolio Allocation Trends................................................................122
Saving Trends: Regional Comparison by Decade ..............................124
Saving Trends in SSA, 1980–2004.....................................................125
Savings Decomposition ......................................................................127
Share of Countries with Competitively Elected
Chief Executives ................................................................................136
World Trade Trends ...........................................................................137
Developing Countries’ Exports ..........................................................138
ICT Investment Impact on Competitiveness ......................................153
Education Investment Impact on Competitiveness.............................156
Smoothed Average Life Expectancy at Birth .....................................185
Demographic Indicators .....................................................................186
Policy Variables Over Time ...............................................................190
Telephone Lines (per 1,000 People)...................................................191
List of Boxes
Box 2.1.
Box. 2.2.
Box 4.1.
Box 5.1.
Box 5.2.
Box 5.3.
Box 5.4.
vi
Different Development Strategies—Very Different Results:
Mauritius versus Côte d’Ivoire .............................................................40
Contrasting Growth Paths of Two Landlocked Resource Countries:
Botswana and Zambia ..........................................................................42
The Demographic Transition and Family Planning in Ethiopia .........100
Technology, Adaptation and Exports:
How Some Developing Countries Got It Right ..................................151
ICT Helping Improve Financial Services in Africa............................155
Banking Sector and Savings Mobilization in Zambia ........................173
Some Initiatives to Expand Access and
Encourage Enhanced Savings.............................................................175
Preface
Recent years have seen renewed international attention on Africa, which,
despite recent successes in terms of increases in economic growth, reduced
conflict, expanded political liberalization and substantial improvements in
governance, remains the continent where poverty is the deepest. It is now widely
accepted that reduction in poverty and achievement of the Millennium
Development Goals requires further acceleration of economic growth, especially
in those countries with large populations where growth had been elusive. The
experiences of East and South Asia have demonstrated that sustained, povertyreducing growth is possible, and these experiences have been echoed across a
number of African countries as well over the past decade.
This study reviews the forty-five years of economic growth in Africa and
elsewhere in the world and distills that experience into a set or policy
recommendations for economic practitioners in Africa. Of course, the
geographic, institutional and historical situations of each of Africa’s forty-eight
countries are very diverse, so the general principles provided here can only serve
as a guideline for deeper country-specific analysis on opportunities and
challenges to accelerated shared growth. Nevertheless, I believe the analysis
presented in this study can help establish the questions and areas of inquiry for
practitioners examining this profound and critically important issue in their
specific country setting. The African people deserve a future of increased
prosperity that they have been denied by bad policy choices in the past.
Gobind Nankani
Vice President
Africa Region
vii
Acknowledgments
This study is a second in a series of regional flagship reports that the
Africa Region is producing on a variety of economic issues to help clarify
opportunities, constraints and strategic directions for African development. It is a
product of a team led by Benno Ndulu, and assisted by Lopamudra Chakraborti,
Lebohang Lijane, Jerome Wolgin and Vijaya Ramachandran. Ms. Ramachandran
also prepared the background paper that became the basis for a major portion of
the section on assessing constraints to growth at the firm level while Abdoulaye
Tall prepared a short paper for the sections on conflict and its costs to growth.
The team wishes to thank Mr. Gobind Nankani, Vice President, Africa
Region, who has personally reviewed the overview of this book and earlier on,
provided some guidance for the penultimate chapter on strategic options for
growth. The team also wishes to thank Mr. John Page, Chief Economist, Africa
Region for substantive guidance and encouragement throughout the preparation
of this work.
This study has benefited from numerous comments, suggestions, and
recommendations at different stages of its preparation. The team would like to
thank in particular the African Economic Research Consortium, the silent partner
in this work, for allowing the team to draw from its very impressive and in-depth
African growth research. Steve O’Connell more specifically in this connection
has provided unwavering support for the study from its inception and is very
much substantively present in this work through the joint work on African
growth he has done with the leader of the team, Benno Ndulu.
Very useful inputs were also received from Bank country economists
involved in growth diagnostic work in Africa, who earlier on reviewed the
concept note for this work and were of tremendous help in underpinning areas of
critical importance to the challenge of African growth. In this regard, the team
specifically thanks Victoria Kwakwa, Robert Johann Utz, Dino Leonardo
Merotto, Robert Keyfitz, Mathurin Gbetibouo, Praveen Kumar, Wilfried
Engelke, Douglas Addison, Preeti Arora, Lolette Kritzinger-van Niekerk, Jos
Verbeek , Benu Bidani, Jeni Klugman, Karim El Aynaoui, Christina Wood, Peter
Moll, Emmanuel Pinto Moreira, Jacques Morisset, Keiko Kubota and Carlos
Cavalcanti.
The team is particularly grateful to the peer reviewers, namely Sudhir
Shetty (Director, AFTPM), who also chaired the Bank-wide review meeting for
the study; Alan Gelb (Director, Development Policy, DECVP), Roberto Zhaga
ix
CHALLENGES OF AFRICAN GROWTH
(Chief Economic Adviser, PREM) , Vivien Foster (Lead Economist, AFTP1),
and Vikram Nehru (Director, PRMED), who provided detailed comments and
guidance for revising earlier drafts. Their inputs have helped hone the focus of
the study. The advice and suggestions of those who attended the review meeting,
particularly Demba Ba, Kathie Krumm, Yvonne Chikata and Mark Blackden and
written comments from AFR staff, especially Louise Fox and Jorge Arbache, are
also acknowledged with gratitude.
Earlier findings of the study were presented at various fora, in particular,
at a DFID workshop on growth in London; at Chattam House in London, United
Kingdom and at an AERC Special Senior Policy seminar in Kigali to discuss the
results from the AERC Growth Research project. The constructive
recommendations from these meetings have been invaluable.
On the production side, Mr. Richard Crabbe and his team have provided
tremendous help for ensuring efficient production of this book. He advised on
practical issues such as editing, typesetting, printing, and publishing. The team
also wishes to thank Grammarians, who edited this book, the cover designers,
Naylor Designs, and the printers, Edwards Brothers.
Finally, Patricia Bunzigiye and Yanick Brierre deserve special mention
for the time and effort they have devoted in providing administrative support for
the preparation and production of this book. Their efforts ensured that this work
came to a successful conclusion.
x
Executive Summary
This report is one of a series of “Flagship Studies” intended to help
clarify the opportunities, constraints, and strategic directions facing Africa and its
partners as they attempt to accelerate economic growth to reduce poverty and put
Africa on a path toward meeting the Millennium Development Goals (MDGs). It
is part of the analytic work promised in a plan entitled “Meeting the Challenges
of Africa’s Development,” also known as the African Action Plan (AAP),
discussed at the World Bank Board in 2005. The AAP has a strong focus on
“increasing shared growth,” and recommends several actions by the World Bank
that will support accelerating growth. Offering both a long-term approach and
country-specific analysis, the report recommends learning from history and from
diverse experiences to guide countries’ growth diagnostic work and strategies for
scaling up growth. The World Bank’s Africa Region intends to provide further
studies in this series that will examine several of the areas critical to growth in
much greater depth. A study on financial markets is nearing completion. Another
on infrastructure is being drafted.
Substantively, this report draws lessons from 45 years of growth
experience in Africa and around the world, providing an important repository of
lessons learned to shape growth strategies in Africa. It is influenced by, and
builds upon, three major studies—The Political Economy of Economic Growth in
Africa, 1960–2000, conducted under the African Economic Research Consortium
(AERC); Can Africa Claim the 21st Century?, produced collaboratively between
the World Bank and African partner institutions; and the World Bank’s study,
Economic Growth in the 1990s: Learning from a Decade of Reform, which draws
from in-depth reflection on growth experiences by respected practitioners.
The current report will seek to answer three key issues: (1) the
opportunities and hence, options for growth available to the diverse range of
African countries; (2) the major constraints to exploiting these opportunities; and
(3) the strategic choices to be made by African governments as well as by
development partners, including the World Bank, in supporting actions taken by
African countries.
The distinguishing characteristic of this study is its long-term
perspective, together with its analysis and description of the African growth
experience from 1960 (the time when most African countries became
independent) to the present. Although there are some commonalities among
countries, the growth experiences are also quite diverse, with a few countries
experiencing consistent long-term growth, a few experiencing long-term
xi
CHALLENGES OF AFRICAN GROWTH
stagnation and decline, and the majority experiencing growth between 1960 and
1973, decline between 1974 and 1994, and renewed growth since 1995. This
long-term perspective explains the current situation in which African countries,
for the most part, find themselves—low levels of per capita income and high
levels of poverty.
Six countries have more than tripled their per capita incomes between
1960 and 2005, nine countries have per capita incomes equal to or less than
where they started in 1960 and the rest have seen some net improvement, but not
enough to make a real dent in poverty levels. Many countries seen as fast
growers in 1970, such as Côte d’Ivoire, flamed out and have found themselves
stagnating or declining during the past 30 years. The critical point is that
frequently, over the long term, the tortoise beats the hare. Steady progress and
consistent performance, in good times as in bad, are the watchwords. Many
African countries made policy choices in 1974 that continue to haunt them today,
whereas a few are experiencing the blessings of different choices made at the
same time.
The report draws six key lessons to inform the growth strategies in SubSaharan Africa.
xii
•
African countries’ growth experience is extremely varied and
episodic. From a regional strategic perspective, addressing two
challenges peculiar to the region is the key to success—the slow
growth of large countries and the extreme instability of growth
across a large number of African countries. Countries with large
populations, such as the Sudan, the Democratic Republic of Congo,
Nigeria, and Ethiopia, will have to grow more rapidly and on a more
sustained basis to improve the livelihood of a “typical” African and
to generate regional traction through positive spillover effects,
similar to the experiences in Southern Africa and East Asia. Another
cross-cutting challenge for the region is how to best manage
responses to shocks, particularly in the resource-rich countries, in
which their fortunes are currently closely tied to the fortunes of key
minerals in the world market.
•
Although lower levels of investment are important for explaining
Africa’s slower growth, it is the slower productivity growth that
more sharply distinguishes African growth performance from that
of the rest of the world. Investment in Africa yields less than half the
return measured in growth terms than in other developing regions.
This situation clearly calls for looking beyond creating conditions for
EXECUTIVE SUMMARY
attracting new investors to more explicitly pursuing measures that
help to raise productivity of existing and new investment. These
include reducing transactions costs for private enterprise, particularly
indirect costs; supporting innovation to take advantage of new
technological opportunities; and improving skills and institutional
capacity to support productivity growth and competitiveness. African
countries and populations are still highly dependent on agriculture
for food, exports, and income earning more broadly. Productivity in
this sector lags far behind the phenomenal progress made in Asia and
Latin America, and should be a key target for raising overall
productivity of African economies.
•
Consistent with much of the cross-country growth analysis,
evidence from the research reviewed earlier suggests that policy
and governance matter a great deal for growth. Taking 45 years of
African growth experience as a whole and controlling for differences
in the composition of opportunities, the impacts of poor policy have
been shown to typically account for between one-quarter and onehalf of the difference in predicted growth between African and nonAfrican developing countries. However, the evidence also suggests
that the importance of policy in explaining the growth differential
between African countries and others may have waned since the
1990s as a result of major reforms implemented in the region, which
have moved policy performance in African countries much closer to
the global average. Thus, whereas it is imperative for countries to
identify and address other binding constraints, sustaining these gains
in the improvement of the policy environment will have to be a
permanent feature of any growth strategy adopted by a country. In
particular, it means maintaining durable macroeconomic stability and
continued propping up of efficient market functioning.
•
Overcoming disadvantages arising from geographic isolation and
fragmentation, as well as natural resource dependence, will be
necessary if Africa is to close the growth gap with other regions.
Estimates show that taking actions to compensate for these
disadvantages may facilitate closing up to one-third of the growth
gap with other developing countries. With much higher proportions
of countries and populations in Africa being landlocked and resource
rich, it is necessary to compensate for these disadvantages, primarily
by closing the infrastructure gap and better managing and using
resource rents.
xiii
CHALLENGES OF AFRICAN GROWTH
xiv
•
Growth of trading partners’ economies has a very powerful
influence. The key transmission mechanisms are trade and capital
flows, requiring greater openness, strengthening capabilities for
taking advantage of the rapid growth in the global markets, and
improving the investment climate to make African countries better
destinations for global capital than in the past. On the side of trade,
evidence shows that integration with global markets is associated
with higher growth, underpinning the need for growth strategies to
emphasize scaling up and diversifying exports. Enhanced
competitiveness and reduced barriers to trade are the two critical
areas of action. It is important to note that although concerns with
border trade policies and facilities (for example, port capacity and
efficiency) are still crucial, increasingly, constraints such as
infrastructure, standards, and access to information have become
much more binding. A core part of any growth strategy, therefore,
will need to target reducing the costs of transacting trade—
particularly reducing supply chain costs, as well as the cost of trade
processes.
•
The analysis points to a very large role played by the delayed
demographic transition in Africa in explaining its relatively slower
growth performance. In all the empirical studies of the sources of
growth differences, the demographic variables consistently predict
two-thirds of the observed difference between average growth in
Sub-Saharan Africa and other developing regions. Two types of
consequences from this delayed transition are particularly important.
The first, and probably the biggest, challenge is the
uncharacteristically high level of age dependency, with its
implications on fiscal and household/parental pressure for taking
care of the overwhelming number of the young. The second relates
to the rapid growth of the labor force, potentially a positive driver of
growth but also possibly a negative force if employment
opportunities do not keep pace. The latter concern relates to the
growing potential instability from rapidly rising youth
unemployment. Whereas the strategy needs to address the
fundamentals of the slow demographic transition such as how to
speed up a reduction in fertility, appropriate actions are also needed
to increase employability of youth and expand opportunities to
engage in a growing private sector at home.
EXECUTIVE SUMMARY
This analysis then leads to a set of four specific pillars—areas where
investment is needed to accelerate growth. These four pillars are critical but not
comprehensive. They are as follows:
Improving the investment climate, mainly focused on reducing indirect
costs to firms (which are generally infrastructure related), with energy and
transportation topping the list of major impediments; and reducing and mitigating
risk, particularly those relating to security of property, such as poor adjudication
of disputes, crime, political instability, and macroeconomic instability. Although
effort in individual countries is the focal point of action, we also suggest pooling
efforts to develop cohesive investment areas by coordinating investment
promotion, coordinating policy, improving security, and increasing connectivity.
The second pillar is infrastructure, mainly targeting transactions costs
in production of goods and services. Transportation and energy make up the
largest proportion of indirect costs for businesses, weighing heavily on the
competitiveness of firms in most African countries in which investment climate
surveys were conducted. Particular focus would be on how to reduce the high
costs associated with the remoteness of landlocked countries to facilitate trade
with neighbors, as well as with the rest of the world. It is clear that there will be a
need to look beyond individual country borders and adopt a regional approach to
coordinate cross-border infrastructure investment, maintenance, operational
management, and use (for example, power pooling) to lower costs.
The third pillar is innovation, primarily emphasizing investment in
information technology and skill formation (higher education) for enhanced
productivity and competitiveness. The potential comparative advantage of low
wages in Africa can be nullified by low productivity. Surveys of investors show
that labor is not cheap where productivity is low. Information and
communication technology (ICT) is now the main driver for productivity growth.
There is strong empirical evidence that shows that investment in ICT and in
higher education boosts competitiveness, making both key parts of the growth
agenda. African countries can make a huge leap forward and over antiquated
technology by exploiting the ICT technological advantages as late starters.
The fourth pillar is institutional capacity. The results from the
investment climate assessment surveys and analysis for the World Development
Report (2005) identify costs associated with contract enforcement difficulties,
crime, corruption, and regulation as being among those weighing most heavily on
the profitability of enterprises. The main focus of action here would be partly to
strengthen the capacity of relevant public institutions for protecting property
rights, and partly to strengthen scrutiny of, and accountability for, public actions.
xv
CHALLENGES OF AFRICAN GROWTH
Building institutional capacity entails strengthening individual competencies,
organizational effectiveness, and rules of the game. Under this pillar, particular
attention should be paid to capacity and space for scrutiny of public action—
mainly within a framework of a strong domestic accountability system and
capacity to clarify and protect property rights to spur private enterprise. The key
strategic areas of action, therefore, include enforcement of contracts (for
example, commercial courts); exercise of voice as an agency of restraint—with
enhanced involvement of civil society, media, and parliament; enhanced revenue
transparency in resource-rich countries; and prevention of corruption as a
country-driven agenda—including checks and balances.
Applying these strategies in a specific country context is beyond the
scope of this study. Each country faces its own challenges and opportunities.
Each country has to work within its own historical and geographical resources
and constraints. Dealing with these specific situations is a subject of specific
analysis and beyond the scope of a generalized study such as this one.
Nevertheless, we hope that the ideas and approaches raised here will enable
analysts and policy-makers at the country level to approach their particular
challenges with a more informed sense of what may be important, and of what
has worked in the past in other situations.
xvi
1
Facing the Challenges of
African Growth: Opportunities,
Constraints, and Strategic Directions
INTRODUCTION
This report is one of a series of “Flagship Studies” intended to help
clarify the opportunities, constraints, and strategic directions facing Africa and its
partners as they attempt to accelerate economic growth in order to reduce poverty
and put Africa on a path toward meeting the Millennium Development Goals
(MDGs). It is part of the analytic work promised in a plan entitled “Meeting the
Challenges of Africa’s Development” (World Bank 2005), also known as the
African Action Plan (AAP). The AAP has a strong focus on “increasing shared
growth”. By undertaking a long term-approach and country-specific analysis, this
report combines learning from history and from diverse experiences to guide
country growth diagnostic work and strategies for scaling up growth. It is the
intention of the World Bank’s Africa Region to provide further studies in this
series that will examine several of the areas critical for growth in much greater
depth. A study on financial markets should be finished soon. Another on
infrastructure is currently being drafted.
Substantively, this report draws lessons from 45 years of growth
experience in Africa and around the world, providing an important repository of
lessons learned to shape growth strategies in Africa. It is influenced by, and
builds upon, three major studies—The Political Economy of Economic Growth in
Africa, 1960-2000, conducted under the African Economic Research Consortium
(AERC); Can Africa Claim the 21st Century (World Bank 2000), produced
collaboratively between the World Bank and African partner institutions; and the
World Bank (2005), Economic Growth in the 1990s: Learning from a Decade of
Reform which draws from an in-depth reflection on growth experiences by
respected practitioners.
1
CHALLENGES OF AFRICAN GROWTH
The AERC anchored a major African growth project, which is just
concluding with a two-volume series of books to be published by the University
of Cambridge Press. With 26 country studies covering more than 75 percent of
the region’s population, this project is by far the most comprehensive countrybased assessment of Africa’s growth experience to date. A number of country
teams had access to excellent recent country studies from the Equity and Growth
through Economic Research (EAGER) project—USAID supported—or the
Emerging Africa project, or both (Berthelemy and Soderling 2001, 2002)). Both
sets of studies contain sustained treatments of growth experiences at the country
level, and make in-depth use of cross-country literature.
Country case studies focused on two questions. First, how did policies
and shocks combine to produce the observed growth outcomes? Researchers
developed microeconomic evidence linking policies and shocks to the resource
allocation decisions of households and firms, and particularly to the scale and ex
ante efficiency of investment in human and physical capital. The second question
was: Why were these policies chosen? Researchers gathered information on the
beliefs of the political elite, the interests to which they responded, and the
institutions through which political competition was mediated (Ndulu and
O’Connell 2006).
The two major previous Bank studies of growth, Can Africa Claim the
21st Century (World Bank 2000) and Lessons of the 1990s (World Bank 2005),
present a good mix of analytical and policy experience insights about what
matters most for growth. Can Africa Claim the 21st Century? focused on four
pillars: (1) improving governance and resolving conflict; (2) investing in people;
(3) increasing competitiveness and diversifying economies: and (4) reducing aid
dependency and strengthening partnerships. In addition to building up on the
many points emphasized in the study, the current report emphasizes strategies
that are largely part of the second and third pillars—such as investing in tertiary
education, harnessing skills for innovation, and reducing behind the border
barriers to scaling up and diversifying exports.
The messages emerging from the Lessons of the 1990s emphasizes the
importance of country-specific growth diagnostics in identifying binding
constraints and what is needed to relieve them. This approach can best be
summarized by the following quote:
“The central message is that there is no unique universal set of rules.
Sustained growth depends on key functions that need to be fulfilled over time:
Accumulation of physical and human capital, efficiency in the allocation of
resources, adoption of technology, and the sharing of the benefits of growth.
2
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
Which of these functions is the most critical at any given point in time, and hence
which policies will need to introduced, which institutions will need to be created
for these functions to be fulfilled, and in which sequence, varies depending on
initial conditions and the legacy of history.” That spirit infuses this current report,
particularly in its discussion of the options and the process of making strategic
choices by a country.
The current report will seek to answer three key questions: (1) what are
the opportunities and hence, options, for growth available to the diverse range of
African countries; (2) what are the major constraints to exploiting these
opportunities; and (3) what are the strategic choices to be made by African
governments, as well as by development partners, including the Bank, in
supporting actions taken by African countries.
It is important to emphasize up front the diverse history, opportunities,
and current growth conditions in different African countries, and how these make
any growth strategy, first and foremost, a country-specific task. This has become
much more pertinent as Africa’s income and policy landscape has become
significantly more diverse in the last decade and a half. There are now 13 middleincome countries (MICs) in Sub-Saharan Africa, which although they host only
13 percent of total SSA population, account for 66 percent of all incomes earned
in the region. Seven of these MICs are in the lower middle income country
group1 (per capita incomes between $826 and $3255) and the other six are in the
upper middle income countries group2. With the exception of South Africa and
Mauritius, none of the others were in this category in 1960. Out of the 13 middle
income countries 7 have acquired their current status largely on account of their
mineral wealth, including oil. Not all oil or other mineral producers, however,
have progressed to this group. For example, Nigeria, Sudan and Zambia remain
low-income countries.
The rest of the countries (35), which host 87 percent of all Sub-Saharan
Africans are in the low income country category and account for one third of all
income generated in the region. The diversity of growth performance among
these is also striking as we will elaborate later.
POVERTY IN AFRICA LARGELY A GROWTH CHALLENGE
Poverty is increasingly assuming an African face, and eradicating it has
become a predominantly African challenge. Although the region currently
accounts for only 10 percent of the world’s population, it now accommodates 30
percent of the world’s poor. The world as a whole has made remarkable progress
in reducing extreme poverty over the last three decades, cutting it by nearly two3
CHALLENGES OF AFRICAN GROWTH
thirds between 1970 and 2000. In contrast, the trend in Sub-Saharan Africa has
been in the opposite direction, increasing from 36 percent of the population in
1970 to 50 percent in 2000. As a result, one in two Africans (or 300 million
people) is poor, spending less than $1 a day on basic necessities of life. This
proportion is twice as high as the world average, and the number of the poor is
twice as high as it was in 1970.
Africa’s slow and erratic growth performance, particularly when
compared to the other developing regions, has been identified as the single most
important reason behind its lagging position in eradicating poverty. Already by
the 1950s, African incomes, which had gained considerable ground in relative
terms since 1913, had begun to diverge markedly from incomes elsewhere in the
developing world (Maddison 2004). This divergence increased sharply when
African populations completely missed out on the economic transformation that
took place in the developing world—particularly in Asia—in the second half of
the 20th century (Ndulu and O’Connell 2006a).
For the 45 years since 1960, African income per head grew at about onefifth of the average rate for other developing countries (0.5 percent versus 2.5
percent). Although in 1960, per-capita incomes for Africa and East Asia were
virtually the same, as a result of this growth difference, by 2003 the GDP per
capita in East Asia was five times higher than that in Africa (Figure 1.1 and table
1.1). Even when measured in purchasing power parity (PPP) adjusted terms, in
1960, African incomes per capita were more than two-thirds of those of East Asia
and Pacific; by the end of the 20th century, African incomes were less than onefourth (Ndulu and O’Connell 2006a). Data also suggests a sharper divergence of
incomes between African and non-African populations than between African and
non-African countries. The larger divergence is mainly because of the relatively
rapid growth of very populous countries such as China, India, and Indonesia in
Asia. In contrast, the large countries in Africa, including Democratic Republic of
Congo, Ethiopia, Sudan, and Nigeria, have on average grown more slowly than
smaller ones.
The growth experience is also quite diverse within Africa. Taking a long
term trend look, countries have distinguished themselves in terms of how much
their income per head has grown over the 45 years period. Figure 1.2 depicts the
wide variation in the progress made by 40 African countries, for which we have
complete data. Each country’s progress in per capita income since 1960 is
measured by the ratio of per capita income in 2004 to that in 1960 (in 1996
international dollars). There is a group of 9 countries, whose income per capita
4
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
East Asia & Pacific
785
Low income
Sub-Saharan Africa
2000
1996
1992
1988
1984
1980
1976
1972
1968
208
124
1964
900
800
700
600
500
400
300
200
100
0
1960
GDP per capita index, 1960=100
Figure 1.1. Comparative per Capita Income Growth Paths: Sub-Saharan Africa
vs. Other Regions
has actually regressed relative to the levels in 19603. Surprisingly, only 2 among
these are countries that have suffered from prolonged conflict (Angola and Sierra
Leone). The rest appear to have had long periods of very slow growth or to have
suffered prolonged crises as they struggled to climb out of the shocks suffered
during the late 1970s.
Several of the middle income countries experienced rapid growth
through a large part of the 45 year period ending up with per capita incomes
several multiples of the initial 1960 levels of per capita income. The rest of the
countries are bunched in a narrow range between stagnation (ratio of 1) and a
doubling of income per capita over a 45 year period—a relatively low
achievement by global standards. Most of these experienced economic stagnation
for two decades between mid 1970s and mid 1990s, usually after respectable
growth performance in the previous decade and a half. For countries like Uganda
and Ghana rapid growth during the last 15 years have enabled them to more than
recoup the severe losses in income suffered during the previous two decades. As
expected differences in average growth rates match the differences in the
progress made in terms of per capita incomes.
5
CHALLENGES OF AFRICAN GROWTH
Figure 1.2. Per Capita Incomes in 2004 Relative to 1960
Average growth rate, 1960-2004
0
2
4
6
BWA
CPV
LSO
MUS
GAB SYC
COG
-2
UGA
MRT
TZA
MWI
SDN
KEN
BFA
GMB
CMR
ZAF
TGO
NGA
NAM TCD
ETH
BEN
MOZ
RWA
CIV
BDI
GIN
MLI GHA
SEN
AGO
COM
ZMB
CAF
SLE
GNB
MDG
NER
ZAR
0.00
2.00
4.00
6.00
8.00
Ratio of per capita income in 2004 to per capita income in 1960
10.00
What is also striking is that countries with very similar opportunities also
have very different growth experience and outcomes depending on the strategies
pursued and the policy disposition adopted. Figure 1.3 presents two examples of
very striking contrasts of growth paths between Botswana and Zambia, both
landlocked resource rich countries; and between Mauritius and Côte d’Ivoire
both coastal resource poor countries and initially both primary commodity
dependent. The two stories are elaborated in chapter 2 but suffice it to mention at
this stage that differences in the long term strategies adopted in exploiting similar
opportunities ended up with Botswana and Mauritius being in the upper Middle
income countries and on the other hand Zambia’s and Côte’d’Ivoire’s per capita
income have hardly progressed relative to their levels in 1960.
6
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
Figure 1.3. Similar Opportunities, Different Strategies, Different Results
Income per capita
15441
10000
15000
PPP adjusted, 1996 international $
5000
Mauritius
3084
1624
Cote d'Ivoire
0
1606
1960
1970
1980
year
1990
2000
Income per capita
10000
PPP adjusted, 1996 international $
2000
4000
6000
8000
8936
Botswana
1167
902
Zambia
0
984
1960
1970
1980
year
1990
2000
The last decade and a half has seen a particularly sharp increase in the
diversity of growth performance and indeed in the way countries have positioned
themselves for the future. Seventeen African countries, though still in the lowincome group, have sustained annual growth rates exceeding 5 percent for more
than a decade now, and have set the groundwork for faster and more diversified
growth in the future. The challenge for this group of countries is to harness
opportunities for increasing growth rates to 7 percent or higher, needed for
achieving the MDGs. Other countries are in, or just emerging from, conflict, such
7
CHALLENGES OF AFRICAN GROWTH
as Somalia and Liberia, and typically have lost significant ground in terms of
income levels relative to the early 1960s. For the countries that have experienced
limited success, the challenge is to learn from the experiences of higher-growth
countries about what works and what does not, and implement the changes
needed to get growth started.
These growth differentials are also reflected in the differences of the
status of human development. For example, Ndulu and O’Connell (2006a) show
that within SSA, an increase in the long-run growth rate of real GDP per capita
by 1 percent was associated with an increase in an index of cumulative human
development of nearly one-half percent. Table 1.1 provides a snapshot
comparison of human development, first at the outset of the 1960-2000 period,
and then at the end (O’Connell and Ndulu 2000). With the exception of the
primary enrollment rate, which was already high outside of Africa in the early
1960s, Africa has fallen further behind the rest of the developing world.
However, the shortfall was not as severe for non-income measures as it
was for income poverty, partly reflecting the relatively greater focus of national
strategies and development assistance on human development in the 1970s and
again in the 1990s. The latter phase followed the steep erosion of the gains in
social development during the 1980s, due primarily to the failure to raise and
maintain the growth of per-capita incomes necessary for sustaining the earlier
achievements. By 2000, Africa exceeded the levels of primary enrollment, adult
literacy, and life expectancy that had prevailed elsewhere in 1960.
There is also a close link between income and another dimension of
poverty preponderant in Africa—undernutrition. A recent IFPRI study
(Discussion Paper 137) on the causal relationship between income and
undernutrition concludes that sustained income growth can produce a sizeable
reduction in undernutrition. The study estimates, for example, that a sustained 2.5
percent growth in per-capita income maintained over the next decade would
reduce undernutrition by a range of 27 percent to 34 percent by 2015, depending
on what happens to community and household infrastructure.
A growing body of evidence confirms that it is not simply higher growth,
but higher shared growth, that is more effective in accelerating poverty reduction.
While there is wide variation across countries in this relationship, there is
undeniable evidence that inequality has a major influence on the efficacy of
growth in reducing poverty. For example, a typical (median) country that
experienced both growth in the average living standards and falling inequality
was able to reduce poverty seven times faster than one that experienced growth
8
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
with rising inequality (Ravallion 2001). This relationship also holds for countries
suffering declines in living standards.
Although this report will not focus on the distributional consequences of
growth, there is need to pay greater attention to this dimension of poverty
reduction to complement the impact of accelerating growth, particularly by
enhancing the income-earning opportunities for the poor more than for other
income-earning segments, or by enabling their greater participation in the growth
process.4
BREAKING OUT OF THE LOW-GROWTH SYNDROME—A
DAUNTING TASK BUT A REAL POSSIBILITY
There is no doubt that the growth challenges faced by African countries
are daunting. However, they are not insurmountable. The experience of Asian
countries over the last three and a half decades, in particular, shows that countries
can break out of the poverty trap, embark on sustained growth, and experience
rapid gains in living standards. More recently, Asian countries have also been
able to overcome a financial crisis and resume robust growth.
Africa’s own record provides similar examples. Mauritius, Botswana,
and Seychelles have maintained per-capita income growth rates above 3 percent
for nearly four decades, making major strides in improving living standards and
placing them in the group of middle-income countries. Sub-Saharan Africa as a
whole experienced quite robust growth between 1960 and 1973, when its percapita income grew at an annual average rate of nearly 3 percent, and it is
capable of regaining that pace of economic progress as the recent resumption of
rapid growth in the region has shown. Since 1995, more than one-third of the
countries in SSA are growing at average rates exceeding 5 percent annually.
Several others have shown themselves to be capable of short spurts of high
growth. The challenge for them is how to sustain such a pace for longer periods.
As late starters, African countries have a possibility of accelerating the
pace of economic progress, provided they can create the right conditions to
exploit the advantages information-based technology offers to enhance
productivity and competitiveness and learn lessons from successful growth
experiences. The 2006 Global Competitiveness Report (World Economic Forum,
2006) presents striking evidence to conclude that investment in higher education
and in information and communication technology (ICT) boosts competitiveness.
Countries across the world seem to have sharply distinguished themselves in
these terms.
9
CHALLENGES OF AFRICAN GROWTH
Starting late also has its disadvantages. In particular, Asia’s recent
success presents a huge challenge to the competitiveness of Africa. Countries in
the region will have to learn in the face of intense competition. As we will see in
greater detail later in this report, several African firms already have shop floor
costs that are comparable to or competitive with those in China, but quickly lose
that advantage to huge differences in indirect costs, largely infrastructure related.
With appropriate investments and improvement in infrastructure services, such a
gap can be closed. Indeed, combined with lower-cost labor, a reduction in
indirect costs and improvement in skills would enable African countries to
compete more effectively in the global market.
The difficulty most countries will face in getting started on a highgrowth path partly relates to the wide range of constraints they face, given their
limited fiscal space and institutional capacity. The challenge is made more
daunting by the need for a big push to offset or mitigate the disadvantages of
Africa’s “unfavorable” endowments or break out of apparent poverty traps. As
more countries attain prosperity, however, the power of example and emulation
will naturally spread, underscoring the importance of positive regional spillover
effects and the need to exploit cross-country strategic complementarities in the
development agenda.
And leadership is crucial for success. Recent research demonstrates the
importance of leadership in achieving and sustaining growth. Glaeser, et al.
(2004), find that in an initially poor economy, economic growth since the 1960s
has to a significant extent been a consequence of having the right leader. The
authors establish that in the post-1960 growth record, the impact of leaders has
been huge and widely dispersed, implying that some leaders have been associated
with rapid growth, while others have not. They show that good leaders
accumulate capital, avoid wars, and are rewarded with longer tenure, particularly
in countries with higher educational achievements. Using the Indian post 1980
growth experience, Rodrik and Subramaniam (2004) demonstrate the importance
of the attitudinal disposition of leadership toward markets and business for
growth in a country context. Jones and Olken (2004), citing Easterly, et al.
(1993), find robust empirical evidence that national leaders, particularly in
autocratic settings, matter in explaining shifts in growth. They do so either
directly, through influencing the policy environment, or indirectly, through
shaping institutions. (Ndulu 2006b). Much as the occurrence of good leadership
is still widely shown to be a matter of chance, increasingly, analytic work is
pointing toward the importance of political competition, transparency, and strong
domestic accountability not only in raising the chances of having good leadership
emerge, but also to having it be sustained.
10
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
THE REPORT─OVERVIEW
Africa’s slow growth over the last half of the 20th century is accounted
for by two primary factors: a relatively low rate of capital accumulation, and a
low growth rate of productivity for the investments that are made. Slightly less
than half of Africa’s growth difference with the other developing regions is due
to slower accumulation of physical capital; slightly more than half is accounted
for by the slower growth in productivity. Investment levels since the 1960s have
remained relatively low in Africa, with their share of GDP averaging only half
that in the rest of the developing world. Furthermore, for similar levels of
investment, African economies have on average achieved only one-third to onehalf of the growth achieved in other developing regions.
The analysis of the sources of growth, discussed in greater detail in
chapter 2 points to the central role of poor investment incentives, including low
returns. A substantial part of the report will therefore explore three sets of
constraints that are behind poor incentives for accumulation and relatively slow
productivity growth in the region: geography, demography, and policy and
institutions.
The first set are constraints that are part of Africa’s endowments—long
distances from markets, tropical climates and soils, small markets, few navigable
rivers, etc. More than 90 percent of Sub-Saharan Africa lies within the tropics,
where the burden of disease is high and impacts negatively on life expectancy,
human capital formation, and labor force participation (Artadi, and Sala i Martin
2003). This compares to 3 percent of OECD countries and 60 percent of East
Asia. SSA is highly fragmented—48 small economies with a median-size GDP
of $3 billion (Wormser 2004). On average, each country shares borders with four
countries, often with different trade and macroeconomic policy regimes. Forty
percent of the population lives in landlocked countries with high transportation
costs and poor trade facilitation. These constraints cannot be changed, but can be
compensated for through public and private actions, such as improving
infrastructure to effectively reduce distances or integrate markets; introducing
anti-malaria programs to contain the tropical disease wreaking havoc on life
expectancy and sapping strength from the labor force, etc.
The second set of constraints relates to Africa’s slow demographic
transition, which has put considerable pressure on public and private investable
resources. Demographic transition began late in Africa and is proceeding at a
slower pace than that experienced in other regions of the world. Fertility rates
began declining in Africa around the mid-1980s, compared to the 1950s for Latin
America and 1960s for Asia, and appear to be proceeding more slowly than in
11
CHALLENGES OF AFRICAN GROWTH
the other regions (Lucas 2003). Uncharacteristically high levels of age
dependency have created fiscal and household pressure to care for the
overwhelming number of the young, (as well as achievement of the MDGs). The
rapid increase of the labor force, although potentially a positive contributor to
growth, can turn negative if employment opportunities do not keep pace, leading
to instability from agitation by the rapidly rising numbers of unemployed youth.
Although measures can be taken to help accelerate the demographic transition,
the changes in basic demographics are likely to remain slow relative to the
medium-term frame of growth outcomes considered here. There will therefore be
a need to complement efforts to accelerate reduction in fertility with carefully
considered measures to compensate for some of the consequences of the delayed
demographic transition, such as paying particular attention to enhancing
employability of youth through vocational training and job creation. This is an
area where much more analytical and policy attention is needed.
The third set of constraints is largely historical, institutional, or policy
related, and can be acted upon in the context of public policy. These constraints
affect investment incentives through reducing risk-adjusted returns to investment,
and hence raising the hurdle rates for those seeking to invest in the region; raising
transactions costs affecting profitability of enterprises, as well as competitiveness
of products; and limiting absorption and constraining productivity growth due to
capacity shortfalls.
The scope of action is largely in the policy sphere. We emphasize in this
report two dimensions of policy action: avoiding policy distortions (“sins of
commission”) and addressing the issue of underprovision of public goods to
support the growth process (“sins of omission”). The first dimension includes
actions needed for sustained macroeconomic stability, maintaining a prudent
exchange rate policy to support export-led growth, and improved market
efficiency to spur private sector initiatives and enterprise. The second dimension
includes ensuring good governance and bureaucratic efficiency, and effective
provision of those goods and services that the private sector alone would not
provide adequately, such as infrastructure or protection of commons.
The menu of ideas proposed in this report for country growth strategies
relate largely, though not entirely, to the third set of constraints. These include a
proposed set of actions that are more likely to help reduce risk and transactions
costs while increasing institutional capacity. These actions are:
• Improving the investment climate by reducing and underwriting
risk, as well as increasing the security of property
12
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
• Embarking on a “Big Push” in infrastructure investment, with a
particular emphasis on transportation and energy to partly compensate
for disadvantages arising from Africa’s unfavorable geography,
reduce transactions costs, and improve firm-level profitability
• Promoting innovation by investing in ICT and higher education to
increase competitiveness in the global knowledge-based economy
• Increasing institutional capacity by a targeted emphasis on a few
priority areas: enforcement of contracts, greater exercise of voice,
enhanced revenue transparency in resource-rich countries, and
reduction of corruption through a country-driven agenda
The rest of this report elaborates on how these areas of strategic action
have been identified and offers a menu of ideas that individual countries can use
in developing growth strategies. The diversity of conditions and history precludes
a strategy that fits all African countries because the above-mentioned constraints
do not apply equally to all. Rather, the lessons drawn from the growth
experiences analyzed in this report would be helpful in narrowing down the
scope and process of searching for the most binding constraints and deciding
what to do about them.
As stated earlier, the 48 countries of Sub-Saharan Africa range from
sophisticated, middle-income countries such as South Africa, to failed states such
as Somalia; from large, oil-rich countries such as Nigeria, to small, resource-poor
countries such as Niger; from countries that have come out of conflict and have
experienced tremendous recent success, such as Mozambique and Rwanda, to
countries that seem trapped in conflict, poverty and poor governance, such as
Somalia. Each country situation is unique and requires specific analysis of
constraints and opportunities. However, the experiences that we distill in this
study can provide some information on strategic directions that have proven
profitable to other developing countries, and that should be examined by analysts
and practitioners seeking to accelerate growth in specific situations.
It is also true that a report of this type can neither be comprehensive nor
contain detailed policy prescriptions for each setting. We have chosen to
emphasize those strategic choices that are most closely associated with
energizing private investment in the short- to medium-run, and with fostering
efficiency and competitiveness as preconditions for export-led growth. Despite
their importance, we will touch only lightly on a number of sectoral issues such
as human resource development, agriculture, and gender, and encourage more indepth work in the context of the “flotilla” of regional flagships mentioned at the
outset.
13
CHALLENGES OF AFRICAN GROWTH
Chapter 2 benchmarks African long-term growth performance in a
global perspective, and elaborates on the key features and patterns of this growth
experience. Our particular interest is to highlight cross-country and temporal
diversity, emphasizing demographic and other features that differentiate African
growth patterns from those of other developing regions. Two broad features of
the African growth record stand out. Growth in most African countries has been
more episodic than in other developing regions. A distinct characteristic of the
African long term growth experience is its historical U shape featuring a deep
and prolonged contraction of growth during 1974-1994, a period sandwiched
between moderately high growth rates of the 1960s and post mid 1990s. Most of
the African countries experienced this pattern with many of them binning their
post-independence years with about a decade of fairly robust growth before
experiencing its collapse, largely beginning in the second half of the 1970s and
lasting until 1995, followed by a subsequent recovery (Pritchett, 1998). The clear
exceptions here are Botswana and Mauritius, which maintained fairly high rates
of growth even by global standards throughout the 45-year history reviewed here.
It is noteworthy that during the last decade and a half, there has been much
greater diversity of growth performance across African countries.
Another distinct feature of Africa’s growth record highlighted in this
chapter is its juxtaposition with a population explosion. In contrast to other
developing regions, Africa embarked on a slow demographic transition only in
the mid-1980s. Total fertility rates fell sharply outside of Africa, while remaining
virtually unchanged within Africa for two and a half decades after independence.
Population growth rates therefore diverged sharply, and from the early 1970s
through the remainder of the century, African populations grew more rapidly
than the non-African developing world had grown at its peak, and age
dependency across most African countries continued to rise sharply. It is
therefore not surprising that differences in per-capita incomes diverged more
sharply with other regions than the gaps in economic growth, and indeed the
more intense demographic pressure from higher levels of age dependency ratios
may partly explain the lower savings rates in the region, as well as fiscal
pressures in catering to a larger dependent-age population ─ a point we will
return to below. Furthermore, uunlike other regions, large countries in Africa
have experienced much slower economic growth, bringing the population
weighted average per capita income growth rates even lower.
Chapter 3 examines the influential factors behind this growth record and
assesses the relative importance of these factors in the context of the growth
experience in African countries. This is done using three approaches. First, at an
aggregate level, using the conventional decomposition of sources of growth, we
14
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
assess the relative importance of capital accumulation, labor, and productivity to
growth. This is done for the region as a whole and for 19 African countries for
which complete and consistent data is available. We rely in particular on the
work of Collins and Bosworth (1998, 2003) and Ndulu and O’Connell (2003),
with the latter covering a larger set of African countries. The results, while
confirming the importance of low levels of capital accumulation, also highlight
the importance of the productivity residual in African growth performance.
Globally, Bosworth and Collin (2003) estimate that total factor productivity
growth accounts for 41 percent of growth in the 84 countries they study. This is
certainly true for the 19 African countries included in the sample,
notwithstanding the significant diversity among them. This feature holds true
through all three phases of the region’s growth path. It dominates the period of
growth contraction between the mid-1970s and early to mid-1990s, and leads the
growth recovery phase of the past decade.
The central role of investment incentives in dealing with both slow
capital accumulation and productivity growth suggests a focus on improving the
investment climate, which in addition to identifying actionable policy areas,
would also target reducing transactions costs and relieving capacity limitations.
The importance of productivity growth also points us to the role of innovation
(technical progress) in raising productivity and competitiveness. Productivity, in
turn, is influenced not only by the quantity and quality of capital stock, but also
the quality and quantity of knowledge (Lindbaek 1997).
Second, and partly to confirm the above conclusions, we use firm-level
data from investment climate surveys to assess the relative importance of
different factors on attractiveness of African countries to investors, as influenced
by the cost of doing business. The assessment uses the benchmarks of other
developing countries to compare the state of institutional, policy, and regulatory
frameworks; business regulations and their enforcement; adequacy and quality of
infrastructure; stability of the macro economy; protection of property rights; and
functioning of the financial system.
Costs of contract enforcement difficulties, inadequate infrastructure,
crime, corruption, and regulation can amount to over 25 percent of sales—or
more than three times what firms typically pay in taxes (World Development
Report 2005). Akin to these findings, the investment climate assessment work
reviewed for this report and previous papers focusing on Africa conclude that
while shop floor-level unit costs in Africa tend to be comparable to those in other
developing regions, “indirect costs”—primarily the cost of infrastructure services
(transportation and energy); weak contractual enforcement; corruption; and skill
deficiency are significantly higher in the African countries surveyed. The impact
15
CHALLENGES OF AFRICAN GROWTH
from these constraints varies across countries and sectors, demanding that
countries make their own assessments. But these appear to be strong candidates
based on the evidence reviewed.
Finally, we use results from cross-country empirical research to compare
the extent of the deviation of the growth conditions in African countries from
those in other regions and to establish where the gaps are widest. It is a
benchmarking exercise for African growth conditions. We make these
assessments relative to three comparators: global average of developing
countries, South Asia, and East Asia. Noting that the region has seriously lagged
behind in growth, including East Asia among the comparators is intended to
provide African countries with a target for their efforts to close the gap. We also
track the changes in the individual components of these growth conditions (i.e.
the drivers for growth) over the three phases of the U-shaped path of the African
growth experience, to identify those areas in which Africa is closing the gap with
other developing regions, and those that require much more effort. This analysis
is done at the regional level and for 36 individual countries that have adequate
data over the entire 45-year period.
We judiciously use findings from cross-country growth studies and from
empirical work done for this report, to help to identify factors that tend to have
the highest likelihood of influencing growth performance in Africa5 and globally,
without drawing causality conclusions. We appreciate the fundamental questions
of exogeneity and identification (Temple 1999) plaguing cross-country growth
regression.6 Hence we limit the use of this empirical work mainly to description
and comparison of growth conditions in Africa and comparator regions. More
detailed econometric discussion and results from empirical work done
specifically for this report are presented in a separate annex to chapter 2.
Three broad conclusions stand out from this analysis. First, consistent
with much of the cross-country growth analysis, evidence reviewed here suggests
that policy and governance matter a great deal for growth. Taking 45 years of
African growth experience as a whole and controlling for differences in the
composition of opportunities, the impact of poor policy typically accounted for
between one-quarter and one-half of the difference in predicted growth between
African and non-African developing countries (Collier and O’Connell 2006;
Ndulu and O’Connell 2006b; and empirical work for this report). The
benchmarking analysis also shows that the relative importance of
macroeconomic policy in explaining the growth differential between African
countries and others may have waned since the 1990s, as a result of major
reforms implemented in the region, which have moved policy performance in
African countries much closer to the global average. Second, overcoming
16
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
disadvantages from differences in the opportunity structures (locational and
natural resource dependence) between Africa and other regions may facilitate
closing up to an additional one-third of the growth gap with other developing
countries (Collier and O’Connell 2006). Finally, our analysis points to a very
large role played by the delayed demographic transition in Africa. In all
estimations undertaken for this study, differences in the demographic variables
consistently predict two-thirds of the observed difference between average
growth in SSA and in other developing regions (see Annex to chapter 2 and
Ndulu and O’Connell 2006b).
Chapter 4 undertakes a more in-depth analysis of a selective list of
constraints emerging from the analysis in chapter 2, and lays the groundwork for
a more prioritized discussion of strategic ideas and options in chapter 4. It draws
extensively from African and global experience. It also tries to highlight the
extent to which the levels and impacts of these constraints are different in
African countries than in other regions. The chapter includes an assessment of
their past and potential impacts on the region’s and individual African countries’
growth performances, using empirical analysis done for this report and from
other sources. The chapter begins with the identification of a set of unfavorable
endowments that have constrained African growth. It then looks at three other
groups of constraints: risks; transactions costs; and capacity.
Although they are not predicaments, challenges from unfavorable
geography, the curse of misgoverning rents from substantial mineral resources,
demographic pressures, and ethnic/regional polarization, have typically made
development activities much more costly to carry out in Africa than in other
regions. The challenges are manifest in the form of location in the disease-prone
tropics, geographic isolation and fragmentation, a history that is fraught with
conflict-motivating ethnic polarization, as well as a delayed demographic
transition. The ttropical location affects the prevalence of disease, work stamina,
and pests, and being landlocked impacts negatively on the cost of production and
trade, primarily due to higher transportation and transit costs. Together with the
consequences of sovereign fragmentation and ethno-linguistic fractionalization
(Easterly and Levine 1997), it makes development under these conditions
relatively more expensive and slower. Easterly and Levine (2003) and Acemoglu
and Robinson (2001), also find that many of these effects are mediated through
the quality of institutions. While we recognize that slow growth may be
influenced by these constraints, they can be mitigated through appropriate
investments and policy actions.
In addition to the risks associated with an unfavorable policy
environment, the investment climate in Africa is adversely impacted by
17
CHALLENGES OF AFRICAN GROWTH
frequency of conflict, corruption, and insufficient local scrutiny. Investors are
discouraged by: not being reasonably sure of the safety of their assets due to the
perceived high risk of conflict; not being able to make a reasonable projection of
profitability because of high price instability; and facing the risk of being unable
to repatriate profits because of exchange controls when a country is unable to
earn enough foreign exchange. These risks are valid for both foreign and
domestic investors. Flight of financial wealth from Africa is symptomatic of the
absence of both attractive opportunities and conditions to invest at home. It is
estimated that in 1990, Africans held up to $360 billion, or 40 percent, of their
wealth outside the region, in search of safer havens and higher returns (Collier,
Hoeffler, and Patillo 1999). This compares with just 6 percent of East Asian
wealth and 10 percent of Latin American wealth being held outside of their
respective regions. More broadly, action at the individual country level to
improve the investment climate may have to be complemented by regional
efforts to improve the collective reputation of the region as an attractive
destination for investment.
Relatively high transactions costs in the region make capital
accumulation, production, and trade relatively expensive in Africa. For example,
dollar-for-dollar investment in African countries yields significantly less
expansion of productive capacity because prices of capital goods are 70 percent
higher than in OECD and South East Asian countries (Sala i Martin,
Doppelhofer, and Miller 2003). Using this information, Artadi and Sala i Martin
(2003) estimate that the average growth rate in African countries would have
been 0.44 percentage points higher in every year if the relative price of
investment goods was the same as in OECD or East Asia7. Amjadi and Yeats
(1995) demonstrate that relatively high transportation costs, especially for
processed products, often place African exporters at a serious competitive
disadvantage. In 1970, for example, net freight payments to foreign nationals
absorbed 11 percent of Africa’s export earnings. That ratio had increased to 15
percent by 1990. And for landlocked African countries, the freight cost ratio
exceeds 30 percent, as exports must transit neighboring territories. In a similar
vein, a more recent study by the African Development Bank (AfDB, 1999) on
exports to the United States found that freight charges as a proportion of CIF
value are on average approximately 20 percent higher for African exports than
for comparative goods from other low-income countries.
These transactions costs arise mainly because of the higher costs of
infrastructure services (particularly transportation and energy), which make up a
disproportionately large part of production and trade costs; barriers to trade,
which raise the cross-border transactions costs; and bureaucratic red tape and
18
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
inefficiencies, which exacerbate these costs. The remoteness of population
concentrations, accentuated by high internal transportation costs, resulted in
estimated median transportation costs for intra-Africa trade (including
transshipments) to be 65 percent higher than in Latin America, and twice that of
East and South Asia (Limao and Venables 2001).
Capacity
encompasses
human
competencies,
organizational
effectiveness, and institutional effectiveness in enforcing the rules of the game.
Improvement of workers’ skills is a fundamental source of economic progress
and increasing human welfare (Adam Smith, cited in Eatwell, et al. 1996). These
improvements are achieved not only through education and formal training, but
also through learning by doing. Although basic education is widely considered to
be critical for poverty reduction, there is emerging evidence from a large number
of studies that secondary and higher education are more significant in raising
long-term growth rates and income levels (Barro and Lee 1993; Barro 1998;
Hanushek and Kim 1995). This impact is evidenced primarily through improved
capabilities to absorb technological advances. Furthermore, studies have also
found that FDI has had a larger impact on growth than domestic investment, due
to its higher productivity. This impact, however, is reached only when there is
sufficient capability in the host country to absorb the complex technologies that
come with FDI (Borensztein, DeGregorio, and Lee 1998; and Lumbila 2005).
Progress in overcoming shortages of skilled and trained manpower in
African countries seems to be disappointingly slow despite substantial resources
devoted by both governments and donors to this effort during the last three
decades. Moreover, African countries have struggled to retain the few skilled
professionals they produce. The region has lost more highly skilled professionals.
It has been estimated that for a number of African countries, more than 30
percent of their highly skilled professionals have been lost to the OECD countries
(Carrington and Detraciage 1998; Haque and Aziz 1998). Nearly 88 percent of
adults who emigrate from Africa to the United States have a high school
education or higher (Speer, cited by Zeleza, 1998). Apraku (1991), in a survey of
African immigrants in the United States, found that 58 percent of the respondents
were either PhDs or MDs, and an additional 19 percent had master’s degrees
(1991). The HIV/AIDS pandemic has exacerbated the loss of skilled manpower
in the region.
Likewise, a lack of state capacity to carry out basic public management
functions constrains delivery of basic services to its citizens and raises the cost of
doing business, discouraging private investment essential for growth. The
problems here are linked to bureaucratic inefficiency; low levels of incentives;
19
CHALLENGES OF AFRICAN GROWTH
and meritocracy, leading to underutilization of the human capacity in the public
sector.
Chapter 5 identifies a set of cross-cutting growth strategies. Six lessons
are drawn from the preceding analysis of 45 years of Africa’s growth experience
to inform growth strategies.
• African countries’ growth experiences are extremely varied and
episodic. However, two challenges are peculiar to the region—the
slow growth of large countries and the extreme instability of growth
across a large number of African countries making growth in large
countries and prudent management of impact of shocks key themes of
growth strategies in the regional.
• While lower levels of investment are important for explaining
Africa’s slower growth, it is the slower productivity growth that more
sharply distinguishes African performance from the rest of the world.
This situation clearly calls for looking beyond creating conditions for
attracting new investors to more explicitly pursuing measures that
help raise productivity of existing and new investments.
• Consistent with much of the cross-country growth analysis, evidence
from the research reviewed in this report suggests that policy and
governance matter a great deal for growth. Thus, while it is
imperative that countries identify and address other binding
constraints, sustaining recent gains in the improvement of the policy
environment would be a desirable permanent feature of any growth
strategy a country adopts.
•
The evidence also suggests that overcoming disadvantages arising
from geographic isolation and fragmentation, as well as natural
resource dependence, will be necessary if Africa is to close the
growth gap with other regions.
• The results from the empirical analysis suggest a very powerful
influence from the growth of trading partners’ economies,
underscoring the importance of enhanced competitiveness and
reduced barriers to trade in order to take advantage of opportunities
offered by the global market. And finally
• Analysis points to the very large role played by the delayed
demographic transition in Africa in explaining its relatively slower
growth performance. This is an area that will need much more work
20
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
to determine what would be helpful for accelerating demographic
transition in Africa.
The experiences of countries that have sustained rapid growth in Asia,
Latin America, and even Africa, have tended to be almost all being export-led.
There is, however, a wide range of options from the strategies that these
countries have followed to scale up and diversify exports. Some African
economies can realistically hope to follow the main Asian model or the route
Mauritius has taken, in which a central component of growth is manufactured
exports. For African countries that have sufficiently abundant valuable natural
resources, like Botswana, their most likely route to prosperity may be through the
equitable exploitation of their resource base—mineral exports. Some countries
may be able to follow the emerging Latin American model of modern agriculture
such as agribusiness in Chile, Costa Rica, or Colombia; or natural resourcebased, export-oriented industrialization as in the case of Indonesia or Malaysia.
Others may be so disadvantaged that prosperity for their populations will depend
upon employment opportunities in more fortunate neighboring economies (e.g.
Swaziland and Lesotho vis-à-vis South Africa, or Burkina Faso vis-à-vis Côte
d’Ivoire) or, like India, by pursuing the high-value service sector—the office
economy. In any case, the paths to prosperity are many and varied.
The stage for scaling up growth in the region is set by documenting the
revival of growth that got underway in the mid-1990s, partly due to a response to
the economic and political reforms of the late 1980s and early 1990s. We argue
in this stage setter that Africa now faces a window of opportunity, with a
growing number of politically stable countries facing the prospect of mutually
reinforcing declines in fertility rates and increases in capital formation and
productivity growth.
The strategic agenda for building upon this platform rests on four pillars,
which primarily target resolution of the constraints identified in chapter 2 and
discussed in greater detail in chapter 3. The first pillar is improving the
investment climate, mainly focused on reducing indirect costs to firms, which
are generally infrastructure related, with energy and transportation topping the
list of major impediments; and reducing and mitigating risk, particularly those
relating to security of property, such as poor adjudication of disputes, crime,
political instability, and macroeconomic instability. While effort in individual
countries is the focal point of action, we also suggest pooling efforts to develop
cohesive investment areas by, for example, coordinating investment promotion,
coordinating policy, improving security, and increasing connectivity.
21
CHALLENGES OF AFRICAN GROWTH
In focusing on improving the business environment it is important to
make the distinction that Rodrik and Subramaniam (2004) make based on their
analysis of India’s growth revival since 1980 “pro-market” and “pro-business”
reforms. The role of leadership in spearheading the needed reforms and public
action is critical for success. The former is concerned with removing
impediments to the market, favoring entrants and consumers; while the latter is
focused on raising profitability of established enterprises—favoring incumbents
and producers. Both orientations are important, but the sequence adopted by
countries has varied with differential impacts. India began with pro-business
reforms in the 1980s before embarking on market liberalization in the 1990s.
The second pillar is infrastructure, mainly targeting transactions costs
in production of goods and services. As the foregoing analysis suggests,
transportation and energy make up the largest proportion of indirect costs,
weighing heavily on the competitiveness of firms in most African countries
where investment climate surveys were conducted. Particular focus would be on
how to reduce the high costs associated with the remoteness of landlocked
countries in order to facilitate trade with neighbors, as well as the rest of the
world. It is clear that there will be a need to look beyond individual country
borders and adopt a regional approach to coordinate cross-border infrastructure
investment, maintenance, operational management, and use (e.g. power pooling)
in order to lower costs.
Mindful of the need for more effective use of infrastructure assets, the
report will also emphasize the importance of enhancing capacity for
nonforbearing regulation of use and maintenance of these assets. Private-public
partnerships would help ensure that these essentially public services are not
underfunded, consequently require greater involvement of the public sector than
in the previous two decades, while at the same time benefiting from the
operational efficiency of private management.
The third pillar is innovation, primarily emphasizing investment in
information technology and skill formation (higher education) for enhanced
productivity and competitiveness. The potential comparative advantage of low
wages in Africa can be nullified by low productivity. Surveys of investors show
that labor is not cheap where productivity is low (Lindbaek 1997). Information
and communication technology (ICT) is now the main driver for productivity
growth. There is strong empirical evidence that shows that investment in ICT and
in higher education boosts competitiveness, making both key parts of the growth
agenda. African countries can make a huge leap forward and over antiquated
technology by exploiting the ICT technological advantages as late starters.
22
CHAPTER 1: FACING THE CHALLENGES OF AFRICAN GROWTH
The fourth pillar is institutional capacity. Again, the results from the
investment climate assessment surveys and analysis for the World Development
Report (2005) identify costs associated with contract enforcement difficulties,
crime, corruption, and forbearing regulation among those weighing most heavily
on the profitability of enterprises. The main focus of action here would be partly
to strengthen the capacity of relevant public institutions for protecting property
rights, and partly to strengthen scrutiny of, and accountability for, public actions.
Building institutional capacity entails strengthening individual competencies,
organizational effectiveness, and rules of the game. Under this pillar, particular
attention will be paid to capacity and space for scrutiny of public action—mainly
within a framework of a strong domestic accountability system and capacity to
clarify and protect property rights to spur private enterprise. The key strategic
areas of action, therefore, will include enforcement of contracts (e.g. commercial
courts); exercise of voice as an agency of restraint—with enhanced involvement
of civil society, media and parliament; enhanced revenue transparency in
resource-rich countries; and prevention of corruption as a country-driven
agenda—including checks and balances.
Chapter 5 concludes with emphasis on the need to address the huge
financing gap for scaling up growth. Several attempts to estimate the financing
needs of African nations have been made, mainly on the basis of achieving the
MDGs. To achieve annual growth rate of 7%, UNCTAD (2000) estimated that
Africa requires investment ratios averaging 25% of GDP over the next decade.
Against Africa’s saving rate of around 9% of GDP, this represents a major
financing gap. For the short-medium term financing, it is clear that African
countries are not in a position to generate any meaningful part of this
requirement, making foreign savings (foreign direct investment and official
development assistance) and reversing capital flight critical for achieving these
targets. Over the longer term however, African countries have to focus on
measures to raise domestic resources as well as to retain its wealth on the
continent. The gap appears to be particularly acute in financing public sector
programs (shares of ODA financing of government budgets exceed 40 percent in
a number of strong growth performers—e.g. Mozambique, Uganda, and
Tanzania). Raising revenue efforts is therefore also important for domestic
resource mobilization and ultimate reduction of dependence on aid.
While not a blueprint, the pillars of the growth strategies discussed above
form the centerpiece of any attempt to increase competitiveness, diversify
production, and accelerate growth in the medium term. The broad strategic
approaches presented here need to be tailored to the specific situation of each
country which in turn means specific analysis of each country setting reflecting
the political, social and economic environments. There are lessons, however, to
23
CHALLENGES OF AFRICAN GROWTH
be learned from the experiences of East and South Asia, as well as from
successful countries on the continent. What does Botswana have to teach African
countries about managing mineral wealth and prudent public investment
scrutiny? What does Mauritius have to teach about export diversification? What
lessons Liberia and Burundi for example learn from Mozambique’s and
Rwanda’s transformation from conflict to being among the fastest growing
countries in the world? It is the hope of the authors that this report has
strengthened the desire for such learning.
24
Table 1.1. Regional Growth Comparisons
Initial values
Gross
Life
primary
enrollexpectancy at
ment
rate,
birth,
1962
1960
Road
density,
1969 (km
per sq
km)*
Ending values
Gross
Life
primary
enrollexpectancy at
ment
rate,
birth,
2004
2004
Endowments
Region
N
Real
GDP per
capita
(1996
PPP$)
SSA
40
1423.2
37.1
41.1
0.098
(23)
2588.9
95.8
47.9
0.130
4.00
40.2a
64
Other
developing
55
2953.5
79.9
55.9
0.251
(25)
8568.6
107.5
71.3
0.411
2.91
7.51
57
LAC
24
3103.0
86.6
56.5
0.057
(6)
6039.2
111.5
70.5
0.122
2.34
2.77
80
SA
5
934.4
48.6
46.7
0.290
(1)
2506.4
103.8
65.1
0.850
2.75
3.78
38
EAP
13
3508.3
90.5
58.5
0.538
(7)
14929.4
107.0
73.3
0.719
2.09
0.42
52
MENAT
13
2899.3
68.4
55.6
0.171
(11)
9209.2
103.3
73.0
0.334
4.44
23.06b
57
INDUST
18
8656.1
108.6
71.0
1.039
(16)
27328.8
102.5
78.9
1.447
-
-
-
Real
GDP per
capita
Road
density,
1999
Fragmentation,
Avg. # of
borders
Share of
pop in
llocked
countries
(%)
Share of
Natural
Resource
Econ**
Source: World Development Indicators, 2006.
Note:* Number of countries in parentheses.
a: Congo, Dem. Rep., Sudan and Ethiopia have been treated as ‘landlocked’ countries.
b: Only one country sampled, Turkey. The average is Middle East and North Africa is zero.
** An economy which generates more than 10% of its GDP in primary commodities exports is classified as a ‘natural resource economy.’ This is calculated
as a share of the total number of countries in each region.
CHALLENGES OF AFRICAN GROWTH
ENDNOTES
1
Angola, Cameroon, Cape Verde, Congo Republic, Lesotho, Namibia and Swaziland
2
Botswana, Equatorial Guinea, Gabon, Mauritius, Seychelles and South Africa
3
These include Angola , Central African Republic, Comoros, Madagascar, Niger,
Senegal, Sierra Leone, DRC, and Zambia.
4
For a comprehensive analysis of this issue see The 2006 World Development Report.
5
A “short list” of noteworthy contributions that draw on global data to make Africarelevant contributions include Sachs and Warner (1995) on outward orientation; the
same authors (1997, 2001) on the natural resource curse; Bloom and Sachs (1998) on
geographical and demographic constraints; Masters and McMillan (2001) on tropical
location and the disease environment; Easterly and Levine (1997) on ethnic
fractionalization and policy; the same authors (1998) on neighborhood (spillover)
effects; Collier (1999) and Collier and Hoeffler (2004) on civil wars; Mauro (1995) on
corruption; Knack and Keefer (1995)) on the rule of law; Acemoglu, Johnson, and
Robinson (2001) on institutional legacies of the colonial period; Guillaumont,
Guillaumont Jeanneney, and Brun (1999), Dehn (2000), and Blattman, Hwang, and
Williamson (2004) on vulnerability to external shocks; Burnside and Dollar (2000) on
aid; and Glaeser, et al. (2004) on political leaders.
6
Researchers have attempted to reduce the dimensionality problem by isolating
determinants that are robust to the inclusion or non-inclusion of other variables (e.g.,
Levine and Relent 1993, Arcade and Sala-i-Martin 2003) and by constructing
portmanteau variables that aggregate a variety of related proxies (e.g., the celebrated
Sachs and Warner “openness” variable, or the “diversion” variable constructed by
Hall and Jones (1999)). Our grouping of variables in table 3b is in the latter spirit.
7
This cost differential is also reflected in the wide divergence between the average
share of investment in GDP for SSA measured in domestic and international prices. In
domestic prices, this ratio for the period 1960 to 1994 (weighted by average GDP at
1985 international prices) was 19 percent, compared to only 9.5 percent at 1985
international prices.
26
2
Africa’s Long-Term Growth Experience
in a Global Perspective
A central concern of this chapter is to highlight and characterize the
relative stagnation of African economic growth in the last 45 years. For the entire
four and a half decades (1960–2004), per capita income grew at a yearly average
of 0.5 percent in the 41 SSA countries, compared to 3 percent in the 57 countries
in the rest of the developing regions for which data for the full period are
available. Sub-Saharan Africa missed out on the economic transformation that
took place in the developing world—particularly in Asia—in the second half of
the 20th century.
Two broad features differentiate the African growth record from those of
other developing regions. Growth in most African countries has been more
episodic than in other developing regions. For the region as a whole, a distinct
long-term feature is its historical U-shape, featuring a deep and prolonged
contraction of growth during 1974–94, a period sandwiched between the
moderately high growth rates of the 1960s and late 1990s. Most African
countries experienced this pattern, with many of them beginning their postindependence years with a decade or so of fairly robust growth before that
growth collapsed beginning in the mid-1970s and lasting until 1995. This was
followed by a subsequent recovery (Pritchett 1998), with much greater diversity
emerging across countries in the region.
Second is the juxtaposition of this poor record with a population
explosion that has served to further depress individual African incomes in
comparison with those of citizens of other regions. In contrast to other
developing regions, Africa embarked on a slow demographic transition only in
the mid-1980s. Total fertility rates fell sharply outside Africa, while remaining
virtually unchanged within Africa for two and a half decades after independence.
Population growth rates therefore diverged sharply, and from the early 1970s
through the remainder of the century African populations grew more rapidly than
the non-African developing world had grown at its peak. It is therefore not
surprising that differences in per capita incomes diverged more sharply with
27
CHALLENGES OF AFRICAN GROWTH
other regions than the gaps in economic growth. The difference in the population
weighted average growth rates with other regions is more pronounced, as figure
2.1 shows.
At the regional level, the four largest countries (Nigeria, Ethiopia,
Democratic Republic of Congo, and South Africa), accounting for 43 percent of
total African population, posted a weighted average per capita income growth
rate of 0.26 percent—well below the regional average for the four and a half
decades. As we will discuss further, resumption of sustained growth in these four
African giants (particularly in Nigeria, DRC, and Ethiopia) will go a long way
toward bridging the individual income gaps between Sub-Saharan Africa and
other developing regions.
In the rest of this chapter we will focus on four main dimensions of the
African growth experience: its evolution over the last four and a half decades;
comparison with other developing countries; diversity of experience and impact
on individual incomes within Africa; and its sectoral composition.
Figure 2.1. Smoothed Average Growth in Real GDP per Capita
Countries with full set of observations
8
6
4
2
0
-2
1960
1970
1980
year
41 SSA
SSA, pop-wt
Source: WDI 2006, PWT 6.1 and GDN 1998.
Note: Pop-wt indicates population weighted.
28
1990
57 Other
Other, pop-wt
2000
CHAPTER 2: AFRICA’S LONG-TERM GROWTH EXPERIENCE IN A GLOBAL PERSPECTIVE
EVOLUTION
A distinct characteristic of Africa’s long-term growth experience is its
historical U-shape (figure 2.1), featuring a deep and prolonged contraction of
growth from 1974–94, a period sandwiched between the moderately high growth
rates of the 1960s and after the mid-1990s. Between 1960 and 1994, nearly half
of African countries with comparable data suffered income losses exceeding 20
percent in constant domestic currency (Rodrik 1998). The great bulk of these
losses occurred between 1974 and 1994. The global deceleration of the 1970s
took substantial portions of the continent into outright contraction, a period that
began with a set of shocks to energy and tropical commodity markets (1974–79).
By 2005, African growth had rebounded to the levels of the 1960s, albeit of
much larger and more diversified economies.
Growth stagnation set in much earlier and lasted longest for the group of
37 African countries currently classified as low-income countries, compared to
the 14 lower and upper middle-income countries in the region (figure 2.2). This
group of countries hosts 87 percent of Africa’s population.
As noted earlier, for the entire four and a half decades (1960–2004), percapita income grew at a yearly average of 0.5 percent in the 41 SSA countries
compared, to 3 percent in the 57 countries in the rest of the developing regions
for which data for the full period is available. Per-capita growth rates of around 2
percent in the early 1960s rose to nearly 5 percent by the end of that decade, fell
steadily through the early 1970s, turned negative during the mid-1980s, and then
climbed back to around 2 percent since the mid-1990s. As seen in Figure 2.3, out
of the 41 African countries for which consistent growth data is available, African
economies grew fairly rapidly during the first decade and a half after gaining
independence. The average growth rate of the population-weighted incomes per
capita for these 41 SSA countries in the early 1960s (figure 2.1) exceeded those
of the other 57 developing countries. For the entire decade and a half (1960–74),
13 African countries exceeded the developing country average growth rate
(Figure 2.3). These were Botswana, Côte d’Ivoire, Gabon, Kenya, Lesotho,
Mauritania, Malawi, Namibia, Nigeria, Seychelles, Togo, Tanzania, and South
Africa. Indeed, many development observers then were more optimistic about
progress in Africa compared to Asian countries, particularly because countries
like Ghana, Zambia and Côte d’Ivoire already had per-capita incomes that
exceeded those of East Asian countries, including Korea.
29
CHALLENGES OF AFRICAN GROWTH
Figure 2.2. Average Growth Rates, by Income Categories in SSA
6
4
2
0
-2
1960
1970
1980
Year
6 Upper MIC
34 LIC
1990
2000
7 Lower MIC
Source: World Development Indicators, 2006.
Note: MIC indicates middle-income countries and LIC indicates lower-income countries.
Growth rates refer to smoothed average growth rates in real GDP per capita.
A prolonged period of economic contraction occurred in Africa between
1974 and 1994, while other regions sustained or increased their growth. As a
result, only seven African countries exceeded the developing country average
growth rates during this period. These were Burkina Faso, Botswana, Cape
Verde, Democratic Republic of Congo, Lesotho, Mauritius, and Seychelles. This
period began with a set of shocks to energy and tropical commodity markets
(1974–79), and ended with a concentrated wave of African democratic reforms
(1989–94). The trough for the growth contraction was reached in the 1980s,
during which the divergence of the levels of incomes per head in Africa
compared to other developing countries sharply accelerated.
During the last decade (1994–2004), there was a rapid revival of growth
in Africa, resulting in 20 countries’ per-capita income growing at a pace
exceeding the developing country average. The new entrants into this growth
club were predominantly either countries with new discoveries or revived
exploitation of natural resources (Sudan, Chad, Equatorial Guinea, and Angola)
or strong reformers (Ghana, Ethiopia, Benin, Mali, Malawi, Mozambique,
30
CHAPTER 2: AFRICA’S LONG-TERM GROWTH EXPERIENCE IN A GLOBAL PERSPECTIVE
Figure 2.3. Average per Capita Growth Rates
1960–1973
1974–1994
1995–2004
20
10
2.75
1.2
0
-10
Countries
Countries
41 SSA
Countries
57 Other
Note: The horizontal line in each panel indicates the global average for the relevant time period.
Source: WDI 2006, PWT 6.1 and GDN 1998.
Senegal, and Tanzania). The revival of African growth since the mid-1990s lends
the distinct U shape to the region’s overall growth record for 1960–2004.
BENCHMARKED AGAINST ASIAN ECONOMIES
African growth performance diverged significantly from that of other
regions. Figure 2.3 compares average growth rates in Africa with those of East
Asia and Pacific (EAP), and South Asia (SA) from 1960 to 2004. The first point
of difference is the significantly higher levels of growth observed in the Asian
economies, on average, over the entire period in comparison to Africa, except in
the early 1960s. The East Asian growth path lies completely above Africa’s
regional average growth rate throughout the four decades, whereas the South Asian
countries start out with growth rates similar to Africa’s, only to diverge from it for
the rest of the time period. The divergence of growth performance is particularly
sharp between the mid-1970s and mid-1980s, during which a combination of
Asia’s accelerating growth and the collapse of growth in Africa quickly widened
the gap. More than half of this growth gap was accounted for by the sharp
31
CHALLENGES OF AFRICAN GROWTH
contraction of growth in Africa, rather than by the acceleration of Asian growth
rates. The more recent convergence of the two sets of growth rates, likewise, is
more a result of the brisk recovery of growth in African countries since the mid1990s, while Asian countries have maintained fairly high average growth rates.
Second, unlike Africa’s U-shaped evolution of growth rates, Asian
countries have followed a sustained growth path. In the initial phase from 1960 to
1973, East Asia and Pacific’s growth rates rose very steeply, attaining a peak
average around the early 1970s, and beginning a slow decline along with the rest
of the world about the same time as African economies began a sharp decline.
South Asia began its steep rise in growth late in the 1970s, and sustained the pace
to reach the EAP average rates in the late 1990s. Since 1995, African country
average growth rates appear to be converging with those of EAP and SA.
As observed earlier, the gap in terms of population-weighted average
growth rates was much wider during the entire period. The resultant divergence
of African incomes relative to those of Asian incomes, measured in terms of real
GDP per capita, is phenomenal and mirrors the comparative time trends of the
growth performance discussed above (see figure 2.5).
Figure 2.4. Smoothed Average Growth in Real GDP per Capita
Countries with full set of observations
5
4
3
2
1
0
1960
1970
1980
Year
41 SSA
5 SA
Source: WDI 2006, PWT 6.1 and GDN 1998.
32
1990
2000
14 EAP
2010
CHAPTER 2: AFRICA’S LONG-TERM GROWTH EXPERIENCE IN A GLOBAL PERSPECTIVE
East Asia & Pacific
785
Low income
Sub-Saharan Africa
2000
1996
1992
1988
1984
1980
1976
1972
1968
208
124
1964
900
800
700
600
500
400
300
200
100
0
1960
GDP per capita index, 1960=100
Figure 2.5. GDP per Capita—SSA and Other Regions, 1960–2004
Source: The World Bank WDI database.
Note: GDP per capita index 1960=100.
DIVERSITY ACROSS AFRICA
Although the evolution of the average growth performance described
above fits most African countries’ experiences, it masks a wide variation of
growth performance across individual African countries within each of the three
phases. For example, roughly half of the 21 economies studied by Pritchett
(1998)—a group accounting for nearly 80 percent of SSA’s GDP and
population—exhibited reasonably robust growth before the long period of
stagnation; the other half tended to show persistent stagnation at growth rates
below 1.5 percent throughout.
As a further illustration of the differences, figure 2.6 shows the
diametrically opposite patterns of growth rates observed in four African
countries. Nigeria and Democratic Republic of Congo, for instance, exhibit the
typical U-shaped pattern of growth discussed earlier. In contrast, Botswana and
Mauritius follow an inverted U-shaped growth path, reaching their peaks of 8
percent to 10 percent in the 1970s and 1980s, respectively, before leveling off to
around 4 percent to 5 percent in the more recent years, more or less similar to the
experience of Asian countries.
What is more striking is how rapidly country growth performance has
diversified since the mid-1990s. Between 1995 and 2004, 15 African countries
have seen GDP growth rates in excess of 5 percent, alongside others that are
experiencing negative growth rates. This differentiation is becoming wider over
33
CHALLENGES OF AFRICAN GROWTH
-6
-2
-1
Nigeria
0
1
2
3
Dem. Rep. of Congo
-4
-2
0
2
Figure 2.6. Smoothed Average Growth in Real GDP per Capita
1970
1980
year
1990
2000
1960
1970
1980
year
1990
2000
1960
1970
1980
year
1990
2000
1960
1970
1980
year
1990
2000
4
2
0
2
2.5
Mauritius
3 3.5
Botswana
4
6
8
10
4.5
1960
Source: WDI 2006, PWT 6.1 and GDN 1998.
time, as exemplified by the comparative performance during the most recent fiveyear period (1999-2004). Excluding the oil countries, median per capita growth
rates in the fastest growing, middle, and slowest growing thirds of the African
countries we have studied—each comprising 13 countries—were 3.3 percent, 1.2
percent, and -1.0 percent, respectively.1 Outside of the mineral exporting group,
rapid growth during this period has also been associated with substantial
diversification of production and exports.
The other major contrast is between large and small countries’ growth
rates (figure 2.7, panel 1). African countries with large populations exceeding 35
million (Nigeria, DRC, Ethiopia and South Africa) have grown much more
slowly than small- and medium-sized countries, pulling down populationweighted average growth rates of the region. An extreme example is the case of
the Democratic Republic of the Congo, which hosts nearly 8 percent of the
SSA’s population, with a negative average growth rate of per-capita income for
the 45-year period of -2.7 percent. The average growth rate for the group fell
behind the others particularly sharply during the growth contraction phase. The
gap closed rapidly after the late 1990s, partly reflecting revival of growth in
Nigeria, helped along by the oil price boom; reduction of hostilities in the
34
CHAPTER 2: AFRICA’S LONG-TERM GROWTH EXPERIENCE IN A GLOBAL PERSPECTIVE
Democratic Republic of Congo; and strong growth performance in Ethiopia after
the fall of the Derg regime.
As can be seen in the second panel of figure 2.7, population growth rates
from 1960-2004 within Africa were higher for countries with large- and mediumsized populations than for those with small ones. At the same time, GDP percapita growth rates of all three categories, as seen in the first panel, started
improving around 1995, following the downward trends in population growth
rates of all three categories of countries from 1985–90. The figure shows that
these large countries have grown on average about 1.5 percent to 3 percent
slower than the small countries over the period of 1960–90. It is only from the
1990s until 2004 that there seems to be a convergence pattern among all three
types of countries based on their total population sizes. The evidence also points
to the age dependency ratios of the small countries being about 7 percent to 10
percent lower than both the medium and large countries. However, the potential
labor force growth rates for these three categories does not seem to be
significantly different from one another, as can be seen in last panel of figure 2.7.
Figure 2.7. Growth Rates in SSA
Growth rates in SSA by size
4
3
2
1
0
-1
SSA's population growth rates by size
.03
.025
.02
1960
1970
1980
yea
r
Large
1990
2000
1960
1970
Medium
1980
year
1990
Large
Small
2000
Medium
Small
Age dependency ratios by size
95
Potential labor force growth rates by size
.005
90
0
-.005
85
80
1960
1970
1980
year
Large
1990
2000
Medium
Small
1960
1970
1980
year
Large
1990
2000
Medium
Small
Source: WDI 2006, PWT 6.1 and GDN 1998.
35
CHALLENGES OF AFRICAN GROWTH
We also distinguish growth performance across countries in four
opportunity groups, determined by location and resource endowment. Table 2.1
includes the list of countries classified by opportunity sets, along with their GDP
and population shares in Sub-Saharan Africa, as well as other key indicators of
economic and social progress at the beginning and end of the period of analysis
(2004). About one-third of African economies are landlocked, compared to the
global average of 11 percent. About 32 percent of the countries in SSA,
compared to 25 percent of all other developing regions, are resource rich. These
criteria are important in terms of distinguishing growth performance (Collier and
O’Connell 2006). Globally, while coastal economies have invariably done better
than their landlocked counterparts, resource-rich coastal countries have
underperformed the coastal resource-poor economies over the entire period from
1970 to 2004.
Figure 2.8 confirms broadly that SSA coastal economies outperform
landlocked economies, but being resource rich under both categories confers a
growth performance advantage over their poorer cousins, particularly during
Figure 2.8. SSA's Smoothed Average Growth in Real GDP per Capita
(Countries with full set of growth observations)
6
4
2
0
-2
-4
1960
1970
1980
Year
Landlocked, resource poor
Coastal, resource poor
Source: WDI 2006, PWT 6.1 and GDN 1998.
36
1990
2000
2010
Landlocked, resource rich
Coastal, resource rich
CHAPTER 2: AFRICA’S LONG-TERM GROWTH EXPERIENCE IN A GLOBAL PERSPECTIVE
times of resource price booms. What is even more striking is that the landlocked,
resource-rich economies trump all other categories, most likely driven by
Botswana’s stellar sustained growth performance. The other resource-rich,
landlocked country included in the sample is Zambia, which as we saw earlier
posted reasonably rapid growth until the mid-1970s
The impact of the diverse growth experience is also reflected in the
impact it has had on individual incomes and welfare. Taking a long-term trend
look, countries have distinguished themselves in terms of how much their incomes
per head have grown over the 45-year period. Figure 2.9 depicts the wide variation
in the progress made by the 40 African countries for which we have complete data,
and table 2.1 also presents the population and income weights of each of these
countries. Each country’s progress in per capita income since 1960 is measured by
the ratio of per capita income in 2004 to that in 1960 (in 1996 international
dollars). In nine countries income per capita has actually regressed relative to the
levels in 19602. Surprisingly, only three among these are countries that have
suffered from prolonged conflict (Angola, Sierra Leone, and DRC). The rest
appear to have had long periods of very slow growth or to have suffered prolonged
crises as they struggled to climb out of the shocks suffered during the late 1970s.
Figure 2.9. Growth
g Experience of Countries
p in SSA
Average growth rate, 1960-2004
0.00
2.00
4.00
6.00
BWA
MUS
CPV
LSO
GAB SYC
-2.00
UGA
MRT
TZA
MWI
SDN
KEN
BFA
GMB
CMR
ZAF
TGO
NGA
NAM
ETH
BEN
TCD
MOZ
RWA
CIV
BDI
MLI GHA
GIN
SEN
AGO
COM
ZMB
CAF
SLE
GNB
MDG
NER
COG
ZAR
0.00
2.00
4.00
6.00
8.00
Ratio of per capita income in 2004 to per capita income in 1960
10.00
Source: WDI 2006, PWT 6.1 and GDN 1998.
37
CHALLENGES OF AFRICAN GROWTH
As expected, generally African middle-income countries grew more
rapidly than their counterpart low-income ones. Of the 13 middle income
countries, seven have acquired their current status largely on account of their
mineral wealth, including oil. Not all African middle-income countries, however,
experienced rapid growth or grew throughout the 45-year period. South Africa’s
2004 GDP per capita at 1996 international prices, for example, was only 20
percent above that of 1960. Equatorial Guinea’s newfound oil wealth suddenly
catapulted it into the club of upper middle-income countries. Given that more
than half of the African middle-income countries are resource rich, volatility of
growth has also been a characteristic of their growth experience.
The rest of the Sub-Saharan African countries are bunched in a narrow
range between stagnation (ratio of 1) and a doubling of income per capita over a
45-year period—a relatively low achievement by global standards. Most of these
experienced economic stagnation for two decades between the mid-1970s and
mid-1990s, usually after respectable growth performance in the previous decade
and a half. For countries such as Uganda, Mozambique, and Ghana, rapid growth
during the last 15 years has enabled them to more than recoup the severe losses
in income suffered during the previous two decades. As expected, differences in
average growth rates match the differences in the progress made in terms of per
capita incomes.
What is also striking is that countries with very similar opportunities also
have very different growth experience and outcomes, depending on the strategies
pursued and the policy disposition adopted. To illustrate this, boxes 2.1 and 2.2
present contrasting outcomes from different strategic approaches adopted by
pairs of countries with similar resource bases or geographic situations. These can
have widely differing experiences because of different strategic approaches. The
two pairs compare experiences of Botswana and Zambia, both landlocked and
resource rich, and Mauritius and Côte d’Ivoire, both coastal and (initially)
agriculturally based. Differences in the long-term strategies adopted in exploiting
similar opportunities ended up with Botswana and Mauritius being in the upper
middle-income countries; on the other hand, Zambia’s and Côte d’Ivoire’s per
capita incomes have hardly progressed relative to their levels in 1960.
38
Table 2.1. Growth and Selected Indicators in African Countries Categorized by Opportunity Groups
Country
Average growth in
Ratio of Income Prop. Of GDP Prop. Of Pop Gross prim. Life expect. Road density, Prop. Of
real GDP per
in 2004 to 1960
in SSA, 1960
in SSA, 1960 enroll rate,
at birth,
1969 (km per
GDP in SSA, in SSA, 2004 enroll rate, expect. at density,
Prop. Of Pop Gross prim. Life
Road
capita, 1961-2004
(per capita)
(%)
(%)
1960
1962
sq km)
2004 (%)
(%)
2004
birth, 2004 1999
Coastal
Mauritius
Tanzania
Kenya
South Africa
Togo
Benin
Mozambique
Côte d'Ivoire
Ghana
Senegal
3.61
1.43
1.23
1
0.89
0.7
0.6
0.55
0.22
0.1
5.01
1.52
1.49
1.6
1.21
1.2
1.05
1.01
1.85
0.95
5.03
0.62
1.27
8.01
1.46
1.75
2.55
2.62
1.36
2.99
0.3
4.56
3.73
7.78
0.68
0.92
3.34
1.69
3.03
1.43
98
25
47
89
44
27
48
46
38
27
60.26
41.66
45.95
49.95
40.51
40.03
38.51
40.46
46.05
38.21
0.97
0.018
0.07
13.82
0.52
1.04
7.03
0.97
1.16
1.47
1.45
1.38
1.55
0.17
5.07
4.5
6.48
0.69
0.94
2.67
2.39
2.96
1.41
103
101
111
81
76
72.67
46.19
48.35
44.64
54.8
54.57
41.83
46.12
57.2
56.14
0.941
0.1
0.112
0.298
0.138
0.061
0.039
0.158
0.173
0.076
Landlocked
Uganda
Malawi
Sudan
Burkina Faso
Ethiopia
Chad
Burundi
Mali
Niger
1.93
1.32
1.31
1.22
0.82
0.69
0.44
0.23
-1.31
1.98
1.64
1.61
1.42
1.27
1.93
1.16
1.11
0.49
0.91
0.69
1.65
1.25
0.86
1.91
0.84
1.62
2.63
2.94
1.58
4.99
2.07
10.19
1.37
1.32
1.95
1.35
49
45.46
38.43
39.67
36.97
36.91
35.46
41.96
36.78
35.96
0.99
0.62
1.45
0.97
0.6
2.03
0.54
0.99
0.72
3.52
1.55
4.79
1.69
9.71
1.21
1.01
1.69
1.69
125
125
60
53
77
71
80
64
45
48.89
40.22
56.55
48.1
42.48
43.88
44.23
48.31
44.7
0.302
0.005
0.046
0.029
0.027
0.564
0.012
0.008
Resource Rich
Botswana
Congo Rep.
Cameroon
Nigeria
Namibia
Guinea
Zambia
Sierra Leone
6.37
1.47
1.01
0.86
0.83
0.23
-0.59
-0.83
9.08
4.17
1.28
1.18
1.34
1.05
0.77
0.88
1.6
0.73
2.76
1.69
5.33
4.48
1.9
1.75
0.21
0.44
2.37
18.26
0.28
1.4
1.41
1
8
1.68
1.93
1.1
3.92
2.58
0.81
0.85
0.24
0.53
2.25
19.71
0.28
1.11
1.41
0.75
105
89
117
99
79
99
145
35.49
52.48
45.98
43.65
47.46
53.9
38.08
41.11
0.018
0.037
0.074
0.213
0.08
0.124
0.09
0.158
Others
Cape Verde
Lesotho
Seychelles
Gabon
Mauritania
Gambia
Rwanda
3.45
3.31
2.48
2.44
1.59
1.09
0.56
4.16
4.38
3.4
2.73
1.75
1.41
1.13
1.62
1.17
5.01
4.86
1.8
1.55
1.53
0.09
0.39
0.02
0.22
0.44
0.16
1.23
3.7
2.83
9.36
7.29
1.73
1.2
0.95
0.07
0.25
0.01
0.18
0.39
0.2
1.18
111
131
110
130
94
81
119
70.42
35.6
0.273
0.196
54.08
53.26
56.34
43.92
0.032
0.007
0.27
0.486
25
8
7
17
18
10
5
42
78
65
36
30
42
23
47.51
42.64
40.46
40.46
43.72
34.29
42.76
32.01
83
52.96
44.44
8
12
49
41.48
39.46
32.96
42.96
0.06
0.047
0.109
0.078
0.13
0.113
0.06
0.006
0.02
0.009
0.005
0.095
0.096
0.046
0.02
0.007
0.25
101
99
95
CHALLENGES OF AFRICAN GROWTH
Box 2.1. Different Development Strategies—Very Different Results: Mauritius
versus Côte d’Ivoire
Income Per Capita
PPP adjusted, 1996 international $
15000
15441
10000
Mauritius
5000
3084
1624
1606
Côte d'Ivoire
0
1960
1970
1980
year
1990
2000
Source: WDI 2006, PWT 6.1 and GDN 1998.
Côte d’Ivoire and Mauritius are both coastal and resource-poor countries, which
chose to pursue very different development paths with very different outcomes. Côte
d’Ivoire chose the import substitution approach to structural transformation after initial
successful agricultural export-led growth. Mauritius opted for export diversification
and export-led structural transformation after initial attempts to follow an import
substitution strategy. By 2004 Côte d’Ivoire’s GDP per capita of $1,624 (in 1996
international dollars), was more or less the same as it was in 1960 ($1,606). In contrast
with a GDP per capita of $15,441 (in 1996 international dollars) in 2004, Mauritius’
income per capita is fivefold higher relative to its 1960 level of $3,084.
Mauritius did have a head start in human development—much higher life
expectancies, and educational attainment. Mauritius consolidated this position and is
now among the world’s upper middle-income countries. From a largely monoculture
economy—sugar, with initial intent to take the path of import substitution—Mauritius
changed strategies in the early 1970s toward a private sector-led, diversified export
economy and has stayed the course at a phenomenal average growth rate of 5.4 percent
for nearly four decades now.
This pivotal strategy involved a combination of export-promotion policies;
channeling of rents from preferential sugar export agreements with Europe (guaranteed
volume of exports at a price on average about 90 percent above market price) to
finance domestic private sector investment for export diversification, and exportoriented FDI from countries like Hong Kong. In successfully exploiting the global
opportunities for growth, the role of government was emphasized in creating political,
social, and economic institutions for the better functioning of markets.
continued
40
CHAPTER 2: AFRICA’S LONG-TERM GROWTH EXPERIENCE IN A GLOBAL PERSPECTIVE
Policies aimed at securing manufactured exports-led growth proved crucial for
the sustained growth performance of this “isolated” island economy. Since the mid1980s, the volume of goods imported and exported by Mauritius has grown rapidly, at
annual rates of 8.7 percent and 5.4 percent, respectively. The openness ratio has
correspondingly increased from about 70 percent to 100 percent, while Africa’s
average stagnated at around 45 percent (Subramanian 2001). Preferential access
provided by Mauritius’ trading partners for sugar and textile, and clothing, which
together accounted for about 90 percent of Mauritius’ total exports, implicitly
subsidized the export sector growth.
Côte d’Ivoire, on the other hand, locked in primary commodity export
dependence, presents a contrasting growth experience. For the 45 years since 1960 the
average growth rate of Côte d’Ivoire’s per capita income has been approximately zero.
The significant growth in the first 15 years since 1960 under Houphet Boigny was
virtually offset by the decline in income per capita since the late 1970s. Agriculture
provided about 75 percent of export earnings in 1965 with coffee and cocoa as the
country’s major exports. By 2004, this situation had hardly changed—agriculture
provided 60 percent of export earnings, with coffee and cocoa sector bringing in about
40 percent of export revenue (AfDB/OECD 2005).
In contrast to the Mauritian strategy of export diversification and export-led
growth (and like many other African countries), Côte d’Ivoire implemented a vigorous
but unsuccessful import substitution strategy for manufacturing and agricultural
processing. The strategy was financed by a combination of taxing the agricultural sector
and attracting foreign direct investment into capital-intensive industrial activities.
Foreign direct investment (FDI) was attracted through incentives that offered attractive
returns to investors and reduced infrastructural transaction costs. Between 1960 and
1980, light manufacturing grew at the rate of 13 percent per year, and its contribution to
GDP increased from 4 percent in 1960 to 17 percent in 1984. In 2002–03, this
contribution remained more or less unchanged at 18–19 percent. It is argued, however,
that the bulk of earnings from the capital invested in industry flowed out of the country
in the forms of tax-free profits, salary remittances, and repatriated capital.
A key contrast with Mauritius on the policy front is the CFA overvaluation,
which became most severe during 1980–94, ushering in the growth collapse, and the
Côte d’Ivoire debt crisis, which Mauritius did not have. By the time these problems
were resolved in the mid-1990s, nearly two decades after Mauritius embarked on its
reforms, instability had set in, exacerbating stagnation.
41
CHALLENGES OF AFRICAN GROWTH
Box. 2.2. Contrasting Growth Paths of Two Landlocked Resource Countries:
Botswana and Zambia
Income Per Capita
10000
PPP adjusted, 1996 international $
8936
8000
6000
4000
Botswana
2000
1167
984
0
1960
902
Zambia
1970
1980
year
1990
2000
Source: WDI 2006, PWT 6.1 and GDN 1998.
Botswana and Zambia are two landlocked and resource-rich African countries
that have followed two very different approaches in managing and using the rents from
their resource wealth to achieve very different outcomes. Botswana’s remarkable per
capita income growth performance, averaging 6.4 percent over the 1960 to 2004
period, enabled it to move from a low-income poor country in 1960 to an upper
middle- income country ($8,936 in 1996 international dollars) since 1998. Zambia’s
per capita income, on the other hand, on average retrogressed at -0.6% per annum over
the past 45 years, and as a result its 2004 level of $902 in 1996 international prices is
23 percent below the 1960 level of $1,167. It is striking that Botswana’s 1960 per
capita income was 20 percent below that of Zambia. The two countries’ income paths
crossed each other around 1970, moving in the opposite directions.
Botswana, the fastest growing economy in Africa (and among the fastest
globally) is landlocked, natural resource dependent, and lacks a history as a settler
colony; hence, it is not a beneficiary of institutions evolving where colonists settled.
Arguably, four major reasons are behind this success story: the strength of its state
capacity; its being part of the Southern Africa’s relatively effective infrastructure
system, which helped offset the negative effects of remoteness; belonging to the
Southern African customs union and monetary area (for a long period), which served
as a commitment instrument against rent seeking; and, most important, its incessant
following of the self-disciplinary rule called the Sustainable Budget Index (SBI), for
the use of mineral rents and managing reserves, combined with stringent application of
public scrutiny to government’s expenditure and investment program (Maipose and
Matsheka, 2006; Robinson , 2003 Rodrik, 2003).
continued
42
CHAPTER 2: AFRICA’S LONG-TERM GROWTH EXPERIENCE IN A GLOBAL PERSPECTIVE
About 40 percent of Botswana’s growth rate, on average, was accounted for by
the growth in the mining sector, although recent economic diversification has reduced
this contribution (Iimi 2006). Minerals accounted for 80 percent of its exports. The
government share of mineral revenue averaged around 50 percent and this source of
revenue amounts to 35 percent of GDP.
Botswana managed and used rents from its mineral wealth prudently and
equitably. Part of its strategy was to channel the returns from the abundant mineral
endowment into improving human capital and the social well-being of its citizens. The
government avoided Dutch disease mainly because the government had taken care not
to spend more than the economy could absorb. Reserve accumulation during boom
periods and rapid responses to adverse terms of trade shocks are two crucial facets of
Botswana’s super-prudent macroeconomic policy. For example, three funds were
established to provide for stabilization reserves, public debt service, and local
development opportunities (Faber 1997).
A secure political elite (with electoral support since independence) had pursued
growth-promoting policies, developed or modified, and maintained viable traditional
and modern institutions of political, economic, and legal restraint, thereby minimizing
the adverse consequences of resource wealth. Sustainable development was underlined
by development planning and pragmatism—not “ideological dogma.” Under this
approach, all mineral revenues were supposed to finance “investment expenditure,”
defined as development expenditure and recurrent spending on education and health.
Zambia chose a very different approach to managing and using its natural
resource wealth. Following the Fabian socialist principle—the state has responsibility
for collecting and redistributing rents from capital, natural resources, and labor to
achieve egalitarian goals—Zambia’s first leader decided to have strong state
involvement in the copper industry. Overall, policy environment and weaknesses in
governance in Zambia combined to create a capital-hostile environment, limiting
accumulation and undermining productivity growth by diverting investable resources
to unproductive uses.
Mwanawina and Mukungushi (2006), present three sad stories of the copper
industry in Zambia. First, around the time of independence, Zambia along with other
key producers, adopted a monopolistic strategy in the global mining market by cutting
down production with the hopes of affecting the world supply of copper and exerting
upward pressure on the world price of copper. Consequently, the country lost out on
potential mineral revenues at the same time it was diverting financial resources toward
maintenance of stocks, away from investment.
Second, government discouraged private investment in the industry,
notwithstanding stagnation of production following nationalization. This exacerbated
the pressure on local borrowing and deterioration of the balance of payments position.
The decline in production continued even after the privatization of the major mining
assets, including the development of the Konkola Deep Mining Project and the
Mufurila and Nkana divisions in 2000; fiscal pressures mounted largely because of
huge tax concessions given to the new owners of the mines. This denied the
government much-needed tax revenue, not to mention the huge liabilities that the
government assumed concurrently.
continued
43
CHALLENGES OF AFRICAN GROWTH
Third, notwithstanding sustained declines in copper prices in the world market,
the government stance was to treat this as a reversible shock that needed to be
financed, rather than viewing this as a longer-term change requiring serious adjustment
and diversification efforts away from copper. Combined with the effects of a failed
import substitution strategy, the collapse in Zambia’s revenue base from copper led to
a long-trend decline in per capita income and social development.
Whereas a much narrower difference in the average investment rates between the
two countries is much less (investment/GDP ratios of 20 percent for Zambia and
26percent for Botswana), the wide differences in GDP growth are quite striking. This
gap most likely illustrates how the difference in policy environment and in the quality
of scrutiny of public investment can have huge effects on the ex ante productivity of
investment.
SECTORAL COMPOSITION
Globally, structural transformation of economies has provided the
bedrock of accelerated and sustained growth. Rural and agriculture-dominated
economies in Asia, for example, have undergone significant diversification away
from agriculture even as they underwent phenomenal productivity growth in that
sector through the green revolution. The rapidly growing Asian countries, for
example, have either diversified toward manufactures or agro-industries. Africa
remains the region most dependent on agriculture for livelihood, exports, and
employment although, as in the case of the growth experience, there is some
diversity across countries within Africa.
Slow growth has gone hand in hand with limited structural
diversification. Traditional agriculture continues to absorb the majority of the
labor force in many African countries, a feature no longer observed in any other
region of the world. At the close of the 20th century, nearly three-quarters of
African livelihoods were still being earned in the agricultural sector—fully a
standard deviation above the level characteristic of other developing countries in
the late 1960s (Ndulu and O’Connell 2006a). As will be seen below, the relative
size of the agricultural sector is in line with the low level of per-capita income in
most African countries. On average, agriculture by the end of the 20th century
still contributed roughly one-third of total GDP in African countries, a share
nearly two standard deviations above the non-African developing-country mean3
(O’Connell and Ndulu 2000). Irrigation is expensive and extremely limited, with
the result that African agriculture remains largely rain fed and subject to periodic
drought.
On the other hand, Africa’s share of GDP in industry and within its
manufacturing subsector (accounting for about 60 percent of industry) has risen
slowly since the early 1970s, mirroring the trend of the overall developing
44
CHAPTER 2: AFRICA’S LONG-TERM GROWTH EXPERIENCE IN A GLOBAL PERSPECTIVE
country mean. The African share, however, diverges strongly from East Asia and
Pacific, which increased substantially over the period, and more recently SSA is
also slipping behind South Asian countries. The services sector share of GDP has
averaged 43 percent in Sub-Saharan Africa. This average showed a pattern of
increase until the early 1980s, and then decreased thereafter.
Following the approach used by Syquirn and Chenery (1989; see table
2.1) O’Connell and Ndulu (2000) assess whether the patterns of sectoral
transformation in African countries depart systematically from what would be
expected given the continent’s overall income levels and cross-country norms.
The authors conclude that given the levels of income and population, the
size of the service sector is markedly smaller in Sub-Saharan Africa, and that of
industry and its manufacturing subsector is markedly larger than would be
predicted based on cross-country norms. Agricultural output shares are just
slightly higher in Sub-Saharan Africa than predicted on the basis of income and
population. The share of the labor force in agriculture, in contrast, is notably
larger. Consistent with these findings, the labor productivity differential in favor
of nonagricultural activities tends to be much higher in SSA than in other
regions.
In fact, despite the large relative size of agriculture in GDP, African
countries have been diversifying into manufacturing more rapidly than would be
expected given their levels of per-capita income (O’Connell and Ndulu 2000).
The movement is somewhat slower into services than predicted.
Finally, the structure of exports has also remained fairly undiversified,
with continued concentration in a narrow band of primary commodities
(Berthelemy and Soderling 2001, 2002), including minerals. Collier and
O’Connell (2005), using global data on primary commodity exports and rents
from energy, mineral, and forest resources, classify a country as a “natural
resource economy” or “resource rich” if it generates more than 10 percent of its
GDP in primary commodities exports. Using this criterion comparing SSA with
other developing regions excluding Middle East and North Africa, they find that
a stark contrast already existed in 1960, with 12.5 percent of the SSA sample
classified as resource rich, compared to only 7 percent of the non-SSA sample.
With new mineral deposit discoveries, over time this difference expanded as 16.7
percent of the African sample acquired resource-rich status, compared to only
10.5 percent of the non-African.
One consequence of Africa’s delayed structural transformation and
uncharacteristically high dependence on primary commodities has been high
45
CHALLENGES OF AFRICAN GROWTH
growth volatility, with some stemming from erratic world commodity prices.
Furthermore, for nearly three decades since the late 1960s, world commodity
prices have tended to decline, resulting in declining export revenues, sometimes
even in the face of expanding quantities of exports. More recently, however, with
China’s phenomenal increase in demand for base metals and oil, this trend
appears to have reversed, leading to a rise in growth in oil exporting countries
and other mineral exporters, such as Zambia.
Table 2.2. Predicted Shares of Economic Structure (Percent) at Selected Levels of
Income per Capita
Component of
economic structure
Final demand
Private consumption
Government consumption
Investment
Exports
Imports
Food consumption
Trade
Merchandise exports
Primary
Manufacturing
Production (value-added)
Agriculture
Mining
Manufacturing
Construction
Utilities
Services
Labor force
Agriculture
Industry
Services
Actual average
share for
y<300
(1)
Share predicted for per-capita income level
(at official exchange rates):
y=300
y=500
y=1000
(2)
(3)
(4)
79
12
14
16
21
73.3
13.6
18.4
19.3
24.6
70.2
13.5
20.8
20.7
25.2
66.4
13.7
23.3
22.6
26.0
39
0.15
34.5
29.1
14
13
1
15.2
13.9
1.3
16.9
14.9
2.0
18.8
15.2
3.7
48
1
10
4
6
31
39.4
5
12.1
4.4
6.7
32.4
31.7
6.6
14.8
4.9
7.4
34.6
22.8
7.7
18.1
5.5
8.1
37.8
81
7
12
74.9
9.2
15.9
65.1
13.2
21.7
51.7
19.2
29.1
Source: Syrquin and Chenery (1989), cited in O’Connell and Ndulu (2000).
CONCLUSIONS
There are three important conclusions we can draw from the analysis of
the growth record in this chapter. First, unlike their Asian counterparts, African
46
CHAPTER 2: AFRICA’S LONG-TERM GROWTH EXPERIENCE IN A GLOBAL PERSPECTIVE
countries, though capable of spurts of high growth, have been unable to sustain
these over longer periods. It is therefore imperative to understand the reasons
behind episodic growth that characterizes many of these countries, and to place
greater emphasis on prudent management of responses to shocks. Second, the last
decade and a half has seen not only more countries with higher growth, but there
is a significant upward shift in the growth trajectory for the 15 fast growers, as
well as a sustaining of the faster pace. This may point to concurrent scaling up of
growth, diversification of its sources, and fundamental changes in the growth
process. In any case, this change challenges the report to explain this shift and
draw lessons for the future. Third, there is far greater diversity in growth
performance during the last decade and a half than during the period of growth
collapse in the previous two decades. It is therefore important to better
understand what distinguishes these countries and hence are critical drivers of
growth. Furthermore, since there are also significant differences in the growth
performance across opportunity groups, country context matters for successful
growth strategies, and any strategic direction offered at the level of this report has
to provide options that accommodate the different contextual needs. It is also for
this reason that the report not only looks at regional trends, but presents
assessments of the relative importance of the key drivers for individual countries.
ENDNOTES
1
Oil exporting countries grew at a median per-capita rate of 3.5 percent. The upper,
middle and lower thirds of the growth distribution comprise 17 percent, 29 percent, and
25 percent of Africa’s population, respectively.
2
These include Angola, Central African Republic, Comoros, Madagascar, Niger,
Senegal, Sierra Leone, DRC, and Zambia.
3
For these sectoral GDP shares, we use value added in constant 1995 dollars, in order to
abstract from relative price movements.
47
3
Explaining the African Growth Record:
What Appears to Matter Most
In this chapter we examine the influential factors behind the African
growth record and assess their relative importance in the growth experience in
African countries. This is done using three approaches: First, at an aggregate
level we employ the conventional decomposition of sources of growth, to assess
the relative importance of capital accumulation, labor, and productivity to
growth. This is done for the region as a whole and for the 19 African countries
for which complete and consistent data are available. We rely in particular on the
work by Collins and Bosworth (1998, 2003) and Ndulu and O’Connell (2003),
with the latter covering a larger set of African countries. A key conclusion from
this analysis is that we have to look beyond differences in the rate of factor
accumulation to understand Africa’s lagging growth performance compared with
that of other regions. We have to unpack the large productivity residual by
employing meso- and microanalysis.
Second (and partly to confirm the aforementioned conclusions), we use
firm level data from investment climate surveys to assess the relative importance
of different factors on the attractiveness of African countries to investors and the
cost of doing business. The assessment uses the benchmarks of other developing
countries to assess the state of institutional, policy, and regulatory frameworks;
business regulations and their enforcement; adequacy and quality of
infrastructure; macroeconomic stability; protection of property rights; and
functioning of the financial system. A separate study assessing constraints to
private sector growth, prepared as a background paper for this report
(Ramachandra and Shah 2006) provides more details of this assessment.
Third, we compare the extent of the deviation of the growth conditions in
African countries from those obtaining in other regions, to establish where the
gaps are widest. First, using the vast cross-country empirical work on growth and
employing global data assembled for this study, we identify the globally
important factors for explaining growth and assess how these are important in the
African countries’ growth experience. Then we undertake a benchmarking
49
CHALLENGES OF AFRICAN GROWTH
exercise for African growth conditions relative to three comparators—global
average of developing countries, South Asia, and South East Asia. Noting that
the region has seriously lagged behind in growth, we include East Asia among
the comparators to emphasize the magnitude of the effort needed to close the gap.
We also track the changes in the individual components of these growth
conditions (that is, the factors influencing growth) over the three phases of the Ushaped path of the African growth experience, in order to identify the areas in
which Africa is closing the gap with other developing regions and those requiring
much more effort toward such closure. This analysis is done at the regional level,
and for 36 individual countries that have adequate data over the entire period of
45 years.
We judiciously use findings from cross-country studies, which have
helped to identify factors that tend to have the highest likelihood of influencing
growth performance without drawing causality conclusions from it. We
appreciate the wide range of econometric and conceptual problems plaguing
cross-country growth regression. Annex 1 has a more detailed econometric
discussion and empirical analysis behind this assessment. We use the results from
the empirical work presented in this annex to more explicitly assess the relative
contribution of each factor of growth to the gap between African growth and that
of other regions.
SOURCES OF ECONOMIC GROWTH: LESSONS FROM
GROWTH ACCOUNTING
Long term growth is a product of both the rate of capital accumulation
(physical and human) and returns to investment. The results from growth
decompositions, point to the importance of both factors in Africa’s growth
experience as is the case in all other regions. Globally, Bosworth and Collins
(2003) estimate that total factor productivity growth accounts for 41 percent of
growth in 84 countries they study. For Sub-Saharan Africa as a whole, slightly
less than half of the growth difference with the other developing regions is due to
slower accumulation of physical capital per worker and slightly more than half is
accounted for by the slower growth in the productivity residual. As noted earlier
not only are investment levels lower in the region but the returns are also much
lower. At international prices the level of investment in SSA averaged about half
that in other developing regions and yielded about half of the average investment
returns.
The results of the decompositions are presented at the end of this chapter
in Tables 3.1 and 3.2 (Bosworth and Collins, 2003), whereby GDP growth per
worker is broken down into the contribution of physical and human capital and, a
50
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
productivity growth residual. The U-shaped time pattern of Africa’s average
growth rate resurfaces. In the 1960-1973 phase, the average growth rate of output
per worker was 2.7; of which 1.6 percentage points represented contribution by
total factor productivity and 0.9 percent by capital accumulation. During this
period both capital accumulation and TFP were on a rising trend, while the
contribution of education per worker was minimal at 0.16 percentage points.
Table 3.1. Sources of Growth, Regions, 1960–2003
Contribution of:
Output per
Physical
Region/Period Output
Worker
Capital
Education
World (84)
1960–2003
3.82
2.26
1.00
0.33
1960–73
5.10
3.42
1.22
0.31
1973–90
3.41
1.68
0.89
0.40
1990–2003
3.09
1.88
0.93
0.27
Industrial Countries (22)
1960–2003
3.36
2.23
0.95
0.31
1960–73
5.16
3.86
1.34
0.32
1973–90
2.79
1.53
0.75
0.38
1990–2003
2.31
1.55
0.84
0.22
China (1)
1960–2003
6.91
4.97
1.86
0.36
1960–73
3.40
1.21
0.30
0.37
1973–90
7.55
5.24
1.95
0.41
1990–2003
9.70
8.51
3.32
0.29
East Asia less China (7)
1960–2003
6.52
3.81
2.23
0.53
1960–73
6.92
3.94
1.86
0.48
1973–90
7.20
4.26
2.65
0.61
1990–2003
5.24
3.12
2.05
0.47
Latin America (23)
1960–2003
3.70
0.95
0.54
0.36
1960–73
5.97
3.09
0.90
0.29
1973–90
2.83
-0.18
0.56
0.44
1990–2003
2.61
0.33
0.14
0.34
South Asia (4)
1960–2003
4.63
2.44
1.02
0.35
1960–73
3.41
1.31
1.00
0.29
1973–90
5.02
2.82
0.84
0.37
1990–2003
5.34
3.10
1.29
0.40
Factor
Productivity
0.91
1.85
0.38
0.67
0.95
2.16
0.39
0.49
2.68
0.53
2.80
4.72
1.02
1.55
0.95
0.58
0.05
1.88
-1.17
-0.16
1.05
0.02
1.58
1.38
51
CHALLENGES OF AFRICAN GROWTH
Table 3.1. Sources of Growth, Regions, 1960–2003
Contribution of:
Output per
Physical
Region/Period Output
Worker
Capital
Education
Africa (19)
1960–2003
3.20
0.60
0.43
0.28
1960–73
5.14
2.73
0.93
0.16
1973–90
2.28
-0.48
0.41
0.27
1990–2003
2.48
-0.09
-0.05
0.40
Middle East (9)
1960–2003
4.56
1.92
1.02
0.45
1960–73
6.37
4.28
1.51
0.33
1973–90
3.89
1.15
1.28
0.50
1990–2003
3.64
0.61
0.20
0.51
Factor
Productivity
-0.11
1.62
-1.16
-0.44
0.43
2.39
-0.63
-0.11
Source: Bosworth and Collins (2003).
The period spanning 1973 to1990 marked a serious collapse in growth as
output per worker fell precipitously at an average rate of -0.48 percent annually.
The contribution of the productivity residual in this period turned sharply
negative, at -1.16 percentage points, more than offsetting the marginally positive
contributions of physical capital accumulation (at 0.41 percent) and education per
worker (at 0.27 percentage points).
In the last decade and a half (1990-2003) some improvements in the
growth of output per worker for SSA were registered, moving the regional
average into the non-negative levels. Again, the contribution of TFP dominated
this growth recovery. This is consistent with the findings of other studies, e.g.
Berthelemy and Soderling (2001), which found that Africa’s recovery in the
second half of the 1990s was entirely accounted for by rapid increases in the
productivity residual. The contribution of human capital also increased sharply
during this period to 0.40 percentage points.
The standard interpretation of a low residual is slow technological
progress (O’Connell and Ndulu 2000). The traditional approach has been to
break down technical change into three branches—invention, the creation of new
products and processes; innovation, the transfer of invention to commercial
application; and diffusion, the spread of innovation into the economic
environment (Freeman 1991). Notwithstanding the interdependence and feedback
among these branches; the first two branches typically entail production of new
knowledge, which is costly and risky to produce but cheap to imitate at the
diffusion stage. The public good nature of knowledge and the difficulties of
establishing and protecting property rights are partly behind these features. Most
52
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
African countries (except South Africa) are technological followers and are more
likely to engage in the third branch of technical change, diffusion.
Table 3.2. Sources of Growth, Africa, 1960–2003
Region/Period
Côte d'Ivoire
1960–2003
1960–73
1973–90
1990–2003
Cameroon
1960–2003
1960–73
1973–90
1990–2003
Ethiopia
1960–2003
1960–73
1973–90
1990–2003
Ghana
1960–2003
1960–73
1973–90
1990–2003
Kenya
1960–2003
1960–73
1973–90
1990–2003
Madagascar
1960–2003
1960–73
1973–90
1990–2003
Mali
1960–2003
1960–73
1973–90
1990–2003
Contribution of:
Physical
Capital
Education
Output
Output per
Worker
Factor
Productivity
3.82
8.20
2.36
1.46
0.42
4.56
-1.02
-1.71
0.28
1.55
0.52
-1.28
0.31
0.19
0.41
0.30
-0.17
2.77
-1.94
-0.72
3.40
2.46
5.10
2.14
1.13
0.79
2.77
-0.64
0.88
0.67
2.31
-0.74
0.27
0.19
0.36
0.23
-0.03
-0.07
0.09
-0.13
3.05
4.47
2.09
2.90
0.64
2.17
-0.64
0.82
1.02
2.20
0.62
0.36
0.20
0.06
0.23
0.28
-0.56
-0.09
-1.48
0.17
2.59
2.71
1.15
4.38
-0.13
0.39
-1.69
1.43
0.10
0.75
-0.81
0.67
0.33
0.67
0.19
0.16
-0.56
-1.03
-1.07
0.60
4.31
6.78
4.53
1.61
1.04
3.78
0.95
-1.50
-0.02
0.66
-0.18
-0.47
0.37
0.32
0.44
0.32
0.69
2.78
0.68
-1.35
1.49
2.30
0.90
1.45
-1.04
-0.09
-1.56
-1.30
-0.05
0.09
-0.24
0.05
0.24
0.09
0.32
0.30
-1.23
-0.27
-1.64
-1.64
3.24
2.94
2.28
4.82
1.17
1.10
0.08
2.67
0.31
0.61
0.07
0.33
0.08
0.06
0.10
0.09
0.77
0.43
-0.09
2.24
53
CHALLENGES OF AFRICAN GROWTH
Table 3.2. Sources of Growth, Africa, 1960–2003
Contribution of:
Physical
Capital
Education
Region/Period
Mozambique
1960–2003
1960–73
1973–90
1990–2003
Output
Output per
Worker
2.86
5.08
-1.37
6.38
0.92
3.05
-3.11
4.23
Region/Period
Mauritius
1960–2003
1960–73
1973–90
1990–2003
Malawi
1960–2003
1960–73
1973–90
1990–2003
Nigeria
1960–2003
1960–73
1973–90
1990–2003
Rwanda
1960–2003
1960–73
1973–90
1990–2003
Senegal
1960–2003
1960–73
1973–90
1990–2003
Sierra Leone
1960–2003
1960–73
1973–90
Output
Output per
Worker
4.97
4.07
5.57
5.09
2.53
1.38
2.83
3.32
0.56
-0.17
0.56
1.29
0.38
0.45
0.44
0.25
1.58
1.10
1.81
1.75
3.84
5.46
3.49
2.71
1.44
3.17
0.50
0.94
1.35
4.66
0.59
-0.90
0.20
0.08
0.19
0.32
-0.11
-1.51
-0.28
1.54
3.34
5.14
2.08
3.20
0.71
2.73
-0.55
0.38
1.28
1.96
1.18
0.76
0.32
0.09
0.34
0.53
-0.88
0.66
-2.04
-0.90
2.80
2.40
4.06
1.57
0.22
-0.25
0.88
-0.17
0.82
0.18
1.93
0.01
0.19
0.16
0.20
0.20
-0.78
-0.59
-1.23
-0.39
2.65
1.49
2.81
3.61
0.10
-0.98
0.27
0.98
-0.06
-0.54
-0.14
0.53
0.16
0.11
0.17
0.20
0.00
-0.56
0.23
0.25
2.07
3.76
2.03
0.40
2.62
0.29
-0.18
0.52
-0.32
0.24
0.19
0.30
0.34
1.89
0.31
54
0.34
0.14
0.33
0.09
-0.42
0.18
1.35
0.12
Contribution of:
Physical
Capital
Education
Factor
Productivity
0.44
2.62
-2.88
2.72
Factor
Productivity
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
Table 3.2. Sources of Growth, Africa, 1960–2003
Region/Period
1990–2003
Uganda
1960–2003
1960–73
1973–90
1990–2003
Tanzania
1960–2003
1960–73
1973–90
1990–2003
Region/Period
South Africa
1960–2003
1960–73
1973–90
1990–2003
Zambia
1960–2003
1960–73
1973–90
1990–2003
Zimbabwe
1960–2003
1960–73
1973–90
1990–2003
Contribution of:
Physical
Capital
Education
-0.69
0.22
Output
0.47
Output per
Worker
-1.62
3.69
4.23
1.16
6.54
0.77
0.70
-1.50
3.90
3.76
5.74
2.75
3.82
0.88
3.02
-0.25
1.06
Output
Output per
Worker
3.18
5.73
2.11
1.97
0.55
3.46
-0.63
-0.60
0.27
0.76
0.36
-0.39
0.26
0.13
0.21
0.50
0.02
2.54
-1.20
-0.71
1.69
3.45
0.95
1.53
-0.93
0.92
-2.01
-0.55
-0.85
0.39
-1.44
-1.19
0.33
0.27
0.30
0.45
-0.41
0.27
-0.87
0.20
3.83
6.34
3.28
-0.70
0.93
3.45
-0.19
-2.52
-0.22
-0.47
-0.43
0.12
0.45
0.24
0.70
0.33
0.69
3.69
-0.46
-2.95
0.67
1.38
-0.05
0.92
Factor
Productivity
-1.15
0.24
0.16
0.33
0.22
-0.14
-0.82
-1.78
2.73
0.12
0.04
0.04
-0.13
0.24
0.12
0.09
0.12
Contribution of:
Physical
Capital
Education
0.73
3.12
-0.60
0.85
Factor
Productivity
Source: Bosworth and Collins (2003)
Singapore’s case presents an interesting contrast to slow technological
progress in Africa, and an example of a successful technological follower whose
major source of long-term growth was technical change initially via diffusion and
some innovation. Ho and Hoon (2006) develop an approach to accounting for
sources of Singapore’s economic growth by explicitly identifying channels
through which Singapore, as a technological follower, benefited from
55
CHALLENGES OF AFRICAN GROWTH
international R& D spillovers. They show that 57.5 percent of Singapore’s real
GDP per worker growth rate (1970–2002) is due to multifactor productivity and
more specifically, 52 percent of the growth explained by an increase in capacity
to absorb new technology through improving educational quality, and effective
links to the world’s technological leaders through trade (particularly machinery
imports) and FDI. They also conclude that these two were the most influential
factors behind Singapore’s fast pace of multifactor productivity catch-up with
technological leaders. These findings are consistent with those from other
empirical research. For example Coe, Helpman, and Hoffmaister (1997) and
Hejazi and Safarian (1999) show empirically that how much any single followereconomy benefits from international R&D spillovers depends on its distance
from the frontier and its stock of human capital, as well as its integration with
technology leaders through trade and foreign direct investment.
Apart from slow technological progress, there are several other
candidates that could explain the slow multifactor productivity growth in African
countries. These include falling capacity utilization, particularly during times
when shortage of foreign exchange constrained raw materials imports1; high rates
of depreciation of physical capital, associated, for example, with poor
maintenance of public infrastructure, climate shocks that undermine total factor
productivity in agriculture, and pervasiveness of civil strife that destroys physical
capital or suspends its use. At shorter frequencies, the residual may also reflect
fluctuations in aggregate demand, which would affect output via capacity
utilization and some degree of underemployment.
The weak empirical link between physical capital accumulation and
growth is a distinct feature of the SSA growth experience, particularly during the
two decades of economic stagnation 1970-1995. Table 3.3 below shows the exante returns to investment in the developing regions. Clearly there is some
variation in the average economy-wide returns to aggregate investment across the
regions. Africa does not compare well with the fast growing regions of the
developing world, including EAP, ECA and SAR.
Interestingly, growth collapse occurred without a corresponding collapse
of investment. In spite of the relatively high ex-ante rates of returns to investment
in the region during the 1980s, for example, three sets of reasons may be behind
this striking feature. Capital accumulation may not be taking place at the same
rate as recorded investment. As noted earlier the average relative price of
investment goods for Sub-Saharan Africa was 70 percent higher than for OECD
or East Asia (Sala i Martin, Doppelhofer and Miller (2003). Using this
information, Artadi and Sala i Martin (2003) estimate that the average growth
rate in African countries would have been 0.44 percentage points higher each
56
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
year, if the relative price of investment goods was the same as in OECD or East
Asia2. In Africa, physical capital accumulation is import intensive but in most of
these countries capital goods attract very low tariff rates or are preferentially
exempted. The relatively higher investment prices most likely result from high
transport costs caused by shipping cartels, port inefficiencies (reflecting poor
quality of infrastructure or management) or simple lack of scale economies
(Collier, 2002, Yeats and Ng, 1997).
Table 3.3. Productivity of Investment—Returns
Decade
AFR
EAP
ECA
LAC
MNA
SAR
1960–69
0.326
0.301
0.263
0.259
0.540
0.314
1970-79
0.243
0.316
0.215
0.247
0.239
0.225
1980–89
0.151
0.146
0.109
0.085
0.106
0.235
1990–99
0.074
0.191
-0.229
0.143
0.214
0.220
2000–02
0.109
0.237
0.258
0.048
-0.022
0.175
Source: Ndulu, 2004.
In addition, failures in governance might have contributed through
distortions that gradually undermine the quality of the capital stock and generate
a negative residual. The governance failures could arise out of the dominance of
inefficient public sector investment during the period of growth collapse; the
prevalence of tax avoidance and self-insurance by firms and households, and the
diversion of resources into rent-seeking and corruption (Vishny and Shleifer
1993). These may all have contributed to generating an inefficient composition of
aggregate investment in Africa that eroded the quality of the capital stock. A
general bias against private sector accumulation, emphasized by Mkandawire and
Soludo (1999), would produce the same effect unless justified by an unusually
high marginal product of public capital, (Ndulu and O’Connell, 2006).
A third possibility that is somewhat speculative is based on increasing
returns and threshold effects and argues that investment yields would have been
much higher if investment rates had been high enough (Sachs et al, 2004).
Structural features that impede the flow of information and trade, even if
unchanged over time, can lower the residual by limiting the scope for
agglomeration economies and the diffusion of existing technological knowledge
(Barro and Sala-i-Martin, 1995).
57
CHALLENGES OF AFRICAN GROWTH
Two important conclusions emerge from analysis of the sources of
growth. First, whereas the results confirm the importance of low levels of capital
accumulation in explaining the slow growth in a large number of African
countries, they also highlight the importance of the productivity residual in
African growth performance. Globally, Bosworth and Collin (2003) estimate that
total factor productivity growth accounts for 41 percent of growth in the 84
countries they study. This is certainly true for African countries included in the
sample, notwithstanding the significant diversity across them. This feature holds
true through all three phases of the region’s growth path. It dominates the period
of growth contraction and leads the growth recovery phase of the past decade.
Second, the central role of investment incentives in both capital
accumulation and productivity growth leads us to focus on improving the
investment climate, which in addition to identifying actionable policy areas, also
targets reduction of transaction costs and relieving capacity limitations. The
importance of productivity growth further points us to the role of innovation
(technical progress) in raising productivity and competitiveness. The potential
comparative advantage of low wages in developing countries, including Africa,
can be nullified by low productivity, in part because of the scarcity of
complementary professional skills. Surveys of investors show that labor is not
cheap where productivity is low. Productivity in turn is influenced not only by
the quantity and quality of capital stock, but also the quality and quantity of
knowledge (Lindbaek 1997).
DOING BUSINESS IN AFRICA: THE INVESTMENT
CLIMATE—TRANSACTIONS COSTS, RISK, CAPACITY
It is generally accepted that the private sector is the cornerstone for
growth. Markets have proven effective in creating opportunities for increasing
incomes through productivity growth. Functioning markets are thus a critical
mechanism for poverty alleviation. The challenge is therefore, harnessing private
initiative delivered through markets for sustained growth and development. The
key requirement in this regard is the overall quality of the investment climate,
and Africa has fallen short in this respect. The state of the investment climate has
presented major impediments to economic growth. While the deficiencies in
African economies are to some extent influenced by geographic aspects, they are
largely the outcomes of ill-advised government policies. A weak investment
climate inhibits the effectiveness of the private sector and also results in
prohibitive costs of doing business.
The “investment climate” is an all-encompassing phrase that captures a
broad array of concerns including institutional, policy and regulatory
58
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
frameworks; business regulations and their enforcement to ensure that sound
rules not only exist but are observed and respected by both the markets and the
states; adequacy and quality of infrastructure; and general conditions in which
markets operate. A sound investment climate will also include a stable
macroeconomy that facilitates decision making, well defined property rights, an
effective judicial and contracting system and a functioning financial system.
This section therefore, discusses the different elements of the investment
climate as they pertain to African countries. Of particular interest is the state of
individual components in Africa highlighted with benchmarking against other
developing regions.
The Cost of Doing Business in Africa: the Role of Transaction Costs
Investment in Africa is relatively expensive with the highest cost of
doing business in the world. The costs of infrastructure services make up a
disproportionately large part of production and trade costs, barriers to trade raise
the cross border transactions costs, and bureaucratic red tape and inefficiencies
exacerbate these costs. The analysis described in this section is drawn from
Eifert, Gelb and Ramachandran, 2005. It is based on a selected group of six
African countries which are benchmarked against India and China. The latter two
countries have been chosen for comparative analysis because of their strong
performance in the area of traditional manufactured exports. Further, it has been
observed that the severity of the impact of a weak investment climate is not
uniform across market participants. In particular, firm size and ownership
determine how much of a burden falls on the firm. Thus, this analysis also
includes an intraregional comparison based only on size and ownership of firms.
Infrastructure
Sub-Saharan Africa has weaker infrastructure than other developing
regions. This is equivalent to saying that the costs of power, transport,
telecommunications and security are higher than other regions, as described
below.
Electricity
While infrastructure presents problems across the entire spectrum, access
to reliable and affordable energy has been without doubt the most problematic in
Africa. The problems in this sector originate from government failures and
prevalence of state-owned monopolies which have generated a host of
inefficiencies. For example, it takes an average of 174 days to get connected to a
power grid in Zambia compared to 18 days in China. In the 2004 Investment
Climate Assessment for Tanzania, 59 percent of surveyed firms considered
59
CHALLENGES OF AFRICAN GROWTH
Figure 3.1. Energy Costs and Power Outages
60
50
40
30
20
10
0
Kenya
Uganda
Tanzania
Zambia
Senegal
Benin
Morocco
China
Energy, % of firm costs (average)
Source: World Bank Enterprise Surveys, 2001–2005.
electricity to be the most serious impediment to enterprise activity and this
pattern is similar in most comparator countries.
The poor quality of infrastructure causes power outages of a frequency
not experienced in any other region. The performance deficiencies in this sector
impose different kinds of costs on firms. The first and most obvious cost
associated with power is output loss, which was about 9 percent in Kenya
compared to 2 percent in China. As figure 3.1 shows, this cost is also high in the
other African countries.
The second cost is due to the need for back-up facilities. In Tanzania, 55
percent of firms had generators, compared to 27 percent for China (Tanzania
ICA). Generators are not only expensive to obtain but they are also less efficient
in providing power, especially for small and medium scale operations. The
burden of power outages is not distributed uniformly across firms. The cost of
generators can be prohibitively high for small firms. This burden falls
disproportionately on small firms as they are unable to compensate for
fluctuations in the power supply. Figure 3.2 shows that in all countries, large
enterprises were considerably more likely to own generators than their small
counterparts.
60
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
Figure 3.2. Shares of Firms Owning Generators
100
90
80
70
60
50
40
30
20
10
0
Kenya
Uganda
Tanzania
Zambia
Micro
Senegal
SME
Benin
Morocco
China
India
Large/very large
Source: World Bank Enterprise Surveys, 2001–2005
Rules, Regulations and Procedures
Complexity of regulations and procedures imposes yet another burden to
some classes of enterprises. In particular, customs and trade regulations have
been found to present a major constraint on firms in Africa (figure 3.3). For the
selected countries, Tanzania has the highest lag time for clearance of both
exports and imports at 14 days and 7 days respectively. Delays in clearing goods
can have a substantial impact on competitiveness. In fact, cumbersome customs
and trade regulations, and poor customs administration have been found to
discourage firms from seeking export markets.
The negative impact of complex regulations is also evident in the number
of inspections that firms are subjected to each year as well as the fraction of
management time devoted to dealing with regulations (figure 3.4). While the
scores for most of the African countries are high, it is interesting that China has a
considerably higher number of inspections but the amount of time management
spends dealing with regulations is the lowest of all comparators. This high
burden of inspections and regulations also encourages firms to remain in the
informal sector. Survey results also show that regulations and inspections are
61
CHALLENGES OF AFRICAN GROWTH
Figure 3.3. Days to Clear Imports and Exports
16
14
12
10
8
6
4
2
0
Kenya
Uganda
Tanzania
Zambia
Senegal
Days to clear imports (median)
Benin
Morocco
China
India
Days to clear exports (median)
Source: World Bank Enterprise Surveys, 2001–2005.
Figure 3.4. Inspections and Management Time Spent Dealing with Regulations
50
45
40
35
30
25
20
15
10
5
0
Kenya
Uganda
Tanzania
Inspections per year (mean)
Zambia
Senegal
Source: World Bank Enterprise Surveys, 2001–2005.
62
Benin
Morocco
China
India
% senior management time spent dealing with regulation (mean)
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
arduous on exporting enterprises and as such may be a disincentive to pursuing
export-oriented activity.
Cost of Security
Figure 3.5 indicates the high level of insecurity in the operating
environment. The cost of crime and cost of security as a percentage of sales are
high in sub-Saharan Africa, particularly in Zambia and Kenya, where these
numbers are 7 and 9 percent respectively. Firms in Africa also indicate that
unofficial payments to get things done are in the range of 3.5 to 8.5 percent.
Informal payment required to secure a contract is also high in many countries,
indicating the weakness of the judicial system.
Estimates of Gross and Net Total Factor Productivity: Africa in
Comparative Perspective
Comparing net factor productivity and gross factor productivity provides
another view of how debilitating these costs are to firm performance. In previous
work carried out using the same investment climate dataset, a comparison has
Figure 3.5. Crime, Unofficial Payments, and Securing of Contracts
9
8
7
6
5
4
3
2
1
C
hi
na
M
or
oc
co
Be
ni
n
Se
ne
ga
l
Za
m
bi
a
U
ga
nd
a
Ta
nz
an
ia
Ke
ny
a
0
„ Cost of crime and security (average % of sales)
„ Unofficial payments to “get things done” (average % of sales)
„ % of contract value in informal payments required to secure a contract (average)
Source: World Bank Enterprise Surveys, 2001–2005.
63
CHALLENGES OF AFRICAN GROWTH
been made of the performance of African firms with those in the other countries.
In particular, Eifert, Gelb and Ramachandran consider the cost of energy as well
as a range of indirect costs such as transport, telecommunication, security, land,
bribes, marketing etc, which are not often considered in the analysis of TFP.
These costs are netted out from value-added to yield a “net value added” from
which a corresponding measure of “net total factor productivity,” is derived. This
broader view of firm performance, which extends beyond the traditional
emphasis on factory-floor productivity and labor costs, is important in order to
understand economic outcomes in Africa. Together with the losses that depress
(gross) productivity, “indirect costs” associated with operating expenses -energy,
transport, telecom, security, land, bribes, marketing, and so on -represent a heavy
drag on net productivity and profitability in most African countries in our sample
and serve as a brake on competitiveness. Without going into too much technical
detail, we present the key results of the analysis here.
The cost breakdown shows the relatively large burden of infrastructure
and public services—energy, transport, telecom, water, and security costs—that
together account for more than half of all indirect costs to firms.
Figure 3.6 provides a cross-country comparison of firms’ cost structures,
including labor (wages, benefits), capital (interest, finance charges, machine
depreciation), raw materials, and other indirect costs. In strong performers such
as China, India, Nicaragua, Bangladesh, Morocco, and Senegal, the combination
of energy and indirect costs are 13-15 percent of total costs, around half the level
of labor costs. In contrast, this combination in most African countries accounts
for 20–30 percent of total costs, often dwarfing labor costs. It is worth noting that
capital costs—also tightly related to the business environment—appear to be a
major component of costs in Ethiopia, Nigeria, and Zambia.
The gap between African and other firms widens when gross and net
TFP are compared, as indirect costs interact with other firm characteristics
(Figure 3.7) 3. African countries in the mid-range of 40-60 percent of Chinese
gross TFP fall to 20-40 percent when net TFP is compared. Kenya, which
appears relatively strong on gross TFP, falls dramatically on net TFP as a result
of very high indirect costs. Zambia, the most extreme case, falls from 30 percent
to 10 percent. Only in Senegal—the strongest African performer on both gross
and net TFP—is the effect of indirect costs relatively low. African countries have
shortfalls in factory-floor productivity, but high indirect costs further weaken
their relative performance
.
64
Figure 3.6. Cost Structures, Firm-Level Average by Country
Mozambique
Eritrea
Kenya
Tanzania
share of total costs
Zambia
Uganda
Bolivia
Nigeria
Ethiopia
China
Nicaragua
Morocco
India
Senegal
Bangladesh
0
0.1
0.2
materials
Source: Eifert, Gelb and Ramachandran, 2005.
0.3
0.4
labor
0.5
0.6
capital
0.7
0.8
indirect
0.9
1
CHALLENGES OF AFRICAN GROWTH
Existing research also highlights the enormous importance of exporting
in the context of African firms (Bigsten, 2006). While we now increasingly
acknowledge the wide diversity in performance across African countries,
enterprise survey data show a similar pattern across firms within countries in
Africa—pushing us to go beyond country characteristics in order to understand
better what matters for performance. It is striking, for example, that the
likelihood of an African firm with previous export experience to be exporting at
the time of the survey is more than 3 times higher than an identical firm which
has never exported in the past—signaling significant fixed entry costs into
exporting business beyond general country conditions.
Many of these costs are described in the charts above--what is interesting
in the African context is that they tend to vary at the firm level as well as the
country level. New research on firm perceptions also indicates that there is
enormous variance at the firm level as opposed to the sector or country level;
these perceptions are well correlated with actual firm experience vis-à-vis the
investment climate (Gelb, Ramachandran, Shah and Turner, 2006). What is also
interesting is that variables such as the supply of electricity—which one typically
does not expect to vary at the firm level—in fact vary quite a lot across different
types of firms.
There is also very strong evidence that participating in the export market has a
relatively strong impact on raising productivity, and hence competitiveness, of
the firm through learning by exporting. The estimated productivity gains from
learning in Africa range from 20–25 percent in the short run to 50 percent in the
long run. This learning effect appears to be larger in Africa than elsewhere,
perhaps given past high trade restrictions and the larger technological gap with
developed countries, which translate into a wider scope for learning. Mengistae
and Pattillo (2004) among several others show a strong positive correlation
between productivity and exporting among African firms. This conclusion
remains robust even after careful accounting for the possibility of causality going
in the opposite direction—that is, efficient firms self-select to export (Bigsten, et
al. 2004; Van Biesebrock 2005). Panel data, which will be forthcoming for
several countries in sub-Saharan Africa over the next few years, will enable us to
better understand exactly how this learning takes place in practice, and the
learning infrastructure needed to absorb and adapt technology to local
circumstances
66
Figure 3.7. Net and Gross TFP, Adjusted Prices
Index, relative to China
1.2
1
0.8
0.6
0.4
0.2
0
na
hi
Net TFP
C
Source: Eifert, Gelb and Ramachandran, 2005.
a
di
In
co
oc
or
M
l
ga
ne
Se
sh
de
la
ng
Ba
a
gu
ra
au
ic
N
ia
an
nz
Ta
a
nd
ga
a
ny
Ke
U
ia
er
ig
ia
l iv
Bo
N
am
oz
a
op
hi
e
Et
qu
bi
M
a
bi
ea
itr
Er
m
Za
Gross TFP
CHALLENGES OF AFRICAN GROWTH
INDIGENOUS ENTREPRENEURS AND
MINORITY-OWNED FIRMS
A variety of interesting differences are revealed when we disaggregate
the investment climate survey data to look at domestic, entrepreneur-owned
firms. Data show the average firm size of an indigenously-owned firm vs. a firm
owned by an entrepreneur from a minority ethnic group (i.e. of Asian, Middle
Eastern or Caucasian descent). We see that indigenous-owned firms are the
smallest—most are well below 50 workers. European, Asian and Middle Easternowned firms are substantially larger in all the countries reported. From here on,
we group European, Asian and Middle-Eastern entrepreneurs into one category
which we term “non-indigenous.”
Our data also show that indigenously-owned firms enter the market at a
significantly smaller size than minority ethnic-owned firms. While the average
firm size at startup of minority-owned firms in Tanzania is about 100 employees,
that number is just under 40 employees for an indigenously-owned firm. For
most countries where we have these data, the difference in startup size is close to
50 percent. We also find that the difference in startup size persists over time, the
difference in size at time of survey is not much different than the difference in
size at startup and that in many cases, a large gap emerges over time between
indigenous and minority entrepreneurs.
On the other hand, minority-owned firms start operations at a
significantly larger size than indigenous African-owned firms. But the data also
show that not all African entrepreneurs start small. Further disaggregation of
indigenously-owned firms shows that for African entrepreneurs, education is
very important in determining the size at which they start operations. African
entrepreneurs with a university education start much larger enterprises compared
to those that do not have a university degree in all countries surveyed.4
Figure 3.8 shows that the difference in size persists over time in most
countries. Size at the time of survey is also higher for indigenous entrepreneurs
with access to a university education than for those without such an education.
There are two possible interpretations of this result—the completion of a
university degree reflects a higher ability that is also responsible for
entrepreneurial success and/or the university degree enables access to a network
of other business professionals that is useful for the success of the business.
While minority ethnic firms have access to these networks via family ties,
indigenous firms may have to build the in alternative ways.
68
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
Figure 3.8. Current Firm Size vs. Access to University Education
Average current size of African firms by university education
180
160
Number of workers
140
120
100
80
60
40
20
0
Kenya
Uganda
Tanzania
University-educated African
Senegal
Benin
Non-university-educated African
Source: Ramachandran and Shah, 2006.
Access to trade credit may help to explain some of these numbers. Figure
3.9 shows that in four African countries, a larger percentage of minority-owned
firms use trade credit compared to indigenous African enterprises.
Data collected in the 1990s to show that the indigenous firms receiving
trade credit have had a much longer relationship with their suppliers than have
minority-owned firms in East Africa. A detailed exploration of the issue of trade
credit shows that repeated transactions are necessary to establish trade credit for
indigenous African enterprises (Biggs and Shah, 2004).5 But for minority-owned
firms, the length of relationship with the supplier does not make much difference.
There number of years dealing with suppliers has no bearing on access to credit
relative to using cash for transactions, in sharp contract to the situation for
indigenous firms.
69
CHALLENGES OF AFRICAN GROWTH
Figure 3.9. Percentage of Firms Receiving Credit
100
90
80
70
60
50
40
30
20
10
0
Kenya
Uganda
Tanzania
Africans
Zambia
Minorities
Senegal
Benin
Total
Source: Ramachandran and Shah, 2006.
Econometric analysis shows that for small and medium enterprises owned by
minorities, the only variable affecting access to trade credit is firm size, and the
magnitude of its importance is much smaller than for indigenous African firms
(Biggs and Shah, 2004). The authors argue that members of ethnic networks do
not have to rely on establishing long-term relationships with suppliers to get
credit, as their reputation in the network provides enough information to lenders.
It also indicates that even smaller firms in the business network have access to
credit.
For indigenous firms, firm size is very important in determining trade
credit access, as is the length of relationship with supplier. In the absence of good
information on indigenous African firms, suppliers use size as a proxy for
information. Thus, only larger firms get credit. Smaller indigenous-African firms
have to establish long-term relationships with each supplier to get credit. There is
coordination failure in the indigenous African business community that prevents
firms from developing an informal credit information system analogous to the
ethnic minority business community.
The results discussed above are in large part, due to the absence of
networks in the indigenous community. This leads to a paucity of information,
thereby preventing small, indigenous-owned firms from accessing capital or
knowledge that would enable them to grow and prosper. This problem is
compounded by the lack of enforceability of contracts and the weakness of the
70
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
judicial system. It is not necessary a lack of capital per se, but more the lack of
availability of information that is slowing the growth of indigenous firms in the
African private sector. 6
BENCHMARKING GROWTH CONDITIONS IN
AFRICAN COUNTRIES
In this section we use the results from Africa-related, cross-country
analysis to more explicitly assess the relative importance of various constraints to
growth identified in the foregoing analysis in explaining the gap between African
growth and that of other regions. It is essentially a benchmarking exercise for
African growth conditions. The main objective of the benchmarking assessments
carried out here is not to establish causality but to infer the significance of the
different constraints on growth by isolating predetermined variation in the
determinants of growth. Furthermore, we track the evolution of these growth
conditions over time and the changes in their relative importance, taking into
account the results of reform programs pursued in various African countries. This
tracking helps to identify the areas in which Africa is closing the gap with other
developing regions and those requiring much more effort toward such closure.
A large amount of work has been done to identify key factors influencing
growth and channels through which these operated. A “shortlist” of noteworthy
contributions that draw on global data to make Africa-relevant contributions
includes Sachs and Warner (1995) on outward orientation; the same authors
(1997, 2001) on the natural resource curse; Bloom and Sachs (1998) on
geographical and demographic constraints; Masters and McMillan (2001) on
tropical location and the disease environment; Easterly and Levine (1997) on
ethnic fractionalization and policy; the same authors (1998) on neighborhood
(spillover) effects; Collier (1999) and Collier and Hoeffler (2004) on civil wars;
Mauro (1995) on corruption; Knack and Keefer (1995)) on the rule of law;
Acemoglu, Johnson, and Robinson (2001) on institutional legacies of the colonial
period; Guillaumont, Guillaumont, Jeanneney, and Brun (1999), Dehn (2000),
and Blattman, Hwang, and Williamson (2004) on vulnerability to external
shocks; Burnside and Dollar (2000) on aid; and Glaeser, et al. (2004) on political
leaders.
Annex 1 presents an update of the analysis done under the AERC growth
research (see O’Connell and Ndulu 2000; Ndulu and O’Connell 2006, and
Hoeffler 2000) to identify systematic features of the growth process and assess
the importance of different drivers of growth. Given the estimated influence of
each determinant on growth, this analysis assesses the extent to which the
differences in the growth environment (levels of the growth conditions and
71
CHALLENGES OF AFRICAN GROWTH
factors) explain the deviation of the predicted growth rate of Africa from the
global sample mean, East Asia and Pacific mean (EAP), and South Asia mean
(SA) over the entire 1960 to 2004 period. This is akin to undertaking regressionbased growth decomposition discussed in Ndulu and O’Connell 2006b7. These
assessments are made relative to three comparators—global average of
developing countries, South Asia, and South East Asia. Noting that the region
has seriously lagged behind in growth including East Asia among the
comparators allows us to target ambition in effort for closing the gap. Applied
this way, results from cross-country growth analysis can also help to inform and
direct country-level analysis into its most productive areas (Collier and Gunning
1999).
How Do African Countries Compare with the Other Regions?
Table 3.4. shows the actual growth deviations and the contributions of
various factors of growth in explaining this deviation. Average growth rates
observed in Africa for the entire time period was 1.12 percentage points lower
than the global sample mean and the deviations were even higher relative to the
growth paths for both EAP at 2.78 percentage points and South Asia at 1.72
percentage points respectively.
Based on this assessment, demographic factors explained the largest part
of the deviation of Africa’s predicted growth. The difference in the levels of the
cluster of demographic factors accounts for 0.86 percentage points out of the
total growth gap of 1.12 percentage points relative to the global mean. The
cluster has similar dominance in explaining the growth gap with EAP and SA.
Differences in age dependency ratios and potential labor force growth rates
accounted for 1.49 percentage points of the 2.78 percentage points growth gap
with EAP and by 0.96 percentage points of the 1.72 percentage points gap with
South Asia. Africa’s delayed demographic transition compared to other
developing regions is a key factor in understanding its lagging position in
growth.
Differences in the initial conditions also explain a significant part of the
deviation. These include differences in initial income and life expectancy at birth.
For the Sub-Saharan African region, the adverse impact of the much lower life
expectancy at birth significantly reduces the positive convergence impact of
lower initial income, leaving a net impact on growth of only 0.39 percentage
points relative to the global sample mean growth instead of 1.18 percentage
points. With more or less similar levels of initial income, differences in life
expectancy with South Asia more than offset the income convergence effect.
Against EAP the net effect from the differences in initial conditions accounts for
explaining 0.50 percentage points of the growth gap.
72
Table 3.4. Contributions of Individual Components of Drivers of Growth toward Explaining Deviation of SSA’s Predicted Growth
Relative to the Sample Mean, EAP and SA, for the Period 1960–2004
Sub-Saharan Africa
Actual
growth
deviation
Initial Conditions
Income
From sample mean
1960–
2004
-1.12
1.18
From East Asia & Pacific
1960–
2004
-2.78
1.56
From South Asia
1960–
2004
-1.72
0.04
Demography
Life
expectancy
Age
dependency
Potential
labor
force
growth
-0.79
-0.67
-1.06
-0.60
Geography
Shocks
Residua
l
Policy
Landlocked
Terms
of trade
Trading
partner
growth
Political
instability
Inflation
BMP
Gov't
cons./
GDP
-0.19
-0.12
0.02
-0.05
0.10
0.00
-0.06
-0.11
0.38
-1.13
-0.36
-0.21
0.07
-0.34
0.03
-0.05
-0.19
-0.21
0.81
-0.68
-0.28
-0.15
0.02
-0.08
0.30
-0.05
0.10
-0.05
0.32
Note: Calculations based on regression sample only.
CHALLENGES OF AFRICAN GROWTH
Differences in the level of policy conditions between Africa and the three
comparators are relatively smaller than with the previously discussed clusters of
growth drivers. Differences in policy disposition contributed to explaining -0.17
and -0.45 percentage points of the predicted growth gaps relative to the sample
mean and EAP only. Africa’s policy performance was at par with that of South
Asia and therefore virtually does not contribute to explaining the growth gap
between the two regions.
Evolution of the Relative Importance of Growth Conditions
The relative importance of different growth drivers have tended to
change over time as countries pursue reform programs, undertake investments to
compensate for unfavorable endowments and undergo deep political changes. As
we saw earlier in the review of Africa’s 45 years of growth experience, the
region’s growth performance has followed a distinctive U- shaped path, with
nearly two decades of growth stagnation sandwiched between early and later
phase of reasonable levels of growth. Figures 3.10, 3.11 and 3.12 depict changes
in the relative contributions of the different growth constraints, over these three
time phases to explaining the growth gaps with other regions.
Following from the pattern of evolution in the per capita GDP, the nine
half-decadal observations for each country from 1960 to 2004 are divided into
three distinct time periods: the 1960-1974 phase which was characterized by
moderate growth rates, the 1975-1994 phase, which represented a deep
contraction within the region and the 1995-2004 phase marked by recovery into
moderate growth rates. The actual growth deviations relative to all the
benchmarks reveal the observed U shaped growth patterns in Table3.5. Not
surprisingly, the deviations are much larger relative to EAP than SA.
Apart from initial income, initial life expectancy was the most important
in explaining predicted growth deviations relative to all three benchmarks.
However, the progress that Africa achieved in raising life expectancy has since
been eroded by incidence of disease, especially HIV/AIDS in southern Africa.
This is apparent in the widening divergence between the second and last phases
relative to EAP and South Asia.
Age dependency also explains a significant part of the deviation of the
predicted growth rate of Africa relative to the global mean. The evolution of
contribution of this driver is consistent with the growth pattern over the three
phases since it rises in the second phase and then declines in the last phase. The
initial population explosion that took place in Africa with the consequence of
increasing dependency ratios was followed by the demographic transition that
74
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
Figure 3.10. Regression-Based Decomposition of Periodical Growth
Rates
Within-SSA Standard Deviation
SSA, 1960-1974
Residual
3
Growth
2
1
Potential Labor force growth rate
Initial Life Expectancy
0
Age Dependency
-1
-2
-1.5
Terms of trade shock
Trading partner growth rates
Inflation
Political Instability
Land-locked
Black Market Premium
Initial Income
Gov't cons.
-1
-.5
0
.5
Deviation of SSA mean from sample mean
1
1.5
Within-SSA Standard Deviation
Figure 3.11. Regression-Based Decomposition of Periodical Growth
Rates
SSA, 1975-1994
3
Growth
Residual
2
1
Potential Labor force growth rate
Trading partner growth rates
Initial Life Expectancy
0
Age Dependency
-1
-2
-1.5
Terms of trade shock
Inflation
Political Instability
Land-locked Gov't cons.
Black Market Premium
-1
-.5
0
.5
Deviation of SSA mean from sample mean
Initial Income
1
1.5
75
CHALLENGES OF AFRICAN GROWTH
Within-SSA Standard Deviation
Figure 3.12. Regression-Based Decomposition of Periodical Growth
Rates
SSA, 1995–2004
Growth
3
Residual
2
1
Initial Life Expectancy
Trading partner growth rates
Potential Labor force growth rate
Terms of trade shock
Inflation Political Instability
Land-locked
Gov't cons.
Age Dependency
Black Market Premium
0
-1
Initial Income
-2
-1.5
-1
-.5
0
.5
Deviation of SSA mean from sample mean
1
1.5
started in the mid 1980s. However, the persistently large difference with EAP
and South Asia, even in the most recent phase clearly continues to account for
the largest part of the explanation of the growth gap between Africa and these
regions - the population structure continues to be a drag against closing the gap.
Policy cluster, exogeneous shocks and the growth of potential labor force seem to
track the U shape path of the growth performance and become much less
important in accounting for the differences in the growth performance in the last
phase.
The difference between policy conditions in Africa and other developing
regions has narrowed considerably, partly as a result of the reforms of the 1990s.
Relative to the global mean, differences in policy conditions accounted for -0.11
percentage points of the growth gap during the early phase; -0.29 % during the
period of growth contraction; and nearly disappear as a factor (0.01 percentage
points) in the last phase. The region has also become much more open and better
able to make use of opportunities afforded by the global economy; and political
instability also appears to be on the wane.
76
Table 3.5. Evolution of Individual Contributions of Drivers of Growth toward Explaining Deviation of SSA’s Predicted Growth
Relative to the Sample Mean, EAP and SA, by Periods
Sub-Saharan Africa
From
Actual
growth
deviation
Sample mean
1960–
1974
0.40
1975–
1994
-2.04
1995–
-0.70
2004
EAP
1960–
1974
-2.46
1975–
1994
-3.73
1995–
2004
-1.03
SA
1960–
1974
1.27
1975–
1994
-2.97
1995–
2004
-1.74
Initial Conditions
Demography
Income
Life
Expectancy
Age
Dependency
Potential
labor
force
Growth
1.19
-1.06
-0.61
1.16
-0.73
1.22
Geography
Shocks
Policy
Landlocked
Terms
of
trade
Trading
partner
growth
Political
Instability
Inflation
(<500%)
Black
Mkt
Prem.
-0.40
-0.10
-0.05
0.54
0.12
0.08
0.04
-0.77
-0.30
-0.15
-0.03
-0.23
0.09
-0.04
-0.15
-0.67
-0.55
0.22
-0.09
0.2
-0.21
0.08
0.01
0.03
0.96
-1.01
-0.53
-0.40
-0.19
-0.03
-0.31
0.01
0.08
-0.08
1.57
-1.02
-1.27
-0.62
-0.24
0.04
-0.38
0.03
-0.10
-0.28
2.17
-1.27
-1.49
0.19
-0.18
0.23
-0.23
0.02
-0.08
-0.13
-0.19
-0.68
-0.32
-0.31
-0.19
0.01
0.13
0.20
0.04
0.55
-0.08
-0.47
-0.73
-0.27
-0.15
-0.02
-0.21
0.35
-0.08
0.48
-0.78
-0.90
-0.26
-0.12
0.13
-0.06
0.25
-0.06
Note: Calculations based on balanced regression sample only.
Residual
Gov't
cons./
GDP
0.23
0.10
0.03
0.36
0.15
0.19
-0.34
-0.58
-0.03
-0.60
-1.30
0.00
0.01
0.15
0.06
-1.28
-0.10
0.06
-0.32
2.23
CHALLENGES OF AFRICAN GROWTH
Contribution of Drivers of Growth to Explaining Growth Deviation at the
Country Level
Tables 3.6 and 3.7 (presented at the end of this chapter) extend the type
of analysis done in the previous two sections at the country level. Table 3.6
presents the contributions for the entire time period and Table 3.7 shows the
evolution of the contributions by periods. For each country, the relative
importance of each driver of growth is assessed based on the extent to which it
contributes to explaining the country’s growth gap relative to the global mean.
These contributions are also assessed along the three phases of the region’s
growth path.
We also classify the countries in two groups “high growth” and “low
growth” countries. Gelb (2006) designated 22 African countries, which have
taken off well during the 1994-2003 and have sustained these rates for more than
a decade; as “high growth” economies. These African countries have posted an
average growth rate of GDP per capita of 3.86 percent during this period. The
remaining 23 countries, for which data is available, is categorized as low growth
economies with an average growth rate of per capita GDP of -0.55 percent. One
distinct feature among the high growth countries is the remarkable improvement
of contribution of the policy variables to explaining growth deviation relative to
the sample mean, in the most recent decade of 1995 to 2004.
The situation for low growth countries remains more or less unchanged
as seen in Figure 3.13. This implies that the high growth countries have to focus
their efforts in other aspects of development like human development and
demographic characteristics, as shown in the regression based decompositions
analysis. Clearly the countries that have not broken out of the cycle of poverty,
have a much bigger task of tackling macroeconomic instability first, before
embarking on other areas of development. By opportunity groups, policy
challenges have been much more acute in resource rich countries (both
landlocked and coastal) following discovery of oil in a number of countries
during 1970s and 1980s. Subsequently, these countries have shown some
improvement in terms of reduction in the negative contribution of the policy
variables in the past decade.
Finally, in the resource rich economies, the positive contribution of
external factors like income effects of terms of trade changes rises sharply in the
most recent decade (Figure 3.14) providing evidence for favorable movements in
terms of trade of these primary commodity economies maybe due to changing
global conditions that raise their relative prices and demand.
78
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
Figure 3.13. Evolution of Contribution of Policy
0.00
-0.05
-0.10
-0.15
-0.20
-0.25
-0.30
-0.35
-0.40
LOW
-0.02 HIGH
1960-1974
-0.13
1975-1994
-0.22
-0.35 -0.34
1995-2004
-0.36
Figure 3.14. Evolution of Contribution of Shocks
0.70
0.58
0.60
0.50
1960-1974
0.40
1975-1994
0.30
0.20
0.10
0.11 0.08
0.14 0.12 0.11
1995-2004
0.00
Rich
Poor
CONCLUSIONS
Based on the unpacking of the clusters of the constraints to growth, it is
clear that demographic factors dominate in terms of Africa’s contrast to the
conditions for growth obtaining in the other regions. Particularly strong amongst
these are age dependency ratios and life expectancy. The former appears to have
gotten much worse in the growth contraction phase before starting to improve in
the past decade, furnishing evidence for the onset of demographic transition in
Africa from the 1980s. However, relative to EAP and South Asia, the
contributions have deteriorated even in the past decade, indicating that the gap
between Africa and the Asian economies is widening with respect to
demographic indicators. Life expectancy rates on the other hand have worsened
79
CHALLENGES OF AFRICAN GROWTH
even in the growth recovery phase, on account of health pandemics like
HIV/AIDS. Hence, it is imperative that greater attention be paid to improvement
of human development indices to complement the demographic transition in
Africa.
Openness of trade and policy improvement are the other two areas of
greatest impact. This is particularly the case for “low growth” countries whose
growth rates have not even averaged to zero percent, in the 1995 to 2004 period.
On the other hand, relative to the other developing regions some significant
improvements in policy have taken place, particularly in the “high growth”
countries in Africa.
Finally, it is clear from the results that Africa needs to pay more attention
to factors other than policy, in order to compensate for the unfavorable
endowments related with geography. The evidence points to significant
improvements in policy during the last decade and probably the payoff in terms
of scaling up growth would now tend to be higher from efforts in tackling the
other constraints to growth.
80
Table 3.6. Contributions of Various Factors Influencing Growth at the Country Level
Contribution to deviation from sample mean
High Growth Countries
code
Period
Actual Growth Initial
Deviation
AGO
BEN
BFA
BWA
CMR
CPV
ETH
GHA
GIN
GNQ
LSO
MLI
MOZ
MRT
MUS
RWA
SDN
SEN
TCD
TGO
TZA
UGA
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
Income
Age
Potential Labor
Land-
Trading partner
Terms of
Political
Expectancy
Dependency
force growth rate
locked
growth rates
trade shock
Instability
Inflation
Black Market
Gov't
Premium
cons./GDP effects
Time
Residual
-1.02
-0.63
1.49
1.76
-0.64
-0.93
-1.02
-1.34
-0.32
-0.26
0.09
-0.48
0.06
-0.51
-0.07
0.00
0.18
0.02
0.07
0.09
0.16
0.16
0.12
-0.15
-0.35
-0.56
-0.79
1.58
-0.49
0.58
-1.22
-1.52
-0.36
0.70
-0.06
2.25
1.43
0.39
-0.65
0.43
-0.99
-0.48
-0.86
-0.63
-0.53
-0.71
-0.76
-0.60
-0.13
-0.60
-0.29
-0.14
0.34
0.09
0.09
0.09
0.09
0.09
-0.06
-0.51
-0.30
-0.01
-0.04
-0.03
0.01
0.01
0.05
0.35
0.17
0.21
0.02
0.12
0.21
0.06
0.12
0.08
-0.13
0.08
0.17
0.18
-0.69
-0.48
0.17
0.32
-0.24
-0.34
-0.09
0.44
-0.06
-1.04
-0.61
0.15
-0.83
-0.45
2.54
0.26
-1.26
-0.10
-0.76
3.53
0.68
1.99
-0.14
1.72
1.74
1.09
-0.99
1.67
-1.01
-1.00
-0.86
0.45
-1.04
-0.98
-0.55
-0.52
1.01
-1.10
-0.44
0.36
-0.21
0.40
-0.24
-0.48
0.09
0.09
0.09
-0.48
-0.36
-0.33
0.18
-0.13
-0.09
0.01
-0.11
0.02
0.26
-0.11
0.14
0.12
0.17
0.21
0.07
0.07
-0.10
0.08
0.05
0.07
0.16
-0.07
-0.16
0.15
-0.15
0.11
-0.25
-0.70
0.24
-0.14
-0.35
-0.63
0.20
-0.57
-0.21
0.66
4.26
1.30
0.83
1.62
-1.96
-0.97
-0.73
2.43
2.43
1.02
1.43
1.41
2.42
2.01
-0.95
-1.12
-0.83
-0.96
-0.87
-0.68
-0.68
-0.75
-0.66
-1.22
-0.17
-0.51
-0.37
0.30
-0.33
0.09
-0.48
0.09
0.09
-0.48
0.09
0.24
0.12
-0.34
-0.30
-0.01
0.10
-0.21
0.10
-0.01
0.17
0.05
0.11
0.21
-0.01
0.08
0.08
0.08
0.09
-0.30
0.15
0.15
0.15
0.18
-0.39
-0.01
-0.45
-0.19
-0.23
-0.27
0.25
0.22
0.25
-1.04
-0.57
-1.99
0.00
-0.61
2.26
5.18
Low Growth Countries
code
Period
Actual Growth Initial
Deviation
BDI
CAF
CIV
COG
COM
ERI
GAB
GMB
GNB
KEN
MDG
MWI
NAM
NER
NGA
SLE
STP
SWZ
SYC
ZAF
ZAR
ZMB
ZWE
Initial Life
Initial Life
Age
Potential Labor
Land-
Trading partner
Terms of
Political
Income
Expectancy
Dependency force growth rate
locked
growth rates
trade shock
Instability
1.96
-0.95
-0.82
-0.16
-0.48
-0.30
-0.05
-0.11
0.92
-0.98
-0.33
-0.38
-0.48
0.02
0.03
0.13
0.68
-0.86
-0.70
-0.14
0.09
0.06
-0.09
0.16
1.51
-0.85
-0.66
-0.41
0.09
0.37
0.42
-0.12
1.00
-0.08
-0.48
0.74
0.09
-0.33
0.29
0.00
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
-2.09
-2.34
-1.36
-0.45
-3.58
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
-0.04
-1.19
-4.25
-0.51
-2.59
-0.43
-0.85
1.31
2.01
1.45
1.51
2.16
-0.70
-0.85
-0.93
-0.50
-0.68
-1.07
0.15
-0.22
-0.67
-1.27
-0.70
-0.93
-0.28
-0.12
-0.24
0.07
-0.06
-0.32
0.09
0.09
0.09
0.09
0.09
-0.48
-0.06
0.12
-0.13
-0.14
0.17
-0.28
0.16
0.05
0.65
-0.16
0.11
0.02
1960-2004
1960-2004
1960-2004
-3.30
-0.87
-3.86
1.31
1.55
1.47
-1.19
-0.89
-1.44
-1.26
-0.74
-0.50
-0.59
-0.28
-0.23
-0.48
0.09
0.09
0.04
0.05
-0.24
1960-2004
1960-2004
1960-2004
1960-2004
1960-2004
-3.23
-0.75
-3.21
-2.48
-2.51
-1.15
-0.70
2.02
1.43
0.41
0.63
-0.33
-0.82
-0.83
-0.51
0.94
0.02
-0.85
-0.89
-0.93
0.40
0.06
-0.41
-0.19
0.14
0.09
0.09
-0.48
-0.48
-0.48
-0.32
0.06
0.05
-0.10
-0.30
Inflation
Black Market
Gov't
Premium
cons./GDP effects
-0.21
-0.40
-0.87
0.30
0.17
0.25
-0.72
0.43
-0.37
-0.83
Time
Residual
0.03
0.08
0.07
0.08
0.08
-0.08
0.15
0.15
0.15
0.15
-0.51
-0.94
-1.20
-0.77
-3.83
0.18
0.18
0.05
0.16
0.16
0.20
0.07
0.02
0.10
0.03
0.04
-0.02
0.17
0.14
0.18
0.05
0.07
-0.12
0.30
-0.15
-0.42
0.15
0.15
0.09
-0.06
-0.40
-1.04
-0.01
0.24
-0.01
0.78
-1.38
-3.91
-0.43
-3.68
0.33
0.04
0.27
-0.02
0.14
-0.06
0.01
0.08
-0.02
-0.21
0.15
-0.66
-0.24
-0.16
0.26
0.24
0.43
0.15
-0.40
-1.82
-0.59
-2.39
-0.69
0.01
-0.21
0.04
0.08
0.21
-0.08
0.06
0.16
0.04
0.09
0.05
-0.39
-0.18
-0.18
-0.72
0.15
-0.56
-0.41
-0.40
-0.49
-0.11
-0.23
-0.51
0.01
-1.04
0.15
0.18
-0.01
-0.57
-1.17
-0.14
-1.57
-0.51
0.18
Table 3.7. Evolution of Contribution to Deviation from Sample Mean at the Country Level
High Growth Countries
code
Period
Actual Growth
Deviation
AGO
AGO
AGO
BEN
BEN
BEN
BFA
BFA
BFA
BWA
BWA
BWA
CMR
CMR
CMR
CPV
CPV
CPV
ETH
ETH
ETH
GHA
GHA
GHA
GIN
GIN
GIN
GNQ
GNQ
GNQ
LSO
LSO
LSO
MLI
MLI
MLI
MOZ
MOZ
MOZ
MRT
MRT
MRT
MUS
MUS
MUS
RWA
RWA
RWA
SDN
SDN
SDN
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
Initial
Initial Life
Age
Potential Labor
Income
Expectancy
Dependency
force growth rate locked growth rates
Land-
Trading partner
Terms of
Political
Inflation
trade shock Instability
Black Market Gov't
Premium
Time
Residual
cons./GDP effects
-1.52
0.99
1.53
1.34
-0.69
-0.47
-1.08
-0.80
-0.49
0.37
0.09
0.09
0.03
0.21
-0.06
-0.13
0.17
0.21
0.07
0.10
0.16
0.18
0.12
0.13
-0.18
-1.04
-1.19
0.80
-0.97
0.39
1.81
1.62
-0.92
-0.96
-1.45
-1.04
-0.19
-0.46
-0.48
-0.48
-0.53
-0.47
0.02
-0.07
-0.04
0.21
0.08
0.11
0.16
0.18
-0.20
-0.02
-0.40
-1.04
1.16
2.83
0.75
-1.09
0.69
1.02
0.62
0.73
-0.94
-0.58
-0.63
-0.44
-0.76
-0.29
-0.64
-0.26
0.88
0.09
0.09
0.09
0.66
-0.21
-0.16
-0.03
-0.22
0.71
0.21
0.16
0.21
0.05
0.05
0.12
0.18
0.16
0.18
0.33
0.33
0.27
1.42
-0.18
-1.04
-1.16
-0.29
-0.36
0.58
-0.06
0.43
-0.53
-0.60
0.09
-0.51
0.01
0.21
0.12
0.18
-0.24
-1.04
2.54
-2.61
0.17
-1.18
-2.79
0.53
2.29
2.20
1.63
1.38
1.25
-0.96
-1.02
-0.79
-0.40
-0.18
-0.62
-0.80
-0.77
-0.81
-0.66
-0.35
-0.22
-0.18
-0.15
-0.05
0.09
0.09
0.09
0.09
0.09
-0.25
-0.36
0.38
-0.27
-0.07
-0.04
0.06
-0.14
0.05
0.34
-0.07
0.11
0.06
0.11
0.21
0.05
0.10
0.05
-0.28
-0.12
-1.29
-0.09
-0.29
-0.96
0.18
-0.24
-0.43
0.06
-0.12
-0.25
-0.39
-0.83
1.25
-0.18
-0.83
-0.83
1.35
-2.52
-1.26
0.63
-0.36
0.39
-0.86
-0.60
0.34
0.09
-0.04
0.35
0.21
0.08
0.17
0.44
-0.83
-0.10
-1.49
2.18
1.75
1.60
-1.00
-1.09
-0.96
-1.10
-0.43
-0.46
-0.48
-0.48
-0.37
-0.32
-0.01
0.10
0.13
0.21
0.06
0.11
0.15
0.18
0.19
-0.19
-0.18
-1.04
-0.34
4.66
2.82
3.88
3.01
-2.14
0.00
1.86
1.67
1.07
0.96
1.26
-0.99
-1.00
-1.17
-0.77
-0.51
-0.62
-0.52
-0.35
-0.71
-0.58
-0.43
0.75
-0.16
-0.75
0.24
0.09
0.09
0.09
0.09
0.09
0.19
-0.59
0.58
-0.07
-0.16
0.01
-0.17
0.01
0.02
0.03
0.02
0.17
0.21
0.11
0.17
-0.23
-0.03
0.09
0.06
0.09
-0.51
0.15
0.12
-0.91
0.17
-0.55
-0.10
-0.98
-0.73
-0.24
-0.24
-0.83
1.25
-0.33
-0.83
4.21
4.29
2.26
0.88
0.28
1.90
2.13
2.79
-3.22
4.55
-0.73
-1.39
1.91
1.54
1.81
0.37
0.57
-1.00
-0.94
-1.26
0.85
1.26
-0.85
-1.16
-1.10
0.33
0.51
-0.70
-0.91
1.33
0.09
0.09
-0.48
-0.48
-0.48
-0.16
-0.09
0.92
-0.20
-0.39
0.17
0.40
0.01
-0.09
-0.21
0.21
0.21
0.21
0.07
0.01
0.04
0.08
0.04
0.10
0.05
0.14
0.16
-0.33
-0.19
0.02
0.22
0.26
0.16
-0.18
-0.21
-0.40
-0.83
0.90
-0.18
-0.83
0.77
0.92
2.01
-0.58
5.83
Table 3.7. Evolution of Contribution to Deviation from Sample Mean at the Country Level (continued)
High Growth Countries
code
Period
Actual Growth
Deviation
SEN
SEN
SEN
TCD
TCD
TCD
TGO
TGO
TGO
TZA
TZA
TZA
UGA
UGA
UGA
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
-2.62
-2.06
0.44
-3.06
-0.12
2.77
2.79
-2.86
-2.83
Age
Potential Labor
Land-
Trading partner Terms of
Political
Inflation
Income Expectancy Dependency force growth rate locked growth rates
trade shock Instability
0.93
-1.25
-0.61
-0.37
0.09
0.63
-0.02
0.14
1.09
-0.84
-0.77
-0.27
0.09
-0.27
0.01
0.21
1.00
-0.51
-0.56
0.80
0.09
-0.07
-0.07
0.13
1.38
-1.40
-0.26
-0.46 -0.48
0.63
0.03
0.14
1.40
-0.96
-0.83
-1.15 -0.48
0.01
0.08
-0.10
1.68
-0.73
-1.49
1.26 -0.48
-0.25
0.40
0.21
1.44
-1.09
-0.70
-0.33
0.09
0.55
-0.29
0.12
1.30
-0.67
-0.84
-0.69
0.09
-0.16
-0.20
0.08
1.73
-0.68
-0.56
0.79
0.09
-0.01
0.00
0.21
Black Market Gov't
Premium
0.09
0.06
0.12
0.09
0.08
0.09
0.10
0.06
0.11
0.14
0.16
0.18
0.14
0.16
0.18
0.14
0.16
0.18
Time
cons./GDP effects
0.02
1.25
-0.03 -0.18
0.00 -1.04
-0.73
1.25
-0.29 -0.40
-0.12 -1.04
-0.05
1.25
-0.32 -0.18
-0.11 -1.04
Residual
-3.66
-1.32
0.37
-3.38
2.36
3.07
1.56
-1.50
-3.54
2.42
-0.96
-0.66
0.30
0.09
-0.34
0.10
0.21
0.09
0.18
-0.23
-1.04
2.26
2.68
2.06
2.20
1.73
-0.76
-1.03
-1.19
-1.26
0.08
-0.94
-0.48
-0.48
-0.26
-0.37
-0.13
0.18
-0.02
0.01
-0.57
0.09
-0.75
0.14
-0.30
-0.24
-0.40
-0.83
5.25
5.07
Deviation
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
1960-1974
1975-1994
1995-2004
Initial Life
2.43
Low Growth Countries
code
Period
Actual Growth
SWZ
SWZ
SWZ
SYC
SYC
SYC
ZAF
ZAF
ZAF
ZAR
ZAR
ZAR
ZMB
ZMB
ZMB
ZWE
ZWE
ZWE
Initial
Initial
Initial Life
Age
Income
Expectancy
Dependency
Potential Labor
force growth
rate
Land-
Trading partner
locked growth rates
Terms of
Political
trade shock
Instability
Inflation
Black Market
Gov't
Time
Premium
cons./GDP effects
Residual
-3.23
1.72
-2.45
-1.07
-0.79
-4.52
-4.11
-0.74
-4.13
-0.92
-1.15
-0.49
-0.83
-0.77
1.57
1.89
3.29
1.21
1.39
1.75
0.63
-0.57
-0.16
-0.29
-0.97
-0.70
-0.88
-0.90
-0.66
-1.11
0.94
-0.37
-0.03
0.69
-0.59
-0.93
-1.15
-0.86
-1.00
-0.70
0.40
-0.17
0.12
0.32
-0.27
-0.62
-0.05
-0.41
-0.33
0.28
0.09
0.09
0.09
0.09
-0.48
-0.48
-0.48
-0.48
-0.48
-0.48
-0.32
0.42
-0.06
-0.23
0.67
-0.18
-0.52
0.63
-0.27
-0.47
-0.69
0.01
-0.01
0.07
-0.50
-0.15
0.19
0.02
-0.16
0.46
0.21
0.08
-0.29
0.10
0.00
0.12
-0.03
0.21
0.17
0.08
0.09
0.09
0.01
0.07
-0.03
-0.40
-1.06
0.05
-0.32
-0.10
-0.72
0.12
0.16
0.17
-0.43
-0.70
-0.40
-0.24
-0.75
0.12
-0.49
0.00
-0.16
-0.17
-0.40
-0.31
0.32
-0.80
-0.72
0.20
-1.04
1.25
-0.18
-0.83
1.16
-0.06
-1.04
1.16
-0.18
-0.83
-1.17
1.26
-1.11
-0.29
-0.52
-2.02
-2.31
-0.31
-0.82
-0.11
-0.58
-5.41
0.38
0.46
-0.31
-0.82
-1.04
-0.77
0.46
-0.35
-0.48
-0.48
-0.36
-0.21
-0.05
0.27
0.06
0.01
-0.02
-0.40
-0.33
-0.52
-0.05
0.09
-0.40
-0.83
1.56
-1.87
CHALLENGES OF AFRICAN GROWTH
ENDNOTES
1
Such shortage of foreign exchange during the late 1970s and 1980s for example were
much less stringent for importing capital goods, since ODA, which funded most of the
public enterprise investments precluded financing raw material or recurrent costs.
2
This cost differential is also reflected in the wide divergence between the average share
of investment in GDP for SSA measured in domestic and international prices. In
domestic prices this ratio for the period 1960 to 1994 (weighted by average GDP at 1985
international prices) was 19 percent compared to only 9.5 percent at 1985 international
prices. For East Asia, China and industrialized countries there is virtually no gap between
the two measures
3
In order to show the impact of the costs of doing business, the residuals from two
estimations of productivity are compared as follows:
Gross TFP is estimated as ln( Aˆ i ) = ln(Yi − M i ) − α ln( K i ) − β ln( Li ) − δZ i and
Net TFP is estimated as: ln( Aˆ i ) = ln(Yi − M i − ICi ) − α ln( K i ) − β ln( Li ) − δZ i
where Ấi is net TFP, IC is indirect costs, and (Y-M-IC) is net value-added.
4
There are other analyses of the role of ethnicity in the private sector in Africa. Most
notable is that a study by Taye Mengistae which looks very rigorously at the role of
ethnicity in the indigenous private sector in Ethiopia (Mengistae, 2001). More recently,
Marcel Fafchamps, 2004 examines the dynamics of the private sector, including the role
of ethnicity, in a comprehensive analysis of markets in sub-Saharan Africa.
5
The data for the figures are from the 1990s surveys conducted by the World Bank in
Africa; this information is not gathered in the current Investment Climate Surveys.
6
We have also tested these hypotheses econometrically, with the use of regression
models. We try to determine whether or not an entrepreneur has access to a university
education is significant in determining start-up size, as is his/her access to a formal loan.
Both university education and access to a loan at start-up are also significant for the
whole sample. University education is significant for indigenous entrepreneurs in both
East and West Africa, and formal loans help only non-indigenous entrepreneurs in East
Africa.
The deviation of a region/country i ’s, period t average growth rate, from the sample
mean ( git − g ) can be decomposed into the sum the observed residual of the
7
84
CHAPTER 3: EXPLAINING THE AFRICAN GROWTH RECORD: WHAT APPEARS TO MATTER MOST
region/country i 7and, the regression-weighted sum of region/country i ’s deviations in the
growth determinants as:
____
git − g = −γˆ (ln yi,t − k − ln y ) +
∑ φˆ ( x
j
j
j
it − x ) +
The symbol ^ denotes an OLS estimate,
the set of factors that are time invariant.
∑ λˆ ( z − z ) + εˆ
l
l
j
l
i
it
is the set of factors that vary over time and l is
85
4
Constraints to Growth
Much of the analytical work done to explain the tragedy of the collapse
of African growth during the 1970s and 1980s and the slow recovery during the
1990s has focused on correcting policy mistakes, or what Collier and Gunning
(1999) referred to as “sins of commission.” Indeed, in combination with the
sharp paradigmatic shifts away from an emphasis on correcting for market failure
to a greater focus on government failure, the thrust of the reforms during this
period were on restoring macroeconomic stability, getting the prices right,
freeing up markets, and scaling back government involvement in the
development agenda. In the process, too little attention was paid to “sins of
omission,” particularly underprovision of public goods and services essential for
reducing firm-level costs and making potential opportunities for investment and
trade more profitable.
In this chapter we look more deeply at some of the critical constraints
that have been overlooked because of the emphasis on traditional policy
approaches. As we saw from the previous chapter, while traditional macro policy
shortfalls did reduce Africa’s growth rates, many of these policies are now at
international norms. We also saw that human development, political,
demographic, and geographic variables were much more important in explaining
Africa’s slow economic growth.
The rest of this chapter tackles three main sets of constraints. The first set
is those which are part of Africa’s endowments—geographic isolation and
fragmentation, tropical climates and diseases, the natural resource curse, and
delayed demographic transition. Some constraints cannot be changed; others
cannot be changed quickly. But ways to compensate must be developed. The
second set of constraints is largely historic, institutional, or policy related, and is
subject to change and amelioration. This set consists of transactions costs, risks,
and capacity limitations.
87
CHALLENGES OF AFRICAN GROWTH
AFRICA’S UNFAVORABLE ENDOWMENTS: A CONSTRAINT
TO GROWTH BUT NOT A PREDICAMENT
Africa has atypically large parts of its population living in countries with
economic characteristics that globally have been disadvantageous, and a history
that has made ethnic and regional polarization a major challenge. A third of its
population lives in landlocked, resource-poor countries. Another third lives in
countries with large natural resource rents, whose growth performance globally
has tended to be significantly poorer than that of non-resource-rich developing
countries (table 4.1). Polarization and fractionalization have invariably been
major root causes of conflict and have saddled the young African nations (most
of them less than a half-century old) with huge costs of nation building and
peacekeeping.
Table 4.1. Interregional Comparison of Geographical and Sovereign
Fragmentation Indicators
Natural resource rents dominance c
Proportio
n of
Average
Share of
populatio transport
Average
natural
Average.
populatio
n in
costs
Proportion resource Frequency
n density Average landlocke
of natural
a country is
($ per
rich
d
resource
(people number
container
countries in natural
per sq.
of
countries
from
rich
in each
resource
km.)
(%)
borders
Baltimore) economies d region e rich status f
Region
SSA
2.00
77.65
4
40.2a
7,600
64
32
6
EAP
ECA
LAC
MNA
SAR
1.44
1.17
1.52
1.60
1.67
405.5
74.58
119.92
136.27
382.94
2.09
4.93
2.34
3.94
2.75
0.42
23.06
2.77
0
3.78
3,900b
4,600
2,100
3,900b
52
36
80
78
38
13
11
26
15
3
8
3
7
5
3
Source: Ndulu (2004, Table 3)
a. Congo, Dem. Rep., Sudan, and Ethiopia have been treated as landlocked countries.
b. Data on transportation costs is available for East and South Asia regions together (Venables and
Limao 1999).
c. An economy which generates more than 10% of its GDP in primary commodities exports is
classified as a natural resource economy.
d. as a share of the total number of countries in each region.
e. as a share of the total number of natural resource” economies (93 in the world).
f. average number of times a natural resource economy generates more than 10% rents from exports
of primary commodities from 1960–2002.
Geographical disadvantages account for uncharacteristically high costs
of development in Africa (Ndulu 2005). It has been argued that high
transportation costs and an environment favorable for diseases conspire to make
88
CHAPTER 4: CONSTRAINTS TO GROWTH
capital accumulation and productivity growth much more expensive in Africa
than elsewhere in the developing world (Gallup and Sachs 1999; Bloom and
Sachs 2000; Sachs and Warner 1995, 1997, 2001).
AFRICA’S GROWTH IS UNUSUALLY CONSTRAINED BY
GEOGRAPHICAL DISADVANTAGES
Distance and being landlocked influence a country’s access to
international markets hinder its ability to exploit economies of scale, and lower
its production efficiency (Sachs and Warner 1995, 1997, 2001). Being
landlocked, remoteness of populations from ports or ocean-navigable rivers, and
large overland transportation distances all reduce growth, studies around the
globe have found (Bloom and Sachs, 1998; and Gallup, Mellinger, and Sachs,
1999). Economic isolation is more acute in Sub-Saharan Africa, where 31
percent of the countries are landlocked, compared to only 12 percent of all the
other developing countries. Nearly 40 percent of the SSA population lives in
these landlocked countries, with high transportation costs and poor trade
facilitation1.
Although there are important variations across countries in the region,
for most African countries, distance from their primary markets and the high
transport intensities of their products (low value-high weight and sparsely
produced) are major impediments to production and trade (Esfahani and Ramirez
2003). Frenkel and Romer (1997) find that distance strongly undermines growth
due to its impact on international trade. Africa is by far the most remote continent
Figure 4.1. Sub-Saharan Africa Geographical Distribution
Coastal, resource rich
26%
26%
Landlocked, resource rich
6%
43%
Coastal, resource poor
Landlocked, resource poor
Source: Ndulu, 2004.
89
CHALLENGES OF AFRICAN GROWTH
by this measure, and trade is an even stronger predictor of growth for African
countries than it is for non-African countries (O’Connell and Ndulu 2001). And
the situation is much worse for landlocked countries.
Relative to other regions, the transport costs of intra-SSA trade are much
higher. The median transport costs for intra-African trade, at $7,600 for a 40-foot
container, are almost the same as for imports from the rest of the world
(involving much longer distance), and it is $2,000 more than for intraregional
trade in other developing regions. Nominal freight rates on African exports are
normally much higher than those on similar goods shipped from outside the
region, (AfDB, 1999). For example, freight charges on African exports to the
United States as a proportion of CIF value are on average approximately 20
percent higher than for comparable goods from other low-income countries.
The situation is worse for landlocked countries. In 1990, the ratio of
freight cost to exports for African landlocked countries, at 30 percent, was twice
the average for the region as a whole. Using shipping and CIF/FOB ratio data,
Limao and Venables (2001) find that a representative landlocked economy has
50 percent higher transportation costs and 60 percent less trade volumes than a
typical coastal economy. However, the authors note that landlocked countries are
able to offset a significant proportion of this disadvantage through improvements
in their own and their transit countries’ infrastructure.
Sub-Saharan Africa is a highly fragmented region. It has 48 small
economies, with a median GDP of $3 billion (Wormser 2004). For a given
geographic area, the region has the highest number of countries, with each
country sharing borders with four neighbors on average, often with different
trade and macro policy regimes (Ndulu 2006). This fragmentation has its origin
in the region’s colonial history, kicked off during “the Scramble for Africa.” This
got worse after independence, with the break up of federations (e.g. Northern
Rhodesia Federation), customs unions, currency zones (only the CFA zone
survived)—as countries established their own trade regimes, central banks, and
immigration systems. This process further fragmented policy frameworks,
fractured transportation networks (e.g. disbanding of East African Railways), and
led to more transshipments and longer transit times, as well as more limited
backhauls. So the problem of isolation is not merely one of market size, but also
the absence of cohesion of policy across potentially larger investment areas.
Ndulu (2004) reviewed the very substantial evidence mustered at macro-,
meso- and micro-levels to show how important infrastructure is for growth—the
bulk of it linked to bridging the gaps in geographical dislocation. We highlight
here those that have direct bearing on African growth.
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CHAPTER 4: CONSTRAINTS TO GROWTH
At the macro level, the two most recent and comprehensive studies are
those by Esfahani and Ramirez (2003) and Calderon and Severn (2004).
Esfahami and Ramirez (2003) use a structural model to estimate the relationship
between infrastructure and output growth. After accounting for the simultaneity
between infrastructure and GDP, they find that the contribution of infrastructure
services is substantial and that in general exceeds the cost of provision of those
services. Drawing on these results the study finds that if, for example, the growth
rate of telephones per capita rises parametrically from about the current 5 percent
per year in Africa to 10 percent per year as in East Asia, the annual growth of
GDP would rise by about 0.4 percentage points. In the power sector, an increase
of per capita production growth rate from the current 2 percent in Africa to 6
percent, as in East Asia, can raise annual GDP growth rate by another 0.5
percentage points. Private ownership of infrastructure assets and government
credibility—for example, low risk of contract repudiation—matter with respect to
infrastructure growth. Because of network properties of infrastructure assets,
returns to infrastructure investment rise with population density. Being
landlocked or experiencing difficulty of access to international markets has a
significant negative effect on steady state investment and productivity in noninfrastructure sectors.
Calderon and Serven (2004) undertake an empirical evaluation of the
impact of infrastructure development on economic growth and income
distribution using a large panel data set encompassing more than 100 countries
and spanning the years 1960–2000. They consider an aggregate index of
infrastructure quantity and quality, rather than concentrating on any single type
of infrastructure (for example, roads, power, or transport and communications
only). To account for the potential endogeneity of infrastructure (as well as that
of other regressors) they use a variety of GMM estimators based on both internal
and external instruments, and report results using both disaggregated and
synthetic measures of infrastructure quantity and quality. The two robust results
of this study are: (i) growth is positively affected by the stock of infrastructure
assets, and (b) income inequality declines with higher infrastructure quantity and
quality.
At the meso-level, using a gravity model Limao and Venables (2001)
estimated elasticity of trade with respect to transport costs, and found it typically
to be quite high at –3. Distance to key markets is an important impediment to
trade as expected, but in their model poor infrastructure (measured by an index
combining road, rail, and telecom density) accounts for 40 percent of the
predicted transport cost for coastal countries and up to 60 percent for landlocked
countries.
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CHALLENGES OF AFRICAN GROWTH
Applying the results from this analysis to SSA trade performance, they
find that whereas a basic gravity model suggests that African trade, both internal
and with the rest of the world, is lower than predicted (in contrast to the earlier
findings of Foroutan and Pritchett [1993]), augmenting the model to include
infrastructure improves the predictive power of the model as the predicted value
gets much closer to the actual values. The median landlocked country has only 30
percent of the trade volume of a median coastal country. What is also striking
from this study is that holding activity levels and direct distances between trading
partners constant, improving landlocked country infrastructure is as important as
improving the infrastructure in the transit country.
At the micro level Elbadawi, Mengistae, and Zeufack (2002) estimate the
impact of geography (supplier and market access) on exports of manufactures
using an export market participation equation on a sample of 1,400 textile and
garment producers from six countries in Africa and two from outside the region.
Supplier and market access are essentially measured by the inverse of transport
costs (international plus domestic), and trade policy constraints (degree of
openness as measured by Sachs and Warner 1995). They find that: (i) firm level
exports increase with both supplier access and foreign market access. A doubling
of foreign market access would raise exports by 7 percent whereas exports would
increase by 20 percent with doubling of supplier access; (ii) degree of openness
has a strong twofold impact on exports; (iii) domestic transport costs seem to
have significant and much stronger impact on exports than international
transport. The elasticities with respect to suppliers’ access are much higher and
more robust than with respect to market access; (iv) productivity in the firms
increases with both supplier access and access to foreign markets. Mengistae and
Pattillo (2004) have further evidence of productivity gains through exposure to
foreign competition pressure as well as through technological learning.
Tropical Climate a Host for Diseases
More than 90 percent of Sub-Saharan Africa lies within the tropics,
where the burden of disease is high, negatively affecting life expectancy, human
capital formation, and labor force participation. This compares with 3 percent for
OECD countries and 60 percent for East Asia. Sachs and Warner (2001) and
Master and McMillan (2001) emphasize the high burden of human and animal
diseases in tropical climates, and its impact on life expectancy, human capital
formation, labor force participation, and economic growth. They also find a
significant negative impact of a “malaria index” on growth. Easterly and Levine
(2003) and Acemoglu and Robinson (2001) show an indirect impact of the
disease environment on long-term growth. Artadi and Sala-i-Martin (2003)
estimate the foregone growth in Africa as a result of malaria prevalence at 1.25
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CHAPTER 4: CONSTRAINTS TO GROWTH
percent per annum, a figure that surely reflects the influence of other highly
correlated aspects of the health environment.
Demographic Pressure
African countries’ populations grew more rapidly than the non-African
developing world had grown at its peak. The ratio of (overwhelmingly young)
dependents to working-age population grew steadily, exceeding historical
developing-country norms by 1970, and remaining above these through 2000.
The fertility rate began to fall in Africa in the mid-1980s, suggesting
entry into the final phase of the demographic transition, but at a slower pace. This
observation is further complicated by the huge impact of HIV/AIDS, starting in
the late 1980s, on life expectancies. These very distinctive demographic features
of Africa compared to other regions weigh unusually heavily on national savings
and undermine building up the human capital needed for growth. As we saw in
the previous chapter, the rapid growth of the population, as manifested by a high
dependency ratio, is inimical to rapid economic growth.
The Demographic Transition and Economic Growth
The findings in chapter 3 that the delayed demographic transition in
Africa has been a substantial drag on economic growth are not surprising. Indeed,
there exists substantial literature on the benefits of the demographic transition on
economic growth in Asia and elsewhere which is, after all, the flip side of the
coin. For example, Robert Lucas (2003), in an essay on “The Industrial
Revolution” says the following:
On this general view of economic growth, then, what began in England
in the 18th century and continues to diffuse throughout the world today
is something like the following. Technological advances occurred that
increased the wages of those with the skills needed to make economic
use of these advances. These wage effects stimulated others to
accumulate skills and stimulated many families to decide against
having a large number of unskilled children and in favor of having
fewer children, with more time and resources invested in each. The
presence of a higher-skilled workforce increased still further the return
to acquiring skills, keeping the process going.
Similarly, Bloom, Canning, and Sevilla (2001) conclude that the
demographic transition throughout the world resulted in a changing age-structure
of the population with the growth of the working-age population outstripping that
of the nonworking-age population. They then offer a number of reasons why age
dependency has a powerful effect on economic growth. These are labor supply,
savings, and human capital.
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CHALLENGES OF AFRICAN GROWTH
Labor Supply. The transition mechanism here is largely mechanical. The
demographic transition, in which mortality rates decline first, followed by
fertility rates, leads to a situation in which the population first gets younger
(mortality declines are disproportional among infants and children), and then the
baby boom becomes a boom in the workforce. It is also likely that declines in
childbearing free more women to also participate in the labor force directly.
Savings. The impact of the demographic transition on savings is also
largely mechanical. Children and the elderly consume more than they save, while
working-age people, for the most part, do the opposite: thus, increasing the
proportion of working-age to dependent population automatically increases
savings.
Human capital. One of the reasons for declining birthrates is the fact that
changes in the economy (rural to urban migration, for example) change, in a
fashion explained by Gary Becker, the calculus that parents use in deciding
whether it is better to emphasize quality or quantity in their children. Economic
development shifts the incentives by providing greater rewards and reduced costs
to investing in children, thus leading to higher levels of human capital
investment.
Table 4.2. Age-Dependency Ratios
1960
1970
1980
1990
2000
East Asia & Pacific
0.79
0.81
0.71
0.55
0.50
Europe & Central Asia
0.61
0.60
0.56
0.55
0.50
High income: OECD
0.60
0.59
0.53
0.49
0.49
Latin America &
Caribbean
0.87
0.88
0.80
0.70
0.61
Middle East & North
Africa
0.90
0.96
0.92
0.89
0.70
South Asia
0.78
0.81
0.77
0.72
0.67
Sub-Saharan Africa
0.87
0.92
0.94
0.95
0.91
Source: World Bank, World Development Indicators (2006).
As can be seen from Table 4.2, in 1960 high-income countries had
reduced their age-dependency ratios to 0.6, whereas most countries in the rest of
the world had high age dependency ratios (SSA and LAC), and those in Asia
were beginning to decline. Over the next decades East Asian dependency ratios
approached those of the high-income countries, whereas those of South Asia and
LAC began to decline. The Middle East and North Africa experienced increasing
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CHAPTER 4: CONSTRAINTS TO GROWTH
dependency ratios until 1970, when they began to decline, while Africa’s
dependency ratios increased until 1990, when declining fertility rates began to
have an effect.
So what has been the global demographic experience since 1960? The
demographic transition information is presented in figure 1. In 1962, virtually all
regions of the developing world were experiencing the same rate of population
growth (between 2.5 percent and 3.0 percent). However, East Asia, and to a
lesser extent Latin America, had already begun to experience lower birthrates and
death rates. Over the next 40 years, East Asia, Latin America, South Asia and
even the Middle East and North Africa experienced a dramatic decline in
population growth because of steady decreases in mortality rates and
unprecedented decreases in fertility rates (2.2 percent per year in East Asia, 1.6
percent per year in Latin America and 1.5 percent per year in South Asia and the
Middle East and North Africa). However, it wasn’t until 1980 that African
fertility rates began to fall, and then at a lower rate (about 0.8 percent per year).
This delay in the demographic transition has probably reduced African growth
rates, but it also offers an opportunity for accelerated growth rates if fertility
declines can be accelerated.
What causes fertility declines? There is a great debate as to the causes
of fertility change, but a number of factors have been cited in much of the
literature. These include declining infant and child mortality rates, urbanization,
increasing incomes, increased levels of education (especially for women),
increased female participation in the labor force, and increased access to family
planning services. A quick look at some of these variables across regions goes a
long way toward explaining Sub-Saharan Africa’s delay in reducing fertility
levels. These data are presented in table 4.3.
Table 4.3. Socioeconomic Indicators, 2004
E. Asia
LAC
MENA
S. Asia
SSA
Fertility
Rate
Infant
Mortality
Rate
Girls’
Primary
Enrollment
Rate
Girls’
Secondary
Enrollment
Rate
Percent
Urban
Per
Capita
Income
(US$ PPP)
2.01
2.45
3.04
3.11
5.31
36.77
31.37
55.19
91.52
168.19
111.75
117.36
96.41
97.99
87.56
68.87
84.75
70.84
48.20
35.00
40.56
76.81
56.78
28.22
34.73
5,335
7,684
5,735
2,876
1,871
Source: World Bank, World Development Indicators (2006).
If the variables presented in table 4.3 are indeed associated with or even
causative of fertility rates, the reasons for Africa’s relatively high fertility rate is
95
CHALLENGES OF AFRICAN GROWTH
readily explicable. Compare SSA to the regions which are, on the whole more
developed—East Asia, the Middle East and North Africa, and Latin America.
Africa’s fertility rate is around twice theirs, its infant mortality rate three to four
times as high, its primary enrollment rates for girls about 80 percent of the other
three regions, its secondary enrollment rate for girls about half, its urbanization
rate 60 percent of the average of the other three, and its per capita income 30
percent of theirs.
Perhaps the more interesting case is South Asia, which has per capita
incomes between those of Africa and the other regions, and intermediate
socioeconomic variables as well. Indeed South Asia is less urbanized than Africa
and has female enrollment rates not markedly higher than those of Africa. South
Asia still has high infant mortality rates as well, yet its fertility rates are much
closer to those of the other regions than to those of Africa. Nevertheless, over the
44 years between 1960 and 2004, South Asia saw its infant mortality rates
decline at 2.2 percent per year, while Sub-Saharan Africa experienced declines
of just half of that, 1.1 percent per year.
One problem, of course, is that all these variables are interrelated.
Income growth affects health outcomes directly through better nutrition and
better hygiene. Education affects health outcomes as well. Income growth affects
fertility and that, in turn affects income growth. The bottom line is that while
there is no magic bullet, the two areas that are most likely to have spillover
effects on fertility behavior are effective health services focused on reducing
infant and child mortality, and expanding girls’ enrollments in secondary
schools.2
Kahn et al. (2006) examined the relationship between education and
fertility in Bangladesh using multivariate analysis and found that education had a
strong impact on fertility behavior. On average, women with no education had
more than 3.5 live births each, while women with a secondary education had a
little more than two.
The literature is ambivalent concerning the impact of family planning
programs. Supporters note the large numbers of women who would like to use
modern family planning methods but for who such services are out of reach,
either because supplies are limited or the price is too high, and argue that unmet
demand indicates that increases in the availability of affordable contraceptives
would reduce fertility (Bulatao, 1998; Casterline and Sinding, 2000). Detractors
96
Figure 4.2. Demographic Transition Information
Rate of Natural Increase
35.0
30.0
per 1000 population
25.0
East Asia
LAC
MENA
South Asia
SSA
20.0
15.0
10.0
5.0
0.0
1962
1967
1972
1977
1982
1987
Years
Source: World Bank, World Development Indicators (2006).
1992
1997
2002
2004
CHAPTER 4: CONSTRAINTS TO GROWTH
(particularly Pritchett 1994) argue that fertility behavior and the desire to control
fertility behavior are strongly correlated over time, and that it is changing
intentions with respect to family size, rather than the supply of contraceptives,
that drives fertility outcomes. It is also true that western countries experienced
the demographic transition before the widespread availability of modern family
planning methods.
However, there is evidence that family planning programs may be more
important in reducing fertility in Sub-Saharan Africa than elsewhere. Westoff
and Bankole (2000) note that the percentage of women who want no more
children has risen slowly but steadily in Sub-Saharan Africa since the 1970s,
having reached a level of 20–40 percent in many countries by the late 1990s. Yet
overall levels remain far below those seen in Asia and in North Africa, where the
level of demand for limiting births clusters in the 40–60 percent range. Unmet
need for the means to limit births is increasing fairly uniformly for most SubSaharan African countries; in contrast, in Asia and North Africa, and Latin
America and the Caribbean, it is generally declining with the adoption of
contraceptive use. Although the evidence indicates that most women in SubSaharan Africa who practice contraception do so to space rather than to limit
births, trend data suggest that the proportion of users practicing contraception to
limit births has been increasing in recent years; in some countries, this proportion
approaches half of all methods used, and is higher than expected elsewhere.
They then conclude:
While demand for contraception is increasing throughout the
developing world, most of the demand in Asia and North Africa and in
Latin America is already being met whereas much of the demand in
Sub-Saharan Africa is not. In both Asia and Latin America, where
contraceptive use is already high, providers need to gear their services
toward helping clients to continue use and to improve the effectiveness
of their contraceptive practice. In Sub-Saharan Africa, where use is
low, programs must aim to encourage adoption of modern methods.
Even if supplying contraceptives has a more limited effect on reducing
fertility than its supporters maintain, it still may be the most cost-effective
approach to the problem. We know fertility is directly linked to income levels,
urbanization, and female participation in the workforce, all of which are part of
the growth and development process, and tend to change slowly. We also know
that reductions in infant and child mortality and increased education for girls also
reduce fertility, and these should be pursued vigorously in any case. However,
although the impact of family planning programs is still debated, there is little
doubt that the costs tend to be modest compared to other approaches.
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CHAPTER 4: CONSTRAINTS TO GROWTH
Fraser, Green, and Dunbar (2002) in a megastudy of the costs of family
planning in SSA present data that show in most countries family planning costs
range from $10 to $20 per couple year, depending on method. This would mean
in Kenya, for example, with nine million women between the ages of 15 and 64,
and an unmet need for contraceptives of 30 percent, that increasing family
planning programs to cover the unmet need would mean spending an additional
$30 million to $60 million. How does this compare to improving primary health
services or expanding secondary education?
Kenya’s education budget in 2003 was $420 million, almost 30 percent
of all government expenditures. Per pupil expenditures in secondary school were
$95 per student in 2003, with girls’ enrollment reaching 1.2 million, or 46
percent of the secondary school age group. To increase the enrollment of girls by
25 percent (an additional 300,000 girls) would cost $29.5 million (assuming you
could expand access only for girls). The Kenya health budget was about $6.50
per capita, well below the estimated requirement by WHO of $12 per capita.
Thus a well-funded (though admittedly untargeted) health program would require
additional expenditures of around $200 million. Without really knowing the
efficacy of these investments in terms of reducing fertility it would be hard to
determine which is more cost effective, although by any measure, the family
planning approach is the cheapest.
Moreover, family planning programs, which in the past have been largely
funded by donors, have seen substantial reductions in available finance, partly
because of shifts to HIV/AIDS programs, and partly because traditional
supporters have lost interest. At a recent symposium in Mozambique African
health experts lamented the lack of funding for family planning:
There hasn't been adequate emphasis on family planning as a strategy,
and yet it is a cost-effective thing,” says Chisale Mhango, a public
health expert at the AU’s Department of Social Affairs. “When you
provide family planning, you are reducing unwanted pregnancies and
therefore maternal mortality—including deaths from abortion.
A United Nations Economic and Social Council (ECOSOC) report
issued in January 2005 notes that funding for family planning programs
decreased by 36 percent from 723 million dollars in 1995 to 461 million dollars
in 2003. A similar report, released this year by (ECOSOC) says donor funding
for family planning continued to decline in 2004.
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CHALLENGES OF AFRICAN GROWTH
Box 4.1. The Demographic Transition and Family Planning in Ethiopia
“Capturing the Demographic Bonus in Ethiopia,” a draft report produced by the
Africa Region of the World Bank (2006) offers a strong analytical case for expanded
support for family planning programs. The researchers examine the proximate and
structural determinants of fertility in Ethiopia, the expected development outcomes over
the period 2005–2030, the costs of family planning programs, and the linkages between
different demographic scenarios and household and national income. Their conclusions
are quite dramatic.
After developing a behavioral model in which the determinants of fertility include,
among other things, urbanization, women’s education, income levels, employment, and
female empowerment, the authors simulate the evolution of fertility behavior between
2000 and 2030. Beginning with estimates of the changes in income, education, and
urbanization over the 30 years, they then add the simulations to estimates of the increased
use of contraceptives, both a low and a high estimate. In the low scenario, the total
fertility rate (TFR) declines from 5.9 in 2000 to 3.63 in 2030. In the high scenario, the
TFR declines more quickly to 2.87 in 2030.
The authors then examine the differences in population levels, dependency ratios,
and income resulting from the two scenarios and compare the gain in long-term income
to the costs of family planning programs needed to move from the low to the high
scenario in terms of contraceptive use. Under the high fertility scenario the Ethiopian
population in 2030 would be 135 million and the age-dependency ratio 0.70; under the
lower fertility scenario the population would be 124.2 million and the age-dependency
ratio 0.61. The welfare difference between the two scenarios, measured in the present
value of per capita consumption, is between $105 and $112.5. This is a massive number
in a country where the current mean level of per capita consumption is $117. The study
estimates the cost of an accelerated family planning program as $52 million annually
(less than 50 U.S. cents per capita) compared to the more modest program implicit in the
high fertility scenario.
While any simulation is subject to differing views about reasonable estimates of key
variables, as well as questions as to the stability of structural relationships over long
periods, the incredible ratio of benefits to costs of family planning are likely to be true
under any imaginable scenarios. The report states, “In conclusion, two major messages
emerge from the population projections and the simulations: (1) Development is the best
contraceptive; and (2) Contraceptives are good for development.”
HIV/AIDS AND THE DEMOGRAPHIC TRANSITION
HIV/AIDS remains a tragedy of overwhelming proportions in
sub-Saharan Africa, even though estimates of prevalence have been
readjusted downward in recent months.3 The basic facts are these4—in
Sub-Saharan Africa:
•
100
Globally there are 24.5 million people living with HIV; the epicenter
of the epidemic is in Southern Africa, where one-third of people
infected with HIV reside
CHAPTER 4: CONSTRAINTS TO GROWTH
Figure 4.3. HIV Prevalence (%) in Adults in Africa, 2005
Source: UNAIDS, 2006 Report on the Global AIDS Epidemic
•
There are 2.7 million new infections each year
•
The adult prevalence rate of HIV is 6.1 percent
•
Two million people die of AIDS each year, of whom about 930,000
were living in Southern Africa
•
Three women are HIV-infected for every two men
•
Among young people (15–24) 75 percent of the HIV-infected
population are women
•
810,000 people (about 17 percent of those with AIDS) are receiving
antiretroviral therapy
101
CHALLENGES OF AFRICAN GROWTH
•
Two million children are living with HIV; there are about 12 million
orphans living in SSA in 2005
DEMOGRAPHIC IMPACTS
As can be seen in the map below, there are four countries in SSA with
prevalence rates above 20 percent, another seven with prevalence rates between
10 and 20 percent, seven with rates between 5 percent and 10 percent, and 26
with rates below 5 percent. Clearly, the biggest demographic impacts will be on
the countries with the highest prevalence rates—the nine countries of Southern
Africa and the Central African Republic. The clearest picture of the impact on the
age structure of these countries can be seen in figure 4.4, which follows.
What is clear is that in countries with high HIV prevalence, the whole
pattern of mortality is changed, and changed dramatically. In 10 years, Southern
Africa went from having one-third of annual deaths coming from the workingage population to two-thirds. While the AIDS pandemic also affects fertility
through a number of channels (increased death rates and morbidity of women of
childbearing ages, changes in sexual behaviors, increased need for women to
enter the workforce) it is unclear whether fertility will increase or decrease. What
is certain is that the net affect of the HIV pandemic on fertility and mortality will
be to increase age-dependency rates and thus reduce economic growth rates.
P ercen tag e o f To tal D eath s
Figure 4.4. Age Distribution of Deaths in Southern Africa
40
35
30
25
1985-1990
20
2000-2005
15
10
5
0
0-4
5-19
20-29
30-39
40-49
Age Groups
Source: World Bank, World Development Indicators (2006).
102
50-59
60+
CHAPTER 4: CONSTRAINTS TO GROWTH
CONCLUSIONS
The high rates of fertility still common in Africa mean that Africa’s
demographic transition has been delayed. The current situation results in high
levels of age dependency, which reduces saving, reduces investment in human
capital, and results in slower growth of the labor force. All of this reduces
economic growth rates from what they might have been if the age-dependency
ratio were lower. On the other hand, it provides a reserve for higher growth rates
if fertility rates can be induced to decline.
Declines in fertility rates seem to be linked to income growth,
urbanization, girls’ education, and reduced infant and child mortality rates, all of
which have been delayed in Africa because of stagnant growth rates. Thus, as
growth begins to accelerate, as it has in many African countries in the last
decade, there is a reserve fuel in the form of declining age-dependency ratios that
can accelerate per capita growth rates by 1 percent or more. Given the
importance of this issue, and the fact that donors have reduced their funding for
family planning programs, it would be well to revisit the relative priority of
investments in family planning.
Finally, the HIV/AIDS pandemic increases age-dependency, especially
in high-prevalence countries. Bearing in mind that investments in preventing and
treating AIDS are extremely important from a human point of view, and the
reduction of human suffering is clearly the prime motivating force for HIV/AIDS
programs, it is good to know that these programs may also, in a minor way, lead
to increased economic growth.
NATURAL RESOURCES—“CURSE” AND “POTENTIAL”
Extensive empirical evidence of poor growth performance by the natural
resource-rich economies in Africa, the Middle East, Latin America, and East
Asia and Pacific suggests that these resources are another factor that is thought to
have negative implications for growth. This is known as the “resource curse”
hypothesis because these countries appear to have failed to realize their apparent
economic potentials. Added to this is what is known as ”Dutch disease,” the fact
that foreign exchange inflows from natural resource exports may have adverse
effects on the domestic economy because they lead to an appreciation of the
domestic currency. This hurts other (nonresource) industries because their
products become more expensive on the world market, and exports generally fall.
A nondiversified primary commodities exporter also becomes extremely
vulnerable to exchange rate volatility, as the domestic currency exchange rate
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CHALLENGES OF AFRICAN GROWTH
fluctuates whenever global demand for the natural resource being exported
changes.
About 32 percent of the countries in SSA and 25 percent of the countries
in all other developing regions are resource rich. Resource-rich countries are
classified according to a threshold defined as generating more than 10 percent of
GDP from primary commodity rents. Because prices of commodities fluctuate,
potentially some economies flip back and forth across this threshold year to year,
but because most resource-rich countries derive their wealth from minerals
including oil, the majority of them maintained a fairly stable status through the
period of analysis.
Figure 4.5 plots the performance in terms of average growth rates,
dividing countries into four groups: resource-rich coastal, resource-rich
landlocked, resource-scarce coastal and resource-scarce landlocked In SSA, there
are only two countries with a full set of annual growth rate observations
(Botswana and Zambia) that are categorized as landlocked, resource abundant
economies. The evidence is rather ambiguous. If we discard the resource-rich
landlocked group because it is dominated by one country with high growth
Figure 4.5. SSA's Smoothed Average Growth in Real GDP per Capita
(Countries with full set of growth observations)
6
4
2
0
-2
-4
1960
1970
1980
Landlocked, resource poor
Coastal, resource poor
104
1990
2000
2010
Landlocked, resource rich
Coastal, resource rich
CHAPTER 4: CONSTRAINTS TO GROWTH
rates—Botswana—the graph suggests that being landlocked and resource-poor is
a strong constraint. However coastal resource-rich countries did better than
coastal resource-poor countries, except during the 1980s.
RISKS AND UNCERTAINTY
It is well known that investors make decisions based on a function that
includes the rate of return and the risk of any investment choice: the higher the risk,
the higher the required rate of return. Each investment carries its own particular
risk-return ratios. However, in Africa, a number of environmental factors, external
to the individual investment, tend to raise the risk, and thus, for any given rate of
return, reduce the rate of investment. In this section we will examine two riskelevating factors—macroeconomic policies and political instability.
Macroeconomic Stability
Africa as a region has made significant progress in the area of
macroeconomic stability. From the mid-1990s, inflation—a standard proxy for
instability—fell from an average of 24 percent to an average of 13.3 percent for
the period 2001–04. However, it is worth noting that despite this recorded
improvement, as figure 3.12 shows, average inflation in Africa is higher than in
other regions for the later years.
Looking at the yearly averages for the region, the improvement achieved
is even more pronounced. The picture depicts a steady decline in inflation to a
Figure 4.6. Inflation Trends: Regional Comparisons, 1971–2004
30
20
10
0
LatAme
SEAsia
SSA
1971-1975
1981-1985
1991-1995
2001-2004
SthAsia
1976-1980
1986-1990
1996-2000
Source: World Bank, World Development Indicators (2006)
105
CHALLENGES OF AFRICAN GROWTH
level below 10 percent in both 2003 and 2004. However, the figure also shows
significant variability over the years, which is a definite threat to perceptions of
stability. In particular, from around 1990, other regions show much less
variability in their inflation rates than Africa (figure 4.7).
It is not only the inflation rate that determines stability, but also its
variability over time. Noise in inflation perpetuates the perception of risk in the
investment environment and also generates skepticism about the authorities’ ability
to maintain stability. The pervasiveness of this problem is also evident in the high
percentage of investors who perceive macroeconomic instability to be a major
impediment to investment and growth. For example, in the 2003 Investment
Climate Survey for Tanzania by the World Bank, 43 percent of respondent firms
rated macroeconomic instability as a major obstacle to doing business, even
though Tanzania has had a steady decline in its rate of inflation from about 21
percent in 1996 to about 4 percent in 2003. The proportion of entrepreneurs who
rate macro instability as a significant constraint to business is comparable to
Uganda and Kenya at 45 percent and 51 percent, respectively, but for China the
percentage is considerably lower at 30 percent. This gives a clear message that
maintaining economic stability should be a priority for African countries.
g
0
10
Inflation Rate
20
30
40
50
60
Figure 4.7. Regional Inflation: 1971–2004
1970
1980
1990
Year
SSA
Latin America
Source: World Bank, World Development Indicators 2006
106
2000
S.E. Asia
South Asia
2010
CHAPTER 4: CONSTRAINTS TO GROWTH
The table below shows that the noted recovery extends to other
indicators of stability, with the possible exception of external debt. Relative to
other developing regions, Africa stacks up very well, again with the exception of
debt, where Africa’s average does not show any signs of declining and also
performs poorly relative to other regions. For example, for the period of 1997 to
2003, the debt to GNI ratio of 133 percent is twice as high as that for both Latin
America and South East Asia, and three times that of South Asia.
These observations suggest that while on the whole Africa has made
great strides in achieving some measure of stability, the region is not completely
out of the woods. Concerted effort has to now be devoted to sustaining the
stability, with particular emphasis on prudent management of fiscal policy.
Table 4.4. Fiscal Policy Indicators for Selected Regions
SSA
Gov. spending (G/GDP)
Growth Rate of Spending
Fiscal Balance
Debt/GNI
Latin America
Gov. spending (G/GDP)
Growth Rate of Spending
Fiscal Balance
Debt/GNI
South Asia
Gov. spending (G/GDP)
Growth Rate of Spending
Fiscal Balance
Debt/GNI
South East Asia
Gov. spending (G/GDP)
Growth Rate of Spending
Fiscal Balance
Debt/GNI
1971–1980
1981–1990
1991–1996
1997–2003
16.26
7.48
-6.44
31.90
17.48
3.74
-5.74
91.00
16.463
1.93
-5.50
133.33
15.04
6.20
-4.81
133.96
12.99
6.56
-2.84
33.36
15.26
2.50
-4.59
87.17
12.97
3.68
-0.73
85.84
14.55
3.21
-2.43
61.55
9.25
8.32
-6.09
22.82
11.26
6.35
-9.77
34.48
11.41
4.87
-7.24
46.10
12.36
6.90
-5.58
44.16
14.38
8.14
-4.049
27.08
17.54
3.61
-5.58
56.36
14.31
6.57
-2.45
65.12
12.73
4.50
-3.90
65.29
Source: World Bank, World Development Indicators 2006.
Recent developments, specifically developments in commodity markets
and future ODA flows, make the issue of fiscal management more urgent. Most
African countries rely on primary commodities, whose prices tend to fluctuate
significantly. This has in the past resulted in a procyclical fiscal policy that is
mainly driven by developments in commodity markets. Further, volatility of
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CHALLENGES OF AFRICAN GROWTH
commodity prices makes it difficult to stabilize budgetary spending. The current
environment of rising oil prices presents a particular challenge to management of
windfall gains by oil producing countries. Dependency on oil tends to be even
trickier due to high volatility of oil prices. In addition to high fluctuations, oil
price changes are subject to exogenous shocks, which are primarily caused by
unforeseen factors and as such are difficult to project. This not only generates
volatility in government spending, but also puts pressure on fiscal policy,
especially with regard to sterilizing excess revenue for medium- to long-term
sustainability.
The donor community has committed to doubling aid flows to Africa
over the next few years. This will be, by any standard, a large increase, and while
the scaled-up aid will open up fiscal space for African countries, it nevertheless
presents a host of challenges to macroeconomic management of recipient
countries and could potentially be a source of imbalances. The impact of higher
aid flows will depend on policy choices regarding the utilization and absorption
of these resources, as well as the interactions between monetary policy, fiscal
policy, and exchange rate management. The threats to macroeconomic stability
from increased aid include the potential for real exchange appreciations and their
effect on exports and competitiveness. Scaling up aid may also generate
inflationary pressures from increased domestic demand—unless the liquidity
injections are sterilized. Aid flows tend to be unpredictable, which may impede a
government’s ability to plan effectively. Also related to this unpredictability,
governments must make plans for continued spending in the event that donors
renege on their commitments. This could lead to increased fiscal deficits.
POLITICAL UNCERTAINTY AND CONFLICT
Polarization, Nation-Building and Conflict
The countries of SSA came to political independence both later and more
rapidly than those of other developing regions. While only Ethiopia, Liberia, and
South Africa existed as independent states at the end of 1955, fully three-quarters
of colonial Africa, representing the vast bulk of its population and GDP, had
achieved political independence by 1966. In 1966 the average independent state
in SSA had held sovereignty for fewer than 10 years; its counterparts in the rest
of the developing world had been independent for the better part of a century.
Colonial structures of political control were both arbitrary—with
boundaries cutting across historical patterns of politics and trade—and effective.
Their abrupt departure meant that the challenge of economic development was in
many cases confounded from the outset with an acute problem of nation108
CHAPTER 4: CONSTRAINTS TO GROWTH
building. Nigeria provides a telling example of the impact of ex ante regional
polarization on political and economic development. But similar patterns of
internal polarization, often created or reinforced in the encounter with conquering
European powers, existed throughout the continent in 1960.
While the salience of ethno-regional polarization was clear to political
scientists in the early 1960s (e.g., Carter 1971), economists have only recently
begun to come to grips with the implications of nation-building for African
economic growth. Two approaches have been important. The first is due to
Easterly and Levine (1997), who noted that as a legacy of low population
densities and arbitrary colonial boundaries, the probability that any two randomly
chosen individuals in a given African country would belong to the same ethnolinguistic group is very small. Moreover, on a global basis, ethno-linguistically
heterogeneous countries tend to grow more slowly, as a result of weaker public
sector performance. Miguel (2004) reports a similar finding for Kenya and
Tanzania. Collier (2000) finds, however, that the adverse impact of heterogeneity
is strongly contingent on political institutions. In democracies, ethno-linguistic
heterogeneity has no impact either on overall growth or on microeconomic
efficiency (as measured by the economic return on World Bank projects). In
dictatorships, the impact is strong.
Azam (1995, 2005) focuses on polarization, rather than on heterogeneity
per se; a polarized society is defined here as one like Nigeria’s, in which there
are two or three large subnational ethnic groups that dominate population and
politics in separate regions. Azam argues that in a situation of ex ante ethnoregional polarization, regionally based redistribution may be required to buy off
the threat of armed conflict. The existence of such a risk is consistent with the
global evidence of Collier and Hoeffler (2000), who find the risk of civil war
maximized under conditions of polarization: Homogeneous societies have low
exposure to civil war, but so do heterogeneous societies. In cases of ex ante
polarization, then, the Azam analysis forces a reinterpretation of distortionary
redistribution. If the “good policy” counterfactual involves armed conflict and
economic collapse, a redistribution program that distorts efficiency relative to a
peaceful counterfactual may be growth promoting (relative to the true
counterfactual). This shifts the grounds of the governance critique from
redistribution itself to the instruments employed to achieve it. Political elites
attempting to “buy the peace” should be seen to do so transparently and credibly
(perhaps via constitutional means), and with a minimum of distortion, and they
should simultaneously employ instruments directly targeted at reducing
polarization.
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CHALLENGES OF AFRICAN GROWTH
Conflict in Africa
Over the past 40 years, especially in the last two decades or so, Africa
has experienced a debilitating descent of states into persistent internal conflict
that has become an all-too-familiar phenomenon across the region. In fact,
conflicts are now arguably the single most important determinant of poverty in
Africa. According to IISS (the International Institute for Strategic Studies), in
1999 Africa played host to more than half the world’s conflicts as instability not
only brewed within countries but spilled over into neighboring states, resulting in
catastrophic wars within and among countries. While growing nationalism and
ethnicity has typified these conflicts, other factors such as abject poverty, lack of
opportunities, and corruption have contributed significantly.
Africa’s underlying proneness to rebellion, and hence to civil war, is
strongly related to economic conditions. Conflicts affect the economy through
reduced investment in both physical and human capital, as well as through the
destruction of existing assets, including institutional capacity, and these are
reflected in reduced economic growth. Statistics show that countries that
experienced a civil war had an average income that was about 50 percent lower
than countries that did not experience a conflict, and investment ratios for both
physical and human capital were also about 50 percent lower in conflict
countries.
Conflicts across the region have profoundly changed the social welfare
of affected societies as military spending has diverted increasing proportions of
national resources from pressing developmental needs. Local and national
economies have suffered huge output losses with devastating consequences to the
quality of life as populations became poorer. Conflicts have led to widespread
dislocation of populations and loss of household savings. Conflicts have also
caused serious reversals in health and other human development aspects. For
example, in most war-torn countries old diseases have reappeared and new ones
have emerged in situations where health and other social facilities were not only
underfinanced but were stretched far beyond their capacities.
A study by Branko (2004) finds that war and underlying risk factors are
the reasons why low-income countries and Africa specifically, failed to catch up
to the slower growing developed countries. The poorest countries have lost, on
average, some 40 percent of their output through greater frequency of war
compared with the rest of the world. Wars alone explain almost the entire relative
decline of the less developed countries (LDCs) compared with the middleincome countries. In other words, had prevalence of war among LDCs been at
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CHAPTER 4: CONSTRAINTS TO GROWTH
Figure 4.8. Countries in Civil War
indep sample
0 10 20 30 40
Proportion of countries in civil war
1960
1970
1980
year
1990
2000
1990
2000
0
20
40
60
Proportion of population in civil war
1960
1970
1980
year
____ Africa ---- Other Developing
Source: Sambani’s dataset
the same level as elsewhere, the LDCs would have at least kept pace with the rest
of the world.
Figure 4.8 shows the incidence of civil war in the developing world since
1960. There is a sharp increase in both absolute and relative terms in SSA in the
early 1990s. Since the mid-1990s, however, there has been a sharp decline in the
proportion of countries involved in civil conflict in the region, and the proportion
of the African population living in an environment of civil conflict has fallen
more sharply, dipping below the average of other developing regions at the turn
of the 21st century. Cessation of conflict in Sudan is not reflected in this data and
should further reduce the latter proportion. This positive change is corroborated
by new global data on the incidence of violent conflicts (Gleditsch, et al. 2002).
Using these data, Collier and Hoeffler (2005) show that immediately after the
end of the Cold War, the incidence of wars declined. The number of wars peaked
in Africa in 1992, and since then the number of civil wars seems to be declining.
The Costs of War
Recent research suggests that the incidence and severity of conflicts in
Africa have had a robust, negative effect on the growth rate of income. For
instance, the data show that countries that experienced civil wars had an average
income 50 percent lower than that of countries that experienced no civil war.
The indirect cost of war can be higher than the direct cost. In war-torn
countries, many state functions that are essential for a good business
environment, such as the judiciary system, are compromised. As a result, the
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CHALLENGES OF AFRICAN GROWTH
production structure is altered, as agents shift their assets to sectors that are
insulated from the disruptions of conflicts. The sectors that produce tradable
goods and services and financial intermediation are adversely affected, whereas
the agriculture and defense sector grows. After the war ends, there is reversal to
the prewar structure, but such reversal occurs gradually and it can take years
before the prewar level of activity is recovered.
A study by Lacina and Gledisch (2004) estimates the magnitude of the
indirect cost of war by comparing the number of battle deaths with estimates of
war deaths from other causes, primarily disease and malnutrition. Their findings
for a selected number of countries are reported in the table below.
Battle-Deaths versus Total War Deaths in Selected African Conflicts
Country
Years
Estimates of
total deaths
Battle deaths
Battle deaths as
a percentage of
total war
deaths
Angola
1975–2002
1.5 million
160,475
11%
Sudan
1983–2002
2 millions
55,000
3%
Liberia
1989–1996
150,000–
200,000
23,500
12–16%
Democratic
Republic of
Congo
1998–2001
2.5 million
145,000
6%
Source: Lacina and Gledisch, 2004.
The study confirms that the direct cost of war is only a fraction, often
less than 10 percent, of the indirect costs. Far more people die from war-related
disease and malnutrition than from battle death. These disproportional costs are
borne mostly by noncombatants and provide the rationale for intervention.
Collier and Hoeffler (2004) estimate that one year of conflict reduces the
country’s growth rate by 2.2 percent. Moreover, a civil war typically has an
average life of 7 years, implying a 15 percent reduction of the economy. However,
these are not the total economic costs of wars. Post-conflict the economy grows at
more than 1 percent above the norm but it takes roughly 21 years to achieve a level
of GDP that would have been attained had there been no war. The total economic
costs (present value at the beginning of the war) have been estimated at 105 percent
of GDP. Military expenditure (as a percentage of GDP) rises by 1.8 percent during
the war but declines by only 0.5 percent post-conflict. Assuming this lasts for 10
years post-conflict, the cost is 18 percent of GDP (present value).
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CHAPTER 4: CONSTRAINTS TO GROWTH
Conflicts affect the growth rate of African economies through reduced
investment in physical capital and the destruction of assets, including its
institutional capacity. Investment ratios and stocks of human capital in civil war
countries are at least 50 percent lower than the average for countries that had no
civil war.
The results for the effects of conflict on the level of income per capita are
mixed. This could reflect the fact that today’s level of per capita income is the
result of years of policy choices and exogenous shocks. Some authors find no or
negligible effects of conflict on the level of income per capita in Africa. Others,
using different quantitative estimation techniques, find a robust and negative
effect of conflict on the level of income. Sala-I-Marti and Artadis, for instance,
find that civil conflict decreased the average annual growth in Sub-Saharan
Africa by 0.5 percent in the second half of the 20th century.
Regional Spillovers
Conflicts are bad public goods. They affect not only the countries
involved, but also neighboring countries through the flow of refugees, drug
activity, loss of remittances, and the loss of export proceeds. Research shows that
neighboring countries lose about 43 percent of GDP and since the average
number of conflict neighboring countries is 2.7, the total cost of a conflict in one
country is 115 percent of initial GDP of neighboring countries. The international
community intervention is therefore needed not only to help break the cycle of
violence, but also to prevent any regionalization of conflicts.
Recent Trends
Even though Africa compares unfavorably with the rest of the world,
significant progress has been made recently. The number of actual and attempted
military coups has been declining since independence in Africa. In 2004 there
were 40 percent fewer coup attempts than in the 1960s and all failed. There is a
decline in the number of international terrorist incidents in Africa, and the
number of terror cells in Africa declined.
The number of conflicts in which a government was one of the warring
parties declined from 15 to 10 between 2002 and 2003, while one-sided violence
declined by 35 percent. Reported fatalities from all forms of political violence were
down by more than 24 percent. Warfare has been less deadly over time. The
average number of battle deaths per conflict per year have declined, although
unevenly.
Despite those positive advances, concerns and challenges remain. The
decline in the number and scale of conflicts was gained through preventive
diplomacy and an involvement of peacekeeping forces when diplomacy failed.
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CHALLENGES OF AFRICAN GROWTH
The fact that wars are ended doesn’t necessarily means that their underlying
causes have been addressed. For peace to be sustainable over the long run, the
root causes of conflict need to be addressed.
Political Instability, Conflict, and Investor Behavior
As we saw in this chapter, political instability reduces growth rates. In
the case of conflict, it does so by dislocating, injuring, and even killing people,
destroying infrastructure and bringing purposive economic activity to a halt. But
political instability, even if it doesn’t lead to conflict, creates uncertainty as to the
direction and stability of economic policy, and thus raises the riskiness of
investment. In unstable times, only those investors who expect very high rates of
return will invest in physical capital, while others will put their savings in land or
other safe investments, including capital flight.
WEAK INSTITUTIONAL CAPACITY
A detailed discussion of the weaknesses of Africa’s institutional
capacity, along with a discussion of strategies to invigorate capacity in both the
state and nonstate sectors, can be found in Capacity Building, World Bank
(2006). Suffice it to say that only four countries in Africa are above global
averages for state effectives (effectiveness?) and societal engagement. With few
exceptions, the first three decades of state capacity building—to 1990—produced
poor results. Efforts at indigenizing the inherited, colonial, extractive, and elitist
state were often swamped by patronage and clientelism and unsustainable
expansions in the scope of government (Levy and Kpundeh 2004). For many
Sub-Saharan countries, independence was followed by a period of political and
economic instability that was not conducive to capacity development. The postindependence instability was related variously to wars (both civil and cross
border), repression, autocratic rule, clientelism, and revolutionary socialism.
Even under these often turbulent conditions, Africa benefited from
islands of excellence in the public sector’s organizational capacity and
performance. The well-managed public entities included central banks, finance
ministries, revenue-generating agencies, and offices of political leaders
(presidents, prime ministers, cabinets). They depended on explicit decisions by
political and administrative leaders to establish the key elements of public sector
management needed to run the state and maintain power, showing that strong,
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CHAPTER 4: CONSTRAINTS TO GROWTH
Country Studies
Rwanda. Lopez and Wodon (2005) estimated the cost of armed conflict in Rwanda.
They found that without the genocide of 1994, Rwanda’s per capita GDP would have
been about 25 percent higher in 2001. The study suggests that the economic cost of the
conflict was long-lasting, even though Rwanda managed successfully to reverse the
decline of some other social indicators, such as the rates of enrollment in primary school
and the rate of child mortality.
Impact of the Genocide on per capita GDP in Rwanda
140
120
100
80
GDP
Actual GDP
GDP if No Genocide
60
40
20
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
Year
Mozambique. Mozambique is an ex-Portuguese colony. The civil conflict, which
started with groups funded at Mozambique’s’ independence in 1974, ended in 1992. It is
estimated that up to 1986, some 100,000 Mozambicans were killed, mostly civilians.
More than 5 million people have been displaced internally, and approximately 1.7 million
have been forced to flee to neighboring countries. Long after the war ended, landmines
continued to exact a heavy toll on the population.
The economic losses to Mozambique because of the war were $15 billion, four
times the 1988 GDP. In addition to the destruction of roads, approximately 45 percent of
schools had been destroyed or closed by the end of 1987. By 1993, 48 percent of the total
number of health posts had been destroyed. The environment was severely affected too,
leading to a fall in the population of elephants from between 50,000 to 65,000 in 1974 to
13,000 or less in 1990.
The Mozambique case provides a classic example of how conflict in one country
can affect the welfare of neighboring countries. Tanzania, Zambia, and Zimbabwe are the
countries that suffered the biggest brunt of the Mozambique war. Their economies have
continued
115
CHALLENGES OF AFRICAN GROWTH
been affected because of increased defense spending, and the additional costs of
transportation throughout South Africa, as the facilities in Mozambique became
unavailable. The use of these ports is estimated to have cost SADC countries $300
million a year. By 1988, Malawi had lost approximately 40 percent of its GDP;
Zimbabwe 25 percent, Zambia 20 percent, and Tanzania 10 percent of its GDP. The
conflict created an environment problem due to the massive displacement of population.
Malawi in 1989–90, for instance, had lost approximately 12 million trees to building and
cooking supplies.
Democratic Republic of the Congo. Since independence in 1960 the DRC has been
almost continuously racked by conflict. The first five years after independence were
extremely bloody, with assassinations and secessions by Katanga and Kasai provinces
the order of the day. In 1965 Lieutenant-General Joseph Mobutu overthrew President
Kasavubu and began 32 years of despotic, but in Congolese terms, peaceful rule.
Mobutu, in turn was overthrown by a foreign-backed rebellion led by Laurent-Desire
Kabila in 1997. This was followed by what has been called the Second Congo War, in
which troops from Uganda, Rwanda, Zimbabwe, Namibia, Angola, Chad, and Burundi
were aligned with various internal forces. An estimated 4 million people have died, most
from starvation and disease, and the Eastern Congo continues to be the site of periodic
conflict.
In 1974, GDP equaled about 8.0 billion US$, fell by 14 percent to 6.8 billion in
1982, and rose again to a peak of 8.4 billion in 1989. Since that time, as a result of
misgovernment and increasing conflict, GDP fell to $4.2 billion in 2002, 50 percent of
what it was in 1989. With a rapidly growing population, the average person in the DRC
saw his income decline from $241 to $82, a decline in welfare that is largely
unprecedented in the modern era.
committed leadership matters for capacity development. Nevertheless, key
institutions, both public and private, necessary for private sector growth are
largely weak and ineffectual. Of particular importance are the institutions serving
the financial sector.
THE FINANCIAL SECTOR AS A CONSTRAINT TO GROWTH
This section discusses the structure of African financial sectors as it
influences private sector activity, economic growth, and poverty alleviation.
Particular emphasis is placed on obstacles and challenges they present to host
economies, specifically financial depth, access, and efficiency. A vibrant,
competitive, and efficient financial sector that reaches the majority of an
economy’s population is a cornerstone of sustained high levels of economic
growth and development. Financial markets enhance economic growth through
various channels that include mobilization and pooling of resources, increased
allocative efficiency of savings, expansion and diversification of opportunities,
risk sharing, and easier exchange of goods through effective payment systems.
Better functioning financial systems are particularly instrumental in reducing
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CHAPTER 4: CONSTRAINTS TO GROWTH
external financing barriers and thus enabling entrepreneurial activity and firm
expansion through increased lending activity.
Financial sectors in Sub-Saharan African countries, however, have not
contributed significantly to economic growth. African financial sectors,
especially in low-income countries, are among the least developed in the world.
The systems are shallow relative to the size of the economies. The range of
institutions is narrow and dominated by commercial banks. Limited access to
basic financial services, including credit availability, continues to pose a major
obstacle to entrepreneurial activity and welfare improvement. It is worth noting
that some progress is being made as financial systems continue to institute
reforms, broaden their product base, deepen their lending, and increase their
reach. However, given that deeper and more efficient systems are critical for
growth prospects, clearly much more needs to be done if financial sectors are to
be in the vanguard of engineering economic growth. Decisive initiatives are
required to turn the tide and make financial sectors major players in economic
growth.
Financial Sector Development
Formal financial systems have been very shallow in African countries,
and they are even more so in low-income countries. Table 3.3 shows that in terms
of both M2/GDP and private sector credit, Africa has the lowest averages. The
M2/GDP ratio of about 27 percent for the period 2001-04 is considerably lower
than the 43 percent for South Asia and 50 percent and 56.9 percent for Latin
America and South East Asia, respectively. These comparisons are also reflected
in the private sector credit averages, whereby Africa scores 16 percent against 26
percent for South Asia, 44 percent for Latin America and 45 percent for South
East Asia. Moreover, while other regions have had the latter measure increasing,
the average for Africa has tended to stagnate.
Table 4.5. Indicators of Financial Development Regional Comparison
SSA
S. E. Asia
Latin America
South Asia
1996–
2000
2001–
04
1996–
2000
2001–
04
1996–
2000
2001–
04
1996–
2000
2001–
04
M2/GDP
24.4
26.7
49.6
56.9
43.1
50.0
38.5
43.6
Private Sector
Credit
17.1
16.5
44.9
45.4
43.2
43.9
22.7
26.4
Liquidity
Liabilities
31.9
32.3
54.3
61.1
48.0
54.8
42.7
47.8
Source: World Bank, World Development Indicators 2006.
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CHALLENGES OF AFRICAN GROWTH
Within the region itself, there are significant differences in the financial
development of individual countries. Not surprisingly, higher-income countries
appear to have more depth than their low-income counterparts. Low-income
countries in Africa attained an average of 25 percent and 12.6 percent for
M2/GDP and private sector credit in the period 2001-04, compared to 32.8
percent and 35.5 percent for middle-income countries.5
Figure 4.9. Financial Development in SSA
0
10
20
30
40
Financial Development Indicators by Income
Private Sector Credit
1971-1980
1981-1990
1991-1995
Middle Income
1996-2000
2001-2004
Low Income Countries
0
10
20
30
40
Financial Development Indicators by Income
M2/GDP
1971-1980
1981-1990
Middle Income
1991-1995
1996-2000
Source: World Bank, World Development
Indicators 2006
118
2001-2004
Low Income Countries
CHAPTER 4: CONSTRAINTS TO GROWTH
Inefficiency in the Banking Sector
Interest rate spreads throughout the region have remained high, with little
indication of converging with global levels. Banks in Africa have been more
inefficient than in most other developing regions, as indicated by the interest rate
spread that is highest among African countries and widest among all developing
regions, at a median of 13 percent. The main factors causing high spreads can be
grouped into high operating costs, perceived risk from policy frameworks and
Figure 4.10. Median Spread—Regional
Comparison
p
g
0
Median Spread
5
10
15
p
1980
1985
1990
Year
SSA
S. E. Asia
1995
2000
2005
Latin America
South Asia
Source: World Bank, World Development Indicators 2006
lending environments, lack of competition, and high concentration.
In most of Africa, lack of competition is pervasive so that banks do not
have to alter their way of doing business or their pricing structures to get a fair
share of the business. In addition, the small size of markets across Africa results
in diseconomies of scale and consequently leads to high fixed and operating
costs. These, compounded by the inadequacy of infrastructure, result in high
transportation and telecommunications costs. All these factors translate into high
costs of intermediation, which are in turn reflected in wide interest rate spreads.
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CHALLENGES OF AFRICAN GROWTH
Figure 4.11. Access to Finance: Africa Relative to other Regions
Access to Financial Services
Number of Branches per 100,000 People
SSA
South Asia
S. E. Asia
Latin America
0
2
4
Branches
6
8
Access to Financial Services
Deposits per 1,000 People
South Asia
SSA
Latin America
S. E. Asia
0
200
400
Deposits
600
800
Source: World Bank, Financial Structure Dataset 2006.
The lending environment across Africa is characterized by a poor credit
culture, poor contract enforcement, and lack of protection of creditor rights.
Coupled with a lack of collateral and inability to prove creditworthiness on the
part of potential borrowers, these have resulted in a higher perception of risk and
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CHAPTER 4: CONSTRAINTS TO GROWTH
higher external finance premiums. The prevalence of nonperforming loans in
banks’ portfolios add to these costs as banks compensate for the cost of foregone
interest income by charging higher lending rates to performing loans.
Access to Finance
A key characteristic of African financial sectors is low access to financial
services.6 A disproportionately small fraction of the populations across the region
is served by formal financial institutions. Data on access to financial services is
scarce, and most conclusions reached are from anecdotal but compelling evidence.7
Figure 4.11 nevertheless gives a good idea of the extent of this problem.
Lending to the private sector remains an impediment. Access to credit in
Africa has been a problem, particularly for small and medium enterprises, the
informal sector, low-income people, and agricultural sectors. Figure 4.12 shows
that for the selected sample of African countries, not only is credit extended at a
much lower rate, but lending conditions, captured by the interest rates and
collateral requirements, are more stringent.
The limited contribution of African financial sectors to their private
sectors is evident in the size of intermediating resources to their most productive
uses. Evidence suggests that Africa has a very low propensity to on-lend
mobilized deposits. This is reflected in low ratios of loans to deposits. The
Figure 4.12. Access to Financial Capital
250
200
150
100
50
0
Kenya
Uganda
Tanzania
% of firms with loan
Zambia
Senegal
Benin
Average cost of loan, %
Morocco
China
India
Collateral as % of loan
Source: Ramachandran and Shah, 2006.
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CHALLENGES OF AFRICAN GROWTH
average ratio for the region is around 32 percent, with a tendency for higherincome countries to have better performance ratios.
Figure 4.13. Portfolio Allocation Trends
.25
.3
.35
.4
.45
Loans/Deposits Ratios in Africa by Income Levels
1980
1985
1990
Year
All Countries
Low-Income Countries
1995
2000
2005
Regional Average
Middle-Income Countries
Latin America
S. E. Asia
Growth - Gov. Claims
SSA
2001-2004
1981-1990
1991-1995
1996-2000
1971-1980
1996-2000
2001-2004
1971-1980
1981-1990
1991-1995
2001-2004
1991-1995
1996-2000
1971-1980
1981-1990
1991-1995
1996-2000
2001-2004
1971-1980
1981-1990
0
50
100
150
Government vs Private Sector
Deposit Money Institutions Claims
South Asia
Growth - Pvt. Sector Claims
Source: World Bank, World Development Indicators 2006, and IMF, EDSS 2005.
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CHAPTER 4: CONSTRAINTS TO GROWTH
What factors impede lending in Africa? Structural problems in financial
systems explain a large part of why access to credit remains a key obstacle to
African enterprise. These deficiencies include information problems, limited
bankable projects, perception of high risk, and in some lingering cases, regulation
of interest rates. Problematic contract enforcement, characterized by lengthy and
cumbersome processes of recovering claims or realizing collateral, also features
prominently in banks’ lending decisions.
Government borrowing has crowded out private credit and has
effectively hampered economic activity. Over the past few decades throughout
the region, banks have relied extensively on government paper. Historically,
instruments such as treasury bills offered higher interest rates despite their being
relatively risk free. From the figure above, Africa has one of the highest growth
rates of government claims, but the main difference is in the growth rate of claims
against the government relative to claims against the private sector. Moreover, in
all other regions, claims against the private sector have been growing faster than
claims against the government. In Africa the opposite has been true. This increased
borrowing by African governments has resulted in banks having little incentive
to seek lending opportunities in the private sector and possible compromised
development of new products and innovative ways of doing business.
LOW SAVINGS
Mobilization of domestic savings in Africa remains at the center of the
debate over ways to harness resources for development in Africa. It is presumed
that higher investment rates will lead to higher growth. Thus domestic savings is
considered an important determinant of growth in developing countries. Foreign
savings is also important, but investment financed with domestic savings is
considered not only less costly but also more permanent and durable. However,
Africa has had the poorest savings performance in the world.
Saving rates in Africa have remained far below that of other developing
regions. As the figure below shows, as a region, SSA has not only had low
savings, but starting in the early 1970s, the savings rate has declined
significantly, especially in the 1980s. This trend has begun to reverse itself with a
notable increase, but the rate remains significantly below the regional average
achieved in the 1970s. The poor performance of Africa becomes even starker
when compared to other regions, especially with respect to South Asia. In the early
1970s the average savings rate in Sub-Saharan Africa was higher than in South
Asia. However, while the savings rate in Africa has trended downward, South Asia
has experienced a sustained upward trend so that by 2003, the average savings rate
had exceeded 20 percent, compared to a mere 9 percent for Africa.
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CHALLENGES OF AFRICAN GROWTH
0
5
10
15
20
Figure 4.14. Saving Trends: Regional Comparison by Decade
LatAme
SEAsia
SSA
1971-1980
1991-2003
SthAsia
1981-1990
Source: World Bank, World Development Indicators 2006.
The situation is even worse if one excludes resource-rich countries which
have relatively high savings rates. Without these outliers, the average savings
rate for the region would be even lower. In fact, when we exclude these countries
from the sample, the average savings rate falls from 5 percent to about 3 percent
in 2003. Over the period under consideration, the savings rates in the majority of
African countries have averaged below 10 percent of GDP, with some countries
actually recording negative rates.
Over time as well, individual country performance has varied
significantly. Some of these differences are depicted in the figure below. With
the exception of Botswana, Cameroon, and Mauritius, all countries suffered
declines in the saving rates in the 1980s. The declines in the average savings
rates for the decade varied significantly from as low as 1 percent to as much as
20 percent8. However, even though the saving rates for most countries bounced
back in the following decade, for some countries the falls were sustained. Some
of the countries whose declines lasted into the 1990s have started experiencing
upswings in their saving rates. The declines have been more stubborn in a few
countries. A case in point is Kenya, whose savings rate of 19 percent in the 1970s
has dropped each decade to an average of 8.6 percent, achieved since the turn of
the millennium. A similar situation exists in Malawi, where the savings rate also
dropped dramatically, from 14 percent in the 1970s to a current average of
negative 5 percent.
124
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Figure 4.15. Saving Trends in SSA, 1980–2004
50.00
40.00
30.00
20.00
10.00
0.00
-10.00
-20.00
1980-1990
Source: World Bank, World Development Indicators 2006.
1991-2004
CHALLENGES OF AFRICAN GROWTH
Overall, the decade starting in the 1990s is marked by improvements in savings.
However, as the figure below shows, more than 25 percent of the countries
experienced declining savings rates.
Another fundamental feature of domestic savings in Africa is the
prominence of public savings as a determinant of savings rates—a feature that is
absent in other developing regions where savings rates are driven by private
savings. Indeed for Africa it has been found that where savings has declined, public
savings deteriorated at a faster rate than private savings (Aryeetey and Udry). This
observation necessitates looking separately at the individual components of savings
as the behavior in the two sectors, i.e. public and private, is likely to be determined
by different sets of factors. This kind of decomposition may also provide better
insights into which of the sectors is a major contributor to a nation’s savings, as
well as giving a better indication of where efforts should be directed.
We benchmark the performance of SSA with respect to these
components against the performance of other developing regions. Figure 4.16
shows that Africa’s performance in both public and private savings falls below
that of other developing regions. Africa’s averages in all time periods are below
the averages for the developing world. Contrarily, the averages for the rest of the
developing world are in almost all cases above the global average. However, it is
also clear from the figures that Africa’s performance is even worse in terms of
public savings.
In the end, there are many reasons for low measured savings rates. These
include low per-capita incomes, low deposit rates that reduce incentives to save
at financial institutions, and institutional impediments such as the distance to
formal financial institutions. Moreover, in rural areas, substantial amounts of
savings may be in the form of physical capital—livestock, trees, and land
improvement. A case in point is provided by Goldstein and Udry in their study of
savings in Ghana. According to the national accounts, gross domestic savings
were 8 percent of GDP, but a household survey of Ghanaian farmers done a year
later found that the median household saved over 30 percent of its income. The
nonmonetization of savings can be attributed to the complexity, or lack thereof,
of economic activity. Specifically, where markets are shallow and fragmented
and small-scale production activities are dominant, then household portfolios will
tend to comprise a higher proportion of physical assets. Finally, the poor have
developed their own informal savings and credit institutions which overcome, in
part, the obstacles presented by failures of the formal system. What are needed
are mechanisms to link these informal institutions to the formal financial sector,
thus deepening the resources available for intermediation.
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CHAPTER 4: CONSTRAINTS TO GROWTH
Figure 4.16. Savings Decomposition
1980
1985
1990
yr
1995
2000
2005
Private Saving
Africa vs. Rest of Developing World
15
20
SSA
Rest
25
Global Average
1980
1985
1990
yr
1995
2000
2005
Public Saving
Africa vs. Rest of Developing World
-10
-8
-6
SSA
Rest
-4
-2
Global Average
Source: World Bank, World Development Indicators 2006.
CONCLUSIONS
We have presented in this chapter a number of constraints which need to
be addressed in order to reinvigorate economic growth in Sub-Saharan Africa.
We have characterized them as constraints which are difficult to address but
which can be ameliorated, and constraints which are more amenable to being
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CHALLENGES OF AFRICAN GROWTH
addressed. The former group includes geographic disadvantages, high population
growth, and low levels of human development. The second group includes
institutional, political, and policy failures, which decrease the return to private
investment—high transactions costs, high levels of risk, and weak institutions.
The final chapter presents a growth strategy for Africa that is largely centered on
dealing with both sets of constraints.
ENDNOTES
1
We include Sudan and Democratic Republic of Congo in this group, given the high
concentration of their population in remote areas (see map).
2
Most studies indicate that the impacts of secondary education on fertility are much
greater than the impact of expanding primary school enrollment.
3
Prior to this year, estimates of HIV prevalence were largely drawn from testing
pregnant women at antenatal clinics and extrapolating to the population at large.
However by the end of 2005, national population-based surveys were available for
twenty countries (nineteen of which were in SSA). These new surveys indicated, that
except for Uganda, generally lower levels of prevalence than the antenatal clinic surveys.
For example, antenatal prevalence in 2003-04 in Botswana was 38.5%, whereas the
national survey showed a prevalence rate of 24.0%; similarly in Ethiopia the prevalence
rates have been adjusted downward from 8.5% to less than 3.5%.
4
The data in this section come from UNAIDS, 2006 Report on the Global AIDS
Epidemic.
5
We have included South Africa in the middle-income group, which is certain to skew
the average as South Africa is definitely an outlier with a much more developed financial
system.
6
Access is defined as “ensuring provision of financial services that entail appropriate
products, reasonable cost and physical proximity.”
7
There are some commendable efforts devoted to filling this gap and some indicators are
becoming available. See for example Beck, Demirguc-Kunt, and Peria (2005) and
Finscope (2005).
8
These exclude declines for countries that were in conflict, such as São Tomé and
Principe and Rwanda, which suffered declines in excess of 25 percent.
128
5
Tackling the Challenges of African
Growth
INTRODUCTION
Africa is on the move and appears to be perched on the cusp of breaking
out of the long economic stagnation of the 1970s and 1980s. The last 10 years
have seen renewed growth and improved governance across a number of African
states, setting the stage for taking advantage of opportunities that are emerging
from a rapidly changing world economy. Average growth rate in African
countries for 2005 is about 4.3%, with 17 countries growing at 5%, and 9 at
approximately 7% or more. In the 2006 Doing Business Report (World Bank,
2006), Africa has moved from last to third among Regions on the pace of
reforms, ahead of the Middle East and Latin America. Africans at the grass roots
level are hopeful and striving to do better for themselves. A recent Gallup poll
shows that Africans are more optimistic about their future than people in many
other developing regions. Following a wave of democratization in the region
since early 1990s, there are now 31 young democracies in the region,
representing more than two thirds of the countries. Apart from serving as a
platform for good governance, this change presents a real opportunity for
switching to peaceful regime changes via elections instead of the coups that
dominated the transfer of power in the 1970s and 1980s, often punctuating the
development process. The number of countries in conflict likewise has come
down sharply from 15 in the early 2000 to 5 currently.
The global economy continues to grow quickly, driven by a phenomenal
expansion in trade and investment. The rapid expansion of China’s and India’s
economies have more recently anchored this growth and has helped raise the
prices of primary commodities, particularly basic metals, reversing the
downward trend for some of the key commodity prices that a significant number
of countries depend on, such as copper for Zambia. Perhaps more significant is
the advent and dominance of the new information-based technologies as the main
driver of productivity growth. This technology is much cheaper to imitate than
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CHALLENGES OF AFRICAN GROWTH
older mechanical technologies, and it is based on two nondepletable resources—
silicon and brain power.
This chapter draws from the analysis of the first four chapters to lay out
the strategic elements for scaling and sustaining African growth in the medium
term. It goes beyond the focus on correcting policy failures—an approach
dominant in the 1990s—to identifying growth opportunities and binding
constraints to exploiting these; and offers ideas for prioritizing areas for action by
African countries and regional authorities. Given the diverse opportunities and
constraints each country faces, as well as the specificity of each country’s
history, growth strategies have first and foremost to be country specific.
Therefore the aim here is to offer a menu of strategic options and ideas drawing
from the global and country specific experiences lessons for country strategies
and cross-cutting regional initiatives.
The rest of this chapter is organized as follows. The next section draws
key lessons from the preceding analysis of 45 years of the African growth
experience, as well as that of other developing regions, to inform growth
strategies in Sub-Saharan Africa. The following section then documents the
revival of growth that got underway in the mid-1990s, and identifies
opportunities from the changing global economy. The underlying influential
factors behind the recent revival of African growth provide a foundation on
which to build the next stages of the region’s growth strategy. We emphasize that
Africa now faces a window of opportunity, with a growing number of politically
stable countries facing the prospect of mutually reinforcing declines in fertility
rates and increases in capital formation and growth.
The strategic agenda builds upon this platform and rests on five pillars,
which primarily target resolution of the constraints discussed in chapter 4 and
integrates the lessons discussed above. The focus is on a medium-term strategy
that hinges on taking action in four areas (characterized as the four “I’s”):
improving the investment climate; a big push toward closing the infrastructure
gap with other regions of the world; a greater focus on innovation as the primary
motor for productivity growth and enhanced competitiveness; and institutional
and human capacity. These areas were identified based on the analysis of what
matters most for growth, based on country-specific, cross-country and micro
analysis done in chapter 3. Finally, we offer a few suggestions on how to finance
such a strategic approach, mainly emphasizing domestic resource mobilization.
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LESSONS FROM 45 YEARS OF AFRICA’S
GROWTH EXPERIENCE
We draw six key lessons from the previous analysis to inform the growth
strategies in Sub-Saharan Africa. First, African countries’ growth experience is
extremely varied and episodic. However, from a regional strategic perspective,
addressing two challenges peculiar to the region is the key to success—the slow
growth of large countries and the extreme instability of growth across a large
number of African countries. Countries with large populations, such as the
Sudan, the Democratic Republic of Congo, Nigeria, and Ethiopia, will have to
grow more rapidly and on a more sustained basis in order to improve the
livelihoods of a “typical” African and to generate regional traction through
positive spillover effects, similar to the experiences in Southern Africa and East
Asia. Nigeria and Ethiopia appear to be on track and need to sustain recent gains
in reviving growth. The region’s stake is particularly high in reviving growth in
the post-conflict economies of Sudan, Côte d’Ivoire and Democratic Republic of
Congo. Another cross-cutting challenge for the region is how to best manage
responses to shocks, particularly in the resource-rich countries, where their
fortunes are closely tied to the fortunes of key minerals in the world market.
Second, while lower levels of investment are important for explaining
Africa’s slower growth, it is the slower productivity growth that more sharply
distinguishes African growth performance from the rest of the world. Investment
in Africa yields less than half the return measured in growth terms than in other
developing regions. This situation clearly calls for looking beyond creating
conditions for attracting new investors to more explicitly pursuing measures that
help to raise productivity of existing and new investment. These include reducing
transactions costs for private enterprise, particularly indirect costs; supporting
innovation to take advantage of new technological opportunities; and improving
skills and institutional capacity to support productivity growth and
competitiveness. African countries and populations are still highly dependent on
agriculture for food, exports, and income earning more broadly. Productivity in
this sector lags far behind the phenomenal progress made in Asia and Latin
America, and should be a key target for raising overall productivity of African
economies.
Third, consistent with much of the cross-country growth analysis,
evidence from the research reviewed earlier suggests that policy and governance
matter a great deal for growth. Taking 45 years of African growth experience as a
whole and controlling for differences in the composition of opportunities, the
impacts of poor policy have been shown to typically account for between onequarter and one-half of the difference in predicted growth between African and
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CHALLENGES OF AFRICAN GROWTH
non-African developing countries, (Collier and O’Connell 2006). However, the
evidence also suggests that the importance of policy in explaining the growth
differential between African countries and others may have waned since the
1990s as a result of major reforms implemented in the region, which have moved
policy performance in African countries much closer to the global average. Thus,
while it is imperative for countries to identify and address other binding
constraints, sustaining these gains in the improvement of the policy environment
will have to be a permanent feature of any growth strategy a country adopts.
More specifically, it means maintaining durable macroeconomic stability and
continued propping up of efficient market functioning.
Fourth, the evidence also suggests that overcoming disadvantages arising
from geographic isolation and fragmentation, as well as natural resource
dependence, will be necessary if Africa is to close the growth gap with other
regions. Estimates referred to earlier show that taking actions to compensate for
these disadvantages may facilitate closing up to one-third of the growth gap with
other developing countries, (Collier and O’Connell 2006). With much higher
proportions of countries and populations in Africa being landlocked and resource
rich, it is necessary to compensate for these disadvantages, primarily by closing
the infrastructure gap and better managing and utilizing resource rents.
Fifth, the results from the foregoing empirical analysis and indeed from a
large body of other studies suggest a very powerful influence from the growth of
trading partners’ economies. The key transmission mechanisms are trade and
capital flows, requiring greater openness, strengthening capabilities for taking
advantage of the rapid growth in the global markets, and improving the
investment climate to make African countries better destinations for global
capital than in the past. On the side of trade, evidence shows that integration with
global markets is associated with higher growth1, underpinning the need for
growth strategies to emphasize scaling up and diversifying exports. Enhanced
competitiveness and reduced barriers to trade are the two critical areas of action.
It is important to note that while concerns with border trade policies and facilities
(e.g. port capacity and efficiency) are still crucial, increasingly, constraints such
as infrastructure, standards, and access to information have become much more
binding. There is growing evidence that high trade transactions costs can be an
important factor in harming export competitiveness and ability of countries to
attract FDI (e.g., results of Integrated Framework studies in Madagascar and
Cambodia). A core part of any growth strategy, therefore, will need to target
reducing the costs of transacting trade ─ particularly reducing supply chain costs,
as well as the cost of trade processes (Braga, C. P. , 2005 ).
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CHAPTER 5: TACKLING THE CHALLENGES OF AFRICAN GROWTH
Finally, our analysis points to a very large role played by the delayed
demographic transition in Africa in explaining its relatively slower growth
performance. In all the empirical estimates discussed in chapter 3, differences in
the demographic variables consistently predict two-thirds of the observed
difference between average growth in SSA and other developing regions. Two
types of consequences from this delayed transition are particularly important.
The first and probably the biggest challenge is the uncharacteristically high level
of age dependency, with its implications on fiscal and household/parental
pressure for taking care of the overwhelming number of the young (and indeed
achievement of the MDGs). The second relates to the rapid growth of the labor
force, potentially a positive driver of growth but also possibly a negative force if
employment opportunities do not keep pace. The latter concern relates to the
growing potential instability from rapidly rising youth unemployment. It is
possible to turn this potential risk into an opportunity since the youth are likely to
be the drivers of innovation in the region with appropriate human capital and
technological investment. In any case, they now constitute a large portion of the
Africans in the Diaspora as they migrate in search of opportunities. Thus, while
the strategy needs to address the fundamentals of the slow transition, like how to
speed up reduction in fertility, appropriate actions are also needed to increase
employability of youth and expand opportunities to engage in a growing private
sector at home.
CHANGING CONTEXTS AND EMERGING OPPORTUNITIES
Africa Is on the Move
Over the 10-year period since 1995, Sub-Saharan Africa has seen both a
revival and far greater stability of growth in several countries. Seventeen
countries have had annual GDP growth in excess of 5 percent2, up from only five
countries during the previous decade (1985–94). Excluding the oil producing
countries (which account for 29 percent of the region’s population), income per
capita in the fastest growing one-third of African non-oil producing countries
grew at a median rate of 3.5 percent, twice the pace of the bottom one-third.
These countries, together, account for 35 percent of Sub-Saharan Africa’s
population. By 2005, nine countries were near or above the 7 percent growth rate
threshold needed for sustained poverty reduction3.
What is also striking in this recent experience is the sharp decline in the
number of countries that on average posted negative growth rates during the
period, down to four from about a dozen African countries during the first half of
the 1990s. Many of the fast-growing countries have accomplished this for
sustained periods. Any fluctuations appear to have much smaller amplitudes, and
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CHALLENGES OF AFRICAN GROWTH
bad years still register respectable growth rates. Diversification of the economy
and exports has been the main source of this greater stability. Some of the fastestgrowing countries have also done relatively well in terms of poverty reduction, as
demonstrated by a group of eight low-income African countries4, which
succeeded in reducing poverty at an annual rate of 1.5 percentage points over the
last decade (WB 2005a).
Sub-Saharan Africa’s recent improved economic performance reflects
some important underlying changes that are taking place across the continent.
Policies and institutions are improving; peace and security is returning to the
region; and African governments are increasingly taking control of their own
economic destinies. Higher levels of political participation and competition also
give Africans a greater stake in their own future. Perhaps the most significant
change is that since 1983, African demography appears to have taken a turn
toward a transition that will reduce pressures on fiscal resources, encourage
savings, and support productivity growth. We elaborate below on each of these
areas of progress in turn.
A significant and durable improvement in the policy and institutional
environment has been observed across a growing number of countries in the last
10 years. During that time, a large number of reforming African countries have
succeeded in reestablishing sustained macroeconomic stability, more open and
liberal markets, and better conditions for private sector involvement in the
economy. The following are the prime indicators of this progress. Unweighted
consumer price inflation persistently and sharply fell within a decade, from 27
percent in 1995, to about 6 percent by 2004. In a median African country,
government spending as a proportion of GDP also fell sharply in the past decade,
as it has in other developing countries in the world, and the average fiscal deficit
was halved to 2 percent of GDP by 2000. Except in a few countries, black market
exchange rate premiums now average just 4 percent. Through unilateral trade
reforms, African countries have also compressed tariff rates; the average rate is
currently 15 percent. And as mentioned previously In the 2006 Doing Business
Report (World Bank 2006), Africa has moved from last to third among regions
on the pace of reforms in improving business environment, ahead of the Middle
East and Latin America. Two countries are in the world’s top 10 reformers
(Tanzania and Ghana) and 2/3 of African countries made at least one probusiness reform (up by 25% from 2005. In these respects, the continent now
more resembles other developing regions, where reforms have been pursued in
earnest for prolonged periods.
Peace and security is spreading in the region after decades of conflicts.
As we saw earlier, since the mid-1990s there has been a sharp decline in the
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CHAPTER 5: TACKLING THE CHALLENGES OF AFRICAN GROWTH
proportion of countries involved with civil conflict in the region, with the number
of countries in conflict falling particularly sharply since 2000, from 15 to five
currently. The proportion of African population living with civil conflict has
fallen even more sharply, dipping below the average of other developing regions
at the turn of the 21st century, reflecting the end of conflict in countries with large
populations, such as Ethiopia, Sudan, and Democratic Republic of Congo.
Southern Africa is now a region of stability after ending conflicts in
Mozambique, Namibia, Zimbabwe, and Angola, as well as the resolution of
tension between South Africa and its neighbors. West Africa likewise has seen
the end of conflicts in Guinea Bissau, Senegal, Chad, Sierra Leone, and most
recently Liberia although the emergence of conflict in Côte d’Ivoire in that part
of the region is a major set back, considering in particular the economic spillover
impacts for neighboring countries whose economies were and are still closely
linked to Côte d’Ivoire’s economy. In Central Africa, recent resolutions of
conflicts in Burundi and Democratic Republic of Congo have taken place and, if
peace holds, together with Rwanda the opportunities for progress in the Great
Lakes will substantially improve. The end of conflict in southern Sudan
considerably expands the possibility of benefiting from the peace dividend in
Eastern Africa and the Horn of Africa.
Increased political participation gives Africans a greater stake in their
own future, laying a stronger foundation for domestic accountability and restraint
against policy syndromes.
A central theme of the recent African political reforms is the restoration
of institutional constraints on the power of African political elites. A wave of
democratization swept through the continent between 1989 and 1994, which
fostered a much faster improvement in the political and participatory processes
(Bates 2006). There are currently 31 mostly young democracies in Africa. Figure
5.1 shows for SSA and for four other developing regions, combined, the
percentage of countries in each year that had chief executives selected via
competitive, multiparty elections. In 1982, only one-tenth of African countries
and two-tenths of other developing countries had competitively elected
executives. As late as 1991, Africa showed virtually no improvement, while other
developing countries had doubled their figure to 40 percent. By 1995, however,
the gap was nearly closed, despite continuing increases in other regions. In 2002,
Africa was ahead of the other regions by about 8 percentage points.
Notwithstanding the early challenges from democratization, the political
democratization drive in Africa has created space for peaceful regime changes,
deeper debates about societal development visions, and greater respect for human
rights. Although there has been some speculation that the initial wave of
democratization was associated with a sharp rise in civil conflict in the region,
135
CHALLENGES OF AFRICAN GROWTH
Figure 5.1. Share of Countries with Competitively Elected Chief Executives
0.7
0.6
0.5
0.4
AFR
All others
0.3
0.2
0.1
0.0
1982
1987
1992
1997
2002
Source: World Bank (2005) Report of the World bank Task Force on Capacity
Development in Africa, p. 18.
this situation appears to have reversed itself as democratic practices are taking
hold in most countries
There is now a significant revival of interest in regional integration
initiatives in Africa, with a change in focus from preoccupation with preferential
trade arrangements to an approach that emphasizes market integration and
promotion of the region as an attractive investment destination for foreign and
African capital. The African Union and NEPAD have embraced the latter two
objectives and are developing plans for pursuing these through promoting a
critical mass of countries with a policy environment friendly to capital
accumulation and private business (under the African Peer Review mechanism);
improving cross-country infrastructure links; reducing the level of risks,
particularly associated with conflicts, which scares away capital (own and
foreign); more vigorously employing risk-mitigating instruments, particularly for
transnational projects; coordinating management of pandemics such as
HIV/AIDS and malaria, and protecting regional commons such as the Nile River
Basin and the Great Lakes; and strengthening as well as helping retention of the
pool of human skills in the region.
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THE CHANGING INTERNATIONAL ECONOMIC
ENVIRONMENT—NEW OPPORTUNITIES
AND NEW CHALLENGES
The last 20 years have seen enormous changes in the international
economy. Of particular note has been the rapid rate of growth of international
trade, which has risen by an average rate of 5.8 percent a year. This means that
between 1950 and 2000, world trade increased seventeen-fold. This growth in
trade has been associated with high rates of growth in countries that have been
called “globalizers,” (Collier and Dollar, 2002). These have led a major shift in
developing countries’ export structures, toward more manufactured goods and
less resource exports (figure 5.2). The change is significantly larger in lowincome countries than in middle-income countries, underlining the real
possibility of this taking place in African countries. It is also significant that
developing countries are moving up the technological ladder as the high tech
content of their exports has risen sharply (see figure 5.3).
Figure 5.2. World Trade Trends
World trade trends: developing countries are
exporting more manufactures…
Composition of exports: 1981-2001
Middle- income countries
80
Low- income countries
90
90
Manufacturing
exports (%)
70
70
60
60
Resources
exports (%)
40
40
30
30
20
20
0
Agricultural
exports (%)
50
50
10
Manufacturing
exports (%)
80
Agricultural
exports (%)
Resources
exports (%)
10
0
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
1981 1982 1982 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
5
Source: Braga C. P. (2005).
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CHALLENGES OF AFRICAN GROWTH
Figure 5.3. Developing Countries’ Exports
Developing countries are moving up the
technology ladder…
Low income countries: Share of
exports, 1981-2001 (percent)
Middle income countries: Share of
exports, 1981-2001 (percent)
100
90
90
80
70
60
50
40
30
20
2001 10
1981
0
80
70
60
50
40
30
20
10
0
Resource- Low tech
based
Medium
Tech
High tech
2001
1981
Resource-based
Low tech
Medium Tech
High tech
6
Source: Braga C. P. (2005).
The rapid globalization of the last 25 years has not only been associated
with high growth by international standards, but by important shifts in the pattern
of that growth. Since 1981, China’s share of world GDP increased from 3.3
percent to 14.0 percent, while India’s share increased from 3.5 percent to 6.2
percent. Export volumes of emerging Asian countries increased by a factor of 14
(10.7 percent per year) between 1981 and 2006, while imports increased by a
factor of 11.6 (9.5 percent per year). This new strength of emerging Asia in the
world economy presents both opportunities and dangers.
Already, the rising demand in East Asia has reversed the decline in
prices for many primary commodities, and led to record prices for oil and copper,
as just two examples. Asian investment in Africa is growing rapidly and
represents an important diversification of FDI sources to Africa. The rising
wages in East Asia could, in the future, make certain labor-intensive
manufactured goods more costly to produce, and thereby expand the potential
market for manufactured goods from Africa. On the other hand, China and India
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CHAPTER 5: TACKLING THE CHALLENGES OF AFRICAN GROWTH
have taken advantage of the end of the Multifiber Agreement, with exports of
textiles and clothing increasing by 46.3 percent and 22.2 percent, respectively, in
2005, while exports from Sub-Saharan Africa declined. African countries must
find ways to take advantage of their low wages to compete effectively with China
and India in the global market, including in South-South trade.
One of the important hallmarks of global economic activity in the 21st
century is the importance of information. This is exemplified by the increased
importance of trade in services and of outsourcing of simple services such as
accounting, bookkeeping, and telephone ordering, as well as more complex
services, such as radiology and software production. But information is not only
embedded in services, it is also embedded in products and processes.
Floriculture is a good example. The development of flower exports from
Africa has depended on creating new supply chains, identifying new end users,
and being able to get flowers to Europe overnight. But moving beyond the
production of red roses will require a much more attenuated knowledge of tastes
and market opportunities, nimbleness in ability to adjust production to take
advantage of new opportunities, and a research capability that will enable flower
growers to produce those specific blooms that will pay the highest prices.
Information is the one factor of production that isn’t used up in
production, and the one factor of production that is cheap to acquire. Being
effective at using information requires access to cheap communications
technology, as well as a high level of human capital to manipulate the
information productively. But if, as we’ve seen, being a latecomer confers
advantages on a country, and that advantage is multiplied in an era in which
information is a key factor of production. One needs to only look at the huge
success of mobile phones in Africa to see what’s possible. Cheap, and relatively
free from excessive state control, mobile phones have provided fishermen,
farmers, and other small entrepreneurs with cost-effective information on
markets and investment opportunities, increasing the productivity of capital.
OPPORTUNITIES AND OPTIONS FOR GROWTH STRATEGIES
The rapid growth of Asian countries and Chile over the past quartercentury makes it clear that growth constraints are not insurmountable. The
experiences from these countries also present options that various African
countries could pursue, depending on their endowments and starting points.
Manufactured export-led growth. Some African economies can
realistically hope to follow the main Asian model, in which a central component
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of growth is manufactured exports. This strategy has the advantages of
generating broad-based benefits because it creates many jobs, and enables very
rapid growth. One small African country, Mauritius, has already transformed
itself from an impoverished sugar island to a middle-income, diversified modern
economy through this strategy. Others, such as Ghana, Kenya, and Madagascar,
could follow. The basic conditions for success include a good coastal location; a
supportive investment climate; and reduction in the trade transactions costs in
order to enhance competitiveness.
Natural resource-based equitable growth. Some African countries are
sufficiently abundant in valuable natural resources, so their most likely route to
prosperity is through the equitable exploitation of their resource base. Another
small African country, Botswana, has already transformed itself from an
impoverished desert country to middle-income status via this route. Resourcerich coastal countries, such as Nigeria, Democratic Republic of Congo, Republic
of Congo, and Cameroon, could also use these rents judiciously to support
diversification of their export bases, thereby reducing their dependence on
volatile resource rents.
Natural resource-based export diversification. Some countries may be
able to follow the emerging Latin American model of modern agriculture. One
possibility for these countries is to diversify within the primary sector itself (such
as agribusiness in Chile, Costa Rica, or Colombia) or move toward natural
resource-based, export-oriented industrialization (as in the case of Indonesia or
Malaysia). In the latter case it would entail adding value to the exports through
processing, or using rents and revenues from natural resources to finance exportoriented industrialization. Landlocked countries pursuing this route could focus
on high-value, low-weight products, since they can more effectively absorb the
high trade transaction costs associated with their location disadvantages.
Labor export and high-value service sector. Some countries may well be
so disadvantaged that prosperity for their populations will depend upon
employment opportunities in more fortunate neighboring economies or, like
India, by pursuing the high-value service sector—the office economy.
Landlocked countries in the Sahel, and Southern African countries, have a long
tradition of inter-country migration (e.g. Swaziland and Lesotho vis-à-vis South
Africa, or Burkina Faso vis-à-vis Côte d’Ivoire) and it is likely to be a feature of
a prosperous future. Investment in human capital would also be supportive of
building such high-value service sectors.
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THE KEY STRATEGIC CHALLENGES
The diversity of country endowments and history demands that country
strategies be specific to their circumstances. However, there are four areas of
action that are common to the majority of African countries. These underpin the
ability of countries to integrate into the global economy, mobilize resources that
can be invested, and raise the productivity of physical and human capital engaged
in the growth process. They are a package of what we refer to as the four “big Is”
─ Investment Climate, Infrastructure, Innovation, and Institutional Capacity.
Investment Climate: Reducing the Cost of Doing Business
In chapter 3 we identified the main challenges for improving investment
climate to be: reducing indirect costs to firms, mainly related to the costs of
infrastructure services, with energy and transport topping the list; and reducing
and mitigating risk, particularly affecting security of property related to
contractual effectiveness, crime, political instability, and corruption. These
measures should be complemented at the regional level by developing
subregional cohesive investment areas through measures that promote collective
good reputation (peer pressure), policy coordination, and coordinated
infrastructure investment to enhance connectivity. A separate paper, prepared for
this study (Ramachandran and Shah, 2006) lays out a more detailed strategy.
Apart from dealing with the challenges of the investment climate more generally,
it also considers those challenges more specific to the development of an
indigenous African private sector, partly as a way to strengthen the domestic
constituency for private sector development.
As we saw previously, African countries are generally at the high end in
terms of the costs of doing business (World Bank 2006). Some of these costs
arise from a legacy of distrust of the private sector; some from excessive and
inefficient bureaucracy; and some from corruption. These causes are linked.
Distrust leads to more regulation, inefficiency increases the cost of this
regulation, and corruption arises from the power given officials to regulate. But
deregulation, given some of the political-economy realities discussed below, is
difficult and requires clear and dedicated political leadership.
One promising example of reform within Africa is Senegal, which has
significantly lowered its costs of doing business relative to other countries in the
region. The investment climate data clearly reveals a lower set of costs in this
country as opposed to the others surveyed in Africa. The Senegalese case needs
to be explored in much further detail, with a focus on understanding the political
incentives for reform and the process of implementation. The forthcoming Doing
Business report from the World Bank highlights 10 countries in Africa that have
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reformed select business indicators, such as the time to register a business (Doing
Business 2007); again, it would be useful to understand the political dynamic
behind these efforts.
But beyond deregulation is the need to actively develop institutions, both
public and private, that will encourage private sector activity. The list is quite
long: grades and standards agencies, particularly for exports; regulatory agencies
for monopolies and quasimonopolies; public research institutions to promote new
technology development and application; export processing zones; business
schools; and a plethora of new or more effective financial institutions such as
capital leasing companies and export credit lines; a more competitive banking
system; mortgage companies; stock markets; venture capital firms, etc. Some of
these issues are taken up later under sections that deal with infrastructure,
institutional capacity, and innovation.
Leadership is the key ingredient. President Park Chung Hee of Korea
became so certain that Korea’s national security lay in economic growth and that
growth depended on export promotion and diversification, that he set weekly
export targets for large exporters and met with them each week to determine
whether they were meeting their targets. When they failed, he stimulated their
ardor, using a number of carrots and sticks that he controlled. This is not a model
that translates easily to Africa, nor should it. What is important, however, is
Park’s single-mindedness and his focus on growth.
Leadership can come from many different quarters, necessitating a broad
engagement of interested parties and actors. Examples from the Ugandan
experience are instructive. Justice James Ogoola has championed a highly
effective commercial court structure in Uganda, which relies on pushing routine
disputes into mediation and getting settlements in a matter of days, rather than
months or years. Similarly, Dr. William Kalema returned from a prestigious
career in the United States to dedicate himself to building the private sector in
Uganda. Individual entrepreneurs have often played a role in shaping their
country’s policies and in changing attitudes toward entrepreneurial activity.
The government’s role in improving the investment climate is pivotal
and we want to highlight here this particular dimension of the challenge. The
“Washington Consensus” focused on reforming government by, inter alia,
privatizing state enterprises, liberalizing foreign exchange markets, bringing
government accounts into balance, liberalizing trade, and reducing government
controls over other markets. What is clear in hindsight, particularly in contrast to
the experiences in Asia, is the lack of emphasis on the important enabling role
the government can and must play in encouraging private investment. Given the
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African experience of weak public institutions, developing a strong positive role
of government that will reduce market failures and avoid government failures
will be a difficult, but necessary, task in most countries.
Infrastructure: A Big Push Necessary to Make a Difference
Analyses of investment climate surveys clearly show that investments in
infrastructure are bound to benefit all firms, large and small, minority and
indigenous. It is also very clear from available evidence that good-quality roads,
and a steady, reliable supply of electricity are in very short supply in many
African countries (see chapter 3). A separate flagship study on infrastructure is
under way, which will drill down on the detailed elements of the strategy. We
will restrict ourselves here to the broader elements of the required strategic
interventions, particularly with respect to supporting growth.
Overcoming neglect. The sheer magnitude of the problem and long-term
neglect of infrastructure in many African countries demands a big-push solution.
During the 1990s, African governments and development partners sharply
reduced the share of resources allocated to infrastructure in favor of scaling up
spending in social sectors. Several reasons were behind this shift. One was the
specter of the “white elephants” of public infrastructure projects that suffered
particularly from inadequate provision for recurrent costs, unrealistic pricing, and
a wide range of regulatory forbearance. Second, the 1990s and the early 2000s
saw an expansion of divestiture programs and increased participation of the
private sector in infrastructure, particularly in telecommunications, water, and
power. Finally, the deliberations of the Copenhagen Social Summit in 1995
provided a powerful platform for a shift in the structure of spending towards
social sectors. In connection with that, several African governments made
commitments to achieve the International Development Targets (IDT), primarily
limited to social well being, and the structure of official development finance was
commensurately aligned to meet these targets, (Ndulu 2005, 10).
Two decades of neglect currently manifests itself in the form of huge
infrastructure gaps relative to needs in the region and compared with other
developing regions. It is estimated that Sub-Saharan African countries need $18
billion a year in infrastructure financing in order to achieve the much higher 7
percent economic growth target needed to halve extreme poverty in the region by
2015; and to achieve the MDGs, SSA would need another $18 billion a year,
(Wormser 2004). It has also become clear that for the foreseeable future, the
drive to fill the investment gap will have to be led by the public sector—either
directly funding the buildup of infrastructure assets or underwriting risk to crowd
in private investment. The last decade has seen a sharp drop in private investment
in this area as investors have become more risk averse. It has also become clear
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that public-private partnerships in infrastructure are more effective than when
either of the two parties goes it alone. This is particularly the case for the
transportation, energy, and water subsectors.
The response to these gaps should be pursued in three areas: scaling up
financing of infrastructure; reorganizing the way the sector is managed for
greater effectiveness; and exploiting the scale and coordination of regional
approaches to infrastructure investment and management of services.
Financing. African countries can absorb more financing for
infrastructure and gainfully make use of it. The rates of return to infrastructure
projects appear to have improved quite substantially with increased private sector
participation and improvement in the financing of recurrent costs. Recent
analysis of World Bank infrastructure projects’ economic rates of return (ERR),
for example, show not only high rates of ERR, averaging 35 percent between FY
1999 and FY 2003, but also that these rates are a considerable improvement over
the 20 percent average ERR for the preceding 40 years, (Briceno, Estache, and
Shafik 2004). Furthermore, with the participation of the private sector in
infrastructure investment and service delivery, capacity constraints have been
significantly relieved. The main challenges relate to availability of financing and
efforts by African governments to reduce investor risks.
Financing needs for improving access to quality infrastructure services in
Africa are huge. Fay and Yepes (2003) estimated the financing requirements for
meeting projected worldwide demand for infrastructure services between 2000
and 2010. Using country-specific growth projections (from Global Prospects
Data, World Bank) they derive the needs for infrastructure services for
production and consumption. The infrastructure investment and maintenance
requirements are then estimated given the stock of assets in 2000. Based on these
estimates, to meet the needs for ensuring quality infrastructure services, SubSaharan African countries would on average need to spend 5.6 percent of their
GDP in the next five years to meet their demands for quality infrastructure
services (excluding electricity transmission and distribution).
The public sector has to play a much larger role in financing
infrastructure than envisaged in the last two decades. Despite the changes that
have taken place since the 1990s, the domestic public sector remains the most
dominant source of financing for infrastructure in the developing world,
accounting for 70 percent of current infrastructure spending. The private sector
and ODA account for between 20 percent and 25 percent and between 5 percent
and 10 percent, respectively, for the developing world as a whole (Briceno et al.,
2004). The private sector is, in fact, a much smaller contributor for Africa.
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Between 1990 and 2002, private commitments for infrastructure in Sub-Saharan
Africa totaled $27.8 billion, compared to $804.9 billion for the developing world
as a whole. Nearly two-thirds of this amount ($18.5 billion) was for
telecommunications. And as African countries were gearing up to attract private
participation, many sponsors were pulling out of developing countries, driven by
pressure from shareholders to exit uncertain markets and reduce risk (Estache
2004). Inclusive of a risk premium, the cost of capital (and indeed the hurdle rate
of return) in this sector is quite high and may shoot past the point where most
new infrastructure projects could generate adequate private returns. The risk
premium is exacerbated by the significant currency mismatch that exists in many
infrastructure transactions, where revenue streams denominated in local currency
do not match foreign currency debt service obligations (Ndulu 2005, 14).
More recent data now shows some reversal of the decline in the
infrastructure investment flows. Private investment has doubled from $3 billion
in 2002 to $6 billion (World Bank PPI data). ODA flows likewise, appear to be
on the rise, for example, increasing from $3 billion in 2003 to $4 billion in 2004.
Non traditional donors, particularly China, are increasingly and rapidly
expanding their involvement in the region with tentative estimates of around $2
billion in flows to African countries in 2004 and 2005 (World Bank, 2006).
Innovative financing arrangements and instruments are emerging and
should be encouraged. One such arrangement involves ODA being used to
leverage private sector finance through underwriting risk in public-private
partnerships in infrastructure investment and service provision. An example here
is the South Africa Regional Gas Project, which has mobilized about $1 billion in
private sector investment ─ equivalent to one-third of Africa’s total private sector
investment in infrastructure in 2002 ─ through combining a World Bank partial
risk guarantee and MIGA political risk guarantees, and IFC equity (World Bank
2004).
Regionwide infrastructure funds are another new instrument that can be
expanded considerably to scale up funding of infrastructure projects. Three of
these are already in existence. The oldest among these is the Southern Africa
Infrastructure Fund, sponsored by the African Development Bank, Standard
Investment Corp, and South African institutional investors, with a commitment
of $130 million in infrastructure projects in Southern Africa. The second is the
AIG African Infrastructure Fund, sponsored by the U.S.-based AIG insurance
company and IFC, with a goal of funding infrastructure projects in reforming
African countries in the form of equity, quasi-equity or convertible debt, with
rates of return ranging from 25 percent to 35 percent, net of local taxes. This fund
has targeted $500 million and had already committed $400 million by 1999. The
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third is the $350 million New Africa Infrastructure Fund, sponsored by the
Overseas Private Investment Corp., with private management, targeting
infrastructure projects in Sub-Saharan Africa countries.
Increasing the productivity of existing infrastructure and new
investments. Obviously, the most cost-effective way of increasing infrastructure
services and productivity is to improve the productivity of investments already in
place. Moreover, most of the steps necessary to do so are also important for
increasing or maintaining the productivity of new investments. The key strategic
areas are: improving maintenance capacity; improving data, monitoring systems,
and accountability; providing financing mechanisms for maintenance and
rehabilitation; improving management in the various infrastructure subsectors;
and strengthening regulatory systems. This agenda is absolutely essential if
infrastructure investments are to have consistently high rates of return.
This is not the place to go into detail as to how to ensure that the
requisite software is in place, but it would be useful to make several
observations. First, data gaps are so large that they impede effective monitoring
of performance. We know less about access, efficiency, and equity in
infrastructure investment worldwide, much less in Africa, than we do about
virtually any other key sector (Estache 2006). As a consequence, accountability
in infrastructure is weaker, locally, nationally, and globally, than other
development sectors. Thus it is incumbent upon all actors to upgrade their
performance in this area.
Second, improved regulation is critical, not only of private sector
monopolies such as power systems, but also of public sector infrastructure such
as roads. Regulatory systems in Africa are weak and subject to corruption.
Strengthening of these institutions requires some emphasis on accountability and
transparency.
Key reforms are underway in strengthening maintenance capacity and
regulatory institutions. By 2000, at least 20 SSA countries had established road
funds and boards. A primary focus of these agencies is maintenance of
infrastructure and judicious selection of new investments. Thirty percent of
countries in SSA now have autonomous regulatory agencies for the electricity
sector, while 75 percent have regulatory agencies for telecommunications
(Estache 2004b). The primary purpose of these is to ensure fair competition and
efficiency in service provision. Strengthened regulation is a necessary condition
for efficient private participation, to which we will now turn.
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Private-public partnerships. One of the major reasons that donors turned
away from investing in infrastructure in the 1990s was a belief that the private
sector would step in and fill the gap. Since many infrastructure investments could
be expected to be profitable in more liberalized environments, donors could turn
to providing truly public goods. Unfortunately, these expectations were not
realized. For Africa, only 41 percent of sample countries have private
participation in electricity generation, 28 percent in electricity distribution, and
20 percent in water and sanitation, (Estache and Goicoechea 2005). Private
participation has taken many different forms, including asset sales/privatization,
concessions, build-own-operate (BOO) and build-operate-transfer (BOT)
schemes, management contracts, and leasing (Estache 2004).
The main brake on private investment in infrastructure is limited
profitability. Estache and Pinglo (2005) suggest that returns to capital in lowincome countries have to be at least 2 percent to 3 percent higher than in richer
developing countries, and twice the returns expected in developed countries. This
means that, ceteris paribus, the average tariff required to generate the minimum
required rate of return will have to be higher than elsewhere. This is a difficult
position for governments to take, and the mechanisms and fiscal resources to
subsidize services to make them more affordable may not be present.
The very factors that raise the costs for private investment in general are
also relevant with respect to private sector investment in infrastructure. High
risks, whether from unstable government policy or other commercial risks, and
high transactions costs, raise the cost of doing business. Thus, while publicprivate partnerships offer some obvious advantages in expanding infrastructure
services, it is no panacea.
Lorrain (2005) offers the following lessons from the experiences of the
1990s to guide the development of public-private partnerships:
•
Pragmatism and ad hoc project organizations adapted to each legal
and economic context have been shown to be superior to the
application of strict a priori models.
•
The development of an appropriate institutional framework is vital;
such a framework must evolve from a lengthy institutional learning
(capacity-building) process.
•
The public-private partnership constitutes a long-term association.
This association must be able to adapt to unforeseen events.
•
The regulatory system must often rely on the involvement of an
independent body.
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CHALLENGES OF AFRICAN GROWTH
•
Public-private partnerships are meant to be long lasting and entail a
certain degree of risk between partners; all parties must be tolerant of
these risks as the project evolves.
Although market-oriented reforms of infrastructure in developing
countries have tended to focus primarily on commercially viable services in
urban areas, an increasing number of countries are beginning to experiment with
extending the market paradigm to infrastructure services in rural areas that are
often less attractive in commercial terms. One approach combines financing
targeted subsidies to lower the cost of private participation, and gradual tariff
reform (using a liquidity backstopping instrument). For example, for small power
projects in Uganda, explicit subsidies are provided through grants to make
investment more attractive for the private sector (e.g. via subsidizing the
electricity connections to poor households). More generally, Wellenius, Foster,
and Malmberg-Calvo (2004) argue that in these cases, subsidies are used to close
the gap between market requirements and development needs, and are
increasingly determined and allocated on a competitive basis.
Regional approaches. Given the geographic disadvantages referred to in
chapters 3 and 4, particularly the number of landlocked countries and the small
size of markets, infrastructure investments should be part of a regional or
subregional strategy. The emergence of regional investments in energy—the
West African gas pipeline and the Southern Africa and West Africa power pools,
in particular, are examples of how important it is to think regionally. Africa’s
historic borders have little to do with coherent economic units. River basins, for
example, can involve more than a dozen countries. Getting all these different
interests on the same page is not easy, but the success thus far of the Nile River
Basin shows it is possible.
For landlocked countries, investment in transport links to ports is critical.
This involves not only roads and railroads, but dedicated port facilities and
improvement in facilitation at cross-border checkpoints. But beyond the
problems that landlocked countries face is the need to escape from the traps
imposed by small markets. Most African countries have GDPs of less than $5
billion. While exports offer access to a dynamic world economy, the importance
of being able to trade with one’s neighbors cannot be overstated. Investment in a
shoe factory becomes much more economical when the potential market is not 5
million consumers, but 30 million.
Infrastructure is one of the key areas of collective regional interest that
NEPAD and a number of subregional integration initiatives have recently
become interested in. The objectives here are partly to foster integration of
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African markets through improved connectivity, and partly to facilitate crosscountry investment within Africa. Where improvements in infrastructure services
entail the use of shared natural resources, such as the Nile Basin and the Great
Lakes, African governments have also collectively sought to protect them as
regional commons and to avert potential conflict in relation to their use, (e.g.
hydroelectric power sharing under the Nile Basin Initiative). The high proportion
of landlocked countries necessitates cross-border trade facilitation and
coordination in trans-boundary infrastructure investment. In other cases,
transboundary cooperation in the provision of infrastructure services could lead
to a substantial reduction in their cost among members, and enhance reliability of
services. A good example of potential here is the West Africa Power Market
Development Project (WAPP), where there is great potential for significant
reduction in power generation costs. Nigeria and Côte d’Ivoire could reduce their
oil thermal generation costs from 8 cents to 10 cents per kilowatt hour to between
3.5 cents and 4.5 cents per kilowatt hour. Two approaches are being pursued for
regional infrastructure initiatives: regional or multicountry projects, and
coordination among individual country projects to maximize the cross-country
synergetic effects of infrastructure projects. Examples of the former include the
gas pipeline project between Mozambique and South Africa, the Nile Basin
energy and conservation projects, and the planned West African gas Pipeline
project. An example of investment coordination is the Southern Africa Power
grid sharing and the roads program under the East African Community.
Investment guarantees for long-term ventures, and funds to cover transfer
risks, are widely used in other regions to leverage private investment in nonexport generating activities (e.g. power). Credit guarantees by multilateral
development banks, such as the Andean and the ASEAN Development Banks,
are used as catalysts for co-financing arrangements for long-term investment.
Since the gaps are more severe for cross-national undertakings, loan guarantees
by creditworthy regional and multilateral development banks can be particularly
helpful in financing public-private infrastructure projects for improving regional
connectivity. Furthermore, a Currency Convertibility Fund for cross-national
guarantees would help reduce transfer risks associated with the non-export
orientation of such ventures.
INNOVATION TO UNDERPIN PRODUCTIVITY GROWTH
AND COMPETITIVENESS
African countries can exploit their status as late starters to intermediate
technologies by adapting and applying available technological inventions. Like a
big book in the sky, technological knowledge and inventions are a global public
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good. But one can only use them if one can reach the book, turn the pages and
read from it. Calestous Juma (2006) identifies the conditions which helped
emerging economies do this effectively.
“First, these countries invested heavily in basic infrastructure, including
roads, schools, water, sanitation, irrigation, clinics, telecommunications, and
energy. The investments served as a foundation for technological learning. Second,
they nurtured the development of small- and medium-sized enterprises. Building
these enterprises requires developing local operational, repair, and maintenance
expertise, and a pool of local technicians. Third, government supported, funded
and nurtured higher education institutions, as well as academies of engineering
and technological sciences, professional engineering and technological
associations, and industrial and trade associations” (Juma 2006).
Recent economic history demonstrates that successful innovation
requires careful action by growth-oriented governments. Chandra and Kolavalli
(2006) point out that their study of 10 successful examples of intervention
required a common set of industry-specific measures to promote technological
innovation (see Box 5.1 for details):
•
They set goals to support a nascent or nontraditional industry
because it was a valuable source of export-led growth.
•
Political commitment sometimes took the form of a guiding national
vision; in other cases it involved taking actions to help the industry,
even in an otherwise-closed economy.
•
Governments rewarded winners and abandoned losers, using success
in the world market as an indicator.
•
With a few important exceptions, governments did not pick winners,
they rewarded winners.
•
Governments supported competition among both domestic and
foreign firms.
•
Governments supported the rule of law and enforcement of contracts.
We have earlier noted the unique position of knowledge as a factor of
production, and its importance in the global economy. Some knowledge is
embedded in particular pieces of capital, while other knowledge exists
independently of any material investment. That knowledge, although sometimes
protected by copyrights or patents, is often free, although using it in a
developmental way may have some costs. Information or knowledge can be used
effectively under two conditions—the presence of a skilled labor force that is
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able to manipulate complex ideas and, in fact, to build new knowledge on the
base of the old; and the existence of a dense network of modes of communicating
that knowledge, i.e., information technology.
Box 5.1. Technology, Adaptation and Exports: How Some Developing Countries
Got It Right
As global markets have become more deeply integrated and competitive, the
challenge of diversifying away from dependence on primary commodities has become
more daunting. Not only are small local markets and poor business environment
constraining competitiveness but also a gap in sophistication of standards and
productivity. Technology can help bridge this gap but individual firms often lack the
incentive, expertise and resources to pursue the required innovation.
In a volume which draws lessons from 10 cases of developing countries that
successfully adapted new technologies to catch up with developed countries in specific
industries, and across a wide range of income levels, Vandana Chandra (2006) draws
the following key lessons.
(i) Latecomers can leapfrog across several stages of development.
India’s global share of outsourced has grown from less than 1% in 1996/97 to 3.3%
in 2003/4 with sales increasing from $1.86 billion to $15.6 billion within this period.
Taiwan increased its per capita income 10-fold within 4 decades largely on the back of
rapid expansion of electronic exports (accounting for nearly 13% of global total).
Malaysia has moved from exporting crude palm oil processed in Europe and only 10% of
global processed palm oil in 1995 to 50% of processed oil by 2001. Chile raised its share
of world production of salmon from 1.5 percent in 1987 to a whipping 35% in 2002; and
increased its share of wine products from 0.5% in 1988 to 5% in 2002. Kenya
floricultural exports grew 300% between 1995 and 2003 and are currently the world’s
third-largest exporter of cut flower. In all cases economic activity in the industry was
either non-existent or at best nascent until public support kicked in and other conditions
changed in favor of harnessing technologies.
(ii) Technological learning was the key channel of innovation behind their
successes Along with Lall (2000) and Kim and Nelson (2000) the study attributes
significant differences in economic performance among countries with similar levels of
technology investment, to technological learning—“technological mastery” at first and
“technological deepening” later. The channels of technology transfer are multi-faceted
and the countries/industries studied followed a variety of them. These include
• within firm transfers through FDI (from parent to subsidiaries—e.g. electronics
in Malaysia and Taiwan, floriculture in Kenya, Nile perch fisheries in Uganda,
wine and salmon in Chile)
•
licensing, contracting and sub-contracting (buyers must develop own marketing
capabilities). This is a more limited channel.
•
Capital goods imports in the presence of capabilities to use and adapt the
technology embodied in the imports;
continued
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CHALLENGES OF AFRICAN GROWTH
•
local adaptation or development through interactions between firms and
technical institutional; training abroad—India, Chile;
•
contracts and consultants to meet product or service specifications (e.g. Nile
perch processing in Uganda).
•
Formal research and development; and
•
harnessing the Diaspora so disseminate technological knowledge to local firm
(Indian software; Taiwanese electronics).
(iii) Underproduction of technology requires public action to support acquisition
of required knowledge for using technology assets—for example leading industrial
clusters in OECD economies including in Singapore and Taiwan owe their existence to
government actions (Yusuf 2003). There are several reasons for the apparent market
failures. Collective benefits exceed those accruing to innovating firms—traditional
spillover effects (Ruttan 2001); market prices do not reveal the profitability of
investments in new technology, deferring discovery (“informational spillover”); and
requirements for large scale complementary investments prior to new investment in
technologies becoming profitable—“coordination spillover” (Rodrik 2004). The key
preconditions are capable institutions (mainly for enforcing property rights and contracts
(Porter 1990); infrastructure; and skills.
(iv) Key areas of public support (a)Negotiating with MNCs for technological transfers
(Taiwan, Malaysia) including the use of fiscal incentives and other forms of lure; (b)
providing financial support to domestic firms and research organization to help spin off
firms it spins off firm its research e.g. Fundacion Chile and Corporacion de Fomento
starting off first commercial scale salmon fishing; (c) Technological extension services
across a wide range of these cases (d) promoting exports to help reach new markets and
develop new products—e.g. export processing zones offering generous incentives and
infrastructure services; (e) Non-forbearing regulatory services and enforcement of
standards particularly for exports of fresh produce, phytosanitary standards; and (f)
investing to meet technical manpower needs e.g. through investing in science and
technology education and promoting in-house training within firms.
As Sebastian Edwards (2006) notes in the case of Latin America, for
example, growth acceleration in the region will require a significant boost in
productivity. Productivity growth associated with the wave of market reforms has
waned and a second wind of faster productivity growth will depend on expanding
the role of technology, the internet, and the “new” economy. In order to take full
advantage of this new technology, Edwards argues, Latin American countries
will have to make major investments in the complementary areas—research and
development; education and infrastructure; as well as institutional and economic
reforms (including more flexible labor markets).
ICT is now the main technological driver for productivity growth. Its
importance has recently received empirical support in OECD country studies. For
example Nordhaus (2001 ) uses a new data set to conclude that for U.S. business
sector, information technology accounts for a little over one third of recent
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productivity acceleration. Jorgenson and Hirsch (1999) and Jorgenson (2001)
found that information technology has contributed 1 percentage point per year on
average (1996–1999) to U.S. output growth. Investment in information
technology facilitates innovation to take place, primarily via organizational
changes (Brynjolfsson and Hitt, 2000 p.5). Two main channels through which
investment in information technology influences aggregate growth (i) a higher
stock of information technology will make investment in human capital and in
“organizational” capital more productive; (ii) investment in information
technology will have a direct effect on growth. The effect of investment in
information technology on GDP growth will depend on the levels of both human
capital and organizational capital.
According to a study by the Centre for Economic Policy Research, a
country which has reached a level of mobile phone penetration of 10 percent of
the population adds 0.59 percent to its GDP per capita growth rate. Furthermore,
strong empirical evidence exists (see figure 5.4) that investment in ICT improves
competitiveness (WEF 2006).
Fig 5.4. ICT Investment Impact on Competitiveness
Source: World Economic Forum (2006)
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CHALLENGES OF AFRICAN GROWTH
Historically, African countries have not treated ICT as a sector which was
important for economic growth and prosperity. For example, in 2003 Internet
access in a sample of African countries cost an average of $78 per month, while
the cost in a set of other developing countries was $19.40. In 2002, there were
only 1.5 million Internet users in all of SSA, half of whom were in South Africa.
Typically, African governments have tried to monopolize Internet usage, charged
high tariffs, treated imported computers as consumer rather than investment
goods (in terms of external tariff rates), and done little to encourage growth of
the ICT sector.
The one exception has been mobile phones, which have been lightly
regulated, and whose development has been the responsibility of private firms,
some indigenous and some foreign.
The result has been perhaps the most breathtaking success in recent
African economic experience. From Somalia to Nigeria, mobile phone growth
has been spectacular. Since 1998, the number of mobile phone subscribers in
Africa has increased from 2 million to more than 100 million. Access to mobile
phones is much greater since many businesses have sprung up renting mobile
phones for periods from 10 minutes to 10 days or more. In fact, a burgeoning
market for air minutes has been created, generating new employment on its own.
In Tanzania, it is estimated that 97 percent of the population has access to mobile
phones. This simple technology has increased the productivity of indigenous
business in a myriad of ways. A few examples:
•
A Kenyan farmer can easily find the best prices for the watermelons
she sells
•
A black nursery owner near George, South Africa, always had
difficulty selling to white consumers because of their security fears;
now they call him and he delivers and his business has taken off.
•
A fisherwoman on the Congo River, with no electricity, keeps her
catch alive in the water tethered to a line; her customers call her with
an order and she prepares the fish for sale.
Moreover, as phones become more sophisticated, they will probably be
the key step to expanding Internet connectivity, freeing consumers from the
constraints of inefficient landline technology and intermittent power availability.
In five years, 200 million Africans will have access to the Internet, and thus to
the global economy.
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Box 5.2. ICT Helping Improve Financial Services in Africa
Financial services in most of sub-Saharan Africa are limited due to a number of
reasons, including high information and transactions costs, governance issues and lack
of competition. If financial services are to be provided to a broader group of savers and
borrowers, then innovations, both organizational and technological are necessary,
particularly to reduce costs. Some of these innovations are now being introduced or
have already begun to spread in certain areas.
Smart Cards—the Remote Transactions System (RTS) in Uganda. Three
microfinance institutions are piloting the RTS, which allows the processing of loan
payments, savings deposits, withdrawals and transfers. Each client or client group
purchases a smart card with a given value. At the front end of the technology is a point
of sale device which reads the cards and is networked to a server, which is then linked
to the institution’s management information and accounting systems. The technology
has challenged the limits of local infrastructure (unreliable electricity supply, erratic
telephone connectivity) and the literacy of the customers. Moreover, the pilot
demonstrated that it would only be economical at a scale that required the different
financial institutions to share the infrastructure.
Cellphone banking. Celpay is a payments company that works in DRC and
Zambia. To make a payment a customer sends a text message with the details to
Celpay which then returns a text message requesting the customer’s personal
identification number (PIN). Once that is done, Celpay transfers money between the
participants’ accounts. Currently there are 2000 users in Zambia who make one to two
transactions per month at a cost of one to two percent of the transaction.
International remittances. The volume of identified international remittances into
Africa in 2005 reached eight billion dollars, almost double the 2004 level. For some
countries with large numbers of workers overseas such as Lesotho and Cape Verde,
remittances can reach from 15 to 30 percent of GDP. Transactions costs here are high,
and there are substantial legal and regulatory barriers to formal remittance avenues.
The potential for using cell phone technology is very high. The Washington Post
described the current use of cell phones in remittances, by providing an example from
the Philippines, where an uncle living in London transferred small amounts of money
to his niece living in Manila to enable her to shepherd potential clients to
condominiums he was renting. The niece, Dulce Amor Bandoy, said, "My phone is
now my wallet." The article goes on to say, “With cellphone use booming across the
developing world, from the open deserts of Africa to Bandoy's densely populated
neighborhood in sultry Manila, handsets that cost as little as $30 are enabling
struggling nations to leapfrog past the need for land-line phones and ATMs.”
Source: Honohan et al (2006).
Investment in higher education is shown to strongly boost
competitiveness, partly through allowing better use of ICT. Hence, investments
in human capital and ICT are key components of the growth agenda.
The challenge of human capacity gaps. African countries cannot build
competitive economies and raise productivity without having the human capacity
to harness knowledge and technology to complement the other efforts being
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Fig 5.5. Education Investment Impact on Competitiveness
Source: World Economic Forum (2006).
made to improve the business environment. In this global economy, a
competitive edge is largely associated with higher productivity. Diffusion of
innovation is crucial for the achievement of productivity gains and successful
competitive performance more generally. However, as Chandra (2006); Utz
(2006); Edwards (2006); Ho and Hoon (2006) emphasize effective diffusion of
innovation requires skills, and incentives for spreading innovation into the
economic environment. For example, information technology enables producers
to do more and better individually and as organizations when there is the capacity
to use it. This is demonstrated in figure 5.5, where the correlation between
economic competitiveness and investment in tertiary education is clearly
demonstrated.
Countries in East Asia that saw this potential early positioned themselves
to exploit this technology very successfully. A good example is what happened
under the initiative of Korea 21. The government invested heavily to prepare the
country for the 21st century. This program targeted what the Korean government
considered to be the seven most important fields in science and technology
required to enhance Korea’s competitiveness in the global economy. As is now
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clear, the results were phenomenal and Korea, which started out as a developing
country barely four decades ago, has now joined the rank of OECD status.
Progress in overcoming shortages of skilled and trained manpower in
Africa seems to be disappointingly slow, despite substantial resources devoted by
both governments and donors to this effort during the last four decades.
According to the UNESCO Institute of Statistics, African countries not only
stand at the bottom of the pile in terms of tertiary education enrollment and
achievement, but also have the lowest proportion of students graduating with
educations focused on science and technology. A major challenge for African
countries therefore is closing the digital divide.
The problem of deficiency in human capacity has now received a new
sense of urgency in the region. Accelerated progress toward meeting MDGs faces
major capacity gaps to implement needed programs. The sheer scale of what
needs to be done to meet these targets dwarfs the weak capacity on the ground,
particularly required skills for supporting growth and implementing health,
education, and other programs. What is worse is that what little human capacity
African countries produce is hard to keep. Africa is losing a very significant
proportion of its skilled and professional manpower to other markets and is
increasingly dependent on expatriates for many vital functions. Emigrants from
the region to developed countries are disproportionately higher skilled. For
example, the International Organization for Migration in 2000 estimated that
there are more African scientists and engineers working in the United States than
there are in Africa. This not only exacerbates the relative scarcity of these skills,
but more important, demobilizes middle- and lower-level skills because of the
absence of supervisory capacity. South Africa’s Bureau of Statistics estimates
that between 1 million and 1.6 million people in skilled, professional, and
managerial occupations have emigrated since 1994, and that for every emigrant,
10 unskilled people lose their jobs. This is aside from the fact that the region is
losing its potentially most enterprising and ambitious young people, stifling the
development of a more dynamic private sector at home.
The losses of human capacity are not only to other regions, but also to
pandemics. HIV and malaria have grown to be major challenges to African
livelihood and development. At the same time, Africa is rapidly losing much
needed health care workers (doctors and nurses) to the developed world, where
they are relatively less needed. It is estimated that there are more than 21,000
Nigerian doctors practicing in the United States alone. About 60 percent of all
locally trained Ghanaian doctors left the country in the 1980s, and very few have
returned. In spite of the huge HIV/AIDS pandemics in Southern Africa, countries
in that part of the continent continue to lose medical personnel in droves. Out of
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all the medical graduates produced by the University of the Witwatersrand in
South Africa in the last 35 years, more than 45 percent (or 2,000 physicians),
have left the country. In the 1980s, Zambia had 1,600 doctors in the country. The
number has since plummeted to 400. Health care in some of these countries is on
the brink of collapse. It is a very serious crisis that needs urgent and major
response.
In the longer term, Africa needs to reverse the growing dependency on
outside experts for essential decision-making and managerial functions. It has
been estimated that annually 100,000 foreign experts are deployed in African
countries at a cost of nearly $4 billion per year. OECD DAC estimates of
technical cooperation assistance to Africa in 2004 reached nearly $6 billion, a
significant increase from its level in the mid-1990s. Technical assistance often
targets short-term alleviation of capacity shortfalls. In this form, it often
discouraged efforts to build and retain local capacity in government, and has
tended to engender psychological dependence on expatriate capabilities.
How should Africa and its partners respond to this challenge? African
countries should expand tertiary education enrollment and achievement as part of
a growth and competition strategy. After decades of decline, many African
universities are reforming themselves, pursuing self-sufficiency in finance,
improved management, and partnering with the private sector (Bollag 2004). In
fact, there has been a mushrooming of private universities, and this development
should be pursued by both the for-profit sector and faith-based communities.
Composition of disciplines should lean away from earlier bias towards social
sciences and more toward science and technology and business education. A
major challenge will be to reform traditional public-funded universities to be
more responsive to the changing needs of their clientele and be more cost
effective. A related challenge will be to build quality-assurance mechanisms (e.g.
independent post-graduation certification that will help users determine the type
of products they are getting from the skyrocketing number of tertiary educational
institutions).
African countries also must stem the tide of skill emigration. They
cannot contain the problem of brain drain by erecting hurdles to contain
emigration. The region could not arrest the flight of its financial wealth through
erecting barriers. Success in reversing capital flight has begun in those countries
that have created attractive investment climates and expanded opportunities for
investors. A similar strategy is needed to contain human capital flight. Talent will
flee from where it finds no gainful use. Expanding opportunities for gainful and
well-remunerated engagement is part of a lasting solution to the brain-drain
problem. In a virtuous circle, better skills lead to higher growth, and in turn,
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higher growth leads to increased demand for skills. The two main sources for
expanding opportunities for gainful application of skills are private sector growth
and professionalization of the public sector. In the current era of globalizing
production systems, people move and jobs move. Globalization therefore has
raised the potential for relocating skilled jobs to Africa through foreign direct
investment and outsourcing, which has been a significant factor behind East
Asia’s phenomenal growth experience. In combination with ongoing public
service reforms, which partly aim to reintroduce meritocracy in public service
and restructure incentives in favor of a professional cadre, the potential for
raising the demand for skills and productivity at home are real.
The countries should make better use of the skills of Africans in the
Diaspora. Some of these skilled personnel could temporarily return to perform
specialist functions when needed. A qualified doctor, for example, would be
assisted to return home to teach, perform operations, and share skills for a limited
time period. Information technology can also enable a virtual return through skill
sharing, teaching, mentoring, and even marking exam papers via the Internet and
video conferencing. This approach is considered particularly attractive because of
its cost effectiveness. Others may make an economic return by encouraging
African professionals with adequate capital or access to it to invest in their home
countries or the region. What African governments should do is provide
information on investment opportunities and facilities for channeling capital to
the region. There is another way in which the African Diaspora skills can be
utilized ─ as technical assistance in place of “foreign” experts. The policies for
deployment of technical cooperation have largely precluded the use of nationals
even if they are qualified. A study by Haque and Khan (1997) has shown that
deploying national emigrants for technical assistance is not only likely to be more
cost effective, but also likely to get those in the hard-to-get higher end of the skill
profile. The argument advanced by the authors is that for each skill category, the
emigrant would be willing to accept a much smaller premium to return and
perform the required task than would a foreign national. This is not surprising as
one of the important features of African migrants is that most maintain social and
cultural links with their home countries.
Strengthening Critical Institutions for Growth
African countries tend to cluster in the lower ranks of institutional
performance measures that are correlated with growth. While economists still
know relatively little about how durable improvements in public sector
performance are achieved, three observations seem relevant to the African
situation. First, when institutions are initially weak, the resultant institutional
vacuum leaves too much discretion and too little accountability in the hands of
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political elites. Much then depends on the quality and disposition of the
leadership in power (Reinikka and Collier 1999, Glaeser, et al. 2004). Wherever
political leaders were unable to reconcile the benefits of a market-friendly
institutional environment with their own priorities, institutional performance
deteriorated and growth suffered. Second, as Collier (1991) argued, donor
conditionality was ill-suited to fill the institutional vacuum or act on behalf of the
disenfranchised African population. Donors had their own constituencies and
could not credibly threaten to terminate aid based on poor policy performance.
Third, in the 1990s there was too much focus on correcting “sins of
commission”—i.e. what governments had done wrong—and too little attention
on “sins of omission”—i.e. under-provision of public goods and services to
reduce costs to firms and make potential opportunities more profitable. A key
strategic challenge faced by many African countries is, therefore, that of
strengthening the role of the government in supporting the growth process
without encumbering private initiative and efficiency.
Consistent with experiences in East Asia and Botswana, for example,
successful states followed the market where it led, (Wade 1993) and
predominantly initiated projects which were ex ante viable at shadow prices,
(Ndulu 2006). Success also depended partly on the institutional capacity of a
state to pursue this prudent path5 and partly on government committing itself to
credibility and tying its own hands through effective political restraint
mechanisms.
Strengthening state capacity entails three dimensions—capacity of
individuals (manning the institutions), organizational effectiveness, and rules of
the game. It is clear that there are a whole range of African institutions, both
public and private, that need to be strengthened for both growth and poverty
alleviation purposes. While there has been a strong emphasis in recent years on
institutions of financial accountability, particularly because of the increasing
emphasis on providing programmatic assistance, we will focus on a few key
areas here which will have the biggest payoff in terms of private sector-led
growth: the enforcement of contracts; exercise of voice as an agency of restraint;
revenue transparency, particularly in natural resource-rich countries; and
reduction of corruption, particularly in critical areas that undermine confidence.
Enforceability of contracts. Economic activity requires trust. Each
nonsimultaneous purchase requires an implicit or explicit contract, and thus
depends on belief that the contract will be adhered to, and, if it is not, that there is
a mechanism to enforce its terms. In fact, Nobel Prize winner Douglas North has
written that nonenforcement of contracts is perhaps the single most important
determinant of underdevelopment. Other scholars believe that weaknesses in
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formal systems of enforcement, such as courts, can be balanced by a network of
trust. In Africa, much of this trust comes from various forms of affiliation—
family, village, ethnicity, history. This works well in small communities or along
ethnic and linguistic lines. But by their very nature, these networks limit the
potential size of the market, and thus limit the degree of specialization. Formal
enforcement institutions become necessary as markets expand and as corporate
businesses become part of the picture.
Richard Mesnick (2004) lays out several lessons that the World Bank has
learned around the world in supporting judicial reform. These include:
•
Judicial reform is harder than project designers believe.
•
Projects cannot be developed on the cheap. It is especially important
to invest in developing quantitative indicators of performance before
moving forward with the project.
•
Altering incentives is crucial. This is true not only for judges, but for
clerks and other actors in the system.
•
Speedier case disposition in and of itself does not constitute reform.
•
Too little attention is paid to alternative dispute mechanisms.
Exercise of voice. As Pritchett and Woolcock (2002) emphasize, while
markets create managerial discipline and induce efficacy through the exercise of
private “choice,” governments are principally disciplined through the exercise of
“voice” to enforce representative public choice. Inclusiveness is, therefore, a
crucial feature of a developmental state and can be broadly characterized by
representational political processes; accountability and openness; a participatory
process in national policy choice; and feedback on outcomes and impact in the
delivery of public services. Space for the exercise of voice in the development
process is necessary for sustaining reforms and achieving results from public
programs on the ground. This is a theme that the WDR 2004 (World Bank 2003)
pursues in remarkable detail, following on the equally remarkable work on voice
in the WDR 2000/01 (World Bank 2000a). While acknowledging the fact that
conceptual underpinnings and systematic empirical evidence linking participation
and inclusiveness to efficiency for better results is at an early stage of
development (Cleaver 1999; Mansur 2004), there is substantial work in this
direction which increasingly supports these assertions.
Governments should commit with credibility; administrative systems
should be accountable; political and economic environments should minimize
risk to enable longer time horizons for actors; domestic politics should
encompass most interest groups; and the political system should be open to
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contestation. In the same vein, devolution of decision making and development
management to subnational levels (local governments and communities) is
important not only for ensuring better use of funds, but also as part of a strategy
for better governance.
Domestic politics will ultimately dictate the speed with which African
countries can move toward more transparency and increased accountability and
good governance, which can not be sustained in an environment that is
characterised by exclusive politics (Hamdok 2002, 19 and 27). Political
contestation is a means for tying the hands of governments through a credible but
peaceful threat of regime turnover. It encourages greater transparency and
increased accountability. As the rapid process of liberalizing political systems
continues, there is mounting pressure for greater inclusiveness of stakeholders in
designing development programs. This development poses perhaps the greatest
challenge to reformulating the aid relationship. The current dual accountability
system of recipient governments to donors and the local constituency may need
to be reconfigured into a single integrated system. The growing emphasis on a
partnership approach and local ownership is a very useful response. But to make
partnership and local ownership a reality, the immense challenges of
surmounting attitudes and changing procedures for aid management first must be
faced.
One weakness of the main model of inclusiveness in this paper and much
of the related literature is that it glosses over the question of whether
participatory political institutions necessarily produce policy choices that serve
“the public interest. Quite often, inclusive/participatory political systems have an
“encompassing” point of view, but it does not follow that (for example) a
majoritarian political system, which may be viewed as highly participatory,
would succeed in aggregating many individual interests into a truly
encompassing welfare function. It is possible to envisage such regimes leading to
populist results, e.g., with a high tax rate on capital that seeks to finance
progressive redistribution, but fails by undermining growth. In nascent
democracies, such as Ghana, there could be fitful policy performance due to
emergence of populist pressures during and after the transition to democracy.
Developing a system with a high degree of resistance to populist pressures is a
constitutional problem (such as that studied in the Federalist Papers); and it
confronts us with the fairly deep question of whether “participation’’ and
“ownership’’ as a domestic political process can potentially be prone to populism
and other “mistakes.” What would be sufficient conditions for emerging
encompassing regimes to generate sustained pro-growth policies?
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Moreover, there is a political economy conundrum that needs to be
addressed by asking a difficult question ─ what are the incentives for African
governments to develop a broad-based private sector? Many African
governments have created business environments in which minority-owned firms
have been able to perform better than indigenous firms. This may partly be a side
effect of poorly formulated and misguided policies, but may also be a result of
the underlying structure of incentives. Is it truly in the interest of governments to
facilitate a broad-based private sector? Or is it safer to have a private sector that
is dominated by ethnic minorities who do not pose a significant threat to political
power but can provide a steady stream of rents? Tangri (1999) argues that the
minority Asian community in East Africa, which has thrived even in difficult
times, often coexists with a small, wealthy, indigenous private sector. This group
relies on its political connections and its rent-sharing arrangements with the
government for its survival. The government, in turn, relies upon it for extrabudgetary revenues. Following Emery’s analysis, one has to consider the difficult
problem of dismantling some of the key control points that certain governments
continue to maintain, which are used to penalize firms that represent a political
threat. While the situation on the ground is changing, what some governments
still seem to fear the most is a private sector which generates wealth independent
of government controls, and which makes its own unfettered decisions.
It is worth pointing out that in some cases, the unease on the part of
government officials exists on purely economic grounds, arising from real
concerns about protectionism in developed country markets or lack of domestic
demand. In other cases, it is the uncertainty that arises from a lack of control over
the generation of wealth, particularly where the private sector is dominated by a
few players.
The key question that arises from these concerns is how African
governments can be encouraged to take steps to develop a broad-based, relatively
unfettered private sector, even when this may be against their short-term
interests. There is a chicken-and-egg problem here. Even in a democratic system,
the crystallization of politics based on economic interests takes time. In Africa,
most politics are regionally, ethnically, or personality based. It takes the rise of a
middle class to move toward economics-oriented politics. But without such
politics, it is less likely that political decisions will be oriented toward rapid
economic growth and the development of the middle class. It is critical to
strengthen those institutions which promote voice and accountability, and those
institutions which speak for an indigenous, export-oriented private sector.
But real accountability is more than the possibility of regime change. The
World Development Report, 2004, develops an analytic framework that defines
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accountability as a relationship among actors that has five features: delegation,
finance, performance, information about performance, and enforceability. Thus
an employee is given a set of tasks (delegation), and paid a wage (finance). The
employee works (performance), the contribution of the employee assessed
(information), and the employer rewards or punishes the employee
(enforceability). This is quite similar to a government’s provision of services,
such as infrastructure. A well is to be built (delegation to provider), finances
made available, the well is built (or not), the potential users have the information
to know if the well is working, but they may not be able to enforce needed
changes if it is not.
The last two links—information and enforceability—are critical for
making government accountable. For many, if not most, aspects of service
provision, information is usually available, at least to clients. A road is built or is
not, drugs are available at a clinic or not, teachers come to the classroom or they
don’t. What is less easy to determine is their quality, and what contracts the
government has made with front-line providers.
One example of the importance of information is the famous Uganda
primary school case. In 1991-95, only 13 percent of per-student capitation grants
actually made it to the schools. The Ugandan government then began publishing
data on monthly transfers in newspapers and on radio. This information could be
used by parents and local leaders to make schools and school officials
accountable. In 1995, the median school received zero capitation funds; by 2001
they were receiving 80 percent of the funds. In this case, information was
enough. Parents were able to enforce performance because the embezzling
officials were known locally and were subject to enormous pressure.
In the mid-1980s, Mali, Benin, and Guinea were in economic and fiscal
crisis. One result was a decline in public resources for health clinics and the
effective elimination of public clinics as a source for health care and medicines.
Health status indicators plummeted. The three governments became participants
in the Bamako Initiative, an effort by West African governments and donors to
revitalize rural health provision (Knippenberg, et. al. 2004). The basic strategy
was to:
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•
Decentralize decision-making and management from the national to
the local level
•
Institute community cost sharing and co-management of health
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CHAPTER 5: TACKLING THE CHALLENGES OF AFRICAN GROWTH
•
Ensure the availability of affordable medicines by allowing
communities to control their own resources
Health care providers and health care financers were now accountable to
local communities. There were a number of important technical reforms which
made care cheaper and more effective, but the core of the program was
accountability through decentralization, and a public-private partnership. Health
outcomes for all three countries improved as a result of this initiative.
In order to improve voice, improvements may need to be made at a
number of levels:
•
Delegation. For example, by introducing performance-based
contracts between the government and the providers. So, if the job of
the customs official was twofold—collecting revenues and ensuring
rapid movement of goods through the port ─ and if his performance
was measured and incentives created to encourage performance, then
importers might receive more effective services.
•
Information. By being clear and specific about expected results and
by collecting relevant data and publishing the data, key clients can
glean the information they need to determine whether providers are
performing as expected and intended.
•
Enforceability. The key process here is to decentralize both
politically and administratively to give clients the ability to enforce
performance.
Of course, effective voice means the opening of space for nonstate
actors—media, civil society and parliament—to have a larger share in the public
discourse. The better trained and the more accountable these actors are the more
effective their “voice” will be as an instrument of accountability.
Revenue transparency. We have noted before that mineral resources,
particularly oil, can lead to weak governance and high levels of corruption, which
can reduce economic growth rates in the nonmineral sectors. One way to mitigate
this result is to strengthen public finance institutions that manage mineral rents
and taxes, and which spend these resources for public investment and
consumption. A first step is to make the relationship between the government and
the mineral producer transparent, in the hope that transparency will lead to better
behavior. This turns out to be a complicated problem. In 2003, the United
Kingdom launched the Extractive Industries Transparency Initiative (EITI),
which built on the NGO campaign Publish What You Pay (PWYP). Both aim to
enhance the transparency of natural resource revenue. PWYP strives for
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mandatory disclosure of payments by extractive industry companies; the EITI
aims for voluntary disclosure by governments as well as companies. In the EITI,
companies and governments use similar templates for reporting all revenue
flows, whether accruing directly to government or through a national oil
company. Any discrepancies become evident by comparing the templates. More
than 20 oil producing countries have endorsed the EITI, and most have started to
implement it. The United Kingdom currently provides a secretariat, and an
international advisory group is preparing proposals for a future management
structure and a monitoring and validation system.
Of the 22 countries that have signed on to the EITI, so far only
Azerbaijan, Gabon, the Kyrgyz Republic, and Nigeria have published EITI
reports, and they all reveal serious deficiencies in coverage or government
accounting procedures, or both. These deficiencies will have to be addressed
through broader public finance reform in order to achieve genuine political
accountability for the spending of mineral revenues. Nevertheless, real progress
is being made. Nigeria, the largest oil and gas producer in Africa, is probably a
poster child for EITI. President Olusegun Obasanjo committed to EITI in
November 2003 and launched Nigeria EITI (NEITI) in February 2004. The
National Stakeholders Working Group (NSWG) steers implementation and is
comprised of 28 individuals from civil society, media, and government, as well
as national and multinational companies.
On March 16, 2005, a consortium led by the London-based Hart Group
signed a contract to audit Nigeria’s oil revenues. The NEITI process consists of
three stages. The first audit is aimed at reconciling information on payments and
receipts. A second audit is focused on amounts of oil and gas produced, lifted,
lost, refined, and exported. A third audit reviews the transparency and
appropriateness of the industry processes, and makes recommendations for
improvement. In addition, all the information and data on the extractive
industries is made public through a communications strategy and the engagement
of regional civil society groups.
On April 26, 2006, the NSWG announced the results of the Hart’s Group
audits for the period from 1999-2004. Based on EITI criteria, these audits
examined financial and physical data from private and state-owned companies,
national and international companies, and regulatory authorities. The report
included a set of recommendations that the government wants to translate into a
time-bound plan of action to correct the identified weaknesses and improve the
relevant systems to avoid future failures. The NEITI Bill, which was approved by
the House of Representatives of the National Assembly on January 19, 2006, is
now awaiting passage by the Senate. This legislation will guarantee mandatory
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annual audits of the extractive industries sector; oil companies will be legally
required to disclose all payments made in its operations; and the recently
established Oil Revenue Monitoring unit will be made independent from the
Finance Ministry and merge with the EITI Secretariat.
Obviously, reforming the revenue side is not sufficient, although it is an
important first step. Whenever the audits are complete, Nigerians will know
exactly how much money is flowing into the government’s coffers from oil rents,
and the public audits should reduce or eliminate leakages. The next step is to
improve management of the spending side, and that will be even more difficult.
For it is in spending, as well as in revenue collection, that the opportunities for
fraud, waste, and abuse are manifold.
Reduction of corruption. Corruption is now recognized as one of the
major obstacles to development. It manifests itself through rent-seeking behavior
which raises the transactions costs on many public and private activities, ranging
from bribes to pass goods through customs, to highway checkpoints, to bribing
police officers to be permitted to do something which might be legal. Corruption
not only raises the costs of doing business and leads to squandering of public
resources, but it is also corrosive to the national psyche. It erodes the culture of
trust that is necessary for the deepening and broadening of markets.
The World Bank’s strategy for reducing corruption has five elements:
•
Increasing political accountability
•
Strengthening civil society participation
•
Creating a competitive private sector
•
Strengthening institutional restraints on power
•
Improving public sector management
We have already dealt with many of these topics—voice and
accountability, deregulation of private sector activity coupled with effective
regulation of monopolies, and transparency of mineral revenues. Others are
somewhat beyond our scope—such as political institutions—which have been
shown to be very important. In this section we want to focus on a few small
points that have not already been made.
Andersen and Rand (2005) empirically tested the proposition that
investment in ITC will reduce corruption. They point out that as governments use
the Internet more broadly, more of their economic workings will be made public.
For example, the Nigerian EITI Web site publishes every audit of the oil revenue
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system. Second, the Internet allows an informal press to flourish. In China, a
number of investigative reporters have been very effective by traveling the
country reporting on corruption and publishing the results on the Internet.
Andersen and Rand’s regressions demonstrate that a one standard deviation
increase in Internet users per thousand leads to roughly a 0.58 standard deviation
increase in the Corruption Perception Index. In 2002, moving Vietnam up one
standard deviation in Internet usage would have resulted in moving it from 100 to
86 in the Transparency International Corruption Perception Index ranking.
Just as ITC development can reduce corruption, so can increased
economic openness. A number of studies (for example Bonaglia, Braga de
Macedo, and Bussolo 2001; and Gatti 1999) have demonstrated that trade reform
is associated with reduced levels of corruption. Gatti and Fisman (2000) have
found that decentralization is associated with reduced levels of corruption,
presumably because clients at local levels have increased information and
increased ability to enforce good behavior.
Preventing and resolving conflict. Some of the methods for solving
conflicted have been tested, while others are still under consideration. One major
preventive tool at the disposal of the policy makers is economic policy. Equity
and governance in the context of a growing economy can help reduce the base
upon which rebellions thrive. However, economic policy making by major
development agencies does not take into account the unique challenges faced by
countries on the brink of war. Policy makers often complain that they lack the
fiscal space they need to effectively implement the required redistributive
policies due to commitment they made to IFI’s.
In societies on the brink of war or the ones surrounding them, a case can
be made for a proactive investment in infrastructure in order to prevent war—i.e.
offer a “bribe” to avoid conflict. Thus roads can be built, and airports and
transportation infrastructure investment can be frontloaded in the areas most
likely to be affected (Azam 2006). This exercise may raise awareness of the
involved parties on the cost of war beforehand, and hopefully this awareness may
elicit additional efforts to prevent or contain conflicts. It is interesting to note that
the Bank can play a unique role as an independent evaluator of the required
investments and can alert donors accordingly.
Well-designed institutions can be effective channels for the peaceful
resolution of conflicts between individuals, groups, or nations. Every time
violence is observed, it is important to thoroughly investigate whether
improvements in the design of institutions could have prevented it. The
institution that has received the most attention is democracy. Improved
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governance and transparency in the conduct of public officials can help reduce
support for groups motivated by grievance to start a conflict. Improved
governance and transparency is also necessary for the design of sound and
sustainable economic policies.
While it is clear that a well-functioning democracy is more adept at
peacefully managing conflicting interests, other types of institution design
received some attention. Elbadawi and Sambani (2000), for instance, suggested
that democracy alone may be insufficient to prevent conflict. They view
innovative arrangements as more effective conduits to peacefully resolve
grievances and make optimal decisions. Decentralization is an example of such
an institutional innovation. By giving regions enhanced autonomy and ownership
of their decisions, it is expected that the motivation to rebel is reduced.
A special mention and encouragement needs to be given to initiatives by
third-party countries, and regional and international institutions in conflict
prevention and resolution. A case in point is that of African countries that have
been involved in peacekeeping and conflict resolution in the region. Nigeria’s
leadership was decisive in the resolution of the conflicts in Liberia, Sierra Leone,
Gambia, Côte d’Ivoire, and the Sudan. South Africa, too, has been heavily
involved in preventive diplomacy to contain the conflicts in the Democratic
Republic of Congo, Côte d’Ivoire, and Burundi.
At the regional level, the African Union’s Peace and Security Council,
inaugurated in 2004, was set up to prevent and help in the resolution of conflicts
within the Union. Other institutions exist, such as the WAMU in West Africa. As
illustrated by the recent conflict in Sudan, the main limitations of African conflict
prevention and resolution institutions is the lack of resources. The emphasis on
consensus before any action is taken has also been criticized as conducive to
delays and a slow response to conflicts. A rapid reaction force is being
contemplated in response to these concerns.
During hostilities, a priority of the international community is to provide
emergency relief and secure cessation of hostilities. In a comprehensive study of
post-conflict countries, Collier and Hoeffler (2002) find evidence that aid ideally
should be phased in during the decade after hostilities end. However, aid
historically has not been higher in post-conflict countries. Instead, it tended to
diminish over the course of the decade. The authors also find that policy
improvements tend to have higher impact on growth in post-conflict countries.
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MOBILIZING RESOURCES FOR GROWTH
There is no doubt that accelerating African growth will require
substantial increases in resources for investment, coming from both external and
domestic sources. Shanta Devarajan of the World Bank has estimated the
increase in external resources needed to meet the MDGs as $40-$60 billion
world-wide (Africa would require half that). However, despite the need for
additional external financing, it is also important that domestic resources be
mobilized, especially as growth proceeds, to avoid increased aid dependence.
Prospects for Aid Financing
Donor commitments of increased aid made at Monterrey, Gleneagles and
other venues promise at least a doubling in aid to Africa in the next six years,
rising from $30 billion to $60 billion in 2004 dollars. Aid levels to Africa had
dropped substantially in the 1990s, but by 2004 were slightly higher in real terms
than 1993-94 levels. However, a large share of the recovery has come in the form
of emergency aid and debt relief, which do little to expand fiscal space for
African governments. In fact, aid going directly to governments, aid that could
open fiscal space, declined from $24 billion to $20 billion in real terms between
1993 and 2004. Over the same period, aid going to emergency and debt relief
grew from 15 percent to 32 percent of total ODA.
Moreover, there has been an important shift in the sectors ODA supports.
Between 1994–95 and 2003–04, the share of aid going to the social sectors went
from 27 percent to 43 percent; aid to productive sectors went from 16 percent to
12 percent; and program aid went from 20 percent to 11 percent. This suggests
then that it is perhaps unfair to evaluate the effectiveness of aid in terms of
growth when aid was not intended to promote growth. Any growth strategy will
require a rebalancing of this allocation toward the productive sectors. Finally, the
expected increases in assistance are heavily back-loaded, with aid increasing by
10 percent per year between 2005 and 2006, and by 20 percent per year from
2007 to 2010.
Aid brings with it a number of problems. Too much of current aid is
duplicative and ill-targeted. Donors bring their own agendas with the aid and
often those agendas clash with those of the recipients. Aid in Africa is extremely
intrusive, providing up to 50% of government resources in some cases, and the
large numbers of donors and projects undermine ownership and lead to
inefficiencies in investments. Implementing the Paris Agenda for improved
harmonization and alignment is crucial to improve the effectiveness of aid. In
addition to the institutional and strategic dependencies implicit in high levels of
aid, financial dependency is a problem also. Expanded investments in economic
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and social services bring with them a commitment for long-term recurrent
finance. The history of the volatility of aid flows leads to great uncertainty as to
whether new investments can be supported over the medium and long terms.
There is need to enhance aid targeting so as to reduce or eliminate aid
dependence, at least in the long term. This requires a careful balancing act
between social development and growth enhancing goals with the recognition
that high growth rates are critical for pulling countries from under the burden of
dependence. The concern that in the past aid did not generate economic growth is
valid. Exploring reasons why aid underperformed in the past is a first step
towards ensuring effectiveness of present and future assistance, and is one of the
purposes of the present study. One main reason for the failure of aid in
accelerating growth and development is because these were not always among
the stated objectives. The past fifteen years have seen a clear shift in the
allocation of ODA away from infrastructure and agricultural development and
toward social expenditures. The question here is whether, in the absence of
growth oriented investment, it will be possible to sustain these expenditures. This
shift does not respond to the priorities African countries have themselves set. It is
now broadly accepted that countries must lead in defining strategies for scaling
up development, national plans and aid priorities and donors should align their
programs and projects to these national strategies and priorities.
Increased levels of ODA, therefore, require African countries to boost
capacity for mobilizing domestic resources. There will be need to sustain
spending once aid is withdrawn or phased out to keep the growth momentum
going. Given the current situation with domestic savings, what measures need to
be taken to reverse the trend? From the earlier discussion on determinants of
savings in Africa, there are some factors that will take a long time to reverse. In
particular, widespread poverty will remain a challenge for some time. However,
there are several factors that present a window of opportunity.
A major problem that has been identified by numerous scholars, (e.g.
Ayeetey and Udry 2000) is that the bulk of savings by African households is in
non financial assets. Several factors are responsible for this, but some stand out:
the structural and institutional impediments that make it difficult for formal
financial institutions to offer services to certain types of clientele, particularly
low income populations, clients in remote areas and the informal sector. In some
cases however, there are clear indications that formal financial providers are
disinclined to serve these particular clients and have designed measures intended
to dissuade this clientele from seeking the services of the intermediaries. This is
evident in the operational procedures of these institutions that entail measures
such as prohibitively high minimum balances and astronomical transaction costs.
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CHALLENGES OF AFRICAN GROWTH
In yet other cases, the conditions in the financial sector itself, such as weak
balance sheets and bank distress discourages monetization of assets by those the
institutions target.
These represent a source of resources that can be tapped into
immediately. The question is whether we can realistically expect African banks
to reform quickly enough to be able to overcome these constraints.
Unfortunately, the reform agenda remains formidable, especially when the
returns from marginal clientele are perceived as being too low to warrant the
effort of designing suitable instruments and delivery mechanisms.
If we accept the possibility that the formal financial bodies are not the
answer to the problem of access for everyone, at least in the foreseeable future,
what are the alternatives? Can microfinance and other semiformal institutions be
the remedy and effectively provide services to the underserved? In most
societies, microfinance is increasingly being pursued as a potentially effective
tool for delivering financial services to those not served by the formal sector.
However, microfinance frameworks need to be strengthened in order to be
successful. Structural inadequacies hamper their effectiveness. Generally, MFIs
manage to mobilize only a small pool of savings, have limited coverage, and
narrow areas of operation. Furthermore, cost management has been a persistent
problem, with excessive overheads being the norm, leading to negative net worth
positions and higher probabilities of failure. Regulatory frameworks also tend to
be deficient, with consequent loss of confidence.
There is no doubt that microfinance is well placed to fill the existing gap,
hence it is considered a complement to the formal sector, rather than a substitute.
Yet more needs to be done to render it more effective in fulfilling the required
mandate. Proper legal, policy, and regulatory frameworks have to be developed.
Policy makers have to build or strengthen institutional capacities in order for
MFIs to be self-sustaining and competitive. A few countries have gone some way
in this direction. In Benin, positive profits and self-sustenance came through
expansion of deposits and loan portfolios combined with recovery of nonperforming loans while in Ghana and Guinea, performance has improved as a
result of enhanced commercial orientation, better loan management, and better
financial reporting (Basu, Blavy, and Yulek 2004).6 There is a need for
operational skills in the different areas, particularly supervisory personnel who
have the competence to effectively monitor the sector.
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Box 5.3. Banking Sector and Savings Mobilization in Zambia
Zambia has had a very pronounced shift in its saving pattern. Starting with very
high saving rates in excess of 35% in 1971, Zambia currently has saving rates of 18%
but the period in between has been marked by significant variability in the saving rate.
From the picture, we see a significant drop from the middle of the 1970s that is
sustained well into the 1980s before a short period of recovery. This decline in the saving
rate was precipitated by adverse developments in the terms of trade that turned out to be
permanent as following the 1973 collapse, copper prices never recovered. Government
savings collapsed from the severe decline in copper related revenues. In addition widescale impoverishment of the general population emerged, as from having one of the
highest per capita incomes in Sub Saharan Africa, Zambia is now one of the poorest
countries in the region with a per capita of US$366. This general impoverishment
contributed significantly to the decline of the saving rate as more people were reduced to
levels of subsistence consumption. This situation was further compounded by the
emergence of macroeconomic instability characterized by high levels of inflation.
The general poor state of the economy also manifested in declining profit
margins, particularly for banks. To compensate some banks took greater risks which
consequently led to distress in the banking system and subsequent closure of three
banks in 1995 including of the largest banks. The closure of banks resulted in a general
loss of confidence in the banking sector, which fell disproportionately on local banks.
Unprecedented deposit withdrawals resulted from this and generated severe liquidity
problems which precipitated more bank failures in 1997 and 1998. The effects of these
bank failures on the saving rate are evident from the figure as again the rate declined
following these episodes. These failures dissipated public confidence in the banking
sector especially the local banks and resulted in a general flight to quality from local
banks to foreign banks but also from financial to non-financial assets. Some of these
shifts were imposed by the banking system. Anecdotal evidence suggests that Zambia
is one of the countries that suffer great bias against small depositors. Foreign banks in
Zambia require higher minimum balances as well as being reluctant to open accounts
for individuals not in formal employment. These practices have excluded a large
proportion of private savings.
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CHALLENGES OF AFRICAN GROWTH
While in the short term formal financial institutions may not be in a
position to serve marginal clientele, this should be a medium-long-term
objective. In fact, the formal financial sector should be a catalyst in mobilizing
domestic resources. Thus continued efforts to reform and strengthen formal
financial sectors are crucial for enhanced savings mobilization from both the
excluded and the clientele already served.
We made a case for micro finance being a complement rather than a
substitute to formal finance in that they serve those members of society that are
excluded by the other sector. But there is a two pronged caveat to this argument.
Micro finance institutions are not in a position to fill the entire gap left by the
formal sector. But more important, formal financial institutions should have the
lead in providing financial services. In fact, Honohan et al (2006) argue that the
formal financial sector has a natural advantage over their informal counterparts
that emanate in its ability to provide a broader range of services and a head start
on product design and delivery. The authors argue further that considerable
progress is eminent in access of formal financial services, especially through new
technology aimed specifically at overcoming barriers to finance in Africa.
Elsewhere in the developing world, financial institutions are being
reorganized to efficiently extend services to marginal clients. Through innovative
product design and technology, intermediaries are finding new ways of
expanding access by providing low cost and convenient products. This active
pursuit of small depositors recognizes that the aggregate volume of resources is
not negligible. But more important, as the innovators scale up, large institutions
are beginning to reassess their decision to stay out of these markets, Honohan et
al (2006). There are now concerted efforts in most of Africa to come up with
innovative ways of reaching the untapped markets, see Box 5.4. The spillover of
these efforts is that combining technology and financial innovation to lower costs
benefits the served clientele and increase their use of formal financial services.
Public revenues in African countries are too low. In the short-medium
term, it is unlikely that the public sector will be able to mobilize significant levels
of resources. The expenditure burden that most African states shoulder makes it
very difficult for the governments to achieve any significant savings, particularly
in the absence of sustained growth.
The low levels of public revenues in Africa are due in part to domestic
revenue bases that are too small. This is not a case that is unique to Africa, but
applies to most developing countries. In particular, Tanzi and Zee (2001) find
that tax revenue as a ratio of GDP in developing countries was 18 percent,
compared to 38 percent for industrial countries. This ratio is much lower for low174
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income countries, but more so for low-income Africa, with countries like Chad
and Madagascar having ratios well below 10 percent, while ratios for countries
like Tanzania and Uganda hovered around 11 percent.
Box 5.4. Some Initiatives to Expand Access and Encourage Enhanced Savings
Innovations made possible by financial engineering and information and
communication technology has offer definite opportunities to overcome some of the
obstacles to doing business. In addition to removing barriers, the innovations need to
have low unit costs. Several countries are currently spearheading these efforts through
new measures but also some revamped methods.
In South Africa, banks have taken decisive measures to expand provision of basic
first-level financial services to low income populations and other unbanked people.
One such initiative is a low cost account intended to provide access to and affordable
banking services. The account known as Mzansi was launched in October 2004 and is
offered by the four main banks in South Africa. To ensure simplicity of use and also
low cost, the account is a basic standardized debit card based transactional and saving
account with transaction limited to deposits, withdrawals and debit card transactions,
Kirsten (2006). To ensure access, the banks have shared ATMs within a 10km radius
of the clients in the townships and rural areas. Although the scheme is relatively new,
the prognosis is good. Over the first seven months of its existence, 1.6 million
accounts were opened with total balances of some 325 million South African Rands.
But most important, of the accounts opened, more than 90% are held by the previously
unbanked and about 54 percent of all accounts are held by women. In October 2005, a
new money transfer service was added to the account.
The not so new but revamped initiative is the mobile banking units which travel
to areas where there are no bank branches. Equity Bank of Kenya has reintroduced
mobile banking units combining use of vans and lap-tops linked to a branch enabling
the bank not only to reach a wider client base but to also to provide a wide menu of
products. In addition the bank is also providing saving services more adapted to the
needs of low income clientele with small high volume transactions. There are also
signs of possible success with considerable net savings, Honohan et al, 2006.
For a self-sustaining process of development, it is imperative that
African states enhance public revenues. In particular, the countries that have been
enjoying reasonable growth rates should show some impact on public revenues.
From the figures, it is clear that for many countries, the task of boosting
government revenues is quite formidable. However, it is by no means
insurmountable.
Currently, the biggest obstacle to the mobilization effort is the
inefficiency of tax systems. The systems are characterized by loose laws with
numerous loopholes that encourage and enable tax evasion. Poor enforcement of
tax laws is rife, hampering tax collection efforts. The complexity of tax
legislation makes identification and assessment of tax liabilities difficult. Finally,
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there are numerous exemptions, some of which do not serve any beneficial
purpose, which encourage corruption and are poorly targeted.
Thus, efforts at improving revenue collection should aim at simplifying
the tax systems and broadening tax bases. These reforms have been undertaken in
most countries, but results have yet to be realized. Consumption taxes have been
the most common means of simplifying tax regimes. In the past most countries
had adopted sales tax but increasing countries are switching to VAT as an
alternative that can broaden the tax base without compromising simplicity.
Generally the VAT is a flat rate that is levied on a broad base and exemption of a
few selected services and some goods that are typically used by low-income
households.
Other measures of simplifying tax systems include removal of tax
exemptions and treating fringe benefits as part of taxable income. These
measures have been adopted in South Africa where before some foreign
companies were exempted from some taxes as an incentive to invest in the
country while employed packages were structured such that a substantial
proportion of the remuneration package was in the form of non-taxable fringe
benefits. These actions achieve both simplification and base broadening of
objectives. In addition, the reforms by South Africa included the strengthening of
the tax authority and this has so far been successful.
In addition, any effort to enhance public revenues should involve
improvement of the tax administration. Done properly and not in isolation from
other reform measures, improvement of tax administration can increase tax
collection for both direct and indirect taxes.
Many African countries have created revenue authorities with the
objective of enhancing the capacity and efficiency of tax administration. Success
of these developments has been, at best, questionable. While Kenya has had
relatively high tax revenues with an average of just over 20 percent of GDP, most
of this was realized from corporate taxes and it was clear that with additional
reforms and other measures, there was potential to increase their income. The
Kenya Revenue Authority was established as one such measure. However, it did
not result in increased ratios of tax revenue to GDP. This failure has been
attributed to the structural weaknesses of the economy. In essence, the small size
of the formal sector workforce has meant that income taxes have a limited
coverage, constraining capacity for revenue expansion. In Tanzania and Uganda,
reforms to the tax administration resulted in revenue increases, but these could
not be sustained over a longer term. Failure in both cases emanated chiefly from
fiscal corruption.
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A missing component of the reforms has been providing autonomy to tax
authorities. In addition, there has been a lack of political will and transparency.
And despite extensive reforms, tax systems remain complex in most of Africa.
The agenda for enhancing public revenue requires reforms that should
start with improvement of tax structures that simplify tax systems. Excessive and
arbitrary taxation have been major disincentives to meeting tax obligations, while
non-transparency and complex tax structures have aided corruption and
encouraged tax evasion. These reforms should also aim to assure cost
effectiveness of revenue collection, as well as reducing excessive tax burdens to
the economies. Some of these reforms will have long-term effects, such as the
elimination of ineffective tax preferences.
Simplified tax systems and improved tax structures require proper
administration. However, tax administration reforms are more effective when
applied to transparent and less complex systems. Thus, reforming tax structures
should necessarily precede tax administration reforms. African countries have
instituted a vast menu of reforms to tax collection mechanisms. However, there is
need to take stock, looking at what reforms were instituted and particularly, how
these reforms were sequenced.
Remittances
Remittances constitute a significant proportion of funds flowing to
developing countries and are more so for low income countries. African countries
have received their own share of remittances which while the lowest as a
proportion of remittances to the entire developing world, these flows are still
substantial. More important, remittances to Sub-Saharan African countries now
exceed the flows of ODA but also, they have been found to be more stable. As of
2004, remittances to SSA totaled $160 billion (from $58 billion in 1995) while
ODA flows in 2004 were $79 billion (relative to $59 billion in 1995), Africa
Partnership Forum, 2006. Not only are African countries receiving substantial
amount of remittances but these have grown very rapidly over the last decade,
growing more than two-fold. Within the region, the remittances vary widely with
Nigeria receiving the highest amount in absolute terms but as a percentage of
GDP, Lesotho has the highest share at about 26%. These figures represent
recorded transactions but anecdotal evidence, however, suggests that the use of
informal means is rife, primarily because of high transaction costs and
weaknesses in banking sector. Given the current situation with outward migration
from Africa, it can be reasonably expected that the remittances with remain a
significant part of the flows to Africa, at least in the medium term.
177
CHALLENGES OF AFRICAN GROWTH
The question that has been raised is whether remittances contribute to
economic growth and can therefore be considered part of the developmental
resources. Remittances indeed contribute to economic objectives of recipient
countries in numerous ways. There is conclusive evidence that remittances
reduce poverty as they expand the budget set and allows more consumption and
fund other developmental activities such as schooling. Adams and Page, 2005
show empirically that a 10% increase in international remittances reduces
poverty by 3.5 percent in developing countries. But whether they contribute to
growth depends on their use. If they are used for consumption only, then their
impact on growth is transitory. However, if they or a part thereto are invested
either directly or indirectly through deposits, they have the potential to affect
growth. Again empirical evidence and country studies show that remittances are
used for investment and savings and have contributed to productive activity.
Quartey, 2006 shows that in Ghana about 17 percent of remittances were used for
investment purposes—most migrants invest in activities such as small and
medium scale enterprises and improved agricultural supplies. Further,
remittances used for activities related to education comprised 27 percent of the
total. These proportions are significant and suggest that migrant remittances have
substantial long term effects on the economic goals of recipient countries.
Clearly remittances are going to be an integral part of the African
developmental agenda for some time to come and should receive a
commensurate part of the resource mobilization effort. In particular, the
developmental potential of remittances can be increased through measures that
would not only increase the flow but would also encourage a larger proportion of
remittances to flow through formal channels. This implies addressing the
bottlenecks that presently exist. Paramount to all this is efforts to reduce
transaction costs of remitting money. The current high costs discourage
remittances and can be regarded as a regressive tax on migrants who usually can
only afford to send small amounts of money, Adam and Page (2005). Evidence
suggest that banks in most developing countries have not shown any particular
interest to enter the remittance arena mainly because of complicated procedures
for what are at most low value transactions. Honohan et al conclude that Africa is
not using the formal remittance infrastructure to its full potential. The ability to
tap into remittances is hampered by the low level of access to formal banking
services. Efforts should also be aimed at enhancing the safety of funds as well as
improving the infrastructure including the payment system. Also, remittances are
subject to complex paperwork and documentation that causes delays in
processing transactions and the process would need to be simplified. These will
improve the efficiency of remittance services and possibly encourage an increase
in remittances.
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CHAPTER 5: TACKLING THE CHALLENGES OF AFRICAN GROWTH
Evidence from other developing regions shows that strategic alliance
between local banks and their international correspondents or between banks and
transfer companies lower transaction costs substantially, while financial
instruments tied to remittances act as an incentive for a larger share that flows
through the banking system. These are areas worth exploring.
CONCLUSIONS
We have laid out a set of actions that need to be taken to accelerate
economic growth in Africa. The experience of a number of African countries
over the past 10 years shows that accelerated growth is possible in a variety of
settings. We have pointed out how important it is for the continent as a whole
that its largest countries, Nigeria, Ethiopia, Sudan, and Democratic Republic of
Congo, make the decisions necessary to grow faster. It is important to emphasize
that each country situation is unique, with individual constraints and
opportunities. The broad strategic approaches presented here need to be tailored
to the specific situation of each country, which in turn means specific analysis of
each country setting. These approaches need to be converted into specific action
plans that reflect the political, social, and economic environments.
There are lessons to be learned from the experiences of East and South
Asia, as well as from the successful countries on the continent. What does
Botswana have to teach African countries about managing mineral wealth? What
does Mauritius have to teach about export diversification? What can be learned
from Mozambique’s transformation from a post-conflict country to one of the
fastest growing countries in the world?
Can Africa learn from the rest of the developing world, such as India?
While there is no doubt that India’s reform processes have a long ways to go,
there are likely some lessons, particularly on the political economy front. How
did India reduce the regulatory burden on the private sector? What are the
underlying forces that have transformed, and are continuing to transform,
political will and attitudes toward the private sector? The emerging literature on
India’s reforms point to three things ─ the demonstration effect of India’s success
in the high-tech sector, the emergence of “MBA politicians” who are focused on
improving the productivity of the private sector, and the realization that public
revenues generated from higher rates of economic growth may well be more
beneficial than fluctuating rents. It is well within the capabilities of several
countries in Africa to replicate some features of the Indian success story. Call
centers, and back-office processing firms in Ghana and South Africa, and hightech firms in Madagascar and Mauritius are all emerging as strong competitors in
the international arena. These and other firms will need the support of their
179
CHALLENGES OF AFRICAN GROWTH
governments and a business environment that will provide a reliable supply of
power and water, and a transparent system of taxation and regulation.
We have not emphasized the importance of ensuring that growth effects
are broadly shared, not only because growth that does not reduce poverty does
not meet Africa’s and the world’s goals, but also because inequality itself
undermines growth and stability. But it is vital that growth is “shared.” We have
also not gone into detail about a number of specific areas that will be the subject
of other “Flagship” studies—infrastructure, financial markets, and agriculture.
Finally, we support the expansion of aid, but emphasize the requirement of
dealing with capacity constraints to make aid effective, the importance of
improved efficiency through harmonization and alignment, and the absolute
necessity to ensure that aid does no harm, either through undermining capacity,
undermining leadership, or undermining incentives for domestic resource
mobilization.
In the end, decisions must be made about priorities, specific actions and
modes of financing. The central question is leadership. Political leadership that
makes growth the number one priority and focuses the efforts of both
government and nongovernment on achieving accelerated growth cannot fail.
None of the steps necessary to achieve levels of growth sufficient to reduce
poverty are easy. There will be political, technological and capacity constraints.
But these can be overcome, and African countries can succeed, if the will to
succeed is present.
ENDNOTES
1
Global Economic Prospects report, (World Bank 2001) shows that countries with
increasing export share also tend to grow faster. Although not a causality statement,
raising export orientation of the economy conditionally also raises the probability of
experiencing higher growth.
2
They include Angola, Benin, Botswana, Cape Verde, Ethiopia, Mali, Mauritius,
Mozambique, Rwanda, Senegal, Tanzania, Uganda, Chad, Equatorial Guinea, and Sudan
3
These are Angola, Cape Verde, Democratic Republic of Congo, Ethiopia, Mozambique,
Republic of Congo, Sierra Leone, Sudan, and Tanzania.
4
These countries include Senegal, Mozambique, Burkina Faso, Cameroon, Uganda,
Ghana and Cape Verde
5
Robert Wade’s (1993) distinction between two types of government interventions:
“leading the market” and “following the market” is relevant here. “Leading the market”
means that government initiates projects that private business people would not undertake
180
CHAPTER 5: TACKLING THE CHALLENGES OF AFRICAN GROWTH
at current prices (ex ante unviable at current prices but viable at shadow prices) or, are
unviable at both current and shadow prices. “Following the market” means that the
government wants to assist in projects that the private business wants to undertake at
current prices (market oriented dirigisme).
6
While commercial orientation is a healthy practice with visible benefits, it nevertheless
can defeat the purpose for which microfinance is being promoted. Commercialization of
institutions sometimes comes at the expense of the very poor. There is evidence to the
effect that successful microfinance tends to target the higher ends of the excluded
populations, as well as the population already served by the formal sector, leaving those
in poverty outside the loop.
181
ANNEX 1
Empirical Analysis of Influential Factors
of Growth in Africa
ESTIMATING THE GROWTH MODEL
In this annex we assess the importance of major factors influencing
growth, identified in the growth literature and discussed in detail in chapter 4.
We update the analysis conducted under the AERC growth research (see
O’Connell and Ndulu 2000; Ndulu and O’Connell 2006; and Hoeffler 2000) to
identify channels through which these drivers operated. The main objective here
is not to establish causality but to infer the relative significance of the drivers for
growth, and use the results for conditional prediction by isolating variation in the
determinants of growth. By identifying systematic features of the growth process
and documenting their relative importance on a global basis, growth regressions
can direct country-level work into its most productive areas (Collier and Gunning
1999).
We estimate a pooled conditional model using a least squares approach
in a global regression setting. These models have very strong descriptive content,
and provide a reliable basis for conditional predictions within any sample drawn
from the joint distribution that produce the data at hand.1 Although the primary
objective is to determine which factors explain Africa’s growth performance, the
global regression is necessary here, partly owing to data limitations for individual
African countries, and partly to infer the relative importance of different factors
from the global experience.
We are aware of the many pitfalls in the use of growth regressions,
particularly the problem of endogeneity—reverse causalities from growth to the
right hand side variables i.e. the factors affecting growth. For example policy
variables that have been used as right hand side variables, i.e. inflation, black
market premium and ratio of government consumption to GDP have also been
found to be subject to reverse causations. These are included in the model to
investigate their effects on growth rates. However, one can expect that
macroeconomic stability and growth tend to mutually reinforce each other.
183
CHALLENGES OF AFRICAN GROWTH
Greater stability, in this sense, reduces investment uncertainty and hence is
supportive of higher long-term growth. Conversely, strong and sustainable
growth makes it easier to achieve greater macroeconomic stability, by enhancing
the sustainability of domestic and foreign public debt. For this reason, OLS
regressions do not give a causal relationship; instead it gives us conditional
expectations. That is, the coefficients can be interpreted as; conditional on a
given level of the included determinant prevailing/observed in a typical country,
average growth rates are expected to be increased/reduced to the extent of the
estimated coefficient (Ndulu and O’Connell 2006).
There are primarily two sources of endogeneity: one from true
simultaneity—investment determines growth, but growth also determines
investment—or from the omission of key determinants that are correlated with
the included variables. Instrumental variables have often been used to circumvent
this problem: for example, instead of using investment rate as an explanatory
variable for growth, demographic variables are used. These factors affect
investment via national saving, and yet they are plausibly more predetermined (or
slow moving) over the 5 year span of country observations. However, it is a
daunting task to find good instruments for all the potentially endogenous
variables in the growth framework.
If endogeneity arises from the omission of unobserved but time-invariant
attributes of countries, a second approach is to eliminate all cross-country
variation from the data. This can be done by estimating the regression model
using deviations from country averages (the “fixed effects” estimator). The cost
here is that many of the most important growth determinants (e.g. geography)
vary more strongly across countries than within countries; a substantial amount
of information is therefore lost. Column (2) of the Table of results, reports the
OLS regression with country specific clusters, since we expect errors to be
correlated for different halfdecadal observations of the same country. As
suspected, the landlocked factor drops out of significance.
INFLUENTIAL FACTORS OF GROWTH AND DATA
Unless specifically mentioned, majority of the data are derived from the
Global Development Network (GDN) database, for the period 1960 through
1997, and subsequent updates from the World Development Indicators (GDF and
WDI, April 2006) database. Apart from the initial conditions mentioned below,
the original, annual data for the set of remaining drivers are averaged over a 5year time period. The dependent variable is growth in real GDP per capita; which
is the average growth rate of real GDP in constant local currency for the halfdecade. Data was supplemented by using the Penn World Table PWT 6.1.
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ANNEX 1: EMPIRICAL ANALYSIS OF INFLUENTIAL FACTORS OF GROWTH IN AFRICA
Human Development
Under this category we include three variables, all related to demography
and human development. One of these enters the regression in the form of initial
conditions—life expectancy, and the other two as half-decadal averages of the
annual data recorded—age dependency and potential labor force growth rate.
Initial life expectancy at birth in years for the total (male and female)
population, is either the data observed or recorded for each country in the first
year of each half-decade or, the values linearly interpolated or extrapolated to the
initial year where necessary. Figure A.1 depicts the trend in the evolution of life
expectancy rates prevailing in SSA as opposed to those in the other developing
regions over the 1960 to 2004 time period. The downward trend is unmistakable
after the new millennium started. Countries like Seychelles and Mauritius
maintained their above regional average life expectancy rates at 71 and 68 years
whereas; for countries like Botswana, plagued by the AIDS epidemic, the rates
deteriorated sharply.
Figure A.1. Smoothed Average Life Expectancy at Birth
80
70
60
50
40
1960
1970
1980
SSA
year
1990
2000
2010
Other Developing
Age dependency: Rising dependency ratios dilute the contribution of any
given real GDP growth per worker to real GDP growth per capita. Bloom and
Williamson (1998) emphasize the “demographic dividend” that accrued to East
Asian countries between 1960 and 2000, as a result of a falling ratio of
dependents to workers. Bloom and Sachs (1998) emphasize additional adverse
impacts operating through the discouraging effect of high dependency ratios on
185
CHALLENGES OF AFRICAN GROWTH
national saving and the quality of human capital formation. The ratio of
population below 15 or over 65 (dependent population) to working-age
population grew steadily. The fertility rate began to fall in Africa in the mid1980s, suggesting entry into the final phase of the demographic transition but at a
slower pace. This observation is further complicated by the huge impact of
HIV/AIDS on life expectancies starting in the late 1980s.
Potential Labor force growth rate: Potential labor force growth rate,
defined as the difference between the average growth rate of the population of
labor force age (15–65) and the average growth rate of the total population over
each five year period, shows persistent growth. But it has not been growing fast
enough to overshadow the effects of high age-dependent populations. Figure A.2
shows that this disparity remains valid even when compared with all the other
developing regions.
Exogenous Shocks
Three clusters of exogenous shocks are grouped under this caption—
income effects of terms of trade, trading partner growth, and political instability.
Income effects of terms of trade: The income effect of terms of trade
improvements is the half decadal average income effect of the change in the
Figure A.2. Demographic Indicators
1960
1970
1980
year
SSA
1990
2000
1960
Other Developing
1970
1980
year
SSA
1990
2000
Other Developing
Smoothed Potential Labor Force Growth Rate
-.4 -.2 0 .2 .4 .6
60 70 80 90 100
Smoothed Age Dependency Ratio
1960
1970
SSA
186
Smoothed Fertility Rate
2 3 4 5 6 7
1 1.5 2 2.5 3
Smoothed Population Growth Rate
1980
year
1990
2000
Other Developing
1960
1970
SSA
1980
year
1990
2000
Other Developing
ANNEX 1: EMPIRICAL ANALYSIS OF INFLUENTIAL FACTORS OF GROWTH IN AFRICA
terms of trade using the final year of the previous half-decade as base. Higher
values represent more favorable terms of trade movements. The risk-related
effects of income terms of trade are largely driven by the price volatility in the
commodity market. Given the large share of primary commodities in income
generation and export earnings in the majority of African countries, volatility in
the prices of these commodities also translate into volatility of income growth.
Although these shocks are reversible, where management of responses to such
shocks is weak or not prudent, second round effects may be triggered in the form
of policy distortions—which tend to have more lasting effects on growth.
It is defined as the product of the share of exports in GDP pertaining to
the initial year of the halfdecade and the cumulative effect of the changes in
terms of trade, which is then averaged over the 5-year period. (Terms of trade
data have been supplemented by data made available from the Collins-Bosworth
growth accounting dataset updated through 2003.) For the halfdecade starting in
year H, this is calculated as:
4
ctot ( H ) = x ( H ) • (1 / 5) ∑ [ln TOT ( H + t ) − ln TOT ( H − 1)],
t =1
Where, TOT (H-1) is the terms of trade prevailing in the final year of the
half-decade immediately preceding the half-decade starting in year H and x(H) is
the ratio of exports to GDP in the initial year of the half-decade: namely year H.
Trading partner growth: Ability to engage in international markets also
has an indirect but positive impact on a country’s performance. Generally, higher
growth rates of the trading partners tend to enhance a country’s potential benefits
from cross-country productivity spillovers as well as increased demand for the
home country’s exports. Thus high growth rates of a trading partner are
positively correlated with the growth of a country. Some of the effects of export
expansion on growth may be coming from the demand side in the short run; as
captured by the terms of trade variable. A long-run growth impact could also
operate through either increased investment or learning-by-doing externalities
from expanded export production. Trading-partner growth is the half-decade,
average weighted growth rate of real GDP per capita for the country’s trading
partners, with weights defined as the partner’s share in total imports plus exports.
The trade weights were calculated from the exports, imports data in the IMF:
Directions of Trade database.
Political instability is measured by the half-decadal period average
number of assassinations, revolutions and general strikes occurring in a year in a
country. The data is available in the Arthur S. Banks Cross National Time-Series
Data Archive, 2004.
187
CHALLENGES OF AFRICAN GROWTH
Political instability exerts an adverse effect on security of property and
hence on investment and growth, primarily on account of the uncertainty
associated with an unstable political environment (Barro, 1991). We are aware of
the reverse causality from growth to political stability discussed widely in the
existing literature, for instance, poor economic performance may lead to
government collapse and political unrest. However, our interest for now is the
other direction of influence.
Policy
The government can affect the economic environment for growth in at
least four major ways: by intervening in markets, by producing or distributing
goods and services, by providing social overhead capital, and by defining and/or
enforcing property rights. The first two categories comprise what is
conventionally treated as “economic policy” in the growth econometrics
literature. Policy failures are at the heart of a critique of African governance that
began with Bates (1981) and the World Bank’s Berg Report (1980) and
converged in the early 1980s with the emergence of structural adjustment lending
throughout Africa and Latin America (Ndulu and O’Connell, 2006).
The two standard indicators of the policy environment considered in this
analysis are inflation indices and black market premium rates.
Inflation: High inflation distorts the information content of price signals
generating large forecast errors and endangering efficiency of resource
allocation. High and unpredictable inflation discourages investment and saving
(Barro, 1995) and through this channel adversely impacts on the growth of
economic activity. Further, risk or uncertainty associated with high and volatile
inflation has adverse effects on the rate of return to capital and investment
(Bruno 1993, Pindyck and Solimano 1993); accumulation of human capital and
investment in innovations; and on total factor productivity due to frequent
changes in prices which are costly to firms, and changes in the optimal level of
cash holdings by consumers (Briault, 1995). The annual, inflation rate is
calculated as 100 * ln(1 + π ) where π, is the CPI inflation rate. Data has been
supplemented by the GDP deflator series wherever necessary.
Black market foreign exchange premium: Black markets for foreign
exchange arise due to the imposition of exchange controls. Governments impose
exchange controls in order to protect international reserves; which in turn create
excess demand that needs to be satisfied at a premium in a parallel market, thus
giving incentives for the emergence of a black market for foreign currency. Thus,
a black market premium arises when there is a deep inconsistency between
domestic aggregate demand policies and exchange rate policy, or (ii) when the
188
ANNEX 1: EMPIRICAL ANALYSIS OF INFLUENTIAL FACTORS OF GROWTH IN AFRICA
government tries to maintain a low level of the exchange rate in order to
counteract balance of payments crisis, (Ndulu and O’Connell, 2006). Thus, the
existence of sizable black market premiums over long periods of time reflects a
wide range of policy failures; including unsustainable macroeconomic policy,
inward looking trade and exchange rate regimes, and patronage-driven
governance structure, (O’Connell and Ndulu 2000). Investment is encouraged if
official exchange rates are stabilized, not to mention gradual cessation of
existence of the parallel market and hence, the elimination of black market
exchange rate premiums.
The black market premium is the percentage excess of the annual
average black market exchange rate over the annual average official exchange
rate. Parallel market exchange rate data were obtained from the Easterly, Levine
and Roodman AER 2004 data set. And, for the years 2001–2004 these data were
obtained from the Monetary Research International publication: “MRI Bankers'
Guide to Foreign Currency.” For both inflation and the black market premium,
we omit half-decadal observations where these take values above 500 percent.
Government current consumption: The ratio of real government current
consumption (spending) to GDP is another policy indicator used in this analysis.
Fiscal deficits often coexist with high government spending. These have
implications for macroeconomic stability and funding for public investment
necessary for raising the absorptive capacity of the economy and crowding-in
private investment. The ratio of real government current consumption (spending)
to real GDP, both at constant international prices, has been obtained from PWT
6.1. Data beyond 2000 have been updated using the series: ratio of nominal
government current spending to nominal GDP from the national accounts in the
United Nations Common Database (UNCDB).
Figure A.3 shows that substantial differences existed in the average government
spending to GDP levels and black market exchange rates prevailing in the region
over the entire time period, in contrast to the other developing regions. All three
policy variables followed the same pattern as the rest of the developing world,
with average inflation rates almost identical and the black market premium
converging around 2002. Government consumption is the only policy variable
that did not bridge the gap between Africa and the rest of the developing world.
Geography: Although there are important variations across countries in
the region, for most African countries distance from their primary markets and
the high transport intensities of their products (low value-high weight and
sparsely produced) are major impediments to production and trade (Esfahani and
Ramirez 2003). The measure of geographical isolation considered in the present
analysis is the landlocked dummy variable, which takes on a value of one if the
189
CHALLENGES OF AFRICAN GROWTH
country has zero miles of coastal boundary, and zero if it has a positive number
of coastal boundaries. Specifically, in developing countries, the attribute of being
landlocked is detrimental to presenting positive opportunities of growth by
discouraging investment in capital (by both foreign and domestic agents) because
of the high transport costs, together with the poor infrastructure services
prevailing in these economies. Average growth rates of the landlocked
economies in other developing regions, for example, were between 1–2.5 percent
lower than the coastal countries over the period 1960–2004.
Infrastructure: Limao and Venables (2001), note that land-locked
countries are able to offset a significant proportion of their disadvantages related
with landlockeness and sovereign fragmentation, through improvements in their
own and their transit countries’ infrastructure. Thus, ceteris paribus, a country
that is landlocked would have to incur higher transport costs and suffer the
consequences of barriers of transit countries to reach the world market. This is
globally true for developing countries because a significantly higher proportion
of the intercontinental and international commerce takes place using water and
land (intra-continental trade) rather than the more costly air transportation.
Figure A.4 shows the significant differences prevailing in Africa and
other developing regions and the diverging trends in the evolution of one such
Figure A.3. Policy Variables Over Time
Countries with full set of observations
Smoothed Inflation
Smoothed Black Market Premium
80
60
40
20
20
15
10
5
0
0
1960
1970
1980
year
SSA
1990
2000
Other Developing
Smoothed Govt. Consumption
24
20
16
1960
1970
SSA
190
1980
year
1990
2000
Other Developing
1960
1970
SSA
1980
year
1990
2000
Other Developing
ANNEX 1: EMPIRICAL ANALYSIS OF INFLUENTIAL FACTORS OF GROWTH IN AFRICA
0
50
100
150
200
Figure A.4. Telephone Lines (per 1,000 People)
1970
1980
1990
Year
22 SSA
2000
2010
58 Other Developing
infrastructure stock index; telephone mainlines per 1000 people over 1975 to
2004.
Initial Income: Initial income is incorporated to capture the effect of the
“conditional convergence” paradigm, that is, countries that are poorer relative to
their own country-specific steady states, grow faster. Hence, we expect the sign
of the coefficient to be negative, implying that the lower is the level of initial
income prevailing in a certain country in 1960; the higher is the “potential” for
growth in terms of converging toward its own steady state. Initial income is
measured by the value of PPP adjusted, real GDP per capita at (1996)
international prices, for the first year of each half-decade (primary source: PWT
6.1).
The table below presents the pooled conditional regression results
including the institutions and infrastructure factors, respectively. The R-squared
for the original model (1) is 0.35, implying that approximately 35% of the
variability of real per capita growth rates is accounted for by the included
variables in the model. The F statistics are reported below the R-squared. The Ftest for the inclusion of all the right hand side variables is statistically significant
for all the three specifications, which means that the model(s) specification is
overall significant. The p-value of the F-test also reveals that the overall model is
significant in all three cases.
191
CHALLENGES OF AFRICAN GROWTH
Table A.1. Regression Results
(1)
Growth in
real GDP per
capita
ln(initial income)
-1.17
(-0.44)**
Life expectancy
0.06
(0.25)**
Age dependency
-0.04
ratio
(-0.29)**
Growth of potential
0.92
LF participation
(0.19)**
Landlocked
-0.58
(-0.08)+
Trading partner
0.38
growth
(0.15)*
Income effect of
0.04
terms of trade
(0.09)**
changes
Political instability
-0.31
(-0.13)**
Inflation
-0.01
(-0.08)*
Black market
-0.01
premium
(-0.14)**
Gov't
-0.03
consumption/GDP
(-0.11)**
African Coastal
-0.87
Economies
(-0.12)**
International
Country Risk Guide
Telephone lines per
capita
Constant
10.91
(3.88)**
Observations
687
192
(2)a
Growth in
real GDP
per capita
-1.17
(4.41)**
0.06
(2.01)*
-0.04
(3.85)**
0.92
(3.27)**
-0.58
(1.52)
0.38
(2.43)*
0.04
(2.66)**
(3)
Growth in
real GDP
per capita
-1.66
(-0.76)**
0.02
(0.08)
-0.07
(-0.51)**
0.84
(0.18)**
-0.66
(-0.09)
0.42
(0.12)+
0.04
(0.12)*
(4)
Growth in
real GDP
per capita
-1.47
(-0.59)**
0.04
(0.19)+
-0.05
(-0.36)**
1.13
(0.24)**
-0.30
(-0.04)
0.62
(0.20)**
0.05
(0.12)**
-0.31
(4.11)**
-0.01
(2.27)*
-0.01
(3.79)**
-0.03
-0.16
(-0.08)
-0.01
(-0.12)*
-0.00
(-0.08)
-0.02
-0.01
(-0.09)*
-0.01
(-0.17)**
-0.01
(2.24)*
-0.87
(2.09)*
(-0.08)
-1.90
(-0.29)**
0.18
(0.27)**
10.91
(4.15)**
687
17.41
(7.04)**
312
(-0.05)
-0.91
(-0.13)*
2.09
(0.15)+
13.25
(4.79)**
513
ANNEX 1: EMPIRICAL ANALYSIS OF INFLUENTIAL FACTORS OF GROWTH IN AFRICA
Table A.1. Regression Results
(1)
Growth in
real GDP per
capita
R-squared
0.35
F-stat
17.56
p-value (Prob > F)
0.0000
(2)a
Growth in
real GDP
per capita
0.35
11.04
0.0000
(3)
Growth in
real GDP
per capita
0.35
9.91
0.0000
(4)
Growth in
real GDP
per capita
0.31
13.26
0.0000
Note: Normalized beta coefficients in parentheses.
a
Robust t statistics in parentheses.
+ Significant at 10%; * significant at 5%; ** significant at 1.
RESULTS
The estimated coefficients of the original model (1) are discussed in this
section. The estimates of the other models in Table A.1 have similar
interpretations. All variables included in the regression have expected signs and
are significant at least at the 10 percent level or less, with nine out of the 12
included variables (not including the half-decadal dummy variables) significant
at 1 percent. What comes out quite strongly is the powerful influence of
demographic and opportunity variables (location, trading partners’ growth).
From the table, we can see that initial income affects the growth rate
negatively as expected, consistent with the conditional convergence effect. For
example, if other factors were constant, if the initial income level of a country
was lower by $1 at international prices, its growth would rise by 1.2 percent.
Life expectancy has a significant positive effect. One more year of life
expectancy achieved by a country would raise the growth rate by 0.06 percent.
Both indicators of demography have the expected impact on growth, with highly
significant coefficients. Age dependency has a negative impact of 0.05 percent,
while growth of the potential labor force is expected to increase economic growth
by 0.92 percent.
A rise in the trading partner growth rate is a positive shock to the
economy. A 1 percent rise in the growth rate of a country’s trading partner is
associated with an increase in the country’s growth rate by 0.4 percent. The result
also supports the hypothesis that an outward-oriented economy can gain more by
exploiting the potential gains from trade, especially in the form of technology
transfers and specialization of inputs of production.
193
CHALLENGES OF AFRICAN GROWTH
Income effects of terms of trade likewise have the expected effect on
growth, though with a very small positive coefficient. The result confirms the
importance of first-order effects of terms of trade changes, particularly for
primary commodity dependent economies. Finally, as expected, an increase in
political instability reduces growth with a negative coefficient of 0.3 percent.
All three macroeconomic indicators have their expected, significant
effects. A 1 percent rise in inflation or black market premium rate negatively
affect growth by 0.01 percent, while a 1 percent increase in the ratio of
government consumption spending to GDP is associated with a reduction in
growth by 0.03 percent. The estimates confirm the expectations that high
inflation indices are related with greater risk and hence uncertainty about
investment decisions, while increasing government consumption has its
implications for existence of commensurate fiscal instability.
As expected, being a landlocked country exerts a negative and significant
influence on growth at the global level. Ceteris paribus, if there were a one more
percent chance of a country being landlocked, its growth rate would decline by
0.6 percent.
Finally, the negative coefficient for the dummy variable capturing the
effect of being an African coastal economy represents a lost opportunity. African
economies have been unsuccessful in exploiting their positive opportunities for
growth, i.e. countries that are endowed with greater proximity and accessibility to
the world market for trade and commerce are unable to grow as fast as coastal
economies in the rest of the world (Collier and O’Connell 2006).
Relative Importance of the Drivers of Growth in the Global Regression
The results of the pooled conditional model discussed in the previous
section give us an idea of how each factor affects growth. While it is clear that all
the drivers have some part in explaining growth performance, we are also aware
that some variables would be considerably more important than others, even
though in the pooled conditional regression, the size of the estimates implies
otherwise. Therefore in order to better inform policy making, we need to know
the strengths of these factors relative to all included variables. For this purpose,
we use the beta coefficients reported in table A.1 above.2 With beta coefficients,
all the variables are standardized and the units of measurement are the same.
Thus the relative magnitudes of these coefficients have a meaningful
interpretation, which allows us to make conclusions about which driver
contributed the most to explaining the growth performance.
194
ANNEX 1: EMPIRICAL ANALYSIS OF INFLUENTIAL FACTORS OF GROWTH IN AFRICA
The strengths of individual factors for predicting growth range from as
high as 0.44 percent to as low as 0.08 percent. It is apparent that globally, initial
income has the strongest explanatory power for predicted growth. This implies
that the relatively low income status of many of the African countries potentially
provides its most powerful motor for accelerating growth to the levels required to
meet the MDGs. The estimated beta coefficients for the cluster of demographic
variables follow next at -0.29 percent for age dependency, followed by initial life
expectancy at 0.25 percent and labor force participation at 0.19 percent. Trading
partner growth, black market premium, political instability, and ratio of
government consumption spending to GDP rank next in that order. The rest have
beta coefficients of less than 10 percent.
In terms of clusters of the growth drivers, the three demographic
variables—age dependency, life expectancy, and growth of labor force
participation, have the strongest influence on growth. This calls for a particularly
strong focus on the demographic transition in Africa. Risk and openness to trade
are the next strongest cluster of drivers, but almost similar to the strength of the
cluster of policy variables.
Models (3) and (4) look at two additional factors that have been known
to drive growth in the positive direction in the existing literature, but for which
we do not have data for the entire 45 years of the African growth experience. In
column (3), the growth model in (1) is presented along with an index of
institutional quality, which incorporates perceptions of corruption, law and order,
and quality of bureaucracy as indicators of the institutional environment
prevailing in a country. Data on this index goes back only until 1984. Higher
values of this index are expected to exert a positive effect on growth rates since it
not only favors accumulation of human and physical capital by attracting more
private investment on account of better investment climate, but it also improves
productivity of labor and capital for both public and private investment through
the synergistic effects of diffusion of technology and skills. Results in column (3)
can be interpreted as; an increase in this index by one unit, leading to a rise in
predicted growth rates by 0.18 percent. Political instability and some of the
policy variables are correlated with this institutions index since they have an
adverse affect on private property rights and are related with corruption and
perceptions of rule of law, resulting in these variables falling out of significance.
In column (4) of Table A.1, another factor that has been known to be
crucial in terms of driving growth in a favorable direction is considered.
Provision of social overhead capital, including public investments in
transportation and communications infrastructure, primary education, and health,
is a vital function of a growth-promoting government (Ndulu and O’Connell
195
CHALLENGES OF AFRICAN GROWTH
2006). Internal infrastructure stocks like telephone mainlines per capita and road
density are expected to improve growth performance because they serve to
promote capital and labor accumulation by raising the standards of investment
climate prevailing in a country at the same time as boosting productivity of
factors of production. Data on telephone mainlines per capita is available from
1975 onward. In column (4), its coefficient is interpreted as an increase in this
communications infrastructure asset by one unit, leading to an increase of
expected growth rates by 2.09 percent. The impact of a country being landlocked
falls out in significance because of its correlation with this infrastructure variable.
ENDNOTES
1
Ndulu and O’Connell (2006, p.16 ) explain that the fundamental assumption behind
estimating a pooled, conditional model is that: the observations for different countries
and time periods are governed by the same joint distribution of variables, ordinary least
squares estimation provides a good approximation to the expected value of growth
conditional on observed determinants (Wooldridge, 2003).
2
The beta coefficients can be obtained by transforming the growth and all the included
determinants, subtracting their respective means, dividing by the standard deviation, and
then fitting the least squares regression on this transformed data.
196
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