-
Africa’s Growth Turnaround:From Fewer Mistakesto Sustained
Growth
John Page
WORKING PAPER NO.54
www.growthcommission.org
[email protected]
Commission on Growth and Development Montek AhluwaliaEdmar
BachaDr. BoedionoLord John Browne Kemal DervişAlejandro FoxleyGoh
Chok TongHan Duck-sooDanuta HübnerCarin JämtinPedro-Pablo
KuczynskiDanny Leipziger, Vice ChairTrevor ManuelMahmoud
MohieldinNgozi N. Okonjo-IwealaRobert RubinRobert SolowMichael
Spence, ChairSir K. Dwight VennerHiroshi WatanabeErnesto
ZedilloZhou Xiaochuan
The mandate of the Commission on Growth and Development is to
gather the best understanding there is about the policies and
strategies that underlie rapid economic growth and poverty
reduction.
The Commission’s audience is the leaders of developing
countries. The Commission is supported by the governments of
Australia, Sweden, the Netherlands, and United Kingdom, The William
and Flora Hewlett Foundation, and The World Bank Group.
A fter stagnating for much of its postcolonial history, economic
performance in Sub-Saharan Africa has markedly improved. Since
1995, average economic growth has been close to 5 percent per year.
Has Africa fi nally turned the corner? This paper analyzes growth
accelerations and decelerations—that is, country-level deviations
from long-run trend growth. Seen from this perspective, Africa’s
record of slow and volatile growth refl ects a pattern of
offsetting accelerations and declines, and much of the improvement
in economic performance in Africa post 1995 turns out to be due to
a substantial reduction in the frequency and severity of growth
decelerations. The fall in economic declines since 1995 is largely
due to better macroeconomic policies, but changes in such “growth
determinants” as investment, export diversifi cation, and
productivity have not accompanied the growth boom. Lack of change
in these variables—and the signifi cant role played by natural
resources in sparking growth accelerations—suggest that Africa’s
growth recovery was fragile, even before the recent global economic
crisis. The paper concludes by setting out four elements of a
strategy that can help move Africa from fewer mistakes to sustained
growth: managing natural resources better, pushing nontraditional
exports, building the African private sector, and creating new
skills.
John Page, Senior Fellow, The Brookings Institution
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wb350881Typewritten Text57753
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WORKING PAPER NO. 54
Africa’s Growth Turnaround: From Fewer Mistakes to Sustained Growth
John Page
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© 2009 The International Bank for Reconstruction and Development / The World Bank On behalf of the Commission on Growth and Development 1818 H Street NW Washington, DC 20433 Telephone: 202‐473‐1000 Internet:
www.worldbank.org
www.growthcommission.org E‐mail:
[email protected]
[email protected] All rights reserved 1 2 3 4 5 11 10 09 08 This working paper is a product of the Commission on Growth and Development, which is sponsored by the following organizations: Australian Agency for International Development (AusAID) Dutch Ministry of Foreign Affairs Swedish International Development Cooperation Agency (SIDA) U.K. Department of International Development (DFID) The William and Flora Hewlett Foundation The World Bank Group The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the sponsoring organizations or the governments they represent. The sponsoring organizations do not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the sponsoring organizations concerning the legal status of any territory or the endorsement or acceptance of such boundaries. All queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202‐522‐2422; e‐mail: [email protected]. Cover design: Naylor Design
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth iii
About the Series
The Commission on Growth and
Development led by Nobel
Laureate Mike Spence was established in April 2006 as a response to two insights. First, poverty cannot be reduced
in isolation
from economic growth—an observation
that has been overlooked in the
thinking and strategies
of many practitioners.
Second, there is growing awareness that knowledge about economic growth is much less definitive than commonly thought. Consequently, the Commission’s mandate is to “take stock of
the state of
theoretical and empirical knowledge on economic growth with a view to drawing
implications for policy for
the current and next generation of policy makers.”
To help explore the state of
knowledge, the Commission invited
leading academics and policy makers
from developing and industrialized
countries to explore and discuss
economic issues it thought relevant
for growth and development, including
controversial ideas. Thematic papers
assessed knowledge and highlighted ongoing debates in areas such as monetary and fiscal policies,
climate
change, and equity and growth. Additionally, 25
country
case studies were commissioned to explore the dynamics of growth and change in the context of specific countries.
Working papers in this series were presented and reviewed at Commission workshops, which were held
in 2007–08
in Washington, D.C., New York City, and
New Haven, Connecticut. Each paper
benefited from comments by workshop
participants, including academics, policy
makers, development practitioners,
representatives of bilateral and
multilateral institutions,
and Commission members.
The working papers, and all
thematic papers and case
studies written as contributions to
the work of
the Commission, were made possible by
support from the Australian Agency for International Development (AusAID), the Dutch Ministry of Foreign Affairs, the Swedish International Development Cooperation Agency
(SIDA), the U.K. Department of
International Development (DFID),
the William and Flora Hewlett Foundation, and the World Bank Group.
The working paper series was produced under the general guidance of Mike Spence and Danny Leipziger, Chair and Vice Chair of the Commission, and the Commission’s
Secretariat, which is based in
the Poverty Reduction and Economic
Management Network of the World
Bank. Papers in this
series represent the independent view of the authors.
-
iv John Page
Acknowledgments
This paper draws on recent work with colleagues Jorge Arbache and Delfin Go to understand
the improvement in Africa’s economic
performance.
Their intellectual contributions are gratefully acknowledged. They are absolved of any responsibility for the policy conclusions, which are wholly my own.
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth v
Abstract
After stagnating for much of
its postcolonial history, economic performance
in Sub‐Saharan Africa has markedly
improved. Since 1995, average
economic growth has been close to 5 percent per year. Has Africa finally turned the corner? This
paper analyzes growth accelerations
and decelerations—that is,
country‐level deviations from long‐run trend growth. Seen from this perspective, Africa’s record of
slow and volatile growth
reflects a pattern of offsetting accelerations and declines, and much of the improvement in economic performance in Africa post
1995 turns out to be due
to a substantial reduction in
the frequency and severity of
growth decelerations. The fall in
economic declines since 1995
is largely due to better
macroeconomic policies, but changes
in such “growth determinants” as
investment,
export diversification, and productivity have not accompanied
the growth boom. Lack of change
in these variables—and the significant
role played by natural resources
in
sparking growth accelerations—suggest that Africa’s growth recovery was fragile, even before the recent global economic crisis. The paper concludes by setting out
four elements of a strategy that can help move Africa
from fewer mistakes
to sustained growth: managing natural
resources better, pushing nontraditional
exports, building
the African private sector, and creating new skills.
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth vii
Contents
About the Series
.............................................................................................................
iii Acknowledgments
..........................................................................................................iv
Abstract
.............................................................................................................................v
I. Introduction...................................................................................................................1
II. Africa’s Growth 1975–2005
........................................................................................3
III. Good Policy or Good Luck?....................................................................................10
IV. Is Growth Sustainable?
...........................................................................................17
V. Toward a Strategy for Sustained Growth.
.............................................................20
VI. Conclusions...............................................................................................................39
Annex...............................................................................................................................40
References
.......................................................................................................................42
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 1
Africa’s Growth Turnaround: From Fewer Mistakes to Sustained Growth John Page 1
I. Introduction
After stagnating for much of
its postcolonial history, economic performance
in Sub‐Saharan Africa (Africa) has
markedly improved. Since 1994,
average economic growth has been close to 5 percent per year. Countries with at least 4 percent
GDP growth now constitute about
70 percent of the region’s
total population and 80 percent
of its GDP. As a group,
these countries have
been growing consistently at nearly 7 percent a year since the mid‐1990s. The number of countries in economic decline has fallen from 15–18 in the early 1990s to 2–5 in recent years, and only one economy—Zimbabwe—has experienced a significant economic collapse since 2000. Per capita income grew by 1.6 percent a year in the late
1990s and by 2 to 3
percent in each year since
2000. Average incomes
in Africa have been rising in
tandem with the rest of
the world, and Africa’s
top performers are doing well
compared with fast‐growing countries
in other regions.
Has Africa finally turned the
corner? Predictions of Africa’s
imminent economic recovery or demise have proved wrong on numerous occasions in the past 40 years. This essay summarizes recent work with several colleagues to try to
understand the improvement in Africa’s
economic performance.2 Section
II looks at Africa’s long‐run
growth from 1975 to 2005 and
addresses
two questions: what characterizes the pattern of long‐run growth in Africa and what has
caused the recent growth
acceleration? Most attempts to
explain Africa’s growth performance have
focused on investigating
the determinants of growth over time and across countries using cross‐country models and comparative case studies
(Collier and Gunning 1999; O’Connell
and Ndulu 2000; Ndulu et
al. 2007). We approach our
growth diagnostics from a somewhat
different perspective.
1 John Page is a Distinguished Visiting Fellow in the Global Economy and Development Program at the Brookings Institution in Washington, DC. He is also a nonresident Senior Fellow of the Global Development Network and an advisor to the African Development Bank. 2 This work is reported in Arbache and Page, 2007, 2008, 2009; Arbache, Go, and Page, 2008; and Go and Page, 2008.
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2 John Page
Africa’s growth over the past
three decades has not only been
low;
it has been highly volatile (see for example Ndulu et al., 2007; Arbache, Go, and Page 2008; Raddatz, 2008). For this reason instead of looking for “determinants” of long‐term
growth, we identify medium‐term
deviations from its long‐run
trend—growth accelerations and decelerations—at the country level. Using this approach, we find that African countries have experienced numerous episodes of accelerated growth in the past 30 years, but also a comparable number of growth declines.
In short, Africa’s long‐run record
of slow and volatile growth
reflects
a pattern of offsetting accelerations and declines, rather than random variations of growth
rates around the long‐run trend.
From this perspective much of
the improvement in economic
performance in Africa post‐1995 is
attributable to African economies
avoiding bad economic times. The
region’s recent
growth boom turns out to be due to a substantial reduction in the frequency and severity of growth decelerations, combined with an increase in the frequency and country coverage of growth accelerations.
While avoiding bad times is
an important achievement in itself,
it raises some questions concerning
the origins of Africa’s growth
recovery. Since
this paper was written in the winter of 2008, the global economy has suffered a major recession. The abrupt decline in economic activity in the OECD and in Asia has resulted
in rapidly
falling commodity prices and exports. Projections of growth for 2009 and beyond for the region are substantially lower. From the perspective of
understanding how the continent may
react to the global downturn a
key question is: was the
reduction in economic declines
between 1995 and 2008 largely
the outcome of a benign global
environment, of better
economic management, or both?
Section III addresses the question: good policy or good luck? Our assessment of
recent commodity price trends indicates
that while until the
recent downturn the terms of trade have been favorable on average for Africa since 1995, they have not been uniformly favorable for all African countries. To address the public policy questions posed by our results, we look for correlates associated with acceleration and
deceleration episodes and examine the
probability that an
economy will undergo a growth acceleration or deceleration. We conclude that the reduction in economic declines since 1995 is due both to better policies and some luck. In the post 2008 crisis better policies will provide some cushion
to
the external shock but they cannot prevent transmission of the global recession to Africa.
One of the most striking
results of the analysis of
Section III is that the policies
and institutions needed to
avoid bad economic times
are much better understood than
those needed
to achieve growth accelerations. Since sustained growth
after 2005 will depend more on
achieving and sustaining
growth accelerations at the country
level than avoiding mistakes, Section
IV draws on the more traditional
growth literature to examine
differences in
“growth fundamentals”—savings,
investment, and productivity
change—between 1995–2005 and
the preceding decade. It also
looks at these variables in
international
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 3
perspective. Although there has
been some improvement in
economic fundamentals since 1995, it is not large enough—particularly in comparison with levels
found in rapidly growing economies—to
support complacency
with respect to the durability of Africa’s growth recovery.
Section V sets out four elements of a strategy that would move Africa from its current recovery
to sustained growth: managing natural resource rents well, pushing nontraditional exports, building the African private sector, and creating new skills. These elements are drawn from the empirical results of the paper and the experience of successfully growing economies in Africa and elsewhere.
II. Africa’s Growth 1975–2005
This section presents a
perspective on long‐run growth
in Africa based on
a series of studies conducted by Arbache and Page (2007, 2008, 2009). We use the most
recent time‐series of purchasing
power parity (PPP) income data
for 45 African countries from 1975
to 2005.3 This period follows the
first oil shock and includes the commodity prices plunge, the introduction of structural reforms, and the recent growth recovery. Because from a public policy perspective we want to focus on the representative country, we mainly use unweighted country data and report regional or subregional averages.4
Between 1975 and 2005 mean
per capita income in Africa
grew slowly. Trend growth declined
until the late 1980s (table 1)
and then increased substantially
during 1995–2005. The per capita
growth rate rose from
−0.23 percent in 1985–94 to 1.88 percent during 1995–2005. Statistical analysis suggests that a structural break occurred in the time series of per capita income growth as growth picked up in the mid‐1990s.5
Income growth was highly volatile,
especially in comparison with
other developing regions (figures 1 and 2), but the post 1995 growth acceleration was accompanied by a sharp reduction in growth volatility. The absolute value of the coefficient of variation
fell from 90.4 percent in
1975–94 to 3.2 percent in
after 1995. Interestingly, however, there is no statistical evidence that growth volatility per
se was associated with Africa’s
poor long‐term economic
performance (Arbache and Page 2008b).
3 Data on per capita
income (PPP at 2000
international prices) and
its growth rate are taken from the World Bank’s World Development
Indicators (WDI)
(various years) unless otherwise
specified. The WDI’s GDP per capita PPP series starts in 1975. The sample includes all Sub‐Saharan countries except Liberia and Somalia, for which there are no data. Thus, there is an unbalanced panel of data with T = 31 and N = 45. 4
This contrasts with Collier’s
contribution in this working paper
series which uses
population weighted aggregates to focus on the welfare of the representative African. 5 Recursive
residual estimations, Chow breakpoint
tests, and Chow forecast tests
indicate
that a structural break in the growth series occurred between 1995 and 1997 (Arbache and Page 2008).
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4 John Page
Table 1: Per Capita Income, Mean Growth, and Variation for
Different Periods in Africa
Growth rate
Period Mean Standarddeviation
Coefficient of variation GDP per capita
1975–2005 0.70 6.27 8.96 2,299 1975–84 0.13 6.92 53.23 2,180
1985–94 −0.23 5.87 −25.52 2,183
1995–2005 1.88 5.99 3.19 2,486 1975–94 −0.07 6.33 −90.43
2,182
(1995–2005) minus (1985–94) 2.11 0.12 28.71 303 (1995–2005)
minus (1975–94) 1.95 -0.34 93.61 304 Source: Arbache and Page
(2007).
Figure 1: Per Capita Income
–8–4048
–4
0
4
8
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
2002 2004
Growth Trend Cycle Source: Arbache and Page (2007a).
Notes: Right axis = per capita income; left axis= cycle of p.c.
income.
Figure 2: Growth Rate of Per Capita Income
–100
0
1002,000
2,400
2,800
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
2002 2004
GDP per capita Trend Cycle Source: Arbache and Page
(2007). Notes: Right axis = growth of p.c. income; left axis =
cycle of growth rate.
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 5
Identifying Good Times and Bad To investigate
the impact of growth volatility
on economic performance
we identify growth accelerations (good times) and decelerations (bad times) using a variation
of the methodology developed
by Hausmann, Pritchett, and
Rodrik (2005). Our approach differs
from theirs and that of
researchers applying their method
to Africa (IMF, 2007) in two
important respects. First, it
identifies both growth accelerations
and decelerations in countries.
Second, it does not use
a common threshold growth rate
to identify growth accelerations.
Instead, it defines good and bad
times relative to each country’s
long‐run economic performance. In
Africa’s volatile, low‐growth environment
this seems appropriate.
To identify a growth acceleration
we require that the following
three conditions are met in each of at least three consecutive years:
Condition 1—The forward
four‐year moving average growth rate minus the backward four‐year moving average growth rate exceeds 0;6
Condition 2—The forward four‐year moving average growth rate exceeds the
country’s average growth rate, meaning
that the pace of
growth during acceleration is higher than the country’s trend;
Condition 3—The forward four‐year
moving average GDP per
capita exceeds the backward four‐year moving average.
A sign change from (+) to (–) in Condition 1 suggests a growth trend shift. A deceleration episode occurs when in three consecutive years: the forward three‐year
moving average growth rate minus
the backward three‐year moving average
growth rate is less than zero
(Condition 1); the forward
three‐year moving average growth rate
is below the country’s average
growth rate (Condition 2); and
the forward three‐year moving
average GDP per capita is below
the backward three‐year moving
average (Condition 3). A
growth acceleration or deceleration
episode is defined to include
the three
years following the last year that satisfies conditions 1–3.7
Condition
2 makes our definition of
a growth
acceleration or deceleration endogenous to each country’s long‐run rate of growth. There is clearly a risk that by identifying a period of modest, sustained growth in a low‐growth economy as a growth acceleration we will assign too much significance to a minor change in economic performance. But
it is also true
that a period of relatively modest per capita growth may signal an important economic change in a country with very low growth rates, and a decline
in per capita
income of equal magnitude could
6 This requires the forward moving average window (t, t+1, t+2, t+3) to be higher than the backward window (t, t‐1, t‐2, t‐3) and above 0. 7 As an example,
if conditions 1 to 3
identify a growth acceleration during, say, 1991 to 1995, the years 1996, 1997, and 1998 are
included as part of
the episode. The growth acceleration episode comprises a period that starts in 1991 and ends in 1998.
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6 John Page
spell a serious economic collapse
in a
stagnant economy.8 Condition 3 ensures that the growth acceleration episode is not a recovery from a recession.
Table 2 shows the relative frequency of accelerations and decelerations, and their respective growth rates, for different periods. Between 1975 and 2005, there was a slightly higher probability that the representative African economy was in a growth acceleration
than a deceleration: 25 percent of
the 1,243
total country‐year observations (per country per year) identify countries experiencing growth accelerations,
while 22 percent identify countries
experiencing
growth decelerations.9 The remaining country‐year observations reflect normal economic times with countries growing at about their trend growth rate.
The frequency of good and bad times over the past three decades is reflected in Africa’s
long–run pattern of growth. Growth declines dominated
the period 1975–1994: between 1975 and 1994 growth decelerations were more than twice as frequent
as accelerations. In contrast 42
percent of the 494
country–year observations for 1995–2005 were growth accelerations and only 12 percent were growth decelerations.
Since 1995 long‐stagnant economies,
such as
the Central African Republic, Ethiopia, Mali, Mozambique, Sierra Leone, and Tanzania, have shown sustained growth, relative to their long‐run trend. Table
2: Likelihood and Growth Rates of Economic Acceleration and
Deceleration in Africa, 1975–2005
All ctry years in the period
Ctry years with growth acceleration
Ctry years with growth deceleration
Ctry years with trend
growth
Period
Obs (country-
years) Growth
rate
Freq (of ctry years)
Growth rate
Freq (of ctry-years)
Growth rate
Frequency (of ctry-years)
1995–2005 (after trend break) 494 1.88 0.42 3.76 0.12 –1.29 0.46
1975–94 (before trend break) 749 –0.07 0.14 3.39 0.29 –3.14 0.57
1985–94 433 –0.23 0.21 3.21 0.36 –3.18 0.43 1975–84 316 0.13 0.04
4.61 0.18 –3.06 0.78 1975–2005 (All years) 1,243 0.7 0.25 3.64 0.22
–2.74 0.53 Source: Arbache and Page (2007). Notes: Ctry: country;
Freq: frequency; obs: observation.
8 Condition 2 also helps to limit the number of identified accelerations in countries with sustained, long‐run growth. If a country is growing rapidly it will lift the growth trend, reducing the number of estimated accelerations. This
is particularly significant for
countries experiencing very
low or very high growth rates. 9 As a means of checking the robustness of the results, growth accelerations and decelerations were also
identified by replacing 0 with
+1 percent and −1 percent for
acceleration
and deceleration, respectively, in condition 1, but the results did not change substantially. Therefore, only the base‐case results are reported, because they are less restrictive.
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 7
Seven countries—the Democratic Republic
of Congo, Eritrea, Gabon,
The Gambia, Madagascar, Mauritania,
and Niger—have never had a
growth acceleration. Of those seven,
only Eritrea shows good long‐term
per capita income growth. Four of
the seven had long‐run declines
in per capita income. Sixteen
countries have avoided growth
decelerations altogether. Many—Botswana,
Cape Verde, Equatorial Guinea,
Lesotho, Mauritius, Mozambique, and
Uganda—are among the region’s top
performers in per capita
income growth over the past three decades, but not all. Burkina Faso, Guinea, Namibia, São
Tomé and Príncipe, and Swaziland
are not among the region’s
growth leaders.
Richer countries had more growth
accelerations, and poorer
countries experienced more growth
declines. This result is, of
course, to some
extent endogenous; average
income per capita will tend to rise
in countries with more frequent growth accelerations and fall in countries with more frequent declines. But the result also holds in each 10‐year period, where the compounding effects may be
assumed to be less
important, perhaps indicating that
richer
countries can take better advantage of circumstances favorable to accelerated growth.
Table 3 shows the frequency
of growth acceleration and
deceleration episodes for several types of countries. In general, there is not much difference in the probabilities of growth acceleration and deceleration
episodes
for different geographical locations. Table
3: Frequency of Growth Acceleration and Deceleration by Country
Category
Growth acceleration Growth deceleration
Country category
Frequency (country-
years) Above/below all countries’ mean
Frequency (country-
years) Above/below all countries’ mean
All countries’ mean 0.25 — 0.22 — Coastal 0.26 Above 0.22 Equal
Landlocked 0.23 Below 0.22 Equal Coastal without resources 0.24
Below 0.23 Above Landlocked without resources 0.22 Below 0.22 Equal
Oil exporters 0.29 Above 0.23 Above Nonoil exporters 0.24 Below
0.22 Equal Resource-rich 0.30 Above 0.21 Below Non-resource-rich
0.23 Below 0.23 Above Major conflict 0.16 Below 0.17 Below Minor
conflict 0.19 Below 0.32 Above Source: Arbache and Page (2007).
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8 John Page
Landlocked countries fair about
the same as their coastal
neighbors.
But, while geography does not appear to matter, geology and conflict do.10 As might be expected, oil exporters and resource‐rich countries had more frequent growth accelerations but, somewhat unexpectedly, about the same frequency of growth decelerations
as the regional average. Major
conflict countries had both
fewer growth accelerations and fewer
decelerations than the regional
average. They also had significantly
lower average growth than
the regional average. Because our definition of accelerations and decelerations
is endogenous to the
long‐run growth rate, these results suggest that major conflict countries were trapped in a low‐level
equilibrium. Minor conflict countries
had a substantially
higher probability of a growth deceleration than the average and were much more likely to experience bad times than good times.
Characteristics of Good and Bad Times Good times
and bad differ quite a bit
in terms of their economic and
social characteristics. Table 4 shows
sample averages during growth
accelerations, decelerations, and “normal” times (defined as the absence of either) for a number of
key economic and social variables.
It also gives the simple
correlation coefficients between these economic, social, and
institutional characteristics and the frequency of acceleration and deceleration episodes.
The major changes
in national accounts during growth episodes
take place in
investment and savings rather than
in consumption. Savings and
investment are higher during accelerations, compared with normal
times and substantially lower during
bad economic times. Foreign direct
investment (FDI) during accelerations
is six times the figure
for deceleration episodes. Consumption
is relatively
lower during growth accelerations. This
is consistent with
the higher allocation of resources
to investment, but consumption also
falls during decelerations, which is
probably due to the fall in
the purchasing power
of households.
Macroeconomic management is an important factor in both good times and bad. Decelerations are accompanied by high inflation. The real effective exchange rate
is more competitive during growth
accelerations and highly
appreciated during decelerations. Official development assistance
(ODA) as a percentage of GDP
is similar in both good and
normal times but falls during
growth decelerations. Per capita ODA
is higher during growth accelerations and
lower during decelerations. Interestingly,
public debt is higher during
both accelerations and decelerations
than it is during normal
times, but government consumption falls
in both episodes relative to
normal times. Trade is substantially
lower during decelerations. Exports
and especially imports drop sharply.
Somewhat surprisingly, the terms of
trade are less favorable
during growth accelerations.
10 See the country assignment criteria in table A.2 of Arbache and Page (2008).
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 9
Table 4: Means of Economic, Social, Governance, and
Institutional Characteristics during Growth
Accelerations/Decelerations and Their Correlations with the
Frequency of Acceleration/Deceleration Episodes
Growth acceleration Growth deceleration
Mean during normal times
or trend growth Mean Correlation Coefficient Mean
Correlation Coefficient
Savings, Investment & Consumption Savings (% GDP) 11.4 15.2
.180 7.5 −.177 Investments (% GDP) 20.0 23.7 .176 15.9 −.236
Private sector investment (% GDP) 12.2 13.7 .125 9.2 −.166 FDI net
flow (% GDP) 2.51 4.12 .130 0.77 −.135 Consumption (% GDP) 93.4
88.5 −.091 89.4 −.058 Macroeconomic Management Consumer price index
(%) 109.5 105.1 −.102 177.0 .082 GDP deflator (%) 69.5 16.6 .011
168.1 .011 Public debt (% GNI) 95.2 112.0 .001 115.3 −.059
Government consumption (% GDP) 16.8 15.9 .100 15.1 −.122 Real
effective exchange rate (2000=100) 139.8 114.4 −.038 183.1 −.084
Current account (% GDP) −5.9 −5.7 .056 −5.9 −.083 Trade Trade (%
GDP) 70.1 75.4 −.034 58.8 .084 Exports (% GDP) 30.2 31.6 −.028 26.7
.078 Imports (% GDP) 41.0 43.1 .077 32.1 .089 Terms of trade
(2000=100) 111.1 102.5 .065 114.4 −.176 Aid ODA (% GDP) 13.9 13.6
.054 11.9 −.217 ODA per capita (US$) 57.0 68.3 −.107 41.5 .168
Policies, Institutions, and Governance CPIA (scale 1=low to 6=high)
3.17 3.19 .065 2.77 −.206 Voice and accountability (−2.5 to +2.5,
low to high) −0.65 −.46 .168 −1.07 −.209 Political stability (−2.5
to +2.5) −0.47 −.46 .051 −1.06 −.200 Government effectiveness (−2.5
to +2.5) −0.65 −.59 .100 −1.01 −.203 Regulatory quality (−2.5 to
+2.5) −0.61 −.46 .129 −.94 −.176 Rule of law (−2.5 to +2.5) −0.62
−.66 .037 −1.11 −.227 Control of corruption (−2.5 to +2.5) −0.55
−.57 .025 −1.11 −.182 Minor conflict (frequency) 0.09 .08 −.046
0.15 .082 Major conflict (frequency) 0.12 .05 −.070 0.07 −.044
Human Development Outcomes Life expectancy (years) 50.8 51.3 .062
48.1 −.136 Dependency ratio 0.93 .91 −.067 .93 .053 Under 5
mortality (per 1,000) 150.4 145.8 −.108 187.1 .237 Infant mortality
(per 1,000 live births) 86.2 84.3 −.108 113.2 .277 Primary
completion rate (% of relevant age group) 53.2 52.5 .049 41.4
−.178
Source: Arbache and Page (2007).
-
10 John Page
Policies and
institutions differ between good, normal, and
(especially) bad times. The World
Bank’s Country Performance and
Institutional
Assessment (CPIA) score, a broad measure of policy and institutional performance, is lower during decelerations, but does not differ significantly between accelerations and normal
times.11 Governance indicators—political
stability, government effectiveness,
rule of law, and control of
corruption—are
lower during growth decelerations.12
Voice and accountability scores are
higher during
growth accelerations. Minor conflicts are more frequent during bad economic times.
Growth variability also affects a number of
important human development indicators.
Life expectancy is substantially
lower in countries
experiencing growth decelerations than in countries experiencing normal times. Mortality for children under age 5 and infant mortality are substantially higher during growth decelerations
than in normal times, but these
indicators do not
improve during growth accelerations.
The primary completion rate is
substantially lower
in countries during growth declines.
III. Good Policy or Good Luck?
Africa’s growth since 1995 largely
reflects a substantial reduction in
the frequency and severity of growth collapses and an increase in the frequency and country coverage of growth accelerations (table 5). Table
5: Frequency (Country-Years) of Growth Acceleration and
Deceleration, by Country Category, 1995–2005 versus 1975–2005
Growth acceleration Growth deceleration
Country category Likelihood 1975–2005
Likelihood 1995–2005
Likelihood 1975–2005
Likelihood 1995–2005
All countries’ mean 0.25 0.42 0.22 0.12 Coastal 0.26 0.44 0.22
0.12 Landlocked 0.23 0.34 0.22 0.14 Coastal without resources 0.24
0.38 0.23 0.14 Landlocked without resources 0.22 0.34 0.22 0.14 Oil
exporters 0.29 0.49 0.23 0.12 Nonoil exporters 0.24 0.40 0.22 0.12
Resource countries 0.30 0.55 0.21 0.08 Nonresource countries 0.23
0.36 0.23 0.14 Major conflict 0.16 0.35 0.17 0.06 Minor conflict
0.19 0.32 0.32 0.13 Source: Arbache and Page (2009).
11 The CPIA measures country performance in 16 policy and institutional areas, grouped into four clusters:
economic management,
structural policies, policies for
social inclusion and equity,
and public sector management and institutions. 12 Governance
indicators are available for the
following years: 1996, 1998, 2000,
2003, 2004, and 2005.
-
Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 11
These trends have coincided with a period of rapid expansion of the global economy
and rising commodity prices. External
shocks have historically
been important determinants of growth in Africa (see, for example, Collier and Dehn 2001). Oil exporters and resource‐rich countries have experienced more growth accelerations than any other country type. To what extent are the shifts in growth performance
observed in the last 10 years
simply a reflection of a
commodity price boom, rather than improvements in economic management?
Commodity Prices
The better economic performance in
the recent period
is certainly partly due to the
higher export prices for many
African commodities (figure 3). Of
the 40 commodity prices monitored
regularly, only
cotton prices have declined
(from high prices during the
2003 drought year). Higher oil
prices benefit 8–10 oil‐exporting
countries. Gains from higher export
prices for commodities such
as gold, aluminum, copper, and nickel more
than offset the losses
from higher oil import bills in several oil‐importing countries, such as Burundi, Ghana, Guinea, Mali,
Mozambique, Rwanda, Uganda, Zambia,
and Zimbabwe.
Overall, compared with the previous major oil price cycle during 1973–80, the aggregate terms
of trade for Sub‐Saharan African
countries have behaved much
more favorably (figure 4).13 Figure
3: Commodity and Oil Prices (price indices, 2000=100)
50
100
150
200
250
300
350
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
Oil
Metals and minerals
Agriculture
Inde
x
Source: World Bank various years.
13 The recovery of terms of trade in non‐oil‐exporting developing countries since the late 1990s is, however,
still below the peaks of the
early 1980s. Data are from the
World Bank’s
World Development Indicators.
-
12 John Page
Figure 4: Terms of Trade Index in SSA 1973–80 and 1999–2006
(1973, 1999 = 100)
60
80
100
120
140
160
1999–2006
1973–1980
1974–2000
1975–2001
1976–2002
1977–2003
1978–2004
1979–2005
1980–2006
Year
Inde
x
Source: World Bank Africa Development Indicators, various
years.
Despite the positive trends in
commodity prices for Africa as
a whole, a significant number of
non‐resource‐rich countries experienced
terms‐of‐trade losses driven by
unfavorable changes in both oil
and import prices. These countries
include Benin, Burkina Faso, Cape Verde, Comoros, Eritrea, Ethiopia, The
Gambia, Kenya, Lesotho, Madagascar,
Mauritius, Niger, Senegal,
the Seychelles, and Togo. In most
cases, the additional negative shock
came from prices of staple
imports, such as wheat, rice,
and vegetable oils. Eritrea,
for example, had an estimated
negative terms‐of‐trade impact of
greater than
5 percent of GDP from higher food prices, while Lesotho, Mauritania, Senegal, and Togo had an estimated negative
terms‐of‐trade impact
in excess of 2 percent of GDP because of changes in food prices.
Policies and Institutions At the same
time that commodity prices were
rising, policies and
institutions were also improving
in Africa. The average CPIA score for Africa rose from 2.8 in 1995 to 3.2 in 2006. The number of African countries with CPIA scores equal to or greater than the threshold of 3.5 for international good performance also rose from 5 countries in 1997 to 17 in 2006.
The most striking improvement in
policy is observed
in macroeconomic management. The
average fiscal deficit as a
percentage of GDP in
African countries declined from
5.7 percent during the 1980s and
1990s to 2.9 percent
-
Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 13
during 2000–06.14 Fiscal policy
in oil‐exporting countries has also
improved. In contrast to
the unchecked spending in
the past, windfalls from oil
revenue are increasingly being saved. At the start of the current oil price shock, fiscal deficits were
reduced, and by 2004–06, the
overall fiscal surplus averaged about
8 percent for the group.
Inflation has declined dramatically since 1995
(figure 5). The regional average has been held below 10 percent since 2002.15 The number of countries able to keep inflation below 10 percent a year increased from 11–26 in the early 1990s
to about 31–35 since 2000, despite
the significant increase
in oil prices that started in 1999.
Figure 6 suggests a correlation
between better policy and
institutions,
as measured by the CPIA, and economic performance since 2000. The high growth rates
in oil‐ and resource‐rich countries
also suggest that the management
of mineral resources has improved and windfalls have not been wasted to the same extent
as in the past. Nineteen African
countries have entered the
Extractive Industries Transparency Initiative
(EITI), which has
the goal of verification and full publication of company and government revenues from oil, gas, and mining. Figure
5: Inflation Pattern of African Countries (number of countries by
inflation range)
21 20 20 20 18 2021 22
10
17
2528 30
32 3336
32 34 31 32 33
7 7 69 11 8 5 5
4
10
2
54 2
43 9 7 12 10 9
2 41
2 0 33
5
8
3 5
23 1
5 22 3
1 2 1
2 25
2 5 2 3
3
12
34
32
2
0 10 0
1 1 1
4 3 66 4 6 7
5 6 74 2
1 3
3 3 22 1 1 1
0
5
10
15
20
25
30
35
40
45
50
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
No.
of c
ount
ries
>50%
31~50%
21~30%
11~20%
-
14 John Page
Figure 6: Economic Performance of African Countries by Quality
of Policy, 2000–06
3.9
13.5
4.9
6.4
5.1
6.9
0
2
4
6
8
10
12
14
16
Growth (%) Inflation (%)
CPIA < 3.5
CPIA ≥ 3.5
CPIA ≥ 3.5, low incomeexcl. oil countries
Per
cent
Sources: AFRCE various years; World Bank various
years.
Explaining Good Times and Bad
Tables 6 and 7 summarize the results of efforts to understand what economic and institutional
variables are associated with growth
accelerations and decelerations. These
regressions represent a further
search for stylized facts about
acceleration and deceleration episodes.16
Table 6 shows the
conditional probabilities of a growth
acceleration or deceleration based
on OLS estimates. Table 7 shows
fixed‐effect logit models that give
the probability of a
growth acceleration or deceleration taking place at the country level.17
The first and most striking result of the econometric exercises is the extent to which
the results provide greater insight
into the determinants of
growth decelerations than growth accelerations. In both econometric models the fit of the model to the data and the precision of the estimated coefficients are higher in the case of growth declines. The number of variables showing statistically significant correlations with the probability of a growth decline is also larger.
16 No
causality is inferred from the
relationships, and no
attempt has been made to control
for endogeneity of some of the right‐hand‐side variables. 17
Random‐effects models, including dummies
for oil‐producing countries, and
landlocked and resource‐rich countries
returned statistically insignificant
results. Hausmann tests suggest
that fixed‐effects estimates are preferable to random effects.
-
Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 15
Tab
le 6
: Con
ditio
nal p
roba
bilit
y of
gro
wth
acc
eler
atio
n an
d de
cele
ratio
n at
the
aggr
egat
e le
vel
Varia
ble
Dep
ende
nt v
aria
ble:
fr
eque
ncy
of g
row
th
acce
lera
tion
per c
ount
ry
Dep
ende
nt v
aria
ble:
freq
uenc
y of
gro
wth
dec
eler
atio
n pe
r cou
ntry
M
odel
1
Mod
el 2
M
odel
3
Mod
el 4
M
odel
5
Mod
el 6
M
odel
7
Mod
el 8
M
odel
9
Mod
el 1
0 M
odel
11
Mod
el 1
2
Ln in
vest
men
t .1
10
(1.7
0)
.047
(.7
2)
−.
253
(−3.
23)
−.
233
(−1.
97)
Voi
ce (g
over
nanc
e in
dica
tor)
.056
(1
.87)
.061
(1
.98)
R
esou
rce
rich
coun
try
.082
(1
.77)
.0
82
(1.7
3)
Ln O
DA
per c
apita
−.
078
(−2.
17)
−.03
6 (−
.84)
Ln im
ports
−.
145
(−2.
40)
.020
(.21
)P
oliti
cal s
tabi
lity
(gov
erna
nce
indi
cato
r)
−.
068
(−2.
08)
Gov
ernm
ent
effe
ctiv
enne
ss
(gov
erna
nce
indi
cato
r)
−.12
7 (−
2.63
)
Rul
e of
law
(g
over
nanc
e in
dica
tor)
−.11
5 (−
2.60
)
C
ontro
l of c
orru
ptio
n (g
over
nanc
e in
dica
tor)
−.
132
(−2.
68)
R
2 .0
6 .0
8 .0
6 .1
6 .1
0 .1
9 .1
2 .0
9 .1
4 .1
4 .1
5 .2
1 N
45
44
45
44
45
45
45
44
44
44
44
44
Sou
rce:
Arb
ache
and
Pag
e (2
007)
. N
ote:
t-te
st in
par
enth
eses
.
-
16 John Page
Table 7: Predicting Growth Acceleration and Deceleration—Panel
Data Dep. variable: dummy of
growth acceleration Dep. variable: dummy of
growth deceleration Variable Odds ratio p-value Odds ratio
p-value
Savings 1.152 .000 .929 .000 Investment in fixed capital .956
.062 FDI net flow 1.146 .000 .811 .000 GDP deflator 1.010 .016
Consumption 1.051 .004 Government consumption .904 .000 Trade .980
.008 Minor conflict 1.744 .045 Major conflict .435 .064 LR (chi2)
127.6 .000 97.4 .000 N 825 647
Source: Arbache and Page (2007). Note: Fixed effect logit
regression.
Better macro economic management, higher
investment and savings, better
governance, and greater openness to trade appear to reduce the odds of a growth decline.
Higher investment, higher ODA per
capita, increased imports, and better
governance indicators are significantly
associated with fewer
growth decelerations in the OLS regressions. In the multinomial logit analysis increases in
savings, investment, FDI, and trade
reduce the probability of a
growth deceleration. Inflation and minor conflicts increase the odds of bad times. Better governance
indicators reduce the
likelihood of growth decelerations
in the OLS results. Avoiding conflict also helps to avoid bad economic times.
The picture is less
clear with respect to good
times. Higher savings
and investment are
less strongly associated with an
increased probability of growth accelerations, although FDI appears to play a positive role. Increases in savings, FDI,
and consumption increase the
probability of good times in
the
logit regressions, whereas higher government consumption and major conflicts reduce the
odds. Voice and resource endowment
raise the probability of
growth accelerations in
the OLS regressions.
Interestingly, better governance
indicators are not associated with more frequent accelerations.
Better Policies and Some Luck
Africa’s recent growth appears have had more to do with good policy—learning how
to avoid economic mistakes—than
to good luck—favorable movements
in the terms of
trade. There were clearly some
important policy and
institutional improvements that underpin
the fall in the frequency of
economic declines. While the
terms of trade have
improved on average, their
impact has been far from uniform,
and changes in the terms of
trade are not correlated
with increased probabilities of growth accelerations or declines.
Indeed, the
terms of trade were less favorable during growth acceleration episodes.
-
Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 17
These findings are consistent with other research. Hausmann, Pritchett, and Rodrik (2005) conclude that positive external shocks are strongly correlated only with short‐term economic expansions, not with sustained growth episodes. The IMF
(2007) finds
that most growth spells
in Africa during
the recent expansion are taking place during negative terms‐of‐trade shocks, and concludes that other factors have been more important in boosting growth. Raddatz (2008) finds that although external
shocks have become relatively more
important as sources of output
instability in Africa in
the past 15 years, output variability
in general
is declining. The relative increase is the result of a decline in the variance of internal shocks, including policy failures or conflicts.
IV. Is Growth Sustainable?
Avoiding the mistakes leading to
growth declines has made an
important contribution to Africa’s economic outlook, but sustaining growth for more than a decade will require
that
its economies achieve and maintain
levels of economic fundamentals—savings,
investment, and productivity growth—that
are
similar to well performing economies
in other regions. Table 8 compares key economic variables for Africa with those of other developing regions in 1995–2005. Savings and
investment rates were well below
those of other regions, and
private investment lagged badly. Both
private consumption and
government consumption were higher than
those of other regions. The
contrast in
savings, investment, and consumption with East and South Asia was particularly striking. Inflation, FDI, and trade are comparable to other regions. Table
8: Differences between Simple Sample Average by Regions, Weighted
Data, 1995–2005
Variable
Sub-Saharan Africa
East Asia & Pacific
Latin America
& Caribbean
Middle East & North Africa
South Asia
All Low & middle income
Per capita GDP growth 1.34 6.75 1.13 2.23 4.27 3.89 Savings (%
GDP) 17.47 38.45 21.04 23.85 22.39 26.01 Investments (% GDP) 17.69
32.77 19.17 22.49 22.88 23.65 Private sector investment (% GDP)
13.11 19.27 16.39 13.92 16.36 16.83 FDI net flow (% GDP) 2.60 3.22
3.24 1.16 0.79 2.73 Consumption (% GDP) 84.10 68.03 80.85 75.64
80.54 76.23 Trade (% GDP) 62.31 66.85 42.72 57.38 31.90 55.43
Exports (% GDP) 30.62 35.04 21.47 28.15 14.81 27.95 Imports (% GDP)
31.68 31.78 21.25 29.22 17.09 27.47 Terms of trade (2000=100)
101.89 90.89 101.50 NA 104.10 96.28 GDP deflator (%) 7.16 4.91 6.17
5.20 5.67 6.48 Government consumption (% GDP) 16.00 13.47 14.52
15.04 10.83 14.34 Source: Arbache and Page (2009). Note: The sample
averages refer to all years between 1995 and 2005.
-
18 John Page
Tabl
e 9:
Diff
eren
ces
of M
eans
of E
cono
mic
Fun
dam
enta
ls B
efor
e an
d A
fter 1
995
A
ll co
untr
ies
Non
-res
ourc
e ric
h R
esou
rce
rich
Varia
ble
1995
–200
5
1985
–94
t-tes
t 19
95–2
005
1985
–94
t-tes
t 19
95–2
005
1985
–94
t-tes
t
Sa
ving
s (%
GD
P)
12.0
5 10
.47
* 10
.88
10.8
14.8
5 9.
68
* In
vest
men
ts (%
GD
P)
20.2
6 19
.4
18
.93
18.7
8
23.4
20
.92
**
Priv
ate
sect
or in
vest
men
t (%
GD
P)
12.5
1 11
.46
**
11.2
3 10
.6
15
.43
13.4
7
Fore
ign
dire
ct in
vest
men
ts n
et fl
ow (%
GD
P)
4.95
1.
50
* 3.
63
1.41
*
8.23
1.
75
* C
onsu
mpt
ion
(% G
DP)
91
.12
92.0
9
95.8
5 95
.24
79
.9
84.1
5 *
Trad
e (%
GD
P)
76.5
8 68
.43
* 72
.73
66.1
1 *
85.7
7 74
.1
* E
xpor
ts (%
GD
P)
32.2
7 28
.06
* 28
.86
25.6
7 *
40.3
2 33
.92
* Im
ports
(% G
DP
) 44
.27
40.3
6 *
43.8
6 40
.44
* 45
.25
40.1
8 *
Sou
rce:
Arb
ache
and
Pag
e (2
008a
). N
otes
: (*
) t-te
st th
at m
eans
are
not
equ
al s
igni
fican
t at t
he 5
% le
vel.
(**)
t-te
st th
at m
eans
are
not
equ
al s
igni
fican
t at t
he 1
0% le
vel.
-
Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 19
Table 9 compares economic fundamentals during 1995–2005 with 1985–94.18 For Africa
as a whole savings were higher
than in the previous decade,
but aggregate investment did not
change significantly. Savings and
investment in resource–rich countries
showed substantial increases (by
about 5 percent of GDP)
in 1995–2005, but savings and
investment were not significantly different in the two periods for non‐resource‐rich economies. Private investment and FDI went up. Overall there was a small increase of about one percent of GDP in the private
investment rate. Resource‐rich countries
had higher rates of
private investment than resource poor
countries, both before and after
1995.
FDI increased threefold in the period 1995–2005, to 5 percent from 1.5 percent in the previous decade. Most of this increase was due to a sharp rise in FDI in resource rich
economies to 8.2 percent of GDP
from 1.8 percent, reflecting the
fact
that most FDI flows to Africa are concentrated in the mineral sectors.
Investment rates for top
performers in Africa are still
below those of
the high‐performing Asian countries
(table 10). Although Ghana and Mozambique, are on par with India, none of the better performing countries in Africa invest a share
of their GDP equal to China
or Vietnam. The aggregate efficiency
of investment among top performers in Africa, as reflected by incremental capital‐output ratios, is equal to that found in many Asian countries. Incremental capital output ratios
(ICORs) in Africa, however, are
less stable and are easily affected by output variation caused by drought (Rwanda in 2003), flood (Mozambique in 2000), or other factors. Table
10: GDP Growth, Investment Rates, and ICOR (select countries in
Asia and Africa, 2000–06)
GDP growth Investment rate ICOR Top Asian performers China 9.5
39.7 4.2 Cambodia 9.2 19.0 2.2 Vietnam 7.5 33.4 4.5 India 6.9 27.8
4.7 Lao PDR 6.4 25.1 4.0
Top African performers (excluding middle-income, oil- and
resource-intensive countries) Mozambique 7.6 26.4 3.1 (5.1*)
Tanzania 6.3 20.2 3.3 Ethiopia 6.2 18.4 3.0 Burkina Faso 6.1 18.5
3.3 Uganda 5.6 20.7 3.8 Rwanda 5.5 19.4 3.7 (5.8*) Ghana 5.0 25.7
5.2 Source: World Bank WDI and authors’ estimates.
18
So that the subsets’ sample
sizes are consistent, oil‐exporting
countries are not
accessed separately.
-
20 John Page
The improvement in the volume
and productivity of investment
among Africa’s top performers has
not translated into a generalized
increase
in investment rates or capital productivity. Physical capital per worker has grown less than 0.5 percent a year, half the world average. The overall ICOR is still high at
5.5, and a major source of
Africa’s disappointing growth, low
total factor productivity
(TFP), has not
improved. TFP growth has been negative
since the 1960s. It averaged
−0.4 percent between 1990 and 2003
(Bosworth and Collins, 2003).19
V. Toward a Strategy for Sustained Growth.
Growth has been higher, more
likely, and more widespread
since 1995. It was spurred by
better commodity prices and better
policy, but there is no
strong evidence that it was accompanied by higher accumulation of human or physical capital, and higher productivity. Avoiding economic
collapses will continue
to depend on good policy,
leadership, and aid, but
the growth bonus that Africa can
realize by further reducing the
frequency of economic declines
has diminished substantially. To sustain and accelerate growth the region will have to tackle several constraints to greater productivity and investment.
Africa is highly diverse, and
any attempt to offer a
strategic approach
to growth for the region as a whole runs the risk of excessive simplification. South Africa
for example dominates the regional
economy of Sub‐Saharan Africa.
Its output is 35 percent of
the total regional GDP. But, most
studies of regional economic prospects
for Africa—including this one—tend to
exclude or marginalize South Africa.
In many ways this is
appropriate: South
Africa’s economic structure
is more closely aligned
to middle‐income countries
in other regions than to
the economies of its smaller
regional neighbors, and it
is more integrated into the global
than the regional economy. For
these reasons
South Africa’s problems and prospects differ
fundamentally from those of the
rest of Africa. As the region’s
leading economy, however, its success
or failure will strongly influence
both economic thinking and
performance in Africa. Box
1 addresses what is, perhaps, the most pressing problem faced by South Africa, the task of job creation.
For the remaining countries in the region the empirical findings of this paper and the experience of a number of successfully growing economies suggest four major
themes that are relevant to
achieving a sustained economic
expansion. These are: using natural
resource rents well,
creating an export push, building the African private sector, and investing in skills.
19 Devarajan, Easterly, and Pack (2003) make the argument that the low and volatile productivity of capital constrains growth in Africa more than the region’s low investment rate.
-
Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 21
Box 1: South Africa: It’s Jobs... Since independence in 1995
economic performance in South Africa has been a modest success.
Early fears of massive capital flight were not realized,
macroeconomic management has been sound, and the economy grew at
3.5 percent per year between 1995 and 2006. At the same time,
however, South Africa had one of the highest rates of unemployment
in the world. Unemployment rose from about 15–30 percent of the
labor force in 1995 to 30–40 percent in 2003, depending on the
definition used (Kingdon and Knight, 2007). Lack of employment
opportunities has contributed to poverty and crime, raising the
specter of a vicious circle in which increasing social insecurity
reduces business confidence and investment, leading to slower
economic growth and lower job creation. Developments in the labor
market may well hold the key to South Africa’s long-term economic
success.
In the simplest terms job creation since 1995 has failed to keep
pace with very rapid growth in the labor force. Between 1995 and
2003 the labor force grew at 4.2–4.8 percent per year (depending on
the definition used)—an extremely rapid rate internationally—while
wage employment grew at only 1.8 percent. The result was an
increase in unemployment of more than 9 percent per year (Kingdon
and Knight, 2007). Ironically, the rapid growth of the labor force
to a large degree reflected the new opportunities offered to
majority South Africans following independence: growth of labor
force participation by African men and women led the growth of the
labor force.
The behavior of the demand side of the labor market in the face
of this rapid increase in labor supply reveals the sharp dualism
that characterizes South Africa’s labor market. Real earnings in
the formal, unionized sector of the economy remained largely
unchanged while earnings in small enterprises, informal employment,
and self-employment declined. In the absence of downward adjustment
in real wages the full burden of job creation in the formal sector
fell on growth of output and hence labor demand. Economic growth
was simply not sufficient to generate robust job growth in the
formal economy. In the informal sector, despite downward pressure
on real wages and earnings, barriers to entry—arising for example
from access to credit, crime, access to infrastructure, and the
risk of “formalization”—appear to have restricted the formation and
growth of dynamic small and micro enterprises.
The policy solutions to the employment problem in South Africa
need to recognize the interconnected roles of economic growth and
regulatory reform. South Africa’s labor market dualism arises from
its regulatory regime: wage and employment regulations restrict
flexibility in the formal sector. Most econometric evidence,
however, suggests that complete deregulation of the labor market in
the absence of more robust, sustained growth would not be
sufficient to absorb all of the unemployed into the formal sector
(Fields et al., 1999). On the other hand labor market regulation—in
particular the “extension provision” that requires collective
bargaining agreements to be extended to all firms in an industry,
regardless of size—is very likely one of the factors inhibiting
investment and growth, especially in small enterprises that
globally provide the bulk of employment in middle- and high-income
countries (World Bank, 2007c). Thus policy makers need to work on
two fronts: identifying and implementing policies to grow the
economy and pursuing regulatory reforms to reduce the degree of
dualism in the labor market.
Using Natural Resource Rents Well
Resource‐based rents (the excess of revenues over all costs) are widespread and growing due
to new discoveries and
favorable prices. Between 2000 and 2010, more
than $200 billion in oil
revenue will accrue to African
governments, dwarfing the levels of official development assistance to the region.
Africa’s resource‐rich economies will
have the ability to finance
their development needs substantially from their own resources. But, if the economic history
of resource‐rich, poor countries—especially
in Africa—is any
guide, rather than bringing prosperity, oil and other minerals may drive new producers
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22 John Page
into what Paul Collier in
his influential book The Bottom
Billion terms
the “Natural Resources Trap.” Collier and Goderis
(2007) find that while
favorable commodity price movements account for short‐run increases in GDP, commodity booms
have long‐run negative effects on
the rate of growth of
low‐income, resource‐rich economies. African
countries dependent on oil, gas,
and mining have weaker political institutions, higher rates of poverty, and higher inequality than
non‐mineral‐dependent economies at similar
levels of income.
Africa’s mineral‐dependent economies also
tend to do worse with respect
to
social indicators than non‐mineral countries at the same income level; they have higher poverty
rates, greater income inequality,
less spending on health care,
higher prevalence of child malnutrition, and lower literacy and school enrollments.
But geology is not destiny.
Natural resource wealth can be
an effective driver of growth
and poverty reduction. Chile, which
has been the
fastest‐growing Latin American country for the past 15 years, has relied almost entirely on exports of natural resource products, accompanied by openness to trade and FDI
to boost
its growth. Botswana has been among
the world’s
fastest‐growing economies for the last 30 years. Indonesia and Malaysia have used their natural resource wealth to diversify and grow their economies, and equally importantly, to
allow the poor to participate
in and benefit from that
growth.
Indonesia successfully pursued a 25‐year policy of using a share of its petroleum revenues to
increase the productivity of
smallholder agriculture, through
targeted fertilizer subsidies and
massive investments in rural
infrastructure (roads, irrigation, market
infrastructure, and water systems).
Labor‐intensive public works made
jobs available to unskilled workers willing to work at
local market wages. Malaysia used
its natural wealth to upgrade
infrastructure,
improve education, and diversify the economy.
The symptoms of the natural resources trap are reasonably common across countries:
weak public institutions, corruption,
boom‐to‐bust macroeconomic management,
stagnant long‐run economic growth,
and inefficient
public expenditures. Its causes are complex and not easily diagnosed or remedied at the country
level. The large literature on
the political economy of natural resources exporters
in Africa agrees that that
politics and
institutions matter.20 Natural resource
revenues accrue primarily to the
state, and public sector
decision making directly
influences their allocation. In Africa political, social, and ethnic factors combine in many resource‐rich countries to encourage clientelism in fiscal policies
and to undermine the effectiveness
of institutions designed to
limit discretionary behavior in public
financial management. Politicians—democratic or autocratic—much of the literature argues, simply find it easier to compete for
20 Commodity windfalls have been associated with the prevalence of conflict (Collier and Hoffler 2005) and rent‐seeking behavior. (Bates 1983; Sklar 1991) According to the prevailing wisdom, the concentration
of fiscal resources also tends
to encourage excessive, imprudent
investment
and corruption. (Gelb 1988; Auty 1998; Eifert, Gelb, and Tallroth 2003).
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 23
power on the basis of
patronage than to promote growth
and deliver public services.
But some countries
in Africa—notably Botswana—have dealt
successfully with these pressures. The key to their success appears in large measure to be the creation
and maintenance of checks and
balances that limit the ability
of politicians (and governments) to
buy support through the distribution
of resource rents. A common
theme in successful resource‐rich
economies—whether democratic or autocratic—is
that political
leaders are held accountable for
and derive their legitimacy
from delivering economic and social
outcomes valued by their societies.
How might Africa’s commodity
exporters strengthen accountability in
the use of their prospective
revenues? One way might be to
attempt to forge a national
consensus—crossing ethnic,
regional, and political boundaries—to use oil revenues to underpin a “shared growth” strategy, similar to those pursued by the
first‐generation high‐performing Asian
economies—Hong Kong, China; Indonesia;
the Republic of Korea; Malaysia;
Singapore; Taiwan, China;
and Thailand.21 These strategies had
two common elements: fostering growth
by encouraging high savings, long‐term investments, and continuous improvements in
organization, technology, and management,
and investing in highly
visible wealth‐sharing mechanisms, such
as universal primary education,
rural development, and basic health care. Unlike populist redistribution schemes, such as food or fuel subsidies or public employment in nonproductive activities, these strategies
were designed to increase people’s
capacity to participate in
and benefit from the process of
economic change. They were
broad‐based investments with visible
outcomes that could be monitored,
and Asian politicians—even in the
resource‐rich economies—were held
accountable by their societies
for results. With
the basic vision of development broadly shared, political competition centered on who was best able to deliver.
In moving from vision to implementation, the experience of other resource‐rich
countries suggests that the elements
of a successful strategy
for mineral revenue management include the following:
Getting a fair price for the resource. Contracts for Africa’s natural resources in
the past have too frequently
provided too few rents and
too many risks to host governments. Auctions have been infrequently used, yet in the
presence of genuine competition, they
offer an efficient means
to allocate rents
fairly between host governments and
extractive industry investors.
Being transparent in accounting
for revenues. Accountability
needs transparency, but many African
mineral producers continue to
keep revenues from public
scrutiny. The Extractive
Industries Transparency
21 The term is due to World Bank (1993). A fuller exposition of the concept is provided in Campos and Root (1996).
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24 John Page
Initiative (EITI) has begun to
make inroads in Africa, but
only
six mineral‐rich countries have actually published EITI reports.
Saving in good times
to anticipate bad
times. This can be accomplished by the
consistent application of fiscal
rules or by the creation of
various stabilization mechanisms, but neither practice is widespread in Africa.
Strengthening public financial management
and accountability. Building
the capacity of public expenditure
systems to identify, prioritize,
and evaluate expenditures is
essential. One of the keys to
Botswana’s and Chile’s successful use
of natural resources has been
the application
of systematic cost benefit analysis to development projects.
Monitoring and evaluating outcomes and reporting on results. In addition to ex
ante evaluations of public
expenditures ex post monitoring
and evaluation need to take
place, and the results need to
be publicly disclosed.
Creating an Export Push For economies without
substantial natural resources rapid
growth and diversification of
nontraditional exports offers two
important ways to
boost growth through greater integration into the global economy. The first channel is simply via an enlarged market, which permits more rapid growth
in exporting firms and sectors, and in some cases, the realization of economies of scale.
The second, and more controversial
channel, is through “learning
by exporting.” There is a large body of empirical literature that indicates that firms engaged in export production have higher levels of total factor productivity than those producing exclusively
for
the domestic market. This empirical
regularity holds for the few African economies for which sufficient microeconomic data are available
to permit rigorous statistical
analysis. Soderbom and Teal
(2003), Milner and Tandrayen (2004),
and Mengistae and Pattillo (2004),
using panel data for manufacturing
firms in three countries
(Ethiopia, Ghana, and Kenya) find
significantly higher levels of
productivity in exporting firms,
relative to firms selling only
domestically. If the higher
productivity levels of
exporting firms are the result of their export activities—as might be the case for example in supplier–buyer
relationships that involve the
transfer of tacit technological
or production knowledge—increasing the
share of exports in GDP will
generate higher levels of economy wide total factor productivity and more rapid growth.
The alternative explanation for the higher productivity of exporting firms is self‐selection. More
efficient firms are able to
export while those with
lower productivity confine themselves
to the local market. Both
hypotheses are plausible, and indeed,
need not be independent of each
other. More
efficient firms can more easily access international markets, but they may still learn from exporting.
The most recent econometric evidence
available suggests that
the learning by exporting hypothesis is defensible and, indeed, was a major factor in the
success of East (and now South)
Asia’s rapidly growing economies.
The
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Africa’s Growth Turnaround: From Fewer Mistakes to Sustained
Growth 25
literature also suggests however that learning by exporting is more likely to take place
in smaller economies and in
new, modern manufacturing and
service exports, rather than in traditional, commodity exports. Given this evidence, a key strategic
initiative to raise productivity in
Africa ought to be to push
the development of nontraditional
exports, including both manufacturing
and modern services.
Compared to Latin America,
the Middle East and North Africa, and South Asia, Africa has always had a relatively high share of trade in its national income and a high ratio of exports to GDP. However, African exports, particularly nonoil exports, are growing slowly (figure 7), and in sharp contrast to the case of China and Asia’s other
top‐performing countries,
exports are not growing as a
share region’s output. Of perhaps
even greater concern, they are
declining
in importance for Africa’s fastest‐growing economies. Africa’s share of world trade is
falling, and its exports remain
heavily concentrated in a few
traditional commodities (figure 8).
To generate new dynamism in nontraditional exports Africa will need to put together
an “export push” strategy, similar
to those undertaken by East
and more recently South Asian
economies. These strategies are
characterized by coordinated pro‐export
commercial and exchange
rate policies, effective export promotion
institutions, and efficient trade‐related
infrastructure. While Africa has made
some progress in each of these
areas, it has not made
sufficient progress in all three to create an environment conducive to the rapid growth of nontraditional exports. Figure
7: Non-Oil Exports as Percent of GDP (SSA versus other regions)
0
5
10
15
20
25
30
35
40
45
50
East Asia andPacific
Eastern Europeand Former
Soviet Union
Latin America& Caribbean
Middle Eastand North
Africa
South Asia Sub-SaharanAfrica
Non
oil e
xpor
ts a
s sh
are
of G
DP
(per
cent
) 1983–85 1993–95 2003–05
Region Source: World Bank various years. Note: Expo