57753 W O R K IN G PAP E R N O .54 Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth John Page WORKING PAPER NO. 54 Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth John Page © 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: 2024731000 Internet: www.worldbank.org www.growthcommission.org Email: info@worldbank.org contactinfo@growthcommission.org 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: 2025222422; email: pubrights@worldbank.org. Cover design: Naylor Design 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 2007­08 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. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth iii 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. iv John Page Abstract After stagnating for much of its postcolonial history, economic performance in SubSaharan 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 longrun 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. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth v Contents About the Series ............................................................................................................. iii Acknowledgments ..........................................................................................................iv Abstract .............................................................................................................................v I. Introduction...................................................................................................................1 II. Africa's Growth 1975­2005 ........................................................................................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 Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth vii 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 SubSaharan 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 mid1990s. The number of countries in economic decline has fallen from 15­18 in the early 1990s to 2­5 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 fastgrowing 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 longrun growth from 1975 to 2005 and addresses two questions: what characterizes the pattern of longrun 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 crosscountry 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. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 1 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 mediumterm deviations from its longrun 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 longrun record of slow and volatile growth reflects a pattern of offsetting accelerations and declines, rather than random variations of growth rates around the longrun trend. From this perspective much of the improvement in economic performance in Africa post1995 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 2 John Page 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 1975­2005 This section presents a perspective on longrun growth in Africa based on a series of studies conducted by Arbache and Page (2007, 2008, 2009). We use the most recent timeseries 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 1995­2005. The per capita growth rate rose from -0.23 percent in 1985­94 to 1.88 percent during 1995­2005. Statistical analysis suggests that a structural break occurred in the time series of per capita income growth as growth picked up in the mid1990s.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 1975­94 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 longterm 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 SubSaharan 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). Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 3 Table 1: Per Capita Income, Mean Growth, and Variation for Different Periods in Africa Growth rate Standard Coefficient Period Mean deviation of variation GDP per capita 1975­2005 0.70 6.27 8.96 2,299 1975­84 0.13 6.92 53.23 2,180 1985­94 -0.23 5.87 -25.52 2,183 1995­2005 1.88 5.99 3.19 2,486 1975­94 -0.07 6.33 -90.43 2,182 (1995­2005) minus (1985­94) 2.11 0.12 28.71 303 (1995­2005) minus (1975­94) 1.95 -0.34 93.61 304 Source: Arbache and Page (2007). Figure 1: Per Capita Income 8 4 0 8 ­4 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 2,800 2,400 100 2,000 0 ­100 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. 4 John Page 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 longrun economic performance. In Africa's volatile, lowgrowth 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 fouryear moving average growth rate minus the backward fouryear moving average growth rate exceeds 0;6 Condition 2--The forward fouryear 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 fouryear moving average GDP per capita exceeds the backward fouryear 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 threeyear moving average growth rate is less than zero (Condition 1); the forward threeyear moving average growth rate is below the country's average growth rate (Condition 2); and the forward threeyear moving average GDP per capita is below the backward threeyear moving average (Condition 3). A growth acceleration or deceleration episode is defined to include the three years following the last year that satisfies conditions 1­3.7 Condition 2 makes our definition of a growth acceleration or deceleration endogenous to each country's longrun rate of growth. There is clearly a risk that by identifying a period of modest, sustained growth in a lowgrowth 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, t1, t2, t3) 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. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 5 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 countryyear 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 long­run pattern of growth. Growth declines dominated the period 1975­1994: between 1975 and 1994 growth decelerations were more than twice as frequent as accelerations. In contrast 42 percent of the 494 country­year observations for 1995­2005 were growth accelerations and only 12 percent were growth decelerations. Since 1995 longstagnant economies, such as the Central African Republic, Ethiopia, Mali, Mozambique, Sierra Leone, and Tanzania, have shown sustained growth, relative to their longrun trend. Table 2: Likelihood and Growth Rates of Economic Acceleration and Deceleration in Africa, 1975­2005 Ctry years Ctry years Ctry years All ctry years with growth with growth with trend in the period acceleration deceleration growth Obs Freq Freq Frequency (country- Growth (of ctry Growth (of ctry- Growth (of ctry- Period years) rate years) rate years) rate years) 1995­2005 (after trend break) 494 1.88 0.42 3.76 0.12 ­1.29 0.46 1975­94 (before trend break) 749 ­0.07 0.14 3.39 0.29 ­3.14 0.57 1985­94 433 ­0.23 0.21 3.21 0.36 ­3.18 0.43 1975­84 316 0.13 0.04 4.61 0.18 ­3.06 0.78 1975­2005 (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, longrun 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. 6 John Page 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 longterm per capita income growth. Four of the seven had longrun 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 10year 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 Frequency Frequency Country (country- Above/below all (country- Above/below all category years) countries' mean years) 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). Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 7 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 resourcerich 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 longrun growth rate, these results suggest that major conflict countries were trapped in a lowlevel 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). 8 John Page 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 Correlation Correlation or trend growth Mean Coefficient Mean 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). Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 9 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, 1995­2005 versus 1975­2005 Growth acceleration Growth deceleration Likelihood Likelihood Likelihood Likelihood Country category 1975­2005 1995­2005 1975­2005 1995­2005 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. 10 John Page 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 resourcerich 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 8­10 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 oilimporting countries, such as Burundi, Ghana, Guinea, Mali, Mozambique, Rwanda, Uganda, Zambia, and Zimbabwe. Overall, compared with the previous major oil price cycle during 1973­80, the aggregate terms of trade for SubSaharan African countries have behaved much more favorably (figure 4).13 Figure 3: Commodity and Oil Prices (price indices, 2000=100) 350 300 Metals and minerals 250 Index 200 Oil 150 Agriculture 100 50 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Source: World Bank various years. The recovery of terms of trade in nonoilexporting developing countries since the late 1990s is, 13 however, still below the peaks of the early 1980s. Data are from the World Bank's World Development Indicators. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 11 Figure 4: Terms of Trade Index in SSA 1973­80 and 1999­2006 (1973, 1999 = 100) 160 140 1999­2006 120 Index 100 1973­1980 80 60 1974­ 1975­ 1976­ 1977­ 1978­ 1979­ 1980­ 2000 2001 2002 2003 2004 2005 2006 Year Source: World Bank Africa Development Indicators, various years. Despite the positive trends in commodity prices for Africa as a whole, a significant number of nonresourcerich countries experienced termsoftrade 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 termsoftrade impact of greater than 5 percent of GDP from higher food prices, while Lesotho, Mauritania, Senegal, and Togo had an estimated negative termsoftrade 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 12 John Page during 2000­06.14 Fiscal policy in oilexporting 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 2004­06, 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 11­26 in the early 1990s to about 31­35 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 resourcerich 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) 50 45 2 2 0 1 1 1 1 1 3 3 0 1 2 1 0 2 3 1 1 40 2 1 5 2 4 2 3 5 6 3 7 12 10 9 6 4 6 7 3 2 9 >50% 35 4 3 6 7 4 2 3 1 4 3 No. of countries 2 2 2 5 2 3 4 2 30 2 4 5 2 0 3 3 5 5 5 3 12 3 31~50% 1 2 25 7 9 8 5 7 6 11 5 10 20 21~30% 8 36 33 34 33 32 32 32 15 28 30 31 4 25 11~20% 22 10 21 20 20 20 18 20 21 17 5 10 <=10% 0 19 6 19 7 19 8 19 9 19 0 19 1 92 19 3 19 4 19 5 19 6 19 7 19 8 20 9 20 0 20 1 20 2 20 3 20 4 20 5 06 8 8 8 8 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 19 19 Year Sources: AFRCE various years; World Bank various years. 14 Lowincome countries in Africa are generally constrained from borrowing in international capital markets. As a result, the current account balance is not a good indicator of macroeconomic management. Imports in these countries tend to adjust to export revenues and aid inflows. 15 Excluding the hyperinflation in Angola and Zimbabwe. In Angola's case, inflation fell over 300 percent in 2000 to about 13 percent in 2006. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 13 Figure 6: Economic Performance of African Countries by Quality of Policy, 2000­06 16 13.5 14 CPIA < 3.5 12 CPIA 3.5 10 CPIA 3.5, low income excl. oil countries Percent 8 6.9 6.4 6 4.9 5.1 3.9 4 2 0 Growth (%) Inflation (%) 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 fixedeffect 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 righthandside variables. 17 Randomeffects models, including dummies for oilproducing countries, and landlocked and resourcerich countries returned statistically insignificant results. Hausmann tests suggest that fixedeffects estimates are preferable to random effects. 14 John Page Table 6: Conditional probability of growth acceleration and deceleration at the aggregate level Dependent variable: Variable frequency of growth Dependent variable: frequency of growth deceleration per country acceleration per country Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8 Model 9 Model 10 Model 11 Model 12 .110 .047 -.253 -.233 Ln investment (1.70) (.72) (-3.23) (-1.97) Voice (governance .056 .061 indicator) (1.87) (1.98) Resource rich .082 .082 country (1.77) (1.73) -.078 -.036 Ln ODA per capita (-2.17) (-.84) -.145 Ln imports (-2.40) .020 (.21) Political stability (governance -.068 indicator) (-2.08) Government effectivenness (governance -.127 indicator) (-2.63) Rule of law (governance -.115 indicator) (-2.60) Control of corruption (governance -.132 Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth indicator) (-2.68) R2 .06 .08 .06 .16 .10 .19 .12 .09 .14 .14 .15 .21 N 45 44 45 44 45 45 45 44 44 44 44 44 Source: Arbache and Page (2007). Note: t-test in parentheses. 15 Table 7: Predicting Growth Acceleration and Deceleration--Panel Data Dep. variable: dummy of Dep. variable: dummy of Variable growth acceleration growth deceleration 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. 16 John Page These findings are consistent with other research. Hausmann, Pritchett, and Rodrik (2005) conclude that positive external shocks are strongly correlated only with shortterm 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 termsoftrade 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 1995­2005. 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, 1995­2005 Latin Middle All Sub- East America East & Low & Saharan Asia & & North South middle Variable Africa Pacific Caribbean Africa Asia 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. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 17 18 Table 9: Differences of Means of Economic Fundamentals Before and After 1995 All countries Non-resource rich Resource rich Variable 1995­2005 1985­94 t-test 1995­2005 1985­94 t-test 1995­2005 1985­94 t-test Savings (% GDP) 12.05 10.47 * 10.88 10.8 14.85 9.68 * Investments (% GDP) 20.26 19.4 18.93 18.78 23.4 20.92 ** Private sector investment (% GDP) 12.51 11.46 ** 11.23 10.6 15.43 13.47 Foreign direct investments net flow (% GDP) 4.95 1.50 * 3.63 1.41 * 8.23 1.75 * Consumption (% GDP) 91.12 92.09 95.85 95.24 79.9 84.15 * Trade (% GDP) 76.58 68.43 * 72.73 66.11 * 85.77 74.1 * Exports (% GDP) 32.27 28.06 * 28.86 25.67 * 40.32 33.92 * Imports (% GDP) 44.27 40.36 * 43.86 40.44 * 45.25 40.18 * Source: Arbache and Page (2008a). Notes: (*) t-test that means are not equal significant at the 5% level. (**) t-test that means are not equal significant at the 10% level. John Page Table 9 compares economic fundamentals during 1995­2005 with 1985­94.18 For Africa as a whole savings were higher than in the previous decade, but aggregate investment did not change significantly. Savings and investment in resource­rich countries showed substantial increases (by about 5 percent of GDP) in 1995­2005, but savings and investment were not significantly different in the two periods for nonresourcerich economies. Private investment and FDI went up. Overall there was a small increase of about one percent of GDP in the private investment rate. Resourcerich countries had higher rates of private investment than resource poor countries, both before and after 1995. FDI increased threefold in the period 1995­2005, 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 highperforming 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, 2000­06) 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. So that the subsets' sample sizes are consistent, oilexporting countries are not accessed 18 separately. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 19 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 SubSaharan 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 middleincome 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. Devarajan, Easterly, and Pack (2003) make the argument that the low and volatile productivity of 19 capital constrains growth in Africa more than the region's low investment rate. 20 John Page 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 15­30 percent of the labor force in 1995 to 30­40 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 4.2­4.8 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 Resourcebased 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 resourcerich economies will have the ability to finance their development needs substantially from their own resources. But, if the economic history of resourcerich, poor countries--especially in Africa--is any guide, rather than bringing prosperity, oil and other minerals may drive new producers Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 21 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 shortrun increases in GDP, commodity booms have longrun negative effects on the rate of growth of lowincome, resourcerich economies. African countries dependent on oil, gas, and mining have weaker political institutions, higher rates of poverty, and higher inequality than nonmineraldependent economies at similar levels of income. Africa's mineraldependent economies also tend to do worse with respect to social indicators than nonmineral 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 fastestgrowing 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 25year 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). Laborintensive 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, boomtobust macroeconomic management, stagnant longrun 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 resourcerich 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 Commodity windfalls have been associated with the prevalence of conflict (Collier and Hoffler 20 2005) and rentseeking 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). 22 John Page 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 resourcerich 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 firstgeneration highperforming 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, longterm investments, and continuous improvements in organization, technology, and management, and investing in highly visible wealthsharing 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 broadbased investments with visible outcomes that could be monitored, and Asian politicians--even in the resourcerich 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 The term is due to World Bank (1993). A fuller exposition of the concept is provided in Campos 21 and Root (1996). Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 23 Initiative (EITI) has begun to make inroads in Africa, but only six mineralrich 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 supplier­buyer 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 selfselection. 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 24 John Page 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 topperforming countries, exports are not growing as a share region's output. Of perhaps even greater concern, they are declining in importance for Africa's fastestgrowing 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 proexport commercial and exchange rate policies, effective export promotion institutions, and efficient traderelated 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) 50 1983­85 1993­95 2003­05 Nonoil exports as share of GDP (percent) 45 40 35 30 25 20 15 10 5 0 East Asia and Eastern Europe Latin America Middle East South Asia Sub-Saharan Pacific and Former & Caribbean and North Africa Soviet Union Africa Region Source: World Bank various years. Note: Export shares are unweighted averages. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 25 Figure 8: Concentration and Diversification of Export, 2000­04 Average (SSA versus other regions) 90 180 80 160 70 140 60 120 50 100 40 80 30 60 20 40 10 20 0 0 Europe and East Asia South Asia Latin America Middle East and Sub-Saharian Central Asia and Pacific and Caribbean North Africa Africa Export Concentration Index (0-100) Share of Top 5 Products in Total Exports (%) No. of Exported Product Categories left axis left axis right axis Source: World Bank various years. At the border policy reforms are the most advanced. Trade reforms have brought tariffs down in Africa, and its trade regimes discriminate against exports to about the same degree as those of other regions worldwide. While there remains scope for further rationalization and liberalization of tariffs, it is unlikely that Africa's lack of export dynamism derives from antiexport bias in the trade regime. Countries with flexible exchange regimes now account for about 76 percent of Africa's GDP and 68 percent of the region's population. In recent years, and during the current oil price shock, countries with flexible exchange rates have tended to grow faster than the regional average and faster than countries with fixed exchange rates (table A.2). In franc zone countries on the other hand, a strong currency tied to the euro is generating concerns regarding real exchange rate appreciation and its impact on exports. Africa has two important "exogenous" sources of income that make it more difficult for its economies to export: rents from natural resources and aid. These income flows increase the prices of nontradable goods relative to internationally traded goods, resulting in an appreciation of the real exchange rate. Real exchange rate appreciation reduces the potential profitability of activities that produce tradable goods: this is the "Dutch disease." Why the Dutch disease represents a threat to future growth and some policy approaches to its management are discussed in box 2. 26 John Page Box 2: Dutch Disease and Long-Run Growth: What You Make and Where You Make It Matters To understand why Dutch disease matters for long-run growth it is important to understand two "stylized facts" from the recent literature on industrial development. The first is that what an economy makes matters: diversity and increasing sophistication in manufacturing production and exports spur long-run growth (Imbs and Wacziarg, 2003; Carrere, Strauss-Kahn, and Cadot, 2007; Hausman, Hwang, and Rodrik, 2007; UNIDO, 2009). The second is that where you make industrial products matters: agglomerations or industrial clusters confer powerful competitive advantages on existing industrial locations and make it difficult for newcomers to break into global markets. Manufacturing is the quintessential exportable. Manufactured export growth has out stripped production for the last decade (UNIDO, 2009). Exchange rate appreciation puts the economy at risk of having too few industrial activities. New investments in more diverse or sophisticated products are discouraged by exchange rate appreciation, and the higher costs of new industrial locations cannot be offset by the exchange rate. Policy responses to the Dutch disease fall essentially in two domains: macroeconomic policies to reduce the excess demand for nontradables and structural policies to enhance the productivity of exporters. The basic macroeconomic choice governments face is whether and how much of the inflow to save. A recent paper from the IMF (Berg et al., 2007) found that in five African countries the amount of saving ranged from one third of the aid flow in Mozambique to 100 percent in Ghana. In the cases where inflows were not spent they were used to increase reserves, to hedge against future volatility, and to manage the appreciation of the exchange rate. The problem with saving aid, however, is that donors may provide less in the future. Resource-rich economies face fewer external constraints, but they do face pressure from their societies to spend resource windfalls. Recent work finds that because economic agents react to uncertainty by increasing current expenditure out of a windfall, the impact of an increase in aid (or resource revenues) on the real exchange rate depends fundamentally on the predictability of the inflow--the more predictable the inflow, the less the degree of appreciation (Deverajan et al., 2008). Thus, donor behavior has an important role to play in mitigating the effect of Dutch disease. In the case of natural resource revenue management savings rules should emphasize transparency and expenditure smoothing. Beyond macro policy two instruments of structural policy will largely determine the ability to adapt: institutional reforms and the public investment program. Improving the investment climate-- including reducing the costs associated with bureaucracy, corruption, risk, and essential business services--is one means of raising firm-level productivity. Overall, the cost of doing business in Africa is 20­40 percent above that for other developing regions. Public investments in trade related infrastructure--through for example export processing zones--can lower the costs of producing manufactured exports. Africa also faces a growing skills gap with its international competitors. Complementary investments in skills and knowledge offer prospects for improved competitiveness. Behind the border Africa does not compare well with its international rivals. Firmlevel studies of productivity (Eifert, Gelb, and Ramachandran, 2005) highlight indirect costs as one of the barriers to greater export competitiveness. Their results indicate that efficient African enterprises can compete with Chinese and Indian firms in factory floor costs for some product lines, such as garments. They become less competitive in the global market because of higher indirect business costs, including infrastructure (figures 9 and 10). In China, indirect costs are about 8 percent of total costs, but in African countries they are 18­35 percent. Valuechain analysis also identifies several choke points in the supply chain for African firms: high costs of import/export logistics, lack of timely delivery of inputs, low speed to market, and high incidence of rejects (Subramanian and Matthijs, 2007). Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 27 Figure 9: Net Productivity is Lower than "Factory Floor" (Gross) Productivity due to High Costs of Doing Business Total factor productivity (China=1) 1.20 1.00 Gross Net 0.80 0.60 0.40 0.20 0.00 ia da a ia a Se h l co a a am a e ia ria a ga ny di bi e qu Ba agu s in an op liv de oc itr ge an In m ne Ch Ke bi Bo nz hi Er or Zi la Ni Ug r ca Et Ta ng M Ni oz M Country Source: Eifert, Gelb, and Ramachandran (2005). Figure 10: African firms are sharply disadvantaged by higher indirect costs Source: Materials Labor Capital Indirect Mozambique Eritrea Kenya Tanzania Zambia Uganda Bolivia Nigeria Ethiopia China Nicaragua Morocco India Senegal Bangladesh 0 10 20 30 40 50 60 70 80 90 100 Share of total costs (%) Source: Eifert, Gelb, and Ramachandran (2005). Many of the indirect costs derive from lack of infrastructure. Despite some progress, there appears to have been little strategic orientation of Africa's infrastructure investments to support trade logistics and little willingness on the part of Africa's development partners to finance infrastructure investments (World Bank, 2007a). SubSaharan Africa lags at least 20 percentage points behind the average for lowincome countries on almost all major infrastructure 28 John Page measures.22 In addition the quality of service is low, supplies are unreliable, and disruptions are frequent and unpredictable (table 11). Indicators of infrastructure access rose between the 1990s and 2000s but mainly in communications technology and water supply and sanitation. Road infrastructure was a notable exception to the improving trend (figure 11). Access to communications services increased dramatically, thanks to the cellular revolution. Average penetration rates in the region doubled between 2004 and 2006 to reach 16 percent of the population, but highspeed data transmission, critical to exporting, lags badly. Concessions have been awarded to operate and rehabilitate many African ports and railways and some power distribution enterprises, but financial commitments by the concessionaire companies are often small. High indirect costs also derive from institutional weaknesses. Surveys of manufacturing firms in African countries highlight a number of areas in which regulatory or administrative burdens impose penalties on exporters (Clarke, 2005; Yoshino, 2008). Enterprises involved in exporting were more likely to identify trade and customs regulations as serious obstacles to doing business. Port transit times are long (figure 12). Customs delays on both imported inputs and exports are significantly longer for African economies than for China or the Philippines. Export procedures--including certificates of origin, quality and sanitary certification, and permits--can also be burdensome. Duty drawback and tariff exemption schemes are often complex and poorly administered, resulting in substantial delays. Table 11: Impact of Unreliable Infrastructure Services on the Productive Sector Sub-Saharan Developing Service problem Africa countries Electricity Delay in obtaining electricity connection (days) 79.9 27.5 Electrical outages (days per year) 90.9 28.7 Value of lost output due to electrical outages (percent 6.1 4.4 of turnover) Firms maintaining own generation equipment (percent 47.5 31.8 of total) Telecommunications Delay in obtaining telephone line (days) 96.6 43.0 Telephone outages (days per year) 28.1 9.1 Source: World Bank (2006). An important exception is the penetration of fixedline and mobile telephones, where Sub 22 Saharan Africa leads lowincome countries by as much as 13 percent. The largest gaps are for rural roads (29 percentage points) and electricity (21 percentage points). Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 29 Figure 11: Lack of Infrastructure is a Key Bottleneck Road density (km of road per 100 sq. km of land area 18 16.1 16 14.2 14 12 10.9 10 8 6.8 6.4 6 4 2 0 East Asia Europe and Latin America Middle East and Sub-Saharan and Pacific Central Asia and Caribbean North Africa Africa Region Source: World Bank various years. Figure 12: The Time to Clear Goods at Ports is Several Days in Many Countries in Africa 80 70 Days to clear impacts Days to clear exports 60 50 Days 40 30 20 10 0 ag o G e am ica r Ta on ia M al us a ia na a na Ke n Se go a ga r in ali ca e ad as r nd ny ni di an g er oi ig iti o M ha hi To r as ne Be In M aF Af Iv er ig N ar nz C d' N h U ut e rk C ôt So Bu C Country Source: World Bank various years. 30 John Page In Asia and Latin America governments have attempted to provide a "quick fix" for traderelated infrastructure and institutional deficiencies by creating export processing zones (EPZs) that provide infrastructure and services within a limited geographic area, usually convenient to air or sea transport links. Many of these EPZs have been privately developed and administered. African economies have established numerous EPZs, but for the most part they have been poorly administered and have failed to attract exporting firms. The small size of Africa's economies and the fact that many are landlocked make imperative regional approaches to the common problems that affect trade. Such approaches include infrastructure in trade corridors, institutional and legal frameworks (customs administration, competition policy, and regulation of transport), and traderelated services. For exporters in landlocked countries poor infrastructure in neighboring, coastal economies, incoherent customs, and transport regulations--as well as inefficient customs procedures and "informal" taxes--in transportation corridors slow transit times to the coast and raise costs. The New Partnership for Africa's Development (NEPAD) has adopted regional integration as one of its core objectives, and the African Union is leading efforts to rationalize regional economic communities. But tangible progress on investments and institutional reforms--such as common standards, regulations, and onestop border facilities--for facilitating trade, especially for landlocked countries, has been slow. Investments in regional infrastructure are slowed by the technical complexity of multicountry projects and the time required for decisions by multiple governments. Progress has been greatest in regional power pools (in West Africa and southern Africa) and in launching customs unions (in West Africa, East Africa, and southern Africa). Creating an export push will be both costly and institutionally complex. Investments in infrastructure are critical to export success but they lack broad based support from the international development community and in the case of landlocked countries will depend on finding effective regional solutions. Policy and institutional reforms at the country level are necessary but may not be sufficient. Africa will also need the support of its international partners. At a minimum, progress in the following areas will be critical: Continuing at the border reforms. Tariffs for many countries can still be reduced and rationalized, although the lack of progress in the WTO Doha round and the advent of the Economic Partnership Agreements (EPA) with the European Union make the prospects of rapid unilateral liberalization unlikely. Exploring "exchange rate protection." The move to flexible exchange rates offers the possibility to use fiscal policies to restrict real appreciation of the exchange rate in the same way that a number of successful East Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 31 Asian economies have done.23 To do so however will require expenditure reducing policies that may be difficult to implement in Africa's low income, aiddominated environment. Closing the infrastructure gap. Transport, power, and communications infrastructure aimed at international markets are necessary elements of an export push. Given the high costs associated with these investments, encouraging private participation will be essential, as will be getting the donor community behind an infrastructure push strategically oriented at trade. National budgets will also have to assign priority to traderelated infrastructure. Improving export institutions. Institutional reforms--from improvements in customs procedures to efficient administration of EPZs--are as important to the success of an export push as at the border policy reforms and investments in trade logistics. They may, however, prove to be more difficult to implement. Making regional agreements work. Despite the political momentum conferred by the African Union, most regional agreements in Africa are dysfunctional. There is an urgent need to rationalize the overlapping mandates of Africa's subregional organizations and to focus them on trade facilitation. Open regionalism--using trade agreements to support international competitiveness--should be the objective of regional integration. Enlisting the support of the international community. Africa's success in boosting nontraditional exports may ultimately depend as much on the actions of its international partners as on its own efforts. Aid agencies will need to support strategic investments in traderelated infrastructure and institutions, mainly under the aegis of the WTO "Aid for Trade" initiative. In addition more advanced economies can reduce escalating tariffs directed at higher stage processing of Africa's traditional commodity exports and could offer a measure of trade preferences for its nontraditional exports.24 Building the African Private Sector Despite a broad consensus among African economic policy makers and their development partners that the private sector must become Africa's primary engine of growth, private investment in Africa is low relative to other faster, growing regions, and it has not notably increased during the post1995 growth acceleration. Although FDI as a share of GDP has grown since 1990, the absolute amount is still modest at $13.3 billion in 2006. FDI is also concentrated primarily in one country, South Africa, and in one line of business, extractive industries. 23 For an exposition of exchange rate protection in the context of the East Asian tigers see World Bank (1993). For a more recent analysis of the Chinese case see Corden (2007). 24 See Collier and Venables (2007) for such a proposal. 32 John Page Figure 13: Africa Was the Least Business Friendly in 2007 160 Average ranking on ease of doing business 136 140 120 107 96 100 87 76 77 80 60 40 22 20 0 OECD high Eastern East Asia & Latin Middle East South Sub- income Europe & Pacific America & & North Asia Saharan Central Caribbean Africa Africa Asia Region Source: World Bank Doing Business 2008. There is of course a substantial "private sector" in Africa, consisting of small farming and informal sector production, but modern, private sector manufacturing and services growth has lagged, and the role of indigenous African entrepreneurs in modern industrial activities has also been marginal in many economies. (Collier and Gunning, 1999). Improving the investment climate--including reducing the costs associated with bureaucracy, corruption, risk, and essential business services--and attracting FDI are central to building modern, private firms. Despite recent reforms, Africa remains a highcost, highrisk place to do business. Overall, the cost of doing business in Africa is 20­40 percent above that for other developing regions. During 2006/07, the average rank of African countries (moving from 1 as the best environment) was 136 in the World Bank's Doing Business indicators (figure 13); only four African countries (all middleincome) rank in the top third globally: Mauritius, 32; South Africa, 35; Namibia 43; and Botswana, 51. All other African economies rank 90 or higher. The picture is only somewhat brighter in terms of the pace of reform. In 2005/06, Africa came in third behind Eastern Europe and Central Asia and the OECD countries with respect to the number of countries that made at least one positive business climate reform. Fortysix SubSaharan countries introduced at least one business environment reform in 2006/07, and Ghana and Kenya were among the top 10 global reformers (Tanzania was also on the list in 2005/06). Kenya rose from 82 to 72, and Ghana from 109 to 87. Several other countries saw Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 33 improvements: Mozambique went from 140 to 134, Madagascar from 160 to 149, and Burkina Faso from 161 to 155. Improving the business environment may prove to be only a necessary condition for growing Africa's private sector. There is substantial heterogeneity in performance across firms in Africa. One quarter of the formal sector firms surveyed in the World Bank's Investment Climate Assessments (ICAs) had profittocapital ratios that were more than four times lower than the median, while another quarter of the firms' profit rates were more than four times higher than the median. Similar heterogeneity among firms was observed in other performance indicators, such as productivity and export intensity (Bigsten et al., 1999). Lack of entry (and exit), limited competition, and incomplete and missing markets all contribute to these outcomes, but both firm size and performance in Africa are also linked to the ethnic origin of the business owner. In much of Africa enterprise ownership and factor markets--for both labor and capital--are fragmented along ethnic lines. Ethnic networks reduce transaction costs and facilitate information flow among their members, but they can have a negative impact on nonmembers, such as indigenous or minority entrepreneurs, who are excluded from the network.25 Using data from Kenya and Zimbabwe, Fafchamps (2000) and Biggs, Raturi, and Srivastva (2002) found that although black business owners were not disadvantaged in gaining access to bank credit, ethnic bias reduced their access to supplier's credit, where reputation and repeated relationships were central elements of the ethnic networks within which the firms operated.26 Biggs and Shah (2006) argue that networks raise the performance of "insiders" and in the difficult business environments in Africa have attendant negative consequences for entry of "outsiders," such as small, indigenous enterprises. Firms owned by ethnic minority entrepreneurs--such as entrepreneurs of Asian or European descent--start out larger and grow significantly faster than indigenously owned firms (Ramachandran and Shah, 1999, 2007). The ICA surveys consistently show that large firms tend to be more productive and to export more. Moreover, large firms tend to begin large and stay large. Smaller firms in contrast face more serious constraints in gaining access to finance, skills, and technology. They also have higher turnover rates (Harding, Soderböm, and Teal, 2004), and there is little evidence that small and medium firms grow into large enterprises (Sleuwaegen and Goedhuys, 2002). Africa, thus, faces a double challenge in growing its private sector. The first task is to improve the investment climate for all firms and to aggressively court FDI. The second--and more difficult task--is to address the ethnic disparities in 25 For example, entrepreneurs who receive information from their own community become less willing to expend resources screening individuals from outside their communities. See Fafchamps (2001). 26 Unlike credit from financial institutions, supplier credit does not rely on formal collateral but on trust and reputation. Contract enforcement is flexible. 34 John Page ownership in order to secure broadbased political support for a growthoriented private sector development agenda. Elements of an approach to building an African private sector include: Accelerating the pace of reform in the business environment. Leveling the playing field remains a necessary condition for success in private sector development. African economies can substantially cut the cost of doing business and the cost of entry through regulatory and institutional reforms of the type outlined in the World Bank's Doing Business reports. Aggressively courting FDI. FDI--especially outside of extractive industries--offers the potential to acquire technological capability and business knowledge that can spill over into the rest of the economy. It also offers the potential to develop forward and backward linkages. In addition to business environment reforms, African economies seeking FDI also need to develop effective investment promotion agencies, modeled for example along the lines of Ireland's (see box 3). Reforming the financial sector. Improving the performance of Africa's financial systems is also high on the agenda for enterprise development. Firms in Africa identify financing constraints as even more severe than lack of infrastructure in limiting their business development. Strengthening networks among African entrepreneurs. Rather than penalizing ethnic minority firms in the interest of promoting indigenous entrepreneurs, as was done by some populist politicians in the past, governments can improve information flow by helping create alternative networks of indigenous entrepreneurs and move aggressively on financial sector reforms to improve projectbased access to credit. They can also support institutional innovations, such as credit rating agencies, that formalize and open up business information flows. Innovating in small and medium enterprise (SME) development. Because of the correlation between size and ethnicity in firm ownership, the question of indigenous entrepreneurship development in Africa has been addressed largely in the context of SME development. But the track record of both governments and aid agencies in this field has been mixed at best. While access to finance is consistently identified by SMEs as a leading constraint to their growth, it is better handled in the context of overall reforms of the financial system than through directed credit programs. Institutional innovations--such as education programs, youth entrepreneurship initiatives, support for the establishment of specialist business schools, national and local enterprise support agencies, business incubators, capacitybuilding support for business associations, and business development services--merit further attention and analysis. Many of these activities could be privately provided. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 35 Box 3: The Irish Development Agency--Feeding the Celtic Tiger Long before it became the "Celtic Tiger," Ireland had embarked on a development strategy that emphasized actively courting foreign investors. Ireland is the most foreign investment­intensive economy in Europe. Foreign-owned firms account for nearly 50 percent of manufacturing employment. A key component of that success was the Irish Development Agency (IDA), which has come to be regarded--along with that of Singapore--as a model of best practice for an investment promotion agency (OECD, 2005). IDA is an autonomous state-sponsored body with the authority to identify and promote FDI in specific industries and to provide incentives and grants to prospective investors. Until 1994 it also had responsibility for providing support to local firms. Since its reorganization in 1969 the Agency has reported to the highest levels of government and was effectively put in charge of Ireland's industrial development strategy (Barry, 2006). One of the keys to the Agency's success was that it was given autonomy from the civil service. This allowed the IDA to recruit and retain staff who were largely drawn from the private sector, and who therefore had a willingness to take risks and innovate and who could be compensated based on performance. The private sector orientation of the Agency also enhanced its credibility with its private sector clients. Autonomy brought a long-term perspective. IDA pursued Intel for more than a decade before the company decided to open a plant in 1989. Over nearly 40 years IDA has shown the flexibility to adapt to changing domestic circumstances and global trends. Ireland and its foreign investors have moved from assembly and components to electronics and software to financial services. This ability to anticipate and adapt was largely the outcome of an organizational structure that emphasized global reach through a network of overseas offices and local knowledge gained from close relationships with investors already in Ireland (Nelson, 2004). IDA's overseas offices had both a promotional and strategic role: they reported regularly on industry developments in such locations as Silicon Valley. In Ireland the Agency emphasized "aftercare"--following up on the satisfaction of its clients--and identifying gaps in skills and services that could be addressed through public policies or investments. Creating New Skills The international community has scored a major success in Africa by supporting the Millennium Development Goal (MDG) of universal primary education. Gross primary school enrollment rates rose from 79 percent in 1999 to 92 percent in 2004. Between 1990 and 2004, the average literacy rate (in the 29 countries for which data exist) rose from 54 percent to 62 percent, while the range improved from 11­81 percent to 26­87 percent. Some 87 percent of Africans today live in countries where the average enrollment rate is over 75 percent, and fewer than 2 percent live in countries where the rate is under 50 percent. Six of the seven top countries worldwide in expanding primary completion rates (by more than 10 percent a year between 2000 and 2005) are in Africa--Benin, Guinea, Madagascar, Mozambique, Niger, and Rwanda (World Bank, 2007b). The expansion of educational opportunities has had a growth payoff. There is evidence for Africa that the contribution of human capital to growth has increased over time (Berthélemy and Söderling 2001), mainly as a result of rising 36 John Page average years of schooling.27 This success has, however, brought new concerns. Educational quality has not kept pace with quantity, even at the primary level, and there have been no comparable improvements in secondary and tertiary enrollments. This is especially worrisome in view of recent research (Hanusheck and Wosmann, 2007) that suggests that the quality of education has a stronger impact on growth than years of schooling, after countries have passed a threshold level of average literacy and per capita years of schooling. While East Asian countries increased secondary enrollment rates by 21 percentage points and tertiary enrollment rates by 12 percentage points over the 12 years between 1990 and 2002, Africa raised its secondary rates by only 7 percentage points and its tertiary rates by just 1 percentage point. Despite this modest expansion, tertiary enrollments have increased much more rapidly than budgets. Real expenditure on tertiary education in Africa fell by about 28 percent between 1990 and 2002 and expenditure per pupil declined from $6,800 in 1989 to $1,200 in 2002. Staff student ratios in West African universities increased from 1:16 in 1990 to 1:32 in 2007 (World Bank, 2007b). The quality of tertiary education is not easy to gauge because there are few surveys of educational quality, but it is unlikely that it can have improved in such a hostile budget environment. Employer surveys report that tertiary graduates are weak in problem solving, business understanding, computer use, and communication skills (World Bank, 2007b). The lack of expanded access to and improved quality in postprimary education has serious implications for both the viability of Africa's export push and for its efforts to build an African private sector. Recent crosscountry work-- including a sample of African economies--indicates that there is a strong empirical link between export sophistication and the percentage of the labor force that has completed post primary schooling (World Bank, 2007b). There is also limited evidence to suggest that enterprises managed by university graduates in Africa have a higher propensity to export (Wood and Jordan, 2000; Clarke, 2005). More broadbased evidence exists that, among firms owned by indigenous entrepreneurs, those with universityeducated owners tend to show higher growth rates (Ramachandran and Shah, 2007). Creating new skills in Africa is likely to be both politically and institutionally complex. The international development community remains focused on achieving the MDG goal of universal primary completion, which in Africa's tight fiscal environments leaves limited budget space for increases in secondary and tertiary expenditures. Improving quality means confronting head on the prevailing curricula and teaching practices of both secondary and university faculties. Some elements of an approach to creating new skills include: See for example Pritchett (2001) for a skeptical view of the role of human capital in growth. More 27 recent work (Cohen and Soto, 2007) suggests that there may be limits to growth when human capital is insufficient. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 37 Revisiting the MDG. As primary enrollment rates approach 100 percent the cost of providing an additional primary school place is likely to rise substantially. In economies facing fiscal constraints this is likely to result in further crowding out of postprimary expenditures from the education budget.28 Africa's economies should attempt to reach agreement with their development partners on a more nuanced measure of success in building human capital than the current MDG, and aid donors should show greater willingness to support secondary and tertiary education. Bringing in the private sector. African governments have shown too great a reluctance to encourage private provision of educational services, especially in technical, vocational, and tertiary education.29 These activities have high private returns and are very suitable for private provision. The lack of financial depth in many African economies raises important equity issues with respect to private provision and financing of postprimary education, but these can be dealt with through targeted grants, perhaps financed by international donors. Listening to the business community. Through public­private dialogue and tracer studies of graduates governments can identify both quantity and quality deficiencies in skills. In the cases of technical and vocational training private sector providers are more often attuned to the needs of the market place and more agile. Picking strategic targets for skills development. In countries such as Brazil, Chile, and Korea research and teaching in social sciences and humanities disciplines have increasingly been left to private universities, while governments have concentrated their public investments on the development of science, engineering, and technology. Focusing on quality. Across the board, from primary to graduate education, Africa needs to strengthen the focus on educational quality. Quality assurance (QA) mechanisms--such as accreditation--are the primary means by which education systems achieve accountability for quality and relevance. Currently only 15 African countries have functioning education QA agencies. Most of these are less than 10 years old, and they differ substantially in their scope in rigor. International comparisons of learning achievements are also important benchmarks for assessing quality. Using the diaspora. Africa is the region of the developing world in which the highly skilled form the largest share of all migrants. This "brain 28 Africa is the only region of the developing world (with the exception of Latin America, which has a vastly different post primary education profile) in which the share of tertiary education in the overall education budget has fallen (World Bank, 2007b). 29 Private universities account for 73, 71, and 75, percent of tertiary enrollments in Brazil, Chile, and Korea, respectively. 38 John Page drain" can offer the possibility of a "brain bank" from which migrants are recruited to support skills development, through virtual, temporary, or permanent return. The experience of other countries with significant highly skilled migration suggests that governments can facilitate such brain banking through active programs of outreach to their nonresident citizens.30 VI. Conclusions Since 1995 a major change has taken place in Africa's economic landscape. African economies are increasingly able to avoid the mistakes and selfimposed economic collapses of the 1980s and 1990s, but even before the global economic crisis of 2009, there was evidence to suggest that the sustainability of growth in SubSaharan Africa was fragile. While the improvements in economic management will almost certainly help Africa's economies to cushion the current global shock, by themselves they cannot ensure sustained growth. Accelerating and sustaining longrun growth are a different challenge. In the medium to long term, it is essential to make progress in improving Africa's economic fundamentals. Higher savings and investment--particularly private investment--and accelerated productivity growth are central to sustained growth. While some progress took place during the growth turnaround of 1995­ 2008, Africa continues to compare unfavorably with other, more dynamically growing parts of the developing world, and, perhaps more worryingly, shows little improvement compared with its own historical performance during the 20 years of economic stagnation that preceded 1995. The results of our work and that of others show that, relative to the lessons learned about avoiding mistakes, much less is known about the policies and institutions needed for longterm success in development (Dixit 2007; Ndulu et al., 2007). Nevertheless, with that cautionary note in mind the experiences of successful growers both within and outside of Africa suggest that four strategic objectives--using natural resource rents well, creating an export push, building the African private sector, and creating new skills--will be key building blocks for moving from fewer mistakes to sustained growth. 30 See for example Page and Plaza (2006). Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 39 Annex Table A.1: Frequency of Growth Acceleration and Deceleration and Growth Rate at the Country Level Growth Growth rate Growth rate Frequency of Frequency of rate during growth during growth growth growth (1976­ acceleration deceleration Country acceleration deceleration 2005) years years Angola 0.48 0.28 0.70 3.93 -5.48 Benin 0.27 0.23 0.59 1.60 -0.99 Botswana 0.43 0.00 6.24 6.87 Burkina Faso 0.43 0.00 1.21 1.39 Burundi 0.20 0.23 -0.47 1.48 -4.45 Cameroon 0.23 0.23 0.81 2.21 -5.34 Cape Verde 0.42 0.00 3.26 3.57 Central African Republic 0.23 0.53 -1.27 0.89 -1.95 Chad 0.20 0.20 1.34 7.66 -1.66 Comoros 0.24 0.28 -0.14 0.11 -1.89 Congo, Dem. Rep. of 0.00 0.30 -3.94 -7.60 Congo, Rep. 0.20 0.43 0.61 10.05 -2.25 Côte d'Ivoire 0.20 0.63 -1.57 1.82 -3.81 Equatorial Guinea 0.42 0.00 10.55 20.88 Eritrea 0.00 0.00 1.96 Ethiopia 0.25 0.25 0.42 3.71 -3.05 Gabon 0.00 0.40 -0.91 -1.52 Gambia, The 0.00 0.23 0.29 -0.99 Ghana 0.43 0.20 0.60 2.15 -4.33 Guinea 0.37 0.00 0.98 1.78 Guinea-Bissau 0.23 0.20 -0.70 0.76 -1.87 Kenya 0.20 0.40 0.48 1.76 -0.75 Lesotho 0.23 0.00 3.27 3.83 Madagascar 0.00 0.43 -1.38 -2.12 Malawi 0.23 0.37 0.22 1.68 -2.12 Mali 0.33 0.23 0.86 2.75 -3.09 Mauritania 0.00 0.00 0.10 Mauritius 0.28 0.00 4.22 5.65 Mozambique 0.32 0.00 2.08 5.08 Namibia 0.32 0.00 0.15 2.14 Niger 0.00 0.43 -1.01 -3.55 Nigeria 0.53 0.20 0.27 1.99 -4.79 Rwanda 0.20 0.20 1.68 2.27 2.12 São Tomé and Principe 0.47 0.00 0.31 0.99 Senegal 0.27 0.23 0.36 1.75 -1.38 Seychelles 0.53 0.00 2.46 4.01 Sierra Leone 0.20 0.47 -0.57 7.95 -2.92 South Africa 0.23 0.40 0.12 1.96 -1.72 Sudan 0.30 0.00 1.72 3.90 Swaziland 0.27 0.00 1.15 4.63 Tanzania 0.47 0.00 1.69 3.69 Togo 0.20 0.60 -0.60 4.27 -2.61 Uganda 0.30 0.00 1.92 3.69 Zambia 0.23 0.50 -1.23 2.35 -2.38 Zimbabwe 0.20 0.27 -1.26 2.61 -5.34 Source: Arbache and Page (2007). Note: Blank space means country did not experience growth acceleration and/or deceleration. 40 John Page Table A.2: Real GDP Growth in Sub-Saharan Africa 1980­2006 Recent periods Since mid-90s Categories of countries 1980­ 1990­ 2000­ 2000­ 2004­ 1995­ * 89 99 06 03 06 2007 2006 I. Sub-Saharan Africa A. Regional simple average 2.9 3.3 4.6 4.3 5.1 5.3 4.9 w/o Zimbabwe 2.9 3.3 4.9 4.5 5.3 5.6 5.0 B. Regional weighted average 2.3 2.1 4.6 3.9 5.9 6.1 4.1 Nigeria 1.7 2.8 5.6 5.2 6.2 7.3 4.4 South Africa 2.2 1.4 4.1 3.4 5.0 5.1 3.5 Rest of SSA 2.7 2.5 4.9 4.0 6.5 6.1 5.1 II. Oil Exporting Countries 3.5 5.9 8.4 8.4 8.4 8.2 9.1 III. Oil Importing Countries 2.8 2.7 4.1 3.7 4.7 5.0 4.1 A. By endowment & location Resource-intensive countries 3.2 1.3 5.7 6.1 5.1 4.9 3.8 Costal countries 2.9 3.4 3.8 3.4 4.4 5.0 4.3 Landlocked countries 2.9 2.5 3.0 2.1 4.2 4.3 3.6 B. By income level & fragile states Middle-income countries 5.6 4.5 3.7 3.5 4.0 4.7 4.2 Low-income countries 2.1 3.5 4.9 4.3 5.6 6.1 5.2 Fragile countries 2.2 0.5 2.8 2.4 3.2 3.6 2.5 IV. Others Flexible exchange rate regime 2.3 2.4 5.1 4.3 6.1 7.1 5.1 Fixed exchange rate regime 3.5 3.9 4.3 4.3 4.4 4.1 5.1 MDRI 2.1 2.7 5.3 5.1 5.6 6.0 5.0 Source: World Bank WDI, Africa Development Indicators, and IMF World Economic Outlook (WEO) database. * All statistics are annual percent rates and simple averages unless otherwise mentioned. Estimates based on AFRCE briefs, World Bank Global Economic Prospects, and IMF (2007). Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth 41 References Arbache, Jorge Saba, and John Page. 2009. "How Fragile Is Africa's Recent Growth?" Journal of African Economies (forthcoming). ------. 2008. "The Long­Term Pattern of Growth in SubSaharan Africa." In Africa at a Turning Point? Growth, Aid, and External Shocks, Delfin S. Go and John Page, eds. 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World Bank, Washington, DC. 46 John Page Eco­Audit Environmental Benefits Statement The Commission on Growth and Development is committed to preserving endangered forests and natural resources. The World Bank's Office of the Publisher has chosen to print these Working Papers on 100 percent postconsumer recycled paper, processed chlorine free, in accordance with the recommended standards for paper usage set by Green Press Initiative--a nonprofit program supporting publishers in using fiber that is not sourced from endangered forests. For more information, visit www.greenpressinitiative.org. The printing of all the Working Papers in this Series on recycled paper saved the following: Trees* Solid Waste Water Net Greenhouse Gases Total Energy 48 2,247 17,500 4,216 33 mil. *40 inches in height and 6­8 Pounds Gallons Pounds CO2 Equivalent BTUs inches in diameter The Commission on Growth and Development Working Paper Series 45. Setting Up a Modern Macroeconomic-Policy Framework in Brazil, 1993­2004, by Rogério L. F. Werneck, April 2009 46. Real Exchange Rates, Saving, and Growth: Is There a Link?, by Peter J. Montiel and Luis Servén, April 2009 47. Avenues for Export Diversification: Issues for Low-Income Countries, by Paul Brenton, Richard Newfarmer, and Peter Walkenhorst, February 2009 48. Macroeconomic Policy: Does it Matter for Growth? The Role of Volatility, by Antonio Fatás and Ilian Mihov, February 2009 49. Current Debates on Infrastructure Policy, by Antonio Estache and Marianne Fay, February 2009 50. Explaining China's Development and Reforms, by Bert Hofman and Jingliang Wu, February 2009 51. Growth Challenges for Latin America: What Has Happened, Why, and How To Reform The Reforms, by Ricardo Ffrench-Davis, March 2009 52. Chile's Growth and Development: Leadership, Policy-Making Process, Policies, and Results, by Klaus Schmidt-Hebbel, March 2009 53. Investment Efficiency and the Distribution of Wealth, by Abhijit V. Banerjee, April 2009 54. Africa's Growth Turnaround: From Fewer Mistakes to Sustained Growth, by John Page, April 2009 Forthcoming Papers in the Series: Remarks for Yale Workshop on Global Trends and Challenges: Understanding Global Imbalances, by Richard N. Cooper (April 2009) Growth and Education, by Philippe Aghion (April 2009) Electronic copies of the working papers in this series are available online at www.growthcommission.org. They can also be requested by sending an e-mail to contactinfo@growthcommission.org. 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 finally turned Commission on Growth and Development the corner? This paper analyzes growth accelerations and decelerations--that is, Montek Ahluwalia Edmar Bacha country-level deviations from long-run trend growth. Seen from this perspective, Dr. Boediono Africa's record of slow and volatile growth reflects a pattern of offsetting Lord John Browne accelerations and declines, and much of the improvement in economic Kemal Dervis ¸ performance in Africa post 1995 turns out to be due to a substantial reduction in Alejandro Foxley the frequency and severity of growth decelerations. The fall in economic declines Goh Chok Tong since 1995 is largely due to better macroeconomic policies, but changes in such Han Duck-soo "growth determinants" as investment, export diversification, and productivity Danuta Hübner have not accompanied the growth boom. Lack of change in these variables--and Carin Jämtin the significant role played by natural resources in sparking growth accelerations-- Pedro-Pablo Kuczynski suggest that Africa's growth recovery was fragile, even before the recent global Danny Leipziger, Vice Chair economic crisis. The paper concludes by setting out four elements of a strategy Trevor Manuel that can help move Africa from fewer mistakes to sustained growth: managing Mahmoud Mohieldin natural resources better, pushing nontraditional exports, building the African Ngozi N. Okonjo-Iweala Robert Rubin private sector, and creating new skills. Robert Solow Michael Spence, Chair John Page, Senior Fellow, The Brookings Institution Sir K. Dwight Venner Hiroshi Watanabe Ernesto Zedillo Zhou 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. www.growthcommission.org contactinfo@growthcommission.org