POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise SEPTEMBER 2010 · Number 30 JUNE 2010 · Number 18 56500 Africa: Leveraging the Crisis into a Development Takeoff Trade and the Competitiveness Agenda Shantayanan Devarajan and Sudhir Shetty José Guilherme Reis and Thomas Farole Africa's precrisis growth and poverty reduction was the result of increased external resources, a buoyant global economy and--crucially--improved economic policies. Although it is still the world's poorest region, the prospects for resuming growth are good. Additional resources and further policy reforms could launch the continent on a path of sustained growth and poverty reduction. The global economic crisis has forced a major rethinking of the respective roles of governments and markets in the processes of trade and growth. Indeed, before the to be back in fashion--or, at least, talking about it is. Growth and Poverty Reduction industrial policy seems increase falls about US$11 billion short of the Gleneagles pledge to double aid to mean a 2010 (World Bank But a renewed "activism" by government in the trade and growth agenda need not Africa by return to old-style2010b). Crises Private mean a stronger focus on competitiveness by policies of import substitution and "picking winners." Instead, it maycapital flows to Africa also increased, reaching a peak of unlocking the constraints to and financial crises growth. Until the onset of the food, fuel, private sector­ledof 2007­ This note discusses the 2007 (IMF 2010). And remittances grew at US$53 billion in renewed role of government in trade 9, the countries of Sub-Saharan Africa had been experiencing and growth policy from the competitiveness angle, and it suggests some priorities for the new competitiveness agenda. double-digit rates, peaking at US$20 billion in 2007 (Ratha, relatively rapid economic growth for over a decade. Between Mohapatra, and Silwal 2010). Second, African countries ben- 1997 and 2007, gross domestic product (GDP) grew at almost efited from a buoyant global economy and rising commodity 5 percent a year--the same rate as all developing countries ex- prices. But perhaps the most important factor was that the un- cept China and India--and accelerated to over 6 percent in derlying economic policy environment in Africa had improved Export-Led was declining: the percentage of the End 2006­7. PovertyGrowth, the Crisis, and Africans liv- pacts of the crisis on the policy environment regarding trade significantly since the mid-1990s. Most countries had under- of on US$1.25 a day fell from 59 percent to 50 percent. Un- ing an Era and growth were becoming more apparent. Indeed, in addi- taken macroeconomic and fiscal policy reforms, and they were like previous episodes of rapid growth, this period was not tion to raising concerns over the global commitment to trade beginning to pay off: the median inflation rate in the mid- The dramatic the boom in global trade over prices decades driven solely byexpansionin oil and commodity recentof the liberalization, the crisis has also led to some serious rethink- 2000s was half that in the mid-1990s, and in 1996, there were has 2000s: about 22 non-oil-exporting countries, accounting earlycontributed significantly to diversification, growth, and ing of some of the conventional wisdom regarding the 13 African countries with inflation above 20 percent, by 2007, poverty reduction in many developing countries. This period for one-third of the African population, had an average annual growth agenda--the most important result of which is the there were only 2. of rapid export growth has been enabled by two critical growth of more than 4 percent during 1998­2008. The oil likelihood that governments will play a much more activist The Crises of 2007­9 exporters, home to another third of (1) the vertical and spatial structural changes in global trade: the population, also en- role in the coming years. There are three principal reasons fragmentation of manufacturing into for the integrated joyed rapid growth--over 6.5 percent annuallyhighly decade-- why governments are likely to be more actively involved in The triple crises of 2007­9 threatened to bring Africa's resur- "global production networks," and below, rise of services thanks to high oil prices and, as detailed(2) thesound macro- industrial and trade policy in the coming years. gent growth and poverty reduction to an abrupt halt. The dou- trade and the growth of "offshoring." Both of population economic management. The remaining third of the these, in turn, First, the crisis has undone faith in markets and discred- bling of food prices (in dollar terms) in 2007 hurt poor Afri- were made possible by major technological at all. Most of lived in countries that were growing slowly or notrevolutions; and cans, many of approaches over rely simply budget on food. ited laissez-fairewhom spend that half of their on trade policy they were supported by multilateral trade policy reforms liberalization. Instead, governments and local by about 4 per- these countries were either in conflict or emerging from it, al- Analysts estimated that poverty would increase markets have and broad liberalizations in domestic trade and investment been "rediscovered." Inand Martin 2008). Riots broke out in though some countries, such as Zimbabwe, were simply stuck centage points (Ivanic this sense, the demand for activist environments worldwide. government as likely to go well beyond financial markets gov- in a disastrous policy environment.1 cities such is Ouagadougou, Maputo, and Douala. African and The global economic and came reduction were due to Africa's precrisis growthcrisispovertycrashing into the middle regulation, and it will affect the policy environment in which ernments responded by lowering taxes, including import tariffs of this long-running export-led reinforcing factors. First, a combination of three, mutually growth party during 2008 on and industrial strategies are designed. trade food and, in some cases, increasing existing subsidies. Coun- and 2009. Betweenin external resources.2007 and the second there was an increase the last quarter of Foreign aid, fueled Second, had reasonably well-functioning safety importance tries that the crisis has highlighted the criticalnet programs quarter of 2009, global about US$14 billion--although the by debt relief, increased bytrade contracted by 36 percent. But scaled them up. Ethiopia, for instance, doubled the partners) of diversification (of sectors, products, and trading wage paid as the recovery started to strengthen in 2010 (at least until in reducing the risks of growth volatility. The recent era of the clouds began to form over Europe), the longer-term im- globalization contributed to substantial specialization of 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise to participants in its Productive Safety Nets Program. Unlike in developed world), the decline in per capita GDP meant that previous crises, very few countries resorted to price controls. poverty would rise. An estimated additional 7 to 10 million Af- Those that introduced export restrictions, as a means of keep- ricans would be thrown into poverty. Furthermore, such sharp ing domestic prices low, soon abandoned them. Nevertheless, declines in growth are associated with increases in infant mor- the food price crisis highlighted two weaknesses in the African tality: some 30,000 to 50,000 additional infants were likely to policy environment. One weakness was that poor agricultural die before their first birthday (Friedman and Schady 2009). infrastructure, not to mention in some cases the abandonment Perhaps most troubling was the prospect that the economic re- of food production, prevented farmers from benefiting fully forms, which had been delivering strong growth and poverty from higher food prices. The other weakness was that very little reduction until 2008, would be slowed or reversed. The payoffs was known about the effectiveness of existing safety nets in Af- to these reforms had suddenly disappeared. And the policies rica, so it was not clear which programs could or should be being pursued by developed countries--increasing fiscal deficits scaled up during a crisis. and nationalizing banks--were precisely in the opposite direc- The near-doubling of world oil prices in 2007­8 had an tion of what African governments were undertaking. asymmetric effect, with oil importers suffering a terms-of-trade These policy reversals did not happen. Those African coun- shock of 5 to 7 percent of GDP, while oil exporters enjoyed a tries that had some fiscal space, thanks to debt relief and pru- windfall of double that magnitude. The oil importers respond- dent macroeconomic management before the crisis, ran mod- ed by increasing subsidies or lowering fuel taxes. In contrast to est countercyclical policies, dampening the impact of the global their behavior during previous oil booms, most of the oil ex- crisis on the domestic economy. Zambia, for instance, ran a fis- porters saved the additional revenues. When the price of oil cal deficit of 2.6 percent of GDP. Most of the increase in the was US$140 a barrel, Angola, Gabon, and Nigeria used a refer- fiscal deficit (which averaged about 2 percentage points) was ence price of about US$80 a barrel.2 the result of the decline in government revenues. Government The global financial crisis that started in September 2008 expenditures did not increase because implementation diffi- initially had only a mild effect on African economies. Most Af- culties would have prevented them from stimulating the econ- rican banks were not sufficiently integrated with the global fi- omy. The increased deficits were financed by a combination of nancial system to suffer from the fallout. The few countries domestic borrowing (which expanded by 2 percentage points with globally integrated financial systems, such as Mauritius of GDP) and front-loaded, concessional resources from the and South Africa, had strong prudential regulations that pro- World Bank and the African Development Bank. tected them. Furthermore, those countries that did not have fiscal space But when the financial crisis turned into an economic crisis, chose to run contractionary fiscal policies to maintain long- most African countries were severely affected. Private capital term sustainability. For example, Ghana, which, unrelated to flows, which had been increasing faster in Africa than in any external shocks, had a fiscal deficit of 14 percent of GDP in other region, dried up. The Democratic Republic of Congo 2008, has now embarked on a program to reduce that deficit by (DRC) saw a decline of foreign direct investment of US$1.8 bil- 2 percentage points a year for the next six years. lion. Kenya and Ghana postponed sovereign bond offerings Not only did African countries respond quickly and prag- worth US$800 million. Remittances, which had been rising at matically to the global crisis, but many of them innovated and about 13 percent a year, slowed to a trickle. Africa was particu- in some cases accelerated reforms. Tanzania, for instance, intro- larly hard hit because 75 percent of its remittances come from duced an emergency program for the banking sector that pro- the United States and Western Europe, the epicenter of the cri- vides loan guarantees that are strictly time bound (two years), a sis. The decline in commodity prices reversed the terms-of- feature that is lacking in comparable programs in the United trade shock of the previous year, with oil importers gaining and States and Europe. Recognizing that public investment typi- exporters losing. While the savings during the oil boom helped cally suffers in recessionary times, South Africa provided coun- cushion some of these exporters, the fact that their economies tercyclical funds of about US$100 billion exclusively for public were so heavily dependent on oil meant that GDP growth suf- investment (this was also necessary so the country could host fered. Angola's GDP, for instance, went from growing at over the 2010 Soccer World Cup). Mauritius introduced an innova- 15 percent a year during 2004­8 to 1 percent in 2009. Finally, tive burden-sharing program among business, labor, and gov- foreign aid was unlikely to increase given the fiscal problems in ernment to restructure distressed companies. Finally, Nigeria donor countries. used the weakness in oil prices to begin deregulating its down- stream petroleum sector. Policy Responses to the Crises Longer-Term Challenges and Opportunities The net result was that Africa's GDP growth rate fell from 5.8 percent in 2008 to 1.4 percent in 2009 (World Bank 2010a). The growth recovery across a large swath of the continent since Although growth was still positive (in contrast to most of the the mid-1990s and the pragmatism that has characterized the 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise policy responses of most countries to the crises of 2007­9 are started, there is a bulge in the under-15 population that will encouraging. Nevertheless, much of the African continent con- work its way into the labor force in the coming decades. These tinues to face a number of challenges in the medium term. In factors will exacerbate the problem of youth unemployment, what follows, four such challenges are noted, along with the op- with 7 million to 10 million young people entering the labor portunities to address them, while recognizing that the specif- force every year and formal sector job growth not fast enough to ics will necessarily differ across countries. absorb them. The creation of productive employment opportu- Infrastructure gaps. In almost every African country, the lack nities, especially for the youth, will be an important economic of physical infrastructure is a constraint to growth and poverty and political challenge for African governments (World Bank reduction. Not only is infrastructure lacking, it is also signifi- 2009a). cantly more expensive than elsewhere in the developing world. Part of the solution will be to reduce the demographic pres- Average electricity costs of US$0.18 per kilowatt hour are sures, especially where fertility rates are still high. These efforts about double the costs in other developing countries. Infra- will need to go beyond providing access and information to structure gaps are largest by far in energy, with citizens in 30 of family planning services and include the empowerment of girls the 47 countries in sub-Saharan Africa facing regular power and women, particularly through access to education. There shortages and service interruptions. Furthermore, only one in will also need to be efforts to increase the demand for youth la- four Africans has access to electricity. Collectively, the coun- bor, including in the informal sector where most jobs in low- tries of the subcontinent (with more than 800 million people) income African economies are created. The informal sector is have about the same power generation capacity as that of Spain, estimated to employ about 80 percent of Africa's labor force. which has about one-twentieth of the population (Foster and Improving the investment climate is critical in this regard both Briceno-Garmendia 2010). for formal and informal sector firms. And targeted efforts to Filling these gaps and lowering service costs will require expand youth employment, such as wage subsidies or vocation- both more money and reforms in the provision of infrastruc- al training schemes, will need to take into account and build on ture. The additional money will need to come from domestic global experience with such interventions. and external sources, including donors. And there will need to Governance and state capacity. The challenges of governance be a balance between spending on new investment and on op- and limited state capacity are starkest in the 20 fragile states of erations and maintenance, so that the latter is not crowded out. Africa--whether as a result of earlier conflicts, such as for Cóte To get the level of infrastructure of all African countries to the d'Ivoire and the Central African Republic, or because they are level of Mauritius, an additional US$48 billion per year will be still in conflict, such as Somalia. But as with the issue of job needed, a third of which will be needed to cover maintenance. creation, governance challenges cut across all of Africa. Even The complementary policy and institutional reforms in infra- resource-rich countries show significant weaknesses in gover- structure sectors will both ensure that new investment is well nance, which means they gain much less than they should from spent and help bring the private sector into financing and oper- their natural resource wealth. In general, although there are ex- ating these facilities. Nevertheless, even if potential efficiency ceptions such as Mauritius, the quality of public sector manage- gains are fully realized, a funding gap of about US$31 billion ment and institutions is lower in sub-Saharan Africa than in will remain (Foster and Briceno-Garmendia 2010). other regions. The most significant adverse outcome of these A specific infrastructure investment that will be important governance weaknesses is the poor quality of service delivery in in almost every African country is irrigation expansion. De- health, education, and water and sanitation. Public school spite its importance to economic activity and its potential role teachers in Uganda are absent about 20 percent of the time in reducing poverty, agriculture in most African countries has (Habayiramana 2010). In Chad, the share of nonwage public been ignored until relatively recently; the adverse impacts of health resources that reaches the primary clinics is 1 percent this neglect were highlighted during the food crisis of 2008. (Gauthier and Wane 2009). These service delivery failures have And with less than 5 percent of cultivated land irrigated, Afri- hindered faster progress toward the Millennium Development can agriculture remains extremely vulnerable to the effects of Goals. global climate change--more frequent floods and droughts and Improving governance will necessarily be a long-term and what appears to be a long-term drying trend in many parts of country-specific effort. However, where conflict is still preva- the continent. lent, such as in DRC, or the risks of conflict resumption are The demographic transition and job creation. In many coun- high, such as in Sudan, the root causes will still need to be ad- tries in sub-Saharan Africa, the demographic transition has not dressed, including through long-term coordinated support even begun. There are still many Sahelian countries, such as from development partners. In resource-rich economies, prior- Mali, Niger, and Burkina Faso, where the population growth ity needs to be placed on ways of increasing transparency, pro- rate is over 3 percent per year, with total fertility rates of more moting accountability, and improving decision making than 7 children per woman. Even where the transition has throughout the chain of resource extraction and use. This will 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise cover such areas as the awards of licenses and contracts, the sources and policy reforms could launch the continent on a macroeconomic management of windfall revenues, and public path of sustained, rapid growth and poverty reduction. spending decisions. All countries must focus on improving About the Authors their capabilities and incentivizing the public sector to better plan and implement development policies that are tailored to Shantayanan Devarajan is the chief economist of the World their country circumstances. Bank's Africa Region; Sudhir Shetty is codirector of the 2012 Aid volumes and modalities. Much of Africa will remain aid World Development Report and until June was the director of Pov- dependent in the medium term. However, as the developed erty Reduction and Economic Management in the Africa Region countries assess the full impact of the financial crisis, aid flows of the World Bank. from the Development Assistance Committee (DAC) donors are not likely to grow as robustly as they have over the past de- Endnotes cade. Even before the crisis, projections were that overseas de- 1. All data in this note are from World Bank (2009b) unless velopment assistance would be about US$11 billion short of otherwise noted. the Gleneagles commitment to double aid to Africa by 2010. 2. http://blogs.worldbank.org/africacan. With the impact of the crisis, the gap has only widened. Along- side tightening aid budgets, there is also a backlash emerging References against budget support as the preferred modality of aid provi- Foster, Vivien, and Cecilia Briceno-Garmendia., (eds.) 2010. Africa's Infrastruc- sion in many Western European countries--despite the evi- ture: A Time for Transformation. Washington, DC, Agence Française de Développement and the World Bank. dence that this instrument lowers transaction costs, supports Friedman, Jed, and Norbert Schady. 2009. "How Many More Infants Are capacity building, and helps harmonize donor support. Ironi- Likely to Die in Africa as a Result of the Global Financial Crisis?" Policy cally, these developments are happening when the productivity Research Working Paper No. 5023, World Bank, Washington, DC. of aid to Africa--as a result of the policy reforms undertaken Gauthier, Bernard, and Waly Wane. 2009. "Leakage of Public Resources in the Health Sector: An Empirical Investigation of Chad." Journal of African over the last 15 years and the continued pursuit of prudent Economies 18 (1): 52­83. policies during the crisis--has never been higher. Habayiramana, James. 2010. "The Determinants of Teacher Absenteeism: Evidence from panel data from Uganda." Draft, Georgetown University. Conclusion International Monetary Fund. 2010. Africa: Regional Economic Outlook, 2010. Washington, DC. Africa is the world's poorest region and faces development chal- Ivanic, Maros, and Will Martin. 20098. "Implications of Higher Global Food lenges of monumental proportions. Nevertheless, the conti- Prices for Poverty in Low-Income Countries." Agricultural Economics 39 nent's prospects for resuming growth are good because policy (2008) Supplement(S1): 405­416. reforms generated relative rapid economic growth and poverty Ratha, Dilip, Sanket Mohapatra, and Ani Silwal. 2010. "Outlook for Remit- tance Flows 2010­11." Migration and Development Brief 12, Develop- reduction before the global crisis, and because policy makers by ment Prospects Group, World Bank, http://siteresources.worldbank.org/ and large continued to pursue these policies during the crisis. It INTPROSPECTS/Resources/334934-1110315015165/MigrationAnd- also means that there is increasing political support for pro-poor DevelopmentBrief12.pdf. reforms--the very reforms that will help the continent address World Bank. 2009a. Africa Development Indicators: Youth and Employment in Africa. Washington, DC. the challenges of infrastructure improvement, job creation, gov- ------. 2009b. World Development Indicators. Washington, DC. ernance, and shrinking aid. If the international community ------. 2010a. Global Economic Prospects, 2010. Washington, DC. continues to support Africa, the combination of additional re- ------. 2010b. Global Monitoring Report 2010. Washington, DC. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise