Authors: Uri Dadush, Shimelse Ali
Originally published by the Carnegie Endowment for International Peace
Africa’s improved growth performance in recent years has been widely noted. GDP growth in the decade before the Great Recession was double that of the previous decade, though it started from a low base. Despite this gain, however, the advance in per-capita incomes in Africa continues to lag behind that of other developing regions.
Africa’s growth acceleration was associated with a number of favorable factors, notably the large improvement in Africa’s terms of trade, a measure of the difference between the growth of export and import prices. Some of these factors may turn out to be temporary, but others reflect improved policies, especially in macroeconomic management and education. Together with reduced external debt (partly the result of debt forgiveness), these improvements appear to have helped Africa avoid recession during the global crisis in 2009.
It is too soon to proclaim victory, however. Not enough time has passed to tell if Africa’s new growth pattern will persist and intensify. But the evidence provides new grounds for hope and suggests that continued reforms—especially those affecting governance and the business climate—could lay the groundwork for sustained advance in the world’s poorest continent.
Recent performance
After stagnating for much of its postcolonial period, economic growth in Africa has accelerated since the mid-1990s. GDP expanded by an average of 4.6 percent a year from 1999–2008, more than twice its pace in the previous decade. Seventeen African economies—twelve of them low-income—grew at 5 percent or more in the decade leading up to 2008, up from only seven during the previous decade.
Economic performance in developing regions
While the economic expansion was strongest in lower middle-income economies—which grew by 6 percent a year from 1999–2008—the acceleration was widespread and included South Africa, an upper middle-income country that accounts for more than a quarter of Sub-Saharan Africa’s GDP. However, the pace of growth in the ten lower middle-income African economies relies significantly on the four oil-exporting economies in this group. GDP growth in the oil-exporting countries increased by 3.7 percentage points, compared to the small increase—about 0.9 percentage points—for the six non-oil exporting lower middle-income economies. Nigeria and Angola—oil-exporters that account for about two-thirds of the region’s lower middle-income economies—expanded by 5.6 percent and 11.1 percent per year, respectively, over 1999–2008.
Africa’s growth also accelerated more than that of developing economies in other regions, albeit from a low base. The two-fold or more increase in Sub-Saharan Africa’s GDP growth rate compares with much smaller rises—by factors of 0.7 to 1.6—in East Asia and the Pacific, South Asia, Latin America, and the Middle East and North Africa (MENA). This is also true when Sub-Saharan African countries are compared with those of other regions in the same income group.
The continent also finally broke out of its long period of negative per-capita income growth. Per-capita income grew by an annual average of 2 percent in the 2000s.
Africa weathered the global financial crisis reasonably well and its growth was better than that of Latin America, Europe and Central Asia, though not nearly as high as that of developing Asia and lower than that in the Middle East. Improved macro-economic policies, dependence on agriculture, and limited financial linkages to the global economy helped Africa absorb the external shocks. Still, the region suffered badly from the global crisis, experiencing a 16 percent loss in its terms of trade, as well as a sharp decline in capital flows and a slowdown in remittances.
Despite the marked uptick in growth, the region’s growth rates from 1999–2008 remained in the bottom half of developing economies’ growth rates. Countries in Africa grew more slowly than those at corresponding income levels in East Asia and the Pacific, Europe and Central Asia, and South Asia. Per-capita income in low-income African economies grew at about one-fourth the pace of those in low-income economies in East Asia and the Pacific—Laos, Myanmar, and Cambodia. Africa’s rate of investment as a percentage of GDP over the decade was lower than that of any other developing region, though it surpassed that of Latin America in 2008.
When making comparisons, one should recall that per-capita income in Africa started from an abysmally low level, and that base levels matter. Consider, for example, that even if Africa’s per-capita income continues to grow at 2 percent per year for the coming decade, its per-capita income will only gain $460 (in PPP terms) over the decade. In contrast, if per-capita income in Japan—one of the richest and slowest growing economies in the world—grows by just 1 percent a year over the same period, its absolute per capita income gain will be more than seven times greater than that of Africa and the gain alone will be nearly 70 percent higher than Africa’s current per-capita income. As a result, the absolute gap in income will widen considerably even if Africa makes proportional gains.
Very low initial levels of income and slower growth help to explain why Africa continues to lag behind other developing regions in eradicating absolute poverty. Though the number of Africans earning $1.25 a day declined from 58 percent of the total population in 1990 to 50 percent in 2005, other poor developing regions made much greater strides over the same period. East and South Asia, which had poverty rates comparable to that in Africa in 1990, had reduced their poverty rates by 38 percentage points and 11 percentage points, respectively, by 2005.
The policy factor
Better macroeconomic management has helped Africa’s overall economy improve. Between 1989–1998 and 1999–2008, average inflation fell by two-thirds in lower middle-income economies, and by half in low-income (excluding Zimbabwe) and upper middle-income economies. Africa’s two economic giants, South Africa and Nigeria, were at the forefront of improvements in macroeconomic policy, reducing their inflation rate by half and two-thirds, respectively. In the 2000s, nearly 30 out of 45 countries had single-digit inflation, compared to only twenty countries in the 1990s. African countries, particularly low-income and lower middle-income economies, have also seen a much more substantial drop in inflation compared to developing countries in other regions.
Due in part to faster economic growth and debt relief under the Heavily Indebted Poor Countries (HIPC) initiative, the continent’s average external debt as a percentage of GDP fell by a quarter between 1989–1998 and 1999–2008. Other developing regions have seen smaller reductions. Africa’s fiscal balance (including grants) turned from a deficit of 2.6 percent of GDP in 1997–2002 to a surplus of 1.3 percent of GDP in 2008. Large fiscal surpluses in oil-exporting economies in the 2000s, which averaged 6.3 percent of GDP, were the major factor behind the continent’s aggregate fiscal improvement, however.
The region also made substantial gains in education enrollment. Gross primary school enrollment rose from 78 percent in 1999 to 97 percent in 2008, while secondary school enrollment went from 24 percent to 33 percent over the same period. Though education enrollment remains far lower in African countries than in other developing economies, the increase in primary and secondary school enrollment over the last decade was greater than that in other developing regions.
Africa has also become more integrated through trade. Between 1989–1998 and 1999–2008, exports of goods and services as a percentage of GDP increased by 5 percentage points to 32 percent—comparable to increases of 5.6 to 7.6 percentage points for the Middle East and North Africa, South Asia, and Latin America and the Caribbean. Tariffs also fell in Africa, though less than in other developing regions. In the two decades leading up to 2008, tariff rates for manufactured products fell by about 46 percent in Africa, compared to a decrease of more than 70 percent in all developing economies.
Despite these improvements, Africa remains hobbled by major policy and institutional weaknesses, which are greater than those faced by other developing regions. At around 46 percent of GDP, foreign debt in Sub-Saharan Africa is still 10 percentage points higher than that in Latin America and the Caribbean or MENA. Inflation is still above 10 percent in about fifteen African countries.
And even with some recent successes—which placed countries such as Rwanda among the top global reformers in the World Bank’s 2010 Doing Business ranking—the business climate in Africa remains enormously challenging. The average rank of Sub-Saharan Africa was the lowest among developing regions in all but two of the nine components of the World Bank’s Doing Business Index in 2010 (dealing with construction permits and enforcing contracts). In particular, lower-middle income economies—which include large countries like Nigeria and Cameroon—scored poorly, all ranking in the bottom half of the 53 lower middle-income developing economies.
The number of state-based conflicts has fallen in Africa, from sixteen in 1999 to seven in 2006, and democracy is becoming more established across the continent. However, while adequate historical data is not available to deduce whether governance qualities have improved over time, the region receives low scores on World Bank governance indicators, including political stability, the rule of law, and government effectiveness.
The external environment
More than other developing regions, Africa—where commodities accounted for more than 72 percent of exports in 2003–2007—has benefited from the significant improvement in terms of trade since the second half of the 1990s. The terms of trade for Africa’s goods in 1999–2008 were about 7 percentage points higher than in 1989–1998, compared to a 3.6 percentage point increase in Latin America and a 1.4 percentage point decline in developing Asia. Oil exporters in the Middle East and Africa saw the largest advances in terms of trade, helped by the surge in oil prices over the past decade. A similar surge in the price of other raw materials also helped Africa.
The jump in Africa’s exports—which increased more than four-fold from 1998–2008—also reflects its rising trade with fast-growing developing economies. The share of developing economies in Africa’s extra-regional trade increased from 19.6 percent in 1995 to 32.5 percent in 2008. Primary products, such as oil and agricultural commodities, accounted for 75 percent of Africa’s exports to non-African developing economies in 2008, up from 55 percent in 1995.
China has become a major player in Africa, more so than in other developing regions. China increased its share of Africa’s exports by 10 percentage points from 1998–2008, compared to a 6 percentage points increase in MENA’s exports and a 4 percentage point rise in Latin America’s exports.
The increase in Africa’s trade has been accompanied by a surge in inward Foreign Direct Investment (FDI). Net inflows of FDI reached about $35 billion in 2008 and averaged around $17 billion in 1999–2008, a more than four-fold increase from the previous decade’s $4 billion average. However, even that impressive FDI inflow growth lags behind that of other developing regions—Eastern Europe and Central Asia, the Middle East and North Africa, and South Asia—which also started from relatively lower levels. Furthermore, FDI inflows to Africa were closely associated with the natural resource boom, as they went mainly to extractive industries. Nearly half of the FDI flows to Africa from 1999 to 2008 went to oil-exporting economies.
Conclusion
There is new hope for Africa, grounded in improved stability and the possibility that the demand boom in natural resources will persist. However, the widening gaps in income and in governance and business climate indicators—compared with those of other developing regions—suggest that some of the recent optimism may not be fully warranted.
Prospects for sluggish growth in industrial countries, still Africa’s main export destination, and the likelihood that commodity prices will continue to show high volatility also argue for caution. Commodity prices may decline as supply responds to high prices. Africa’s recent performance is best interpreted as a first step up the development ladder. For the climb to continue, African countries must improve governance and establish a business climate that can compete for investment with other poor but increasingly dynamic developing regions.
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