PRESS DIGEST
Economic reforms in Africa are stimulating growth
Robert Chote, Business Day (South Africa)
January 21, 1998
IN THE 1960s economists had high hopes for Africa, with one leading textbook rating its growth potential ahead of east Asia’s. Alas, these hopes have been cruelly dashed: output per head has fallen in much of Africa since 1960 and living standards have slipped further behind those in Asia and Latin America. But in the past few years there have been tentative signs of improvement. After falling at an average rate of 2% a year in the early 1990s, output per head in sub-Saharan Africa has risen more than 1% a year since 1995. Inflation, public-sector borrowing and current account deficits have meanwhile declined over the same period.
In a paper prepared for a recent American Economic Association conference, economists from the International Monetary Fund (IMF) argued that these improvements should not be dismissed as the result of fortuitous changes in external circumstances. “Rather, they appear to result mainly from improved policies in a number of countries,” they argued. Needless to say, performance has differed from country to country. In 12 countries, output per head has continued to fall. Conflicts have prompted declines in Burundi, Central African Republic, Comoros, Congo and the Democratic Republic of Congo. But Angola, Benin, Botswana, Cote D’Ivoire, Lesotho, Ethiopia, Guinea Bissau, Mauritius, Equatorial Guinea and Togo have all enjoyed growth in output per head of more than 2% a year between 1995 and last year—4% on average as a group. In three of these countries rapid growth has resulted from special factors —the exploitation of newly discovered oil reserves in Equatorial Guinea and recovery from armed conflicts in Angola and Ethiopia. But in the other eight, better policies appear to have yielded results.
The policy reforms in the better-performing countries have taken several forms. Nontariff trade barriers have been eliminated and import tariffs reduced. Domestic price controls have been liberalized, inefficient monopolies dismantled and state enterprises privatized. Exchange rates have been freed and exchange controls lifted in many countries. Government spending has also been reduced as a share of national output, reducing budget deficits and taming inflation.
Reform was certainly needed. Bad policies help explain why Africa’s growth performance has been so much weaker than that of other continents. A recent study in the Quarterly Journal of Economics notes economic growth should have been 1.1 percentage points higher each year in Africa than east Asia since 1960, simply because Africa had more room to “catch up” with richer countries by exploiting superior foreign technology and higher returns to investment. But in fact growth in Africa was 3.4 percentage points lower each year than in east Asia.
The journal’s study argues that 2.6 percentage points of the growth differential can be explained by a set of seven policy variables. These include high budget deficits, big black market exchange rate premiums, low infrastructure investment, poor education, shallow financial markets and pervasive political instability. But why have bad policies persisted for so long in Africa and why might things have changed for the better over recent years? The answers might tell us whether the recent improvement in Africa’s economic performance is likely to persist or whether the continent has simply embarked on what will prove another false dawn.
The study argues that Africa has been plagued by worse policies than east Asia partly because of greater ethnic diversity: “Ethnic diversity alone explains between one-fourth and two-fifths of the east Asia/Africa growth differential and may fully account for some extreme country cases.” Ethnic diversity might cause problems for various reasons. Conflict between ethnic interest groups may delay macroeconomic stabilization or the removal of black market premiums. Corruption may be more damaging if several groups take bribes. Different groups may impose taxes independently at levels which, added together, are far above economically desirable levels. All but one of the world’s 15 most ethnically diverse nations are found in Africa. Kenya illustrates the problem: when political power passed from the Kenyatta ethnic coalition to the Moi coalition in 1978, resources for road-building, health care and the like were shifted from the former’s homeland to the latter. But if ethnic diversity has helped explain poor policy making for decades, why the apparent recent improvement? Mohsin Kahn, one of the IMF authors, argues that policy makers have been spurred into action by globalization and shrinking flows of overseas development assistance.
The IMF authors argue Africa will have to make further reforms to sustain the recent rise in growth. This means improving infrastructure, legal systems and public services, as well as further liberalizing trade, tackling corruption and strengthening financial systems. This is a challenging agenda and one which will have to be underpinned by a political culture that does what it can to prevent ethnic diversity from impeding the reform process. But as aid flows continue to dwindle—and reliance on foreign investment increases—the pressure will remain intense and the rewards for success great.
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