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October 2008

A Mozambique Paradox

Submitted by Shanta on Mon, 2008-10-27 08:57

There is widespread consensus that financial development is critical to economic growth, globally, and in Africa. Yet Mozambique, a country with very low levels of financial development (in a recent survey, only 13 percent of firms had obtained credit from the banking sector, rural credit is almost nonexistent), registered a GDP growth rate of over 8 percent a year over the last decade.

On a recent visit to Mozambique, I tried to understand this apparent paradox, but ended up with even more puzzles. A group of prominent bankers said the problem was that enterprises lacked managerial and accounting skills, which is why they didn’t want to lend to them. They insisted that subsidizing credit will not solve this problem. In a separate meeting, one of the most successful entrepreneurs in Mozambique said that even he has trouble getting credit; he needs to put up his factories as collateral, and even then it takes about seven months. Finally, the government’s plan to stimulate agricultural production includes a program of credit subsidies to farmers to buy tractors and other inputs.

So, while everybody seems to agree that access to finance is a constraint (which begs the question of how Mozambique grew so fast), there are different views on how to relax that constraint. I look forward to your comments and suggestions.

The African media and state accountability

Submitted by Gözde Isik on Fri, 2008-10-24 17:22

I attended a very interesting seminar today on the role of the media in governance and anti-corruption. Key speaker for the session was the first African-born winner of the Pulitzer Prize, Nigerian journalist Dele Olojede. Mr. Olojede talked about the information and communication revolution that has taken place in Africa in the last decade and how it has transformed the role of the media all across the continent.

Emphasizing the breakthrough in widespread usage of cell phones and internet coverage and the growth of commercial radio stations, he talked about how it has substantially changed the way Africans view governance and their role in holding governments accountable.  As a result of this media revolution, citizens are becoming more empowered by increased access to information that otherwise would not be accessible to the public. He also mentioned how this revolution had been very effective in activating the wider public. Especially with the increase in user generated content based media such as blogs and ‘eye witness’ type news, anyone with access to a cell phone or the internet has the opportunity to share information in real time while remaining anonymous.

I left the seminar thinking to myself that given the huge potential the media has, perhaps it is the best tool that African countries have at their disposal to promote accountability and anti-corruption, then shouldn’t we be increasing our efforts to keep supporting and strengthening Africa’s media sector?

Will the financial crisis reduce foreign aid?

Submitted by Shanta on Wed, 2008-10-22 10:19

This question comes up frequently in discussions with policymakers, civil society and journalists. Two things need to happen for the crisis to lead to a significant reduction in foreign aid. First, the financial crisis has to lead to a major recession in donor countries. Second, the recession leads to such fiscal constraints that foreign aid is cut. Since the first is the subject of intense discussion among macroeconomists around the world (not all of whom agree) that a recession is inevitable, I looked into the second. How has foreign aid varied during previous recessions? According to my colleague Rocio Castro, “after a period of stagnation throughout the 60s, Official Development Assistance (ODA) has been on an upward trend since the mid 70s--except for the period of 1992-97 when it declined in real terms. This downward trend may have been linked to the economic recession of the early 90s, but it would be hard to tell to what extent.” This point is confirmed by a recent paper by Pamela Paxton and Steve Knack, which shows that aid is motivated largely by non-economic factors.

Official Development Assistance (ODA) in $ Millions

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Source: World Development Indicators

Poverty in Africa and elsewhere

Submitted by Shanta on Wed, 2008-10-15 09:12

Poor people are poor because markets fail them and governments fail them.  That markets fail them is well-known.  Failures in capital markets mean that young people cannot get loans to finance their education; imperfect or nonexistent insurance markets mean that poor people will not get decent health care if left to unfettered markets; economies of scale as well as the simple fact that basic services such as water are necessities mean that markets will not ensure that poor people will get the services they need to survive.  As Roy Radner, a former professor of mine once put it, “When you allocate resources by market prices, you discriminate against poor people.”

To overcome these failures—that is, to protect the poor—governments step in.  They finance and provide primary education and basic health care; they subsidize water and electricity so poor people can afford these services.  Unfortunately, these well-intentioned government interventions lead to failures of their own.  In Ugandan public schools, teachers are absent 27 percent of the time; health workers in primary health centers are absent 37 percent of the time.  Only one percent of the money allocated to non-salary spending in Chad reached the health clinics.  These “government failures” are sometimes as pernicious as the market failures they were intended to correct.  They are also difficult to overcome because various interest groups who benefit from the status quo may resist reform. 

The Nobel Prize in Economics and Africa

Submitted by Shanta on Tue, 2008-10-14 14:28

The awarding of this year’s Nobel Memorial Prize in Economics to Paul Krugman is a tribute not just to the elegance of Krugman’s pathbreaking contributions to international trade and economic geography, but also to his ability to apply cutting-edge economics to real-world problems.  Two pieces by Arvind Panagariya and Arvind Subramanian explain Paul’s varied contributions to economics.  Simply put, he turned traditional trade theory on its head by showing that countries trade with each other not just because they have different endowments of factors such as labor and land, but also because people like variety (Germans buy French cars; French people drink German wine). 

Also, production could be concentrated in some regions within countries (or even between countries) because of economies of scale and “agglomeration externalities”—clusters can be more productive if located near each other, as happened in Silicon Valley, California.  In thinking about their implications for Africa, I was struck by how many of Paul’s ideas were brought to life in this year’s (forthcoming) World Development Report, Reshaping Economic Geography.   Although the report will be published in November, earlier drafts show how Africa, especially those parts that consist of many small countries, could gain by concentrating production in certain locations, while ensuring goods and people can move easily among locations. 

Can Africa's growth be sustained?

Submitted by Shanta on Fri, 2008-10-10 17:50

We had a fascinating seminar on this topic yesterday.  Goolam Ballin of Standard Bank said that Africa today looks like Asia did 20 years ago--poised to grow rapidly over the next two decades.  At the same time, he was worried about the next two years because of Africa's dismal experience in adjusting to the external shocks of the 1970s.  Nigerian central bank governor Chukwuma Soludo struck a distinctly more optimistic note, pointing out that, for example, Nigeria's non-oil sector was growing even faster than its oil sector.  Justin Lin (chief economist of the World Bank) reconciled the two positions by noting that we may be somewhat pessimistic in the short-run, but the medium-term prospects are definitely good.  If East Asia could bring its poverty rate down from 80 percent to 18 in 25 years, Africa could do the same with its 50 percent poverty rate in the coming quarter century. 

Does the financial crisis signal the end of free markets and a return to state intervention?

Submitted by Shanta on Thu, 2008-10-09 09:30

At a recent videoconference with journalists, I was asked the question in the title of this post several times.   Does the fact that private banks in the United States are going bankrupt mean that the free market system is a failure?  Does the fact that the United States government is bailing out these banks and in some cases “nationalizing” them mean that state intervention is back?

In a word, “No.”  First, any financial system needs some form of government intervention, a point lucidly made by Bob Shiller.  The problem with some aspects of the financial system in the U.S. is not that there was no government intervention, but that it was flawed.  The solution is to improve government regulation of the system.  This however takes time.  Meanwhile, there is a danger of the system collapsing, which is why the government is bailing out various institutions. 

What are the lessons for developing countries in general, and Africa in particular?  In many countries, the extent of government intervention in the financial systems was so great to begin with that the system had become “stuck.”  Think of the various directed credit programs, where government banks lent only to politically-connected families, rather than the most productive people in the country.  In these circumstances, less government intervention, not more, would improve access to finance.  The key word here is “less”, and not “zero.” 

L'autre débat

Submitted by Shanta on Fri, 2008-10-03 10:36

Pour ceux qui ont raté le débat entre Sarah Palin et Joseph Biden, les deux candidats à la vice-présidence des Etats-Unis, je vous offre une alternative—un débat entre le professeur Kako Nubukpo de l’Université de Lomé et moi-même.  Contrairement aux candidats américains, nous avons traité des sujets différents, mais peut-être plus pertinents pour l’Afrique : la zone CFA, l’agriculture, les politiques industrielles, le « consensus de Washington », la pauvreté et

Is information the solution?

Submitted by Shanta on Thu, 2008-10-02 15:52

Chris Blattman is right to question my enthusiasm for information as the solution to seemingly intractable development problems. (By the way, thanks for the complimentary plug for AfricaCan, Chris).  Information by itself is not useful unless people can do something with it.  And we’re talking about poor people, who typically have very little power. But if enough poor people have access to the same information, they may be able to mobilize and enforce better performance from service providers or public officials. This is the reasoning behind the work on citizen report cards, public expenditure tracking surveys, community monitoring, and the like.

A recent note by Stuti Khemani explores why community monitoring of health care in Uganda appeared to work so well, while a similar program for schools in Uttar Pradesh (UP), India didn’t.  She suggests three reasons: differences in the level of NGO activism in the two countries; differences between health and education; and the political economy of service delivery (teachers unions are very powerful in UP).  The latter is particularly troubling because another rationale for information campaigns is when reforms in service delivery are blocked for political reasons.  What then can we do?