Dear Africa Can readers, we’ve heard from many of you since our former Africa Chief Economist Shanta Devarajan left the region for a new Bank position that you want Africa Can to continue highlighting the economic challenges and amazing successes that face the continent. We agree.
Today, we are re-launching Africa Can as a forum for discussing ideas about economic policy reform in Africa as a useful, if not essential, tool in the quest to end poverty in the region.
You’ll continue to hear from many of the same bloggers who you’ve followed over the past five years, and you’ll hear from many new voices – economists working in African countries and abroad engaging in the evidence-based debate that will help shape reform. On occasion, you’ll hear from me, the new Deputy Chief Economist for the World Bank in Africa.
We invite you to continue to share your ideas and challenge ours in pursuit of development that really works to improve the lives of all people throughout Africa.
Here is my first post. I look forward to your comments.
In 1990, poverty incidence (with respect to a poverty line of $1.25) was almost exactly the same in sub-Saharan Africa and in East Asia: about 57%. Twenty years on, East Asia has shed 44 percentage points (to 13%) whereas Africa has only lost 8 points (to 49%). And this is not only about China: poverty has also fallen much faster in South Asia than in Africa.
These differences in performance are partly explained by differences in growth rates during the 1990s, when emerging Asia was already on the move, and Africa was still in the doldrums. But even in the 2000s, when Africa’s GDP growth picked up to 4.6% or thereabouts, and a number of countries in the region were amongst the fastest-growing nations in the world, still poverty fell more slowly in Africa than in other regions. Why is that?
Part of the answer is that Africa’s population growth rates are still very high: 2.7% per year, versus 0.7% in East Asia. So a 4.6% growth rate for GDP translates into a much more modest sounding 1.9% growth in per capita GDP – less than the developing country average in 1999-2012. But an even bigger part is that Africa just seems less efficient at transforming economic growth into poverty reduction. That conversion is measured by what economists call the “growth elasticity of poverty”, a number that tells us by how much poverty falls for each percentage point in economic growth. According to a recent (and as yet unpublished) estimate by my colleagues Luc Christiaensen, Punam Chuhan-Pole and Aly Sanoh, that elasticity was about 2.0 in the developing world as a whole (excluding China) during the 2000s, but only 0.7 in Africa.
At this rate, even if countries in Africa continue to grow at the same rates as in the 2000s – a period when the external environment was particularly benign, with rising commodity prices and abundant liquidity – poverty in 2030 would be in the 26%-30% range (assuming constant inequality). Under similar assumptions for other countries, somewhere between 60% - 80% of the world’s poor would live in Africa.
Why is growth in Africa apparently less pro-poor than elsewhere? And what can be done about it? At first blush, at least part of the answer (beyond rapid population growth) has to do with both levels and changes in inequality. Inequality is relatively high in Africa: seven of the world’s 10 most unequal countries in the latest data in Povcalnet are in the region – despite the fact that African inequality is almost invariably measured for consumption, rather than income, while the opposite is true in Latin America. In addition, inequality has actually been rising in a number of countries. (Although the truth is that infrequent household surveys and changing methodologies are so common that we actually know relatively little about real changes in inequality in Africa – despite the impression you may get from various sources…)
This clearly reflects a growth pattern that is less inclusive than we might like. In our latest Africa’s Pulse and in our recent presentation on the State of the Africa Region to the Annual Meetings of the Bank and the Fund in Washington, we reviewed some of these data, and suggested a four-part strategy for better sharing Africa’s growth in the future:
• First, preserve macroeconomic stability. Africa’s growth success in the 2000s reflects policy improvements, but also a benign external environment. During this period, fiscal deficits and current account deficits grew in most countries (Figure 1). While that is understandable, given plentiful capital flows, the risk is that those capital flows cease – or reverse – precisely at a time when commodity prices have stopped rising and are, in many cases, falling. Countries with large fiscal and current account deficits are inevitably more vulnerable to those risks.
Figure 1: Change in Current Account Balance (% GDP) and Fiscal Balance (% GDP), 2000 - 2012
• Second, build more – but mostly better – human and physical capital. Of course, alongside increases in total factor productivity - this is what drives economic growth everywhere. Despite progress, the needs in Africa are enormous, in everything from health and education to transport and energy. Our emphasis here is on quality: there have been real gains in access, but children won’t learn unless the teachers show up at school and, in addition, actually teach! Similarly, the costs of power, water, transport and communications remain excessively high. That is partly due to sheer scarcity, and partly to geographic fragmentation, but not only. The way contracts are designed, the way competition is (or isn’t) promoted, and the way subsidies interact with firm incentives all need looking at as well.
• Third, promote growth in the places and sectors where the poor live and work. For most of Africa, that means in rural areas – both by finding better ways to promote higher yields in agriculture, and by strengthening the off-farm economy. Linkages to small and medium-sized towns seem to be an important ingredient. This suggests that “local investments” – in rural roads and electrification, for example – is likely to be as important as big flagship projects. Even if the political economy tends to favor the latter.
• Fourth, harness the power of growth that takes place elsewhere for investments near – or in – the poor. That is particularly pertinent for (the large and growing group of) countries with large natural resource sectors. Oil and mining are not intensive in unskilled labor and could, if left alone, develop almost as “enclave sectors”. The main policy concern with these resources is to invest as much as possible of the rents they generate into other forms of capital, to replace the natural capital being depleted. But countries should be imaginative and comprehensive in their choice of investment portfolio. The portfolio should obviously include infrastructure, health and education projects, to build physical and human capital. But it may also include foreign assets, to help with the risk of exchange-rate appreciation and “Dutch disease”.
And it should also include some cash transfers made directly to poor people. The prevailing evidence is that poor households tend to use the resources from small cash transfers rather wisely. They buy more and better food. They send their kids to school more often. And they even invest some of it in their own (very) small businesses: they buy chickens in Mexico, or goats in Tanzania.
That’s pro-poor growth for you! Poor people feeding their babies better and sending their children to school, while also building a new chicken coop. Let governments ensure that there are teachers there to actually teach the children, and you could be on to a really promising combination. It may look less impressive than a new oil platform or a shiny airport, but it will reduce poverty just the same, if not more!