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Right analysis, wrong conclusion?

Shanta Devarajan's picture

During my recent seminar in Geneva, where I was also meeting with the Africa Progress Panel, a couple of members of the audience (which consisted of ambassadors, U.N. staff, civil society and academics) said, “I liked your analysis, but not your conclusions.” 

The seminar summarized many of the points I have been making on this blog:

  • For the decade before 2008, Africa was experiencing sustained and widespread economic growth, thanks to aid, debt relief, private capital flows, high primary commodity prices, and improved macroeconomic policies
  • Despite being the least integrated region, Africa was perhaps the worst hit by the global crisis
  • Contrary to some people’s fears, African governments continued to pursue prudent economic policies during the crisis—even though the visible payoffs to these policies (growth and poverty reduction) had suddenly diminished
  • Conclusion:  Economic policy in Africa, which had been improving before the crisis, and either stayed on course or improved during the crisis, has never been better.

    Since my conclusion followed directly from the analysis, I had three possible explanations for the reaction mentioned above:

    1. Some people may have interpreted the conclusion that policy “has never been better” as implying that all is well in Africa—which of course is not the case.  There is huge room for improvement in those policies, but that doesn’t negate my conclusion, which was a statement about current policies relative to the past.
    2. Others were uncomfortable with the notion that African governments were willingly pursuing these policies which were, as my discussant mentioned, the same policies advocated by the IMF and the World Bank.  Perhaps these governments had no choice but to follow these policies.  While it is true that many of these policies were the same as those contained in IMF and World Bank programs, it is clear that this time—and in fact over the past ten years—the policies were increasingly driven by African governments themselves.  In at least a few cases, the Bank may have suggested that the country go for a larger fiscal stimulus, but the government demurred because they didn’t think they had the capacity to implement a larger spending program, and they didn’t want to risk increasing their debt levels.  Also, it was not because they had no choice:  during previous crises, such as the commodity price busts of the late 1980s, the response of many African governments was very different—they introduced exchange rate controls, price controls, and a host of untargeted subsidies.  They could have done the same this time, but they didn’t.
    3. Finally, reading between the lines of the questions, I got the impression some people felt that the global economic crisis should have caused a rethinking of development policy, whereas I was suggesting that “orthodox” economic prescriptions continued to apply.  When developed countries are stimulating domestic demand, shouldn’t African countries consider doing the same, rather than the export-led strategy they have been pursuing until now?  But small African countries face limits on how much they can stimulate domestic demand; they have to export to generate sustained economic growth.  Similarly, just because the U.S. is considering regulating the derivatives side of its financial markets, it doesn’t follow that African countries should abandon their programs of financial-market deregulation—because the starting points are different.  The U.S. financial sector is largely private, but some parts are in need of regulation.  By contrast, the financial sector in many African countries is still largely government-owned and –operated, leading to political patronage and huge losses; reduction in government control is likely to improve matters.

Let the debate continue...

Comments

Submitted by Jared Osoro on
Shanta; I am just wondering loudly: Are your arguments based on evidence that factors such as aid and debt relief have had a signficant contribution to Africa's "sustained" growth? Empirical work that I have come across by, for instance, Willian Easterly and others indicates that such relationship is at best not conclusive, otherwise dies nit exist. Tell me; why is it that the economies in Africa that have benefited fro HIPC ad ehnanced HIPC (e.g. Uganda, Zambia) are the ones that still remain debt-unsustaibale? Or I am confusing correlation with causation? Let's assume a Robinson Crusoe economy. How could it be hit by the the developments in the mainland where it is, at best, "least intergrated"? My simple answer could be that if Robinson Cruse is "worst hit", ingetration is narrowly defined. If instead of Robinson Crusoe you have Africa and for the mainland you have the developed world that authored the economic meltdown. It seems to me that for purposes of your analysis, integratio was restricted to that of the financial systems, not trade, remmitance flows, even aid! when you bring all these transmission channles to bear, then africa may not be as "least" integrated as youi portend; thus the "worst hit"consequence would be precisely expected. Giving credit where it's due, like you have done, Africa has avoided costly policy reversals that the crisis could have privuided an excuse for. But then , it should have not taken the global crisis for us to start questioning the "orthodox" economic policy prescritions. Don't you think that East Asia could still be playing in the same league as Africa had it not almost treated with contempt the "Washington Consesus" (read Orthdox economic policy prescritions)? I have seen recet review reports by IMF and World Bank staff praising those economies that have attempted to put in place stumulus packages (both fiscal and monetary) where either the absorption capacity is low (in the case of Uganda and its fiscal stimulus) or the authorities have not figured out the nature of the transmision mechanism (in the case of Kenya's stimulus via monetary policy). So it it a case of "Right Analysis, Wrong Concusions?"No. May be one of Wrong Analysis leading to Wrong Conclusions!

Thanks for your thoughtful set of comments, Jared. Let me take them para by para. 1. While over the long-term, the relationship between aid and growth is somewhat inconclusive, there seems to be agreement that the relationship has become stronger over the last 10-15 years, which is the period when Africa was experiencing rapid and widespread growth. Incidentally, neither Uganda nor Zambia has unsustainable debt. 2. When I said Africa was "least integrated," I was referring not just to finance, but also to trade, where Africa's trade ratios are lower than, say, East Asia's. But this is precisely why they were the worst hit. Their low trade ratio is a reflection of the fact that these countries are typically trading in one or two primary commodities, so when the price of that commodity falls, the economy is badly hit, since this is the only source of foreign exchange. By contrast, some of the more diversified East Asian countries are less dependent on one or two primary commodities, so that they are not as badly hit (and even if they were, they have more opportunities to adjust) as African countries. 3. I would not characterize the East Asian experience as violating the Washington Consenus. For instance, they all followed prudent macroeconomic policies--low fiscal deficits, positive real interest rates, carefully managed (and often undervalued) exchange rates. Many people refer to the industrial policies that promoted and subsidized exports as examples of East Asian countries' defiance of "orthodoxy." But here too, I have a different take. The existence of externalities in exports is perfectly consistent with neoclassical economics (indeed, it is a cornerstone of welfare economics). When there is a positive externality, the neoclassical (or "orthodox") prescription is to subsidize it. This is exactly what the East Asians did. The problem is that many African countries, too, tried to subsidize industries (using the same externality arguments as did the East Asians), but the result was a colossal failure--with the subsidies going to politically-connected, but economically unproductive enterprises, etc., etc. It is to avoid this "government failure" that some of us are skeptical about re-introducing industrial policy in Africa. As you can see, it is this skepticism that is the departure from orthodoxy, not the desire to subsidize externalities. 4. Finally, it is because absorptive capacity is low that the fiscal stimulus packages of Uganda and many other African countries have been so modest. Keep in mind that the U.S.'s fiscal stimulus leaves it with a deficit of 10 percent of GDP, whereas those of African countries are in the 2-3 percent range.

Submitted by Pedro on
Shanta, I couldn't agree more that policy has never been better in Africa, but I do think that the framework of the last decade has not been truly tested. The GFC was an exogenous shock (from the point of view of Africa) and widely viewed as such. Nor have its effects been long-lasting: commodity prices fell sharply but recovered quickly, and I would say the liquidity on which the continent has counted is very much a function of commodity prices, even if indirectly. How solid is the political support for orthodox policy if we see the global stagnation dragging on for a few years?

Excellent point, Pedro. One reason some of the African countries were able to run (albeit modest) deficits was that the World Bank and ADB "front-loaded" their concessional lending. Front-loading means there will be less money available in subsequent years. If the global stagnation continues, this could have serious consequences, including, as you say, a reversal of political support for maintaining reforms.

Submitted by Pedro on
If I may ask your opinion, which countries would you say are more likely to persist with reforms during any hard times?

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