Macroeconomics and Economic Growth
Optimism about Africa’s future is no longer scarce. The continent’s growth has been exemplary in recent years. Yet it is just as easy to find signs of distrust in the global economy.
Multilateral agencies insist that international integration offers opportunities for accelerating economic growth. Official parlance has become tame since the heyday of structural reforms in the early 1990s, but they have found subtle ways to argue that trade is good. The World Bank recently launched “Defragmenting Africa,” providing an exhaustive and exhausting list of policies to increase international trade within the continent.
Unsurprisingly the prescriptions can be costly. Removing import taxes might improve economic efficiency and enhance consumer welfare, but revenues can fall in countries with limited public resources. Although Africa harbors some of the highest trade taxes in the world (World Development Report 2009), the point is that there are tradeoffs. The same applies to policies that entail investments in infrastructure for “trade facilitation.”
What would Africa get in return?
Over half the countries in Sub-Saharan Africa subsidize fuel to protect consumers from high and volatile prices. But fuel subsidies are neither cheap nor likely to be sustainable (see the full analysis in the new Africa's Pulse).
Data for 2010-11 show that fuel price subsidies consumed, on average, 1.4 percent of GDP in public resources: The fiscal cost in oil exporters was almost two-and-a-half times that in oil importers. In the face of high (and rising) world fuel prices, a number of countries have raised domestic prices to stem fiscal costs.
For example, Ghana raised fuel prices by about 30 percent in January 2011. The Nigerian government removed the subsidy on gasoline this January, although a portion of the subsidy was subsequently reinstated. With oil prices likely to remain elevated, fuel subsidies will continue to weigh on government budgets in Africa.
But who benefits from fuel price subsidies?
Expenditure data for seven African countries show that the distribution of these subsidies is disproportionately concentrated in the hands of the rich. Richer households spend a larger amount on fuel products, and, consequently, benefit more than poorer households from any universal subsidy on these products. On average the richest 20% receive over six times more in subsidy benefits than the poorest 20%.
One of the most distressing aspects of the frail economic recovery from the global crisis has been lagging job creation. In developed and developing countries alike, millions of people remain unemployed (some 200 million by ILO estimates), and many who still have jobs live in fear of losing them or seeing their incomes and benefits stagnate. Fortunately, the worst may be over in several parts of the world.
Can Africa claim the 21st century? When the World Bank’s Africa department published this book in April 2000, most observers were doubtful that African countries would ever be in a position to become emerging markets. That year, The Economist called Africa “The hopeless continent” and global attention was focused mainly on Africa’s problems: HIV/Aids in Southern Africa; the relentless war in Somalia; and, droughts in the Sahel—which gave the pessimists plenty of ammunition.
But over the last several years, something remarkable has happened: Africa’s fragile and conflict-affected countries remain a major development challenge, but besides these, a Stable Africa has emerged. Most of this Stable Africa has experienced continued high growth for a decade, and major improvements in social indicators. Africa is becoming an investment destination, and there is hardly a week which goes by without a major investor dropping by my office, to discuss the region’s economic fundamentals.
How has Africa changed over the last decades?
This piece was co-authored with Günther Schulze1.
Kenya may have found oil in Turkana that could change the development trajectory for the country. In 2011, Kenya spent US$ 4.1 billion on oil imports, equivalent to approximately 100,000 barrels per day. For Kenya to become a net oil exporter, the resources in Turkana would need to be substantial and similar to those of Sudan or Chad.
If indeed Kenya has substantial oil reserves, will they benefit the country in the long-term?
Some observers are predicting similar problems as in Nigeria, Equatorial Guinea and many other resource-rich African countries where corruption has been amplified.
Others argue that this need not be the case. Countries as diverse as Botswana, Chile and Norway have shown that natural resources can be a blessing. If managed well, they can even support the fight against poverty by providing the resources needed to scale up the delivery of public services. In the last ten years, many of the world’s fastest growing economies, including in Africa, have benefitted from exporting natural resources.
So who should we believe?
Supporters of social entrepreneurship often cite examples of “heroes” who have successfully built organizations to solve social problems on a global scale. But social entrepreneurship also includes many efforts to fix targeted, local problems rather than working toward large-scale global change. An increasing number of social entrepreneurs are experimenting with ways to use commercially generated revenue to grow and maintain their social impact.
These findings are part of one of the most robust quantitative studies of social enterprise to date. Undertaken by Harvard Business School Associate Professor Julie Battilana and her colleague Matthew Lee, a doctoral student at Harvard Business School, they analyzed 6 years worth of applicant data from Echoing Green. The purpose of the study is to expand the field of vision beyond “heroic stories” that dominate the discussion on social entrepreneurship. In this interview, they share some initial findings from their research.
Important developments today:
1. Japanese Yen strengthens as the country’s current account turns to surplus again
2. Japan’s current account returns to surplus in February
Perhaps it is not surprising that trade with emerging economies is often more complicated, time consuming, and costly than one would want. In addition to lacking some of the necessary physical infrastructure to transport goods, emerging economies frequently have complex and opaque regulatory requirements that create additional delays and increase transaction costs at their borders.