How to sustain Africa’s growth

Sub-Saharan Africa is doing well. The region has never grown so fast for so long.

• On average, the growth has been around 5% per year over the past decade; the region even breezed through the Global Crisis.
• Nine African governments have managed, for the first time, to sell bonds in London and New York – and, in a sign of confidence, these bond issuances were oversubscribed.
• The proportion of Africans living in poverty is, at last, on a downward trend.

Talk of Africa’s renaissance is in the air. Is this an exaggeration? Put differently, is Africa’s growth – and glow – sustainable? The answer is in the hands of its policymakers.

Good policy and a dash of luck

To start with, the current span of African growth is the result of good policies and a dose of luck. Data on the quality of the region’s macroeconomic management show that most governments have upped their game (The World Bank 2013). Much of the improvement was ushered in by debt relief programmes closely monitored by donors and multilaterals. The luck part has to do with commodities. Higher prices for oil, gas, and minerals – and superior technologies for discovering them – have pumped bundles of cash into African economies, making their expansion almost inevitable. However, both debt relief and the commodity super-cycle are coming to an end (Guigale 2013). This may soon begin to show in lower growth numbers.

If that were not enough, some might rightly argue that Africa’s growth is by-passing its manufacturing sector – the bulk of its labour force is moving directly from agriculture and extractives into urban services (Rodrik 2013). This industry-less economic structure robs the continent of the opportunity to raise its productivity more and faster – there is good theory and some evidence that factory workers clustered together learn more from each other than, say, shopkeepers (African Centre for Economic Transformation 2014, Greenwald and Stiglitz 2006, Jorgenson and Stiroh 2000). Slow(er) productivity growth will at some point mean slow(er) economic growth.1

While plausible, the policy, cyclic, and structural reasons to doubt the long-term sustainability of Africa’s growth miss a much bigger issue – the evolution of the region’s wealth. When growth is driven by income from the exploitation of natural resources, the right question to ask is whether that income is being consumed or invested. Or, as John Hartwick taught us thirty years ago, is the wealth underground being converted into equal or more wealth above ground (Hartwick 1977)? If it is not, at some point growth will stall. Think of it as selling the family’s gold to pay for monthly expenses – how long can that last?

There is a rough but reliable measure of whether countries are burning off their wealth – it is called ‘adjusted net saving’ (The World Bank, 2011). In essence, this is the sum of the incomes of a country’s residents reduced by national consumption, the depreciation of physical capital, the depletion of natural resources, and the pollution of the environment, and increased by expenditures on education – a proxy for the formation of human capital. So, when governments spend more on things like basic infrastructure or school buildings, they raise the level of net saving; when they pay more for gasoline subsidies or bloated bureaucracies, they lower it.

It is now possible to estimate the adjusted net saving for most countries in Africa between 2000 and 2012, and to compare it with how fast they have been growing. This is shown in the Figure 1 below. You can quickly see four groups. One is growing fast but is draining their wealth. If this were a race, you could think of them as ‘sprinters’ – if they don’t start saving, they will sooner or later lose speed or stop. Others are both growing fast and building wealth – the ‘marathon runners’. Many are ‘joggers’ – not dissaving but are not growing much either. And a few are both dissaving and growing relatively slowly – ‘obstacle runners’.

Figure 1. Adjusted net saving and annual growth rate of GDP for African countries (2000-2012)

Source: World Development Indicators.

Concluding remarks

The point of this evidence is that the quadrant in which a country finds itself depends on its government – not on its endowments.

• Countries with and without natural resources show up in all four groups more or less in the same proportions.
• What makes growth unsustainable is not that it comes from hydrocarbon or mineral rents, but how those rents are used.

That is a public-policy decision, not fate. In that, and for Africa as a whole, the jury is still out.

References

African Centre for Economic Transformation (2014), “Growth with Depth”, 2014 African Transformation Report.

Greeenwald, B and J. E. Stiglitz (2006), “Helping infant economies grow: Foundations of trade policies for developing countries”, American Economic Review, Vol. 96 (2): 141-146.

Guigale, M (2013), “What on Earth Are ‘Commodity-Super Cycles’ and Why Do They Matter?”, huffingtonpost.com, 5 September.

Hartwick, J (1977), “Intergenerational Equity and the Investing of Rents from Exhaustible Resources”, American Economic Review, Vol. 67(5):972-974.

Jorgenson, D W and K J Stiroh (2000), “US Economic Growth at the Industry Level”, American Economic Review, Vol.90 (2):161-167.

Rodrik D (2013), “Africa’s Structural Transformation Challenge”, project-syndicate.org, 12 December.

The World Bank (2011), “The Changing Wealth of Nations”, The World Bank, Washington, DC.

The World Bank (2013), “Assessing Africa’s policies and institutions”, CPIA Africa, data.

Footnote

[1] A guess: the reason why industry is not leading Africa’s economic transformation is a mix of shoddy regulation, transport monopolies, and corruption; they make it impossible for the region’s countries to join the kind of ‘global value chains’ that turned most of east Asia into such a development success.

This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Marcelo Giugale is the Senior Director of the World Bank Group’s Global Practice on Macroeconomics and Fiscal Management, the professional home of the Group’s 300-plus macroeconomists.

Image: A view is seen of the Nigeria stock exchange building in the central business district in Lagos April 10, 2013. REUTERS.