What is the growth outlook in East Africa?

Sustained rapid growth in many African economies has generated a debate on the sources and likely persistence of a so-called “African growth miracle” (see McMillan, 2014). The East African Community (EAC) countries’ have been an especially vibrant part of the continent.

Its economic growth performance during the past decade has been impressive. At 6.2%, the EAC’s average growth rate (unweighted, see Figure 1) in 2004-2013 is in the top one-fifth of the distribution of ten­-year growth-rate episodes experienced by all countries worldwide since 1960. Such performance is even more remarkable taking into account that the past decade encompasses the global economic and financial crisis that began in 2007.

Will this prove to be an isolated episode, with growth returning to lower levels in the years ahead, or is strong growth going to persist?

Figure 1. EAC and member countries, average real growth rates (%)

Source: World Economic Outlook, International Monetary Fund.  Notes: For Burundi the growth series starts in 1997 to exclude the period of rapid contraction in the first years of the civil war. For Rwanda, the series starts in 1998 to exclude the genocide-related contraction in 1994 and the subsequent sharp rebound in 1995-97.

Informed guesses about medium-term economic growth are indispensable to policymaking, despite the economics profession’s abysmal record at forecasting turning points in growth (Loungani and Juhn, 2012). For example, economic growth is perhaps the most important determinant of whether a country’s fiscal policy is sustainable, and growth slowdowns have caused many public debt crises in the past (Easterly, 1991).

In a recent effort (Gigineishvili, Mauro, and Wang, 2014), we looked at more disaggregated information on the sources of recent growth in the EAC in order to help inform judgments about the sustainability of its growth in the future. In particular, we analysed changes in the composition of output and exports by economic sector, and various indicators of improvements in the quality of goods produced and exported by countries in the region. The extent to which developments in the EAC countries reflect a move toward more modern economic processes and outputs may be a valuable indicator of whether growth is likely to be longer lasting.

Our key findings are as follows:

• Correlates of growth. To validate the information from official statistics on output growth, we considered developments in correlates of production, consumption, and economic development, such as consumption of electricity, the mortality rate, credit, and fiscal revenues (Easterly, 1999). These corroborate the overall picture of healthy economic growth.
• Structural transformation in output. The trend decline in agriculture’s output share has been steeper than in the rest of Sub-Saharan Africa or in low-income countries worldwide since 1970. Using a newly-collected, detailed database for 2000-2011, we show that the decline in the share of agriculture was mirrored by broadly-distributed gains in a wide range of other sectors (see Figure 2). The biggest winners were construction, transport and communications, wholesale trade, and public administration. The shares of manufacturing, mining and utilities displayed smaller gains.

Figure 2. EAC: Sector shares and changes, 2000 vs. 2010 (average; %)

Note: 1/ Real estate & business services. 2/ Transport and communications.
Sources: Data assembled with IMF desk economists’ input; authors’ calculations.

• Rising international integration and diversification. Exports as a share of GDP in the EAC rose from 12% in 1990 to 19% in 2010. They became more geographically diversified (using a Theil index or the share of the top ten destination countries in total exports).
• Structural transformation in exports. The share of agriculture in exports fell from 4/5 of all exports in the 1970s-90s to 2/3 in 2010, with mirroring gains in manufacturing. Considering data since the early 1960s, exported products have become more diversified in all EAC countries at a more rapid pace than for the Sub-Saharan average, with a steeper trend since the early 1990s, using the Theil index or the share of the top ten products in total exports of goods. The sheer number of distinct export products has also increased substantially (Figure 3).

Figure 3. Number of export products

Sources and notes: UN COMTRADE, authors’ calculations. Number of distinct products for which export revenues exceed $1 million (or $10 million).

• Increasing sophistication of exports. The EAC countries have generally moved toward exporting more “sophisticated” products, defined as those predominantly produced by advanced economies. A “sophistication” index (calculated from COMTRADE data at the 4-digit SITC level using a method similar to Hausmann and others, 2007), rose visibly in all EAC countries between 1990 and 2010 (Figure 4).

Figure 4. Sophistication Index, 1990 vs. 2010

Sources: UN COMTRADE, Penn World Table, authors’ calculations.

• Improved quality of individual items being exported. Summary measures of the quality of exports (Henn and others, 2013) within each export category also indicate a trend toward improved quality for each of the EAC countries. Focusing on changes in the quality of the various export items, there is no clear rising trend, perhaps not too surprising given that most of the products are primary commodities or goods that involve limited processing. It is also worth mentioning that the quality is measured relative to trading partners, suggesting that the countries in the region are broadly keeping pace with, but are not moving faster than their competitors.

Putting all of this together

The picture that emerges is that recent diversification and structural transformation bode well for continued economic growth. Yet, the kind of growth observed seems to be one in which consumer and investment demands for more sophisticated goods and services are beginning to be met, as one would expect as per capita incomes rise in the region. There do not yet seem to be any clear winners on the production side that are likely to embed a clear and durable comparative advantage in international markets, particularly beyond the region.

Nor are there major quality improvements vis-à-vis competitor countries, where progress is also being made. These observations may instill a further note of caution against projecting continued rapid growth into the distant future (see also Ho and Mauro, 2014). Going forward, economic growth is likely to remain healthy but to slow down to a more moderate pace than during the past decade.

Published in collaboration with VoxEU

Authors: Nikoloz Gigineishvili is a senior economist at the International Monetary Fund, where he has worked for the past 11 years. Paolo Mauro is currently senior fellow at the Peterson Institute for International Economics. Ke Wang is an Economist in the Caribbean I Division of the IMF’s Western Hemisphere Department.

Image: Kenyan workers prepare clothes for export at the Alltex export processing zone (EPZ) factory in Athi River, near the Kenyan capital Nairobi, July 31, 2009. REUTERS/Thomas Mukoya