Following decolonization in the 1950s and the 1960s, growth accelerated in several of the leading African economies with the flowering of long-delayed industrial activity, the modernization of physical infrastructure, and the quickening of urbanization. However, by the mid-1970s this initial phase of catching up had run out of steam as countries fell prey to political turbulence, internal and cross-border conflicts, and economic distortions introduced by policy mismanagement and import substituting industrialization. Problems internal to the continent were exacerbated by the weakening performance of Africa’s main trading partners in the West. African countries entered a long economic twilight that extended through the mid-1990s;
1 since then and for over a decade, Africa has benefited from a widely shared revival of economic activity. Reasons for this revival include the spurt in growth worldwide that can be traced to globalization; the upsurge in innovations triggered by the advent of the Internet and advances in semiconductor/digital technologies, by expansionary monetary policies, and by the extraordinary economic prowess of China and other Asian countries that raised the tempo of industrialization; the demand for mineral resources; and the volume of trade, particularly South-South trade. Other causes for this resurgence are internal to Africa. On balance, there is greater stability and a democratization of politics, macroeconomic policy is better managed, African economies are more open, and human development indicators have improved. Also, higher primary product prices have enhanced export earnings and increased the volume of foreign direct investment (FDI) in resource-based sectors and linked infrastructures.
2With growth averaging over 5 percent per year during 2000 and 2011, both African policymakers and external observers are confident that the continent has turned the corner and its long-term prospects are brighter than at any time in the recent past. But this newfound momentum cannot be taken for granted, and sustaining or even improving on this performance will depend on how effectively African countries, both individually and collectively, respond to a number of challenges—old and new. In particular, the financial crisis of 2008/2009 has seriously weakened some of Africa’s principal Western trading partners and suspended questions over the future contribution of industrialization, trade, and the flow of aid to Africa’s growth. Aid fatigue, and doubts as to its efficacy,
3 is being compounded by the budgetary woes of Western countries that are unlikely to be resolved during this decade.
4 Moreover, the sources (and the future
5) of growth are less easy to discern than was the case just five years ago. Even the East Asian economies are casting around for additional drivers of growth with services including nontradable ones becoming the focus of policy attention.
6 The fragmentation of production and its offshoring from Western countries might by now be well past its high water mark, and in fact there is some evidence of a reflux of certain kinds of manufacturing activities back to the industrialized nations. Whether the transfer of some industrial activities from East Asia (China in particular) to Africa will offset a slowing of offshoring from the West remains to be seen. A sharp and sustained increase in capital investment, rapid technological advance, and innovation complemented by human capital deepening and a strengthening of governance institutions are plausible options, but all demand a commitment to long-term development strategies backed by the sort of sustained political resolve that has been in short supply in Africa.
So much is at stake that inaction is not a viable option. African countries will need to adopt a proactive approach and capitalize on both the newly gained confidence in the continent’s future and the mineral and energy discoveries that have brightened the growth prospects of countries such as Mozambique,
7 Ghana, Tanzania, and Uganda, among others. Several attempts have been made to craft a strategic framework for African countries,
8 but the uncertainties injected by the lingering aftermath of the financial crisis have complicated the situation and made it harder to chart a course forward. While recent research offers a plethora of findings, these too add to the confusion because not infrequently their relevance for Africa and the practical policy implications are left unstated.
The purpose of this chapter is to sketch a strategy for African late starters that identifies the key objectives and the mix of policy initiatives appropriate for a post–financial crisis environment in which South-South trade and capital flows are taking on a greater salience. In sketching this framework, the chapter will draw on the empirical work that is helping spell out the constants in growth economics and what our new knowledge suggests are the changes that need to be factored into policies.
9 The chapter is divided into three parts. The first part briefly reviews the performance of African economies over the past decade; it highlights the factors that enabled the continent to escape from a prolonged spell of stagnation. The second part notes the challenges for African countries and how these have been sharpened by the crisis and by other developments, such as the greatly enlarged role of China in both the global economy and in Africa. The third part defines a diversified strategy
10 that could help African countries remain on their current growth paths while addressing challenges they cannot afford to sidestep.
AFRICAN ECONOMIC PERFORMANCE, 1990–2011
The first half of the 1990s was a low point for growth in Sub-Saharan Africa—0.8 percent per year. In the latter half of the decade, growth rose to an average of 3.9 percent per year, well in excess of the 2.4 percent average of the 1980s,
11 and it continued accelerating into the first decade of the twenty-first century.
12 Growth between 2000 and 2010 averaged 5 percent per year and, in spite of spreading gloom in the European Union, was 5.1 percent in 2011. Growth slowed to 3.7 percent in 2012 but then rose to 4.7 percent in 2013–2014.
13 This performance was supported by a rise in investment rates from an average of 18 percent in 1990 to 21 percent in 2012
14—not comparable to East Asian levels, but respectable nonetheless—and by an increase in total factor productivity from −0.5 percent per year between 1980 and 1994 to 1.3 percent per year since 1995.
15 Exports grew from just over 26 percent of GDP in 1990 to almost 32 percent in 2012.
16 Several countries also improved their social and Doing Business indicators,
17 and foreign investment in Africa rose from USD 9 billion in 2000 to USD 57 billion in 2013,
18 with African countries attracting 3.9 percent of global inflows. Remittances also climbed to USD 41.6 billion in 2011.
19 And African countries reduced their external debt in 2012 to 22 percent of GDP from 63 percent in 2000 (Severino and Debled 2012).
The stronger growth performance is reflected in some progress toward several Millennium Development Goals (MDGs). The region has achieved 35 percent of its poverty target of halving the population living on less than USD 1.25 (in 2005 prices)—from 57 percent in 1990 to 48 percent in 2010 (World Bank 2014b), although according to Sala-i-Martin and Pinkovsky (2010), Africa is en route to halving its poverty rate by 2017. Moreover, growth was pro-poor with inequality diminishing since 1995.
20 In a recent paper, Alwyn Young (2012) goes further to claim that income statistics might be seriously underestimating the actual gains. By using the Demographic and Health Surveys, which collect data on household ownership of durables, he concludes that household consumption has in fact been increasing by between 3.4 and 3.7 percent per year, which is three to four times the rate reported by international data sources. Declining rates of poverty have had positive spillover effects, with the percentage of underweight and malnourished children declining by 25 percent. Furthermore, primary school completion rates rose to 79 percent in 2009, with countries such as Burundi, Madagascar, and Rwanda achieving near-universal primary enrollment; child mortality dropped from 181 to 130 percent over the same period; and there was a significant slowing in the growth of new HIV infections by up to 74 percent in some of the worst affected countries (United Nations 2012;
Economist 2013, 3).
Other indicators convey a less positive picture. Gross savings fell from an average of 24.6 percent in 2006 to 20 percent in 2012.
21 Although gross capital formation was increasing, private fixed investment was unchanged at 13.4 percent of GDP from 2006 to 2009, and the infrastructure deficit scarcely narrowed.
22 In a disturbing trend, the share of manufacturing in GDP for Africa as a whole declined from 13 percent in 2000 to 10 percent in 2012.
23 It was 9.7 percent in East Africa, 5 percent in West Africa, and 18.2 percent in Southern Africa.
24 Moreover, most manufactures are resource based with low domestic value added, and they register limited productivity gains and spawn few linkages with the rest of the economy (UNCTAD 2011). Diversification of manufactured exports was correspondingly limited. The share of manufactured exports in total merchandise exports, which was 27 percent in 2000, fell to 26 percent in 2012,
25 and Africa was responsible for just 1.3 percent of global manufactured exports in 2008 (and 1.1 percent of global manufacturing value added in 2009), against 1 percent in 2000 (and 1.2 percent of global manufacturing value added). The principal exports of even the more industrialized African countries were resource based. For example, South Africa’s top two exports were platinum and gold; Kenya’s were tea and cut flowers; Ethiopia’s were coffee and sesame seeds (the lackluster performance of manufacturing is noted in
Economist [2013]);
26 Tanzania’s were coffee and tobacco; and Ghana’s were cocoa beans and manganese ores (World Bank 2011b).
CONTRIBUTING TO GLOBAL PUBLIC GOODS AND RAISING GROWTH POTENTIAL
The accumulated experience of more than half a century has substantially enhanced the developmental potential of the African continent. Technological advances and globalization have improved the growth prospects of late starters and opened up avenues for leap frogging in areas such as telecommunications, banking, and power generation. The scope for internalizing decades of lessons makes it possible for African countries to pursue smart urban development and avoid the many missteps of countries at a more advanced stage of urbanization. Increased South-South trade and capital flows and Africa’s diminishing reliance on its traditional trading partners reduces the continent’s vulnerability to a prolonged stagnation of Western economies. In comparison to the 1970s, Africa is in a better position to sustain its regained growth momentum. But success continent-wide will rest on two factors. First, Africa must increase the supply of global public goods that have helped foster recent prosperity but are currently inadequate to sustain future growth. Second, African countries must take a strategic and methodical approach to transforming economic assets into innovative drivers of economic performance.
Africa faces a host of challenges and an exhaustive listing serves no useful purpose. However, a small subset of global public goods is likely to exert a profound influence on Africa’s prospects. These include continued integration with the global trading environment in a manner that contributes to the diffusion of capital and ideas; continent-wide political stability; and a wide-ranging, multisectoral response to global climate change that minimizes economic costs while containing the increase in greenhouse gas emissions.
INCREASING THE PROVISION OF PUBLIC GOODS
PRESERVING GLOBALIZATION
The past decade has witnessed a sea of changes in international relations alongside a rebalancing of the global GDP. It appears that we are entering a multipolar world in which a number of regional hegemons are vying to displace a single superpower. This could have political and economic consequences. On the political front, the risk of regional tensions leading to arms races and flaring into sharp and costly conflicts is greater. On the economic front, the stalemated Doha Round and climate change–related negotiations (UNFCCC)
27 provide a foretaste of what a multipolar world may be like. There is a nontrivial risk of a slide back to a more protectionist environment if countries are unable to correct trade imbalances, and industrial hollowing and associated unemployment could induce politicians to buy short-term relief by raising barriers to trade. The term “murky protectionism” has been coined to describe the creeping revival of trade impediments, which if not reversed, could begin to eat into the gains from trade and the opportunities for export-led growth (Baldwin and Evenett 2009, Evenett 2013
28). Following the financial crisis, worries have again resurfaced over untrammeled flows of international capital and the possibility of “sudden stops” to some countries when investors panic, the appreciation of exchange rates in others faced with a surge in inflows, and the inflating of asset bubbles as a consequence of quantitative easing by central banks in some of the leading economies. Similarly, the backlash against financial innovations (including securitization and exotic derivatives), and the havoc some have caused, is leading to a tightening of regulations. These could not only curb the excesses of financial globalization but also limit the benefits to developing countries in the form of productivity gains from financial development (Bekaert, Harvey, and Lundblad 2011), equity capital for industrialization, and sophisticated banking technologies that improve access of local businesses to capital and resource allocation.
29Although its promoters
30 can exaggerate the advantages of globalization and a tempering of certain trends may well be desirable,
31 a reversal would not be in the interests of the community of nations. The world has lived through one such reversal in the early decades of the twentieth century, and a recurrence is best avoided. But unless the widening cleavages between the interests of the advanced countries and the interests of developing countries can be bridged, a partial retreat from globalization and a weakening of the institutions that contribute to the benefits from closer integration are unwelcome possibilities.
Africa cannot afford to remain a largely passive bystander, and the challenge for African countries is how to collectively work with and influence other nations to secure and improve the institutional underpinnings of globalization. This institutional infrastructure, painfully pieced together over the past several decades, is an enormous asset. It has its deficiencies; however, the priority should be to fix the problems so that the gains from economic globalization are more widely shared and there are effective procedures and fora for settling political differences. In an increasingly fractious world, the importance of the latter and its bearing on the former cannot be minimized. Africa will need to use “voice,” diplomacy, and its growing economic clout to help safeguard the future of “good” globalization.
Sustaining globalization and contributing to the public goods that will maximize its advantages need to be complemented by continent-wide efforts at trade integration that could serve as an additional engine of growth. In particular, Africa’s many small, landlocked countries stand to benefit from increased intra-African trade. This has risen more rapidly since 2000 than exports to the rest of the world, but it still amounts to less than 10 percent of Africa’s total trade, with the large countries accounting for the lion’s share.
32 Intraregional trade confers an additional advantage on the smaller countries because it favors the exports of processed goods to partner countries in Africa instead of the export of unprocessed goods overseas.
33 Regional institutions supporting trade liberalization, and backed by domestic policies promoting export-oriented development, will contribute to greater integration, as will investment in infrastructure to close the wide remaining gaps and pruning other behind-the-border impediments to the flow of trade.
34POLITICAL STABILITY AND INSTITUTIONS
It is commonplace to note that political stability and conflict avoidance are critical for growth to be sustainable. Africa has had its share of local conflicts
35 and has experienced their destructiveness.
36 With the spread of democratic and more inclusive regimes, the continent is enjoying a period of relative respite. But the threat of renewed instability has not disappeared. Internal conflicts continue to smolder in Sudan, Uganda, Mali, Nigeria, and the Democratic Republic of Congo. Democratic rules of government appear to be widely applied throughout the region with all countries except Eritrea holding elections, but both the Mo Ibrahim Index and the Freedom House Index point to a decline in “full electoral democracy” and in political participation since 2007. Joshua Kurlantzick (2013) has reinforced this view in a recent book describing the retreat of democracy worldwide.
37 Only Mauritius can be classified as a “full democracy.”
38 However, as the
Economist (2012a) notes, there are grounds for optimism in the blurring of ideological fault lines, the increasing numbers of young voters, the information and media access made possible by information and communication technology, and more carefully supervised elections in some countries. Nevertheless, Africa’s political institutions are at the embryonic stage, and the recent progress seems tentative and precarious. There is an unabated need for continuing national and Pan-African efforts to secure the gains achieved and create the political milieu that can underpin inclusive growth. How to minimize economic instability, political tensions, corruption, and violent conflict will be a continuing test for many African countries.
39CLIMATE CHANGE
The third most pressing challenge, which is entwined with preserving globalization, is climate change. Many African countries are at the epicenter of the changes to come that will result in higher temperatures, desiccation, worsening water scarcities,
40 extreme weather events, and coastal flooding.
41 Adaptation will undoubtedly provide partial relief, and as Africa becomes more prosperous, the continent will find it easier to absorb the additional costs. But early and concerted efforts to mitigate climate change would ease the burden on later generations. In this regard, the challenge for Africa is to play a proactive role in international negotiations—because it has so much at stake—and for Africa’s leaders to make an early commitment to greening growth. With the advanced economies preoccupied with their fiscal and employment problems, by default the baton is passed to developing countries. They should engage in bold commitments followed by determined efforts at implementing difficult and initially unpopular policies. With so much urbanization, industrialization, and transport development ahead, Africa could embark on a path that efficiently manages the growth of energy, water, and resource utilization. Similarly, Africa could constrain increasing greenhouse gas emissions caused by deforestation by preserving carbon-sequestering forests. This step would help Africa avoid becoming locked into less resource-frugal technologies and forms of urbanization. It would also protect the continent’s wealth of biodiversity (Steiner 2010). The (evidence-based) policy options and technologies to achieve these objectives are well known, if governments can muster the political will and the administrative capacities to put them into effect. In the long run, such green policies are likely to prove much more inclusive than current strategies, which will entail costly adjustments that could destabilize societies and be especially hard on the poor.
42In part, growing sustainably will depend on global developments, which Africa can influence—if it tries. Successful intervention would require a joint and unified approach predicated on an alignment of key objectives among African countries, using existing Pan-African institutions, making common cause with other developing nations, and articulating the approach forcefully in international bodies such as the G-20, which have the capacity to affect the direction of global change.
RAISING AFRICA’S GROWTH POTENTIAL
How Africa mobilizes its own resources and enlarges its economic potential will largely determine its future. The potential differs significantly among countries, which range in size from Nigeria, with a population of 175 million, to the Comoros and Cape Verde, with populations of just half a million, and will evolve at differing rates. Moreover, natural resource endowments vary widely among countries. Hence strategies and policy options will vary and need to be country specific. These country characteristics will affect how countries respond to trends and harness their factor endowments. Nevertheless, broadly speaking, growth potential is likely to be keyed to the following conditions.
NATURAL RESOURCES
Africa’s decade-long growth spurt is closely tied to the export of mineral resources and to the higher prices these now command. Looking ahead, the abundance of natural resources will be a major determinant of future potential. Therefore it will be vital to accurately assess the magnitude of resources; adopt a rate of exploitation that maximizes long-term benefit streams, while taking account of absorptivity; and carefully choose options for investing the proceeds from the mineral wealth.
43 Furthermore, augmenting resources through discovery
44 and with the help of technological advances will further contribute to the potential. Arable land and water resources are no less important. Both are scarce in a number of countries, and their efficient utilization can be enhanced with the help of new technologies that minimize the wastage of water and the degradation of arable land through erosion. More fortunate countries, such as Zambia, by effectively husbanding their water resources,
45 can benefit from the food security and agricultural exports that could derive from an abundance of cultivable land.
POPULATION AND THE YOUTH DIVIDEND
Demographics will have a large hand in the fortunes of African countries, all of which have growing populations. Between 1950 and the end of the century, Africa’s population ballooned from 230 million to 811 million and by 2010 had passed the 1 billion mark (Deen 2011). At current trend rates of growth of 2.2 percent per year, it will approach 2.4 billion by 2050.
46 There is scope for reaping a demographic dividend because more than one-half of Africa’s population is under the age of twenty (Fine 2012) and Africa will add 122 million people to its workforce between 2010 and 2020. Whether the dividend, which offers a window of opportunity,
47 is realized will depend on the quality of education provided,
48 measures to secure the health of the population, and most important, investment that generates jobs by enabling existing firms to grow and induce start-up activity.
49EXPORT-ORIENTED INDUSTRIALIZATION
The development of productive activities, mainly by the private sector, and their composition will decisively affect growth potential and employment. How these evolve is a function of entrepreneurship (including from the large African diaspora), investment, and technological change. As noted earlier, investment in productive assets and in infrastructure has been low. Some observers of the East Asian experience are of the view that a WTO-compatible variant of industrial policy that (with suitable safeguards) nurtures new and potentially competitive activities may be appropriate for some countries.
50 Absent such policies, African economies will struggle to build manufacturing capabilities and/or export-oriented services—other than tourism comparable to those of Southeast Asian countries—and be unable to create the millions of new jobs that the continent urgently needs. Such policies suitably embedded within a competitive business environment could also assist with the growth of African firms: with the exception of South Africa, African countries host very small numbers of companies employing more than one hundred people,
51 the sort of companies likely to venture into overseas markets. Moreover, as evident from the Boston Consulting Group’s report on Africa’s new challengers, the vast majority of the larger firms are in services (such as banking, telecommunications, transport, and construction) (Ndulu et al. 2007). Strengthening and diversifying the base of tradable products, not only in urban areas but also in the agricultural sector, will ultimately determine if Africa can reap the advantages of globalization. It will also determine whether African firms can integrate with global value chains with the help of FDI,
52 especially those that will tighten Africa’s links with markets in developing countries in which demand is likely to be growing faster.
RURAL ECONOMY
The demographic center of most African economies is in the rural sector. In Sub-Saharan Africa, 63 percent of the population was rural in 2013,
53 although on average agriculture generated just 16 percent of the GDP. Nevertheless, the unexploited agricultural potential is large (60 percent of the world’s uncultivated cropland is in Africa
54), and as global population grows and food security becomes an issue, some African countries could emerge as major exporters. In 2008, arable land per one hundred people amounted to over 24 hectares—well above the average for low- and middle-income countries. Moreover, because of the neglect of agricultural R&D, fertilizer inputs,
55 irrigation infrastructure, and better tillage practices, agricultural productivity is the lowest in the world—grain yields average 900 pounds per acre with one-fifth of those in China. Yield increases have contributed to 34 percent of the increase in production since 1960 compared to 80 percent in South Asia (Smith et al. 2010).
56 The opportunities for catching up are considerable, and with climate change the development of drought- and disease-resistant crop strains and lean irrigation techniques is rapidly becoming a priority.
TECHNOLOGY, INNOVATION, AND FDI
Africa has gained relatively little from the huge advances in industrial, agricultural, and services-based technologies, although mobile telephony has made substantial inroads (475 million people had mobile phone subscriptions by 2012 compared to 90 million people seven years ago
57). There is a wealth of opportunity for late starters if they can mobilize skills and capital. For Africa, the shorter route to growth could be via human capital deepening and determined efforts at raising its quality so that it can harness the technologies now available. Once a pool of human capital initiates a virtuous spiral, the supply of capital can follow from local sources and overseas. Casual empiricism suggests that there is no shortage of capital globally that is searching for profitable opportunities. Over the medium term, FDI could substitute for domestic savings if the business climate is propitious and foreigners can perceive the market opportunities. In addition to capital, FDI can be a source of much-needed technologies and it can help stimulate local innovation. For Africa, the benefits of plugging into the global innovation system will increase commensurately as innovation becomes a bigger source of growth.
DEMAND AS A DRIVER
Africa’s growth is unlikely to be constrained by a dearth in the demand for its mineral resources. However, that alone might not be enough for the continent as a whole to sustain the growth and to create the jobs that it needs to—and in fact, a number of mineral-rich African countries have suffered from the growth-retarding “resource curse” or are susceptible to it.
58 Future growth will rest on the pace and composition of agro-industrial development and a robust services economy producing tradables that the rest of the world demands, and they must, to varying degrees, figure in the strategies of all countries. However, as seen in the case of South Africa, rich in resources, stable in politics, and large in size, the development of new industries, especially manufacturing, has been limited (Yusuf 2011). Africa will need to derive a substantial boost from the growth of its own middle classes eager to raise their own consumption standards—especially the younger elements (Fine 2012). By 2020, this class is projected to number 130 million, which will generate a strong demand for consumer goods (Fine and Lund 2012). This potential source of future growth must be facilitated and factored into any calculation of longer-term growth prospects.
A FRAMEWORK FOR SUSTAINABLE GROWTH
A two-pronged strategy straddling the global and the local is central to the achievement of sustainable economic growth; African economies will have to conduct policy on both registers depending on their international salience and capabilities. Here we will focus on how countries might go about augmenting and realizing their growth potential, starting with the minimum objectives for sustainable and inclusive growth: the rate of increase of GDP; employment opportunities for the vast majority of the workforce; the avoidance of wide income disparities without eliminating “good inequality” that sharpens incentives; and containment of the ecological/resource footprint.
A growth rate averaging 7 percent per year would bring Africa to the level reached by the Republic of Korea at the end of the twentieth century.
59 Although higher than what most African countries have registered during the past decade, it is a desirable target for a number of reasons. Africa’s current low per capita income and large technological gaps permit an acceleration of growth; they also present well-charted opportunities for catching up. The current overhang of unemployment, which exceeds 20 percent of the workforce in countries such as South Africa, and the anticipated increase in the labor force
60 cannot be accommodated except through growth in excess of current levels. Capital-intensive and unskilled, labor-displacing, technological change is also reducing the elasticity of labor demand in manufacturing and in services (and, at least in the advanced countries, resulting in jobless growth) (Kapsos 2005). Therefore absorbing Africa’s growing pool of workers will call for faster growth than in the past, even if most of the jobs are in light industry and services. Ensuring an acceptable sharing of the fruits of growth will be a challenge, but one that could be manageable if more of the growth derives from (1) labor-intensive manufacturing (some of it shifting from East and Southeast Asia to Africa), (2) relatively labor-intensive tradables, and (3) labor-intensive services. Finally, green growth (which encapsulates some of the messages embedded in “sustainable”) will be a function of price signals that encourage conservation and changing life styles. But it will equally be influenced by regulatory policies; government procurement; standards (for vehicles, equipment, and durables, among others) and their enforcement; technological change; and the pace of absorption of new ideas into equipment and in production practices.
Looking forward, we elaborate the five elements of a strategic framework for sustainable growth in Africa: (1) the political system; (2) state policymaking as well as regulatory and implementation capacities; (3) resource mobilization, investment, and total factor productivity (TFP); (4) learning and innovation systems; and (5) management of the urban system. Although many of these elements are not new, the global situation in which economic growth is proving more difficult for all economies makes this a necessary list of priorities in our view to propel Africa’s future growth.
POLITICAL SYSTEM
There has never been much doubt that economic policies are almost always freighted with myriad political concerns. They leave an imprint on policy design, affect implementation, and influence both the outcomes and how the public perceives them. The varied and, in many instances, partial and halting responses to the financial crisis across the world have brought home once again the far-reaching role of politics and of political institutions in how countries respond to crises and how they struggle to arrive at a consensus on longer-term strategies.
61What kind of a political system delivers the better economic results has been endlessly debated, and accumulating experience has been subjected to rigorous testing. A prior belief in the efficacy of democracy and the enlightened resilience of democratic institutions has been challenged by the superior economic performance of a handful of countries all in East Asia; they achieved outstanding results under autocratic regimes and without the benefit of institutions that credibly protected individual rights to speech and to property against the grasping hand of the state.
62 With two exceptions, China and Vietnam, all of the East Asian star performers have embraced democracy, and the two African countries that vied with the East Asian ones with regard to economic performance—Botswana and Mauritius—managed to grow rapidly under democratic regimes. But the belief lingers that the wise and far-seeing autocrat who can create an effective bureaucratic machinery is more likely to deliver the prosperity that developing countries are seeking—and, as noted earlier, democracy has lost some of its appeal worldwide. The empirical research suggests, however, that the prior belief in democracy has considerable merit (Radelet 2010). At worst, democracy does not impede growth, and for developing countries that are taking the democratic road, the direct and indirect benefits of democracy can be large.
63 Pereira and Teles (2010) state that political institutions supporting a more pluralitarian electoral system are important determinants of growth in incipient democracies, but political institutions have a weaker bearing on growth in consolidated democracies that have already internalized their effects. Indirect benefits of democracy derive from increased stability; a higher degree of accountability; lower rates of inflation; the greater protection afforded to property rights; and the responsiveness to popular demands for education, health care, and a safety net.
64In a globalized world, countries are more exposed to external shocks and will require collective action and sacrifices if a liberal multilateral trade regime is to be sustained and climate change curbed. Under such conditions, democracies are better placed to win the support of the majority and to more equitably distribute rewards or burdens. For African countries that have embraced democracy (and the majority have), the priority is to continue the process of building institutions and strengthening those already in place. African democracies have been buoyed by good economic times, but the danger of slippage is by no means past. A precondition of future sustained and inclusive growth is surely the commitment of governments and of the public to making democracies work better. To this end, Africa’s democracies should use the political leverage of representative government to craft long-term growth strategies.
STATE CAPACITY
Democratic institutions can serve as the foundation of growth, but absent state capacity to frame and implement policies derived from an overarching strategy, progress is unlikely.
65 For example, East Asian economies notably have delivered good economic results under both autocratic and democratic regimes and have performed credibly on the international stage. To be successful, they have all relied on the capacity of the state’s bureaucratic machinery to efficiently conduct wide-ranging development activities—including long-range planning policies to develop comparative advantage—and to steadily build the market and regulatory institutions that determine how well or poorly an economy functions. Weak state governing and policymaking capacities have been the bane of many African countries. These deficiencies should be remedied through public sector reforms that address problems with recruitment, culture, incentives, accountability, and the motivations to serve the public and to deliver results. A reformed public sector is the necessary complement to a development strategy aimed at prolonging the recent growth spurt and tackling the challenge of sustainability.
State capacity might be even more vital in the future because the financial crisis has stirred doubts and forced a rethinking of neoliberal policies.
66 The retreat of the state in developing economies (if such a retreat was ongoing or in the offing) is over, for the time being at least. As indicated earlier, a number of countries—including some advanced economies—are taking a second look at updated variants of industrial policies practiced by China
67 (and earlier by the Republic of Korea, Taiwan, China, and other Asian “tigers”). There is also a renewed push to fashion policies that do not undermine allocative efficiency and competitiveness and minimize the risk of public agency capture by industrial entities.
68 Structural (and youth) unemployment might also demand a more active role in creating jobs (as is currently the case in the Middle East and a number of African countries). However, for industrial, active labor market and redistributive policies to succeed, state policymaking and implementation capacity must be augmented. Thus far, only a tiny handful of African countries can claim to have reached the requisite level of public sector efficiency and transparency needed to accomplish the task.
69RESOURCE MOBILIZATION, INVESTMENT, AND TFP
Capital investment in infrastructure,
70 housing, and productive assets is critical in the earlier stages of industrialization. However, as countries develop, more of the growth is derived from total factor productivity (TFP), which reflects embodied and disembodied technological change, innovation, tacit knowledge, and gains in efficiency from a variety of sources. Income gaps and the slow speed of income convergence among countries are associated with slowness in assimilating technologies and persisting technology gaps.
71 When technology gaps are wide, as in most African countries at an early stage of industrialization, more of the TFP accrues from investment in fixed assets and linked processes embodying the latest technologies. Jorgenson and Vu (2007) estimate that between 1989 and 1995, capital accounted for 41 percent of growth and TFP accounted for 22 percent of growth in the 110 countries analyzed. By 2000–2004, the share of capital had declined to 34 percent, while that of TFP had risen to 37 percent. In developing Asia, the share of TFP was 39 percent, while that of capital was 35 percent. In other words, between 70 and 74 percent of growth is from these interlinked sources. For African countries, during 2000–2004, capital contributed 21 percent of growth and TFP contributed 23 percent. Much of the growth in Africa came from labor inputs, with quantity prevailing over quality gains. Ndulu et al. (2007) point to the low or negative contribution of physical capital and TFP to growth in Africa between 1990 and 2003. However, recovery in the late 1990s was substantially aided by improved TFP.
If African countries want to follow the path of other industrializing economies over the next couple of decades, particularly East Asian economies, then they may need to invest heavily to generate growth and make up for infrastructure deficits in the agricultural and urban sectors, and also widen and deepen the productive base. Further down the road, TFP could move into the lead once incomes are considerably higher. For this reason, measures to raise investment in specific areas with the highest growth potential deserve priority. These are likely to differ from ones that have been the principal sources of recent growth. One-third of Africa’s growth in the past decade was from the exploitation of natural resources; the balance was from development of wholesale and retail activities (13 percent), transport and telecommunications (10 percent), real estate and construction (10 percent), financial intermediation (6 percent), and public administration (6 percent). The real sectors—manufacturing and agriculture—contributed 9 percent and 12 percent, respectively.
72 In contrast, over the same period these latter subsectors were the main sources of growth and employment in East Asia, and will arguably play a vital role in enabling Africa to grow at higher and sustainable rates.
The markedly small share of manufacturing in African economies is responsible for weaknesses in the export mix. Abdon and Felipe (2011), using the product space methodology
73 devised by Hidalgo and Hausmann (2009), show that the export structure of resource-rich African countries barely changed between 1962 and 2007. They remained exporters of a narrow range of products, almost all lying on the edges of the product space (although it should be noted that exports from Ghana, Kenya, and South Africa are dominated by manufactures). A few landlocked countries added exports to their portfolio that were closer to the networked interior of the product space, while coastal countries revealed a comparative advantage in more networked products, particularly garments. But the results for African coastal economies were dominated by South Africa, which has the most products in the core of the product space. Abdon and Felipe observe that Africa’s poorly diversified productive structure and the high proportion of standardized ubiquitous (peripheral) products exported by many countries seriously compromise their export prospects. Especially for the smaller countries that need external markets to generate sufficient demand for rapid growth, export diversification and upgrading is a must.
Moreover, as Easterly and Reshef (2010) note, the desired growth outcomes will depend on achieving “big hits,” that is, large exports of a few products to a single market or a limited number of markets.
74 They claim that a disproportionate share of export earnings derive from big hits that are difficult to anticipate; in addition, the composition of the big hit is itself subject to churning.
75 The winning recipe, discerned from the experience of leading export nations, consists of conditions facilitating the entry and maturing of companies that can opportunistically become exporters with global value chains of garments, footwear, metal products, consumer electronics, food products, and auto parts, providing points of entry for firms capable of meeting price, quality, volume, and delivery standards. Creating these export-friendly conditions requires a long-term strategy to stimulate domestic and foreign investment (supported by domestic saving) by improving the business climate, access to financing at reasonable cost,
76 and ease of importing intermediates, and through incentives for entrepreneurs. The strategy can be supported by investments in infrastructure that do away with troublesome logistics constraints for businesses, but infrastructure building by itself will not lead to a crowding in of industrial investment needed to deepen and diversify the industrial sector. For that, some form of state-led, industrial policy–based inducements might be required as well, and East Asia is replete with such examples.
LEARNING AND INNOVATION SYSTEM
If growth is sustained, domestic, public, and private savings could rise and help finance increased investment. However, it is unlikely that Africa will be able to realize East Asian levels of resource mobilization; if so, increased TFP will be an asset. The road to higher TFP winds through the learning and innovation system, which is a weak point for all African countries, even South Africa. But it is a weakness that can and must be addressed.
The research of Hanushek et al. (2011)
77 suggests that such a growth path will require improving and deepening human capital with the help of education and related health policy reforms. And recent research by Glewwe, Maiga, and Zheng (2014) indicates that because of poor school quality, Africa is deriving less benefit from growth than other regions.
78 If African economies can substantially raise the quality of their workers, and if this in turn makes it possible for businesses to step up the pace of technology absorption, research, and development and innovation, then it is possible to envisage a shift to a sustainable high-growth path less reliant on capital accumulation. In fact, the quality of the labor force affects economic performance through multiple channels. Human capital is key to the building of research infrastructure, the production of ideas, and their commercialization. And human capital, suitably motivated, will influence the vigor of entrepreneurship. The difficult part—a difficulty underscored by the Glewwe et al. (2011) review—is actually identifying and implementing the policies that will produce results within the space of five or ten years (for example, improved performance of teachers),
79 and then translating the gains in human capital quality into growth performance. No country has found a durable recipe, although small countries such as Finland and Singapore can claim a measure of success.
80For health policies, Africa’s disease burden and epidemiological profile raise the challenge for policymakers by an order of magnitude.
81 The widespread prevalence of debilitating infectious diseases and helminthic infections erodes efforts at building human capital, but these have been joined by the spread of chronic diseases arising from changing lifestyles and eating habits associated with urbanization and rising incomes (Aikins et al. 2010). As with education, there is some low-hanging fruit to harvest with the help of policy changes, the harnessing of appropriate technologies, and foreign assistance. But the key to success again lies with implementation, monitoring of results followed by policy adjustment as needed, and persistence.
82Development thinking buttressed by the experience of East Asian countries devotes most attention to manufacturing and tradable services. However, for decades ahead, Africa’s growth and export prospects will also hinge on the productivity and diversification of the agricultural economy. In almost every African country, agriculture is the largest employer, especially of women; and given Africa’s reserves of unused arable land, agriculture is a potentially large source of exports.
83 Africa has lagged behind in agricultural research, and as a result labor and land productivity is well below levels elsewhere (Paarlberg 2008). African researchers are making limited progress in developing disease-resistant and drought-resistant strains of the crops most vital for farmers.
84 Compounding the problem is increasing water scarcity in a number of countries, particularly in the north and the east of the continent. This is likely to become more acute as populations expand, industrial and urban demand increases, and global warming leads to worsening desertification that is already apparent in Ethiopia and Kenya. Both rural and urban dwellers will need to come to terms with water scarcity in the coming decades,
85 and the risk is that difficulties in agreeing on fair sharing of water resources could lead to tensions between riparian nations. A combination of pricing, conservation, and many technological fixes will be part and parcel of development strategies, but recent history offers scant encouragement. Evidence of shrinking freshwater resources has been growing, but African countries have yet to take the needed initiatives to manage their water resources, which will be a key to sustainable growth.
86 Whether independently or in conjunction with agricultural development, water must figure prominently in the defining of a sustainable growth strategy. Water management will be an ongoing and expensive undertaking.
87 However, if neglected, poor water management will lead to rising food prices, trade imbalances, and water stress, and cities will suffer under the weight of unchecked migration from rural areas.
URBAN SYSTEMS
Industrial and innovation policies (which have a bearing on the business climate) are intermeshed with urbanization policies. Together these affect what sort of productive activities cluster and flourish, where they cluster and flourish, their competitiveness, how much employment they generate, their growth potential, and the revenue they produce for cities. Managing the process and the characteristics of urbanization in Africa to extract the productivity gains from efficient land use, services provision, and agglomeration economies will be a crucial test for policymakers. This challenge must be successfully tackled while containing per capita resource and energy costs, and also minimizing the negative externalities that undermine the quality of urban life and contribute to environmental degradation.
88 Policymakers will have to battle the inertial patterns of sprawling urban development prevalent in almost all countries because of widening private automobile use, the problems caused by past infrastructure and housing development, and resistance from all those who benefit from the existing land use and urbanization patterns. But neglect of urbanization strategy and enabling policies would seriously compromise an important strand of development and also cripple efforts to limit climate change and mitigate its consequences. Urbanization strategies can be highly complex, and most African municipal administrations will need to develop the technical capacity, the administrative skills, and the financing to craft and implement workable strategies that take full advantage of new technologies, hard as well as soft.
89CONCLUDING OBSERVATIONS
The current decade is likely to differ markedly from the preceding one, and this will have significant implications for national growth policy formulation in Africa and for the policies of others, principally donors and foreign investors (see Rodrik 2012a and 2012b). The evolving global economic environment is both a blessing and a curse. It is a blessing because the high-growth engine of the world economy, China, is generating substantial demand for raw materials that Africa has in abundance, and because China’s financial status and its willingness to use its surpluses make Africa a privileged destination. Moreover, China’s resource commitment to Africa in recent years exceeds that of the World Bank and the African Development Bank (AfDB) combined, if one looks at lending and foreign direct investment flows.
90 Hence Africa has everything to gain under current circumstances. Of course, the generalized global slowdown is not good news for the export of manufactures; however, it will take a while for Africa to reach the stage at which it can compete in many developed markets, and by then the outlook may well have improved. Moreover, while some of the advanced economies are struggling to extricate themselves from the financial crisis aftermath, Africa until now has been largely spared these dislocations, and its growth is close to recent trend rates.
This growth momentum benefits from the policy dividend arising from favorable macroeconomic developments. Independent examination by the IMF, the World Bank, and others show that macroeconomic management has been increasingly prudent in many African countries.
91 By any number of measures of macroeconomic probity—fiscal and current account balances, foreign exchange reserves, and access to capital markets or inflation—the situation is generally propitious, and governments are well positioned to take advantage of this. Moreover, the historically low interest rates that now prevail and are likely to continue in the medium term are another reason to attract capital for the myriad of needed investments previously mentioned. Hence there is ample reason to act vigorously.
So what constitutes a vigorous growth policy and how might governments act so as to achieve the elusive 7 percent per year growth rate that doubles GDP in a decade? From past experience, it is clear that few countries have managed growth acceleration without considerable policy effort (Commission on Growth and Development 2008). Rapidly growing countries have generally made conscious choices to defer some consumption in order to promote investment. While a country is living near subsistence, this may be a difficult tradeoff to manage; yet Africa as a region is no longer in this absolutely dire situation (although there are of course counterexamples and special cases). The policy elements that have worked have included high and effective investments in human capital; strong efforts on infrastructure; the channeling of savings into productive export-led growth spearheaded by manufacturing (executed by the private sector but supported by public sector policies); well-coordinated, yet malleable programs; and a long-term vision to propel the economy forward.
Some of the necessary, but not in and of themselves sufficient, conditions have already been mentioned, in particular capable bureaucracies, effective public spending, low levels of corruption, and a workable relationship between business and government. With respect to a key point on cooperation between business and government, it should be noted that local entrepreneurs with the ability to tap informal overseas financial markets can be effectively mobilized—provided they understand what is expected of them. African countries can augment local entrepreneurial resources by tapping the offshore diaspora (Ratha and Plaza 2011), and East Asian financing can be an asset if properly exploited.
While structural change that is transferring labor from agriculture to the urban sector has served to raise productivity in recent years,
92 future gains, as in East Asia, will depend on the dynamism of firms producing manufactures and tradable services. As noted earlier, the manufacturing sector’s share in GDP is shrinking in part because African labor costs (productivity adjusted) are high and because of other constraints.
93 Enlarging the role of manufacturing and strengthening the productivity of tradeable services will be a central developmental objective of all African countries.
94East Asian experience shows that vigorous competition is a good thing. In some countries, such as the Republic of Korea, access to scarce finance was used as the lever to force firms to compete for export markets, with the successful ones being given the opportunity to grow and ultimately become national champions.
95 If firms are protected in the domestic market, they will have little incentive to improve productivity, pursue innovation, and shift their energies to exports.
96 Examples from Latin America abound, where either a lack of domestic competition has resulted in high-cost services (for example, Mexican telecommunications charges are the highest in the OECD) or comfortable domestic markets have limited the export drive in new products (for example, Chilean manufacturing). Where domestic markets are small, as in most African economies, the focus should be on regional markets supported by regional trading arrangements. These can be encouraged by cross-border policies on infrastructure, regulations, and standards (as has been happening in East Africa with some success).
97The interest on the part of China in both exploiting natural resources on the continent and also providing infusions of capital provides an opportunity that is not infinite in duration. The rules of the game, therefore, become quite crucial in determining how natural resource rents will be used, what kinds of enticements will be offered and in exchange for what, how infrastructure projects will be sequenced, how much job creation will occur, and how much technical knowhow will be transferred. Africa’s policymakers can take advantage of favorable circumstances, provided that they have strong and viable development strategies prepared. This is a clear lesson of East Asia’s success.
98Finally, the role of bilateral and multilateral donors in helping Africa to make maximum use of this “decade of opportunity” requires some elaboration. The stories of bilateral assistance programs that are too small to be effective, too narrowly focused on areas that seem to generate support in donor capitals, and too short term in duration to generate sustainable impact are well known. Also well established is the insufficient level of cross-border financing for projects, especially in infrastructure needed on the continent, but that cannot command sufficient international development assistance. To break free of their low-manufacturing, low-value-added export structure, African countries need a significantly altered flow of assistance. Priority needs to be given to those flows that can be leveraged with private sector investments in energy, transport, ports, and rails. The analytic work of the Stern Report on Infrastructure (Commission for Africa 2005) and the follow-up work by the World Bank (Foster and Briceno-Garmendia 2010) leave no doubt that there are myriad high-return projects waiting to be funded. Action on these, some of which the New Partnership for Africa’s Development (NEPAD) has identified, is long overdue.
99Africa is the last region to be facing the huge development challenges of today. In the past, much time was spent lamenting what did not happen and explaining why, and much of the scholarly work was excellent in its diagnostics.
100 The game has to move on to the phase in which action is required to enable Africa to make the necessary strides forward. A great deal can be learned from the policies of other regions, particularly East Asia. After all, Vietnam twenty years ago had an average per capita income of around USD 100 and a poverty rate of 70 percent; by 2014, its average per capita income was USD 2,000 and poverty was below 20 percent. While still an agricultural exporter, Vietnam managed to attract FDI and expatriate capital and move into new and higher value-adding industries. Vietnam was better endowed with energy than other poor developing countries, had a population of close to seventy million and thus a large domestic market, and is not landlocked. Nevertheless, Vietnam’s vital statistics as of 1990 were far worse than those of many African economies. Yet it has begun transforming into a more modern economy. Africa can and should do no less.
A final observation is that countries that radically transformed themselves and grew at high and sustainable rates decade upon decade did so not with the stroke of the pen or a single policy intervention but with the help of many coordinated policy interventions. The Growth Report (Commission on Growth and Development 2008) enumerates these interventions, and most have found their way into this diagnostic paper on Africa’s future growth. The salient finding of that exhaustive exercise, however, was that countries needed to get many policies right, needed to have coherence among policies, needed effective leadership and political stability, and needed a long-term vision of where the economy was headed. Africa is at a moment in history, in our modest opinion, in which it must grasp the opportunities that exist and propel itself forward. The time is now!
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