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Week 1.1: Economic Growth in Africa

Takashi Yamano

Development Issues in Africa

Spring 2006

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The Economics of Being Poor

Most people in the world are poor. If we knew the economics of being

poor, we would know much of the economics that really matters.

Theodore W. SchultzNobel Lecture: The Economics of

Being Poor,Journal of Political Economy, 1980, vol. 88: 639-651.

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The Economics of Being Poor

Most of the world’s poor people earn their living from agriculture.

If we knew the economics of agriculture, we would know much of the economics of being poor.

Theodore W. SchultzNobel Lecture: The Economics of Being Poor,Journal of Political Economy, 1980, vol. 88: 639-651.

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Development Issues in Africa

Objective: To apply economic theory to economic

problems in Sub-Saharan Africa to obtain broad descriptive information on

various economic and social problems in Sub-Saharan Africa

To develop academic communication skills

• Methods: • Lectures and Student Participations• Plan: see Syllabus

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Week 1Economic Growth in Africa:

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Economic Growth in Africa

Today’s contents• Overview• Evidence from Cross-country Models• Does History solve the Africa

mystery?• Can political reform provide

solutions?

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Map of Africa

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Economic History in Africa

Phase 1: Pre and Post Independence Period in1955-1973

Phase 2: Oil Crisis and Export Goods Price Declines in 1973-1980 >> Debts Expansion

Phase 3: Adjustment Period in 1980-1995

Phase 4: Post Washington Consensus Period in 1995-presence

Phase 5: Some Bright Spots?

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Economic Growth

1960s 1970s 1980s 1990s

Africa 4.01 4.68 2.86 3.00

South Asia 3.97 3.28 4.71 5.33

Asia 5.34 7.00 4.57 3.41

Annual Growth Rate (%)

GNI per capita in 2000 and 2004

2000 2004

pc GNI PPP pc GNI pc GNI PPP pc GNI

Sub-Saharan Africa $480 $1,560 $600 $1,850

South Asia $460 $2,260 $590 $2,830

East & Pacific Asia $1,060 $4,120 $1,280 $5,070

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Sub-Saharan AfricaAngola

Benin

Botswana

Burkina FasoBurundi

Cameroon

Central African Republic

Chad

ComorosCongo, Dem. Rep.

Congo, Rep.

Cote d'Ivoire

Gabon

Gambia, TheGhana

Guinea-Bissau

Kenya

Lesotho

Madagascar

Malawi

Mali

Mauritania

Mauritius

Mozambique

Namibia

Niger

Nigeria

RwandaSenegal

Seychelles

Sierra Leone

South Africa

Sudan

Swaziland

Togo

Zambia

Zimbabwe

66

.57

7.5

88

.5ln

19

80

6 7 8 9 10ln2004

PC GNI PPP in 1980 and 2004

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Best and Worst Performers in the 1990s

PC GNI PPP 1994 2004 %change

Growth rate

Mozambique

566 1,168 100.6 7.6

Rwanda 626 1,242 98.2 7.6

Angola 1,018 1,930 89.5 6.7

Zimbabwe 2,279 2,041 -10.4 -1.0

DR Congo 764 675 -11.7 -1.1

Sierra Leon 637 547 -14.2 -1.2

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South Africa (43%)

Nigeria (12%)Sudan (4%)Angola (4%)

Kenya (3%)

GNI in US$ in 2004 (% in total SSA)

FASIDFASIDSource: Deaton (1999) Journal of Economic Perspective vol. 13: 23-40

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• Countries that are missing Economic Growth rates in 1970s:– Angola, Cape Verde, Comoros, E. Guinea, Eritrea,

Ethiopia, Guinea, Mauritius, Mayotte, Mozambique, Namibia, Tanzania, Uganda

• War and Conflict in 1960-2001– Angola, Burundi, Chad, Congo-Brazzaville, Congo

(Zaire, DRC), Eritrea, Ethiopia, Guinea-Bissau, Liberia, Mozambique, Namibia, Nigeria, Rwanda, Senegal, Sierra Leone, Somalia, South Africa, Sudan, Uganda, Zimbabwe

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Cross-Country Regression Models

• There are serious problems with cross-country regression models– Missing data– Missing variables– Poor quality in data– Small number of observations

• We can still obtain some insights

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Cross-country Regression Studies• Easterly and Levine (1997) QJE

“Africa’s Growth Tragedy: policies and ethnic divisions”Africa’s high ethnic fragmentation explains poor economic policies and performances.

• Sachs and Warner (1997) JAE“Sources of slow growth in African Economies”Africa’s slow growth can be explained in an international cross-country framework:

Poor economic policies Africa’s lack of openness to international

marketsLack of access to the sea Tropical climate/diseases

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Easterly and Levine (1997) QJE“Africa’s Growth Tragedy: policies and ethnic divisions”

• Ethnic diversity explains a substantial part of public choices, political instability, and other economic factors associated with long-run growth.

Ethnic Diversity Economic Growth

Public Policy Choices

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Ethno-linguistic Fractionalization Index (ETHNIC)

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ETHNIC weakens as policy choices are included

AFRICA dummy remains significant

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Ethnic Diversity, Political Instability, and Policy Choices

ETHNIC is correlated with(+) Schooling(-) Financial Depth(+) Black Market Premium(-) Infrastructure

But not withAssassinationsFiscal surplus

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Easterly and Levine (1997) QJE Summary

• Africa’s poor growth is associated with – low schooling, political instability, underdeveloped financial

systems, distorted foreign exchange markets, high government deficits, and insufficient infrastructure.

• Ethnic diversity is closely associated with– Low schooling, underdeveloped financial systems, distorted

foreign exchange markets, and insufficient infrastructure Ethnic Diversity Economic Growth

Public Policy Choices

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Englebert (2000) WD“Solving the Mystery of the African Dummy”

• African Dummy remains significant in regression models, suggesting that specifically African characteristics, not captured by explanatory variables, exist. What is it?

• Hypothesis: the lack of historical continuity from the pre-colonial to the post-colonial period constraints the options available to African policy makers. Legitimacy Problem!

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How to measure legitimacy?

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Legitimate countries in Africa

10 out of 38 in the data: Botswana, Burundi, Cape Verde, Ethiopia, Lesotho, Mauritius, Rwanda, Sao Tome, and Principe, Seychelles, and Swaziland

Non-legitimate countries outside Africa:Latin America: Bolivia, Guatemala, Peru, Ecuador

Asia: India, Indonesia, Malaysia, the Philippines

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Comparison between Legitimate and Non-legitimate

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Englebert (2000) WD Summary

• Legitimacy is correlated with policy choices• Legitimacy is an important determinant of

economic growth: legitimate states grow 2.2 % faster than their non-legitimate counterparts

• Results call for a greater integration of political science into the study of economic growth.

• There are reasons (e.g., legitimacy) for bad policy choices. Economists need to know about them.

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Further Readings• Acemoglu, Johnson, and Robinson (2001). “Colonial origins o

f comparative development: an empirical investigations,” AER, 91 (5): 1369-1401.

They divide colonialism into Settlement and Extractive: Settlement: Institutions that protect property rights were created and helpe

d post-colonial development.Extractive: Resources were only extracted, and institutions that protect prop

erty rights did not develop.

Settler mortality had a large impact on choosing settlements.

The authors show that Mortality >> Settlement/Extractive >> Institutions >> Economic Growth

FASIDFASIDSource: Acemoglu, et al. (2001) AER vol. 13: 23-40