Is Africa’s Economy at a Turning Point?

Is Africa’s Economy at a Turning Point?

Written By

Jorge Arbache, Delfin S. Go, and John Page

There is something decidedly different and new about the economic landscape of sub-Saharan Africa (Africa or the region hereafter). After stagnating for much of 45 years, economic performance in Africa is markedly improving. In recent years, for example, growth in gross domestic product (GDP) is accelerating to its strongest point at about 6 percent a year. Although improvement in aggregate output does not necessarily indicate broad economic development of the region, the current growth episode has nonetheless lasted 12 years altogether, a period that is neither trivial nor brief.

The recent economic expansion seems to be registering across an increasing number of countries. Only one country has significant economic contraction-Zimbabwe. In contrast, 40-45 countries have positive growth, and 14-19 countries are growing by more than 5 percent a year. Higher oil prices since 2000 benefit eight countries where net oil exports make up 30 percent or more of total exports: Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Gabon, Nigeria, and Sudan. Partly as a result of the recent higher oil prices, real GDP growth in oil-exporting countries accelerated to about 8.4 percent a year during 2000-06. Economic growth is also accelerating and registering across several types of countries, not just oil-exporting and resource-rich countries but also oil-importing, landlocked, and to some extent fragile countries.

Good luck or Good Policy?

Today’s Africa is clearly different from the Africa of the early 1990s, when it was coming out of the declines after the first two oil price shocks, the debt problems, and stagnation of the adjustment years. Thanks to the recent acceleration of growth, there is definitely a higher economic base to work with.

The better economic performance in the recent period is certainly partly due to the higher export prices of many African countries. Higher oil prices benefit about 8-10 oil-exporting countries. Non-oil commodity prices have also risen significantly. Of the 40 commodity prices monitored regularly, only cotton prices declined from the high prices of the 2003 drought year. Gains from higher export prices for commodities such as gold, aluminum, copper, and nickel more than offset the losses from higher oil import bills in several oil-importing countries, such as Burundi, Ghana, Guinea, Mali, Mozambique, Rwanda, Uganda, Zambia, and Zimbabwe.

Moreover, new commitments to scale up foreign aid from industrial countries have led to greater external resources and debt relief for poor countries. Additional and significant debt relief became a reality when the World Bank and IMF approved the financing and implementation of the Multilateral Debt Relief Initiative (MDRI) starting on July 1, 2006. Sixteen countries in sub-Saharan Africa have now reached the completion point for significant debt relief under the enhanced Heavily Indebted Poor Country Initiative and have qualified for further assistance from the MDRI. Benefiting from debt relief, MDRI countries did very well recently and grew by over 5.3 percent during 2000-06.

However, the current acceleration of growth is not all due to luck; better policy seems to be taking place in sub-Saharan Africa. The most striking improvement in policy is observed for macroeconomic stabilization. Inflation has come down dramatically since 1995 and the average fiscal deficit as a percentage of GDP declined from 5.7 percent during the 1980s and 1990s to 2.9 percent during 2000-06. Fiscal policy in oil-exporting countries has also improved. Unlike the unchecked wasteful spending of the past, windfalls from oil revenue are increasingly being saved.

Africa today enjoys better economic prospects because its leaders have undertaken major reforms during the past 10 years and are taking increasing control of their economic destiny. African governments are making regional initiative in conflict resolution and are taking action to improve governance under the African Union and the New Partnership for Africa’s Development initiatives. These are designed to: (i) push African countries to be assertive about ownership and to assume leadership and accountability for their development programs; (ii) improve the reputation of the region through certification of good practice in governance for a critical mass of African countries under the African Peer Review mechanism; (iii) increase regional connectivity to improve capacity to trade within the region and with the outside world; and (iv) enhance the capacity of regional bodies to provide public goods, such as cross-country transportation and power sharing, coordination in managing pandemics, and protection of regional commons such as the Nile and the Great Lakes.

The Blueprint for Success Is Still Not Secured

In the period 1995-2005, trade as a share of GDP increased significantly with exports and imports increasing by 4 percent each. However, African exports, particularly non-oil exports, are growing slowly. And the region’s exports remain heavily concentrated compared with those of other regions.

Although foreign direct investment (FDI) as a share of GDP has grown since 1990, the absolute amount is still modest at $13.3 billion in 2006, and is concentrated primarily in one country, South Africa, and in one line of business, extractive industries. Outside of FDI, migrant remittances appear to be increasing, but a large portion of the flows bypass formal financial channels and these remittances are difficult to account for.

As for human capital, Africa is the only region in the world where life expectancy has declined. Between 1990 and 2005, life expectancy at birth in sub-Saharan Africa declined from 49.2 years to 47.1. Although life expectancy increased in 25 countries by an average of eight years, it declined in 21 more populous countries by an average of four years. HIV/AIDS, malaria, and armed conflict have contributed to the falling life expectancy. Progress against malaria, tuberculosis, and HIV/AIDS is mixed but showing some positive signs. Malaria remains Africa’s leading killer of children under age five, but a strong new global partnership has formed to address the disease. The spread of AIDS has slowed in the region, but the continent still bears the brunt of the epidemic. Africans account for 60 percent of the world’s people living with HIV/AIDS. This fact has a profound social and economic impact, which can be seen in the large numbers of premature deaths of people in their prime employment, reproduction, and parenting years and in the large numbers of orphans that burden Africa’s families and economies.

All in all, these results indicate a mixed picture with regard to the robustness of growth in Africa. There is no strong evidence that growth was unambiguously fueled or accompanied by accumulation of capital, that higher productivity is spread across all countries, or that export diversification has been attained. Although a group of diversified, sustained growers is emerging, economic performance varied substantially.

Without greater productivity and factor accumulation, changes in global demand for oil and metals or other external adverse shocks, including aid flows, could jeopardize the current growth boom.

Key Areas of Actions to Sustain Growth

The avoidance of economic collapses will continue to depend on good policy, leadership, and aid. To sustain an accelerating growth, however, the region will have to tackle several barriers and constraints to greater productivity and investment. Addressing these barriers will require both continuing reforms and greater external assistance.

Research shows that efficient African enterprises can compete with Chinese and Indian firms in factory floor costs. They become less competitive, though, because of higher indirect business costs, including infrastructure (electricity, telecommunications, roads, etc.). In China, indirect costs are about 8 percent of total costs, but in African countries they are 18-35 percent.

Building the African private sector will be crucial both for growth and for fostering a national consensus for growth-oriented policies. Improving the investment climate and enhancing the capacity of African entrepreneurs to invest and engage in business are central to this effort.

Improving the performance of the financial systems is high on the agenda for enterprise development. Firms in Africa identify financing constraints as even more severe than lack of infrastructure in limiting their business development.

Is Africa at a Turning Point?

Based on the records, the verdict is guarded. There is indeed an acceleration of growth in sub-Saharan Africa, but its sustainability is fragile. African countries in general are increasingly able to avoid mistakes and economic collapses, but increasing and sustaining growth are a difficult challenge. Particularly needed are higher exports, more private sector growth, greater productivity of investment, higher foreign investment and remittances from migrant workers, greater regional efforts at tackling the infrastructure gaps, and improving agriculture. These economic fundamentals can be raised through continuing reforms and improved governance. In the long run, there is no substitute for improving human development and sharing the benefits of growth.

Predictions of Africa’s imminent recovery or demise have proved wrong on numerous occasions in the past 40 years. Some of its economies have been badly managed and have declined, whereas others have prospered. But the energy, imagination, and entrepreneurship of its people have overcome both limited opportunities and bad policies to place the region at a position in this new century where better governments and better policies can make a difference.

This essay is drawn from a World Bank publication titled Africa at Turning Point? Growth, Aid, and External Shocks, Edited by Delfin S. Go and John Page, 2008.

Share This

Latest Comments

Ajayi Olutayo

Ajayi Olutayo

11. October, 2012 |

People like you are needed on this continent to take us to where we should be. Keep it up man!

Marcus Edibogi Akor

Marcus Edibogi Akor

11. October, 2012 |

Thanks for this powerful article. I am very glad I read it. Keep up your great work and remain Blessed Law!

Array ( [format] => html [Itemid] => 163 [option] => com_zoo [task] => item [item_id] => 109 )