After a long period of stagnation, Africa has shown a remarkable acceleration in economic growth since the turn of the century. However, questions remain about whether it can sustain this acceleration and its ability to keep up with up with the rapid progress in other developing economies.
To address these issues, Carnegie hosted a discussion with Shanta Devarajan, chief economist of the World Bank’s Africa Region; Mwangi Kimenyi, senior fellow and director of Brookings’ Africa Growth Initiative; Vincent Palmade, lead economist in the Private and Financial Sector group of the Africa region of the World Bank; and Harry Broadman, senior vice president of Albright Capital Management LLC and chief economist of Albright Capital Management LLC. Carnegie’s Uri Dadush moderated. The event coincided with the publication of “Whither Africa?”, a Carnegie Policy Outlook by Uri Dadush and Shimelse Ali which reviewed several of these issues.
What is Driving Growth in Africa?
Following decades of declining per-capita income growth, Africa registered remarkable growth over the past decade due to a variety of factors:
- Improved Governance: The mechanisms that led to the decline in economic performance in the 1980s and 1990s—such as a widespread breakdown in governance, military dictatorships, and distortions in the agriculture market to serve a particular part of the population—were reversed in the 2000s. This reversal was integral to Africa’s improved economic performance, said Devarajan.
- Macroeconomic Management: Kimenyi and Palmade agreed that improved economic policies—such as reductions in the budget deficit and the opening up of the economy—strengthened economic management and the business environment across Africa. Devarajan also cited improved management of natural resources in some of the continent’s low-income economies as a contributing factor.
- Integration with the Global Economy: Broadman noted that Africa’s increased integration into international markets—a result of better governance and economic management—reinforced the improved competitiveness and efficiency of African firms and encouraged Foreign Direct Investment (FDI).
- Information Communication Technology (ICT): Devarajan noted that 60–70 percent of Africans now have access to mobile phones, and the mobile phone sector is becoming one of the biggest growth sectors in Africa. Mobile technologies are serving as an input to other industries, providing, for example, price and weather information to farmers. Kimenyi indicated that some non-resource-rich economies that have performed well, such as Kenya, have diversified their economies toward services.
Speakers cautioned that some of the factors that have contributed to Africa’s improved growth may be temporary, however. While mining accounted for 73 percent of the continent’s export growth, for example, this increase was due largely to a rise in export prices—which, as Palmade said, often go through cycles. Broadman and Kimenyi also argued that some of the governance improvements may not be permanent, as seen in North African economies despite their successful institutional reforms.
Impediments to Sustainable Growth
In addition to the potential reversal of those factors, panelists pointed to a number of impediments for sustainable growth:
- Limited Regional Integration: Broadman argued that the geographical fragmentation of countries and small local markets constrains intra-African trade. The absence of mega- cities―like those in India and China―makes achieving economies of scale, that is, mass-production at low average cost, more difficult. Kimenyi agreed that the limited integration among African economies will be a challenge over the long-term.
- Lack of Skilled Labor Force: While primary school enrollment has increased, the pace of improvement in secondary education has been substantially slower, limiting the size of the skilled labor force. This affects the competitiveness of African economies, said Broadman. Kimenyi emphasized that investing in human development could not only improve economic performance, but also promote democracy.
- Low Productivity: Low productivity—not unemployment—remains a challenge in most low-income African economies, said Devarajan. About 70–80 percent of the labor force is employed in low-productivity, informal-sector jobs.
Sectors with Potential for Growth
- Construction and Retail: Palmade and Broadman noted that the construction and retail sectors have expanded in many fast-growing African economies as a result of microeconomic reforms, a rising middle class, and overall economic growth.
- Agriculture and Light Manufacturing: Palmade pointed to agriculture and light manufacturing as sectors that have high long-term potential for sustaining growth. However, despite having the most arable land and lowest wages in the world, Africa remains a net food importer and imports ten times more light manufacturing products than it exports. Palmade suggested that at least five factors—high-yield seeds, fertilizers, irrigation, farmer skills, and access to markets—must work together for a Green Revolution to take hold in Africa.
- Competitiveness in Specific Sectors: Palmade noted that export performances varied across the continent, with Kenya and Ghana now competitive in agriculture, Lesotho in light manufacturing, Cape Verde in tourism, and Botswana in mining.
- Aid Effectiveness: The speakers agreed that foreign aid can be effective if well-managed, attached to well-specified programs, and executed with responsibility and ownership on the part of the recipient. Devarajan argued that aid can be particularly effective in helping countries recover from a negative shock—such as a financial crisis—and suggested that the international community can improve the effectiveness of aid by not reducing it during crisis times.
- World Trading System: Kimenyi argued that the real problem with Africa’s relation to the world trading system is not market access, but rather that Africa has not fully exploited the quota-free and duty-free market access opportunities available from advanced economies. The big issue is Africa’s lack of competitiveness. Broadman agreed that Africa needs to improve its competitiveness but he noted that Africa faces higher trade barriers with respect to developing countries such as China, India, and Brazil.
- Foreign Direct Investment (FDI): The significant FDI that goes into the mining sector does not spill over to the broader economy, argued Palmade; in Botswana, for example, mining FDI is impressive, but unemployment remains very high. Palmade suggested that, to improve the impact of FDI, revenues from mining should be spent on infrastructure and building linkages with the rest of the economy. Devarajan indicated that African governments need more bargaining power to place them on equal footing with the foreign companies providing FDI.
- China: The fact that China invests in sectors considered by Western investors as “off-limits” or too risky is good for Africa, said Broadman. However, it is Africa’s responsibility to put health, safety, and competition standards in place to take full advantage of Chinese investments.
- Arab Political Turmoil: Kimenyi argued that the political turmoil in some Arab countries may not spill over into Sub-Saharan Africa, as some of the characteristics that fueled the crisis in Tunisia and Egypt―a highly educated, urbanized, and ethnically harmonized population―are lacking in many African economies. Devarajan disagreed, saying that countries may not need an educated, urban middle class to run a protest movement. He contended that the lack of political space and ethnic fractionalization could cause a similar crisis in Africa.