Development Issues in Africa Spring 2006 Week 1.1: Economic Growth in Africa Takashi Yamano FASID 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. Schultz Nobel Lecture: The Economics of Being Poor, Journal of Political Economy, 1980, vol. 88: 639-651. FASID 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. Schultz Nobel Lecture: The Economics of Being Poor, Journal of Political Economy, 1980, vol. 88: 639-651. FASID 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 SubSaharan Africa To develop academic communication skills Methods: Lectures and Student Participations Plan: see Syllabus FASID Week 1 Economic Growth in Africa: FASID Economic Growth in Africa Today’s contents • • • • Overview Evidence from Cross-country Models Does History solve the Africa mystery? Can political reform provide solutions? FASID Map of Africa FASID Economic History in Africa Phase 1: Pre and Post Independence Period in 1955-1973 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? FASID Economic Growth Annual Growth Rate (%) 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 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 $5,070 FASID 8.5 South Africa Seychelles Namibia 8 Gabon 7.5 Mauritius Swaziland Botswana 7 Zimbabwe Cote d'Ivoire Tog o Comoros Ang ola Cameroon Sub-Saharan Africa Congo, Dem. Rep. Ghana Gambia, The Lesotho Mauritania Central African Republic RwandaSeneg al 6.5 Madag ascar Nig er Zambia Kenya Sudan Sierra Leone Nig eria Benin Mali Burkina Faso Burundi Chad Congo, Rep.Mozambique Guinea-Bissau Malawi 6 ln 19 80 PC GNI PPP in 1980 and 2004 6 FASID 7 8 ln2004 9 10 Best and Worst Performers in the 1990s PC GNI PPP 1994 2004 %change Growth rate Mozambique 566 1,168 100.6 7.6 Rwanda 626 1,242 98.2 7.6 Angola 1,018 1,930 89.5 6.7 Zimbabwe 2,279 2,041 -10.4 -1.0 DR Congo 764 675 -11.7 -1.1 Sierra Leon 637 547 -14.2 -1.2 FASID GNI in US$ in 2004 (% in total SSA) South Africa (43%) Kenya (3%) Angola (4%) FASID Sudan (4%) Nigeria (12%) FASID Source: Deaton (1999) Journal of Economic Perspective vol. 13: 23-40 • 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 FASID Cross-Country Regression Models • There are serious problems with crosscountry regression models – Missing data – Missing variables – Poor quality in data – Small number of observations • We can still obtain some insights FASID 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 markets Lack of access to the sea Tropical climate/diseases FASID 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 FASID Ethno-linguistic Fractionalization Index (ETHNIC) FASID AFRICA dummy remains significant ETHNIC weakens as policy choices are included FASID Ethnic Diversity, Political Instability, and Policy Choices ETHNIC is correlated with (+) Schooling (-) Financial Depth (+) Black Market Premium (-) Infrastructure But not with Assassinations Fiscal surplus FASID 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 FASID 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! FASID How to measure legitimacy? FASID 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 FASID Comparison between Legitimate and Non-legitimate FASID 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. FASID Further Readings • Acemoglu, Johnson, and Robinson (2001). “Colonial origins of 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 helped post-colonial development. Extractive: Resources were only extracted, and institutions that protect property rights did not develop. Settler mortality had a large impact on choosing settlements. The authors show that Mortality >> Settlement/Extractive >> Institutions >> Economic Growth FASID FASID Source: Acemoglu, et al. (2001) AER vol. 13: 23-40