MPhil in Development Finance Economic Development Perspectives in Africa Professor Euan Phimister MPhil in Development Finance Introductions Professor Euan Phimister Professor in Development Finance, USB since 2020 Formerly Professor of Economics, University of Aberdeen, UK Resource Economist, focused on Development Worked and undertaken research, Ethiopia, Ghana, Uganda, Angola MPhil in Development Finance 2 Reducing land degradation & carbon loss from Ethiopia's soils to strengthen livelihoods and resilience (RALENTIR) Area Exclosures Gully Formation Interventions Experiment & Sheep +landless Bees + landless Oxen + landless Demonstrate gully female headed youth youth formation measures. households Interdisciplinary: Environmental Modelling, Agricultural Science, Soil Science, Hydrology, Geography, Sociology, Economics MPhil in Development Finance Introductions Your Turn! • Go to Learning Hub or Direct to Padlet https://padlet.com/euan17/8jesdo1wbg19hwvk • And introduce yourself in a few words! MPhil in Development Finance 4 Course Aims • Understanding of economic development in Africa • Identify and analyse challenges in SSA economies • Show how they affect socio-economic development Topics • • • • • • Development Concepts and Measuring Development Savings, Investment, Growth Education & Health Population, Poverty and Inequality International Trade Agriculture, Industrialization and Sustainable Development • Key Context and Starting Point for Understanding Development Finance Challenges MPhil in Development Finance Organizational Issues Online Sessions • Review Lecture material, Exercises, Discussion Preparation & Post Live Class • Readings (often Chapter in Book) + Supplementary Videos Discussion Forum. “Open Sessions” – to be arranged MPhil in Development Finance 6 Assessment: Individual quizzes 20% • Five timed individual multiple-choice quizzes on the learning hub. – You have one go only! • Best four results count towards the individual assignment mark. • For each quiz will be a practice quiz (do the practice quiz and review your answers • Quiz Schedule. Quiz Date Quiz first available To be competed by 1 Thu 25 Feb Wed 3 March 2 Sat 27 Feb Sat 6 March 3 Tues 2 March Tues 9 March 4 Tues 9 March Tues 16 March 5 Tues 16 March Tues 23 March MPhil in Development Finance 8 Assessment : Team Assignment 20% • Team Presentation + Submission of Report • Presentation Monday 8th March • Report Submitted by Monday 15th March. • Group Allocation – in next few days • Topics in Course Outline. Your group will be allocated a Topic (To be finalized in next day or two) • Opportunities to Discuss with me MPhil in Development Finance 9 Assessment : Individual Written assignment 60% • • • • • • End towards of March: Date to confirm RPNow – Exam type conditions Assessment will be open book Essay type questions A mock final assignment will be provided More information later . • Any questions MPhil in Development Finance 10 Download from Learning Hub Documents & Files for Online Live Session Day 1 • Slides • Agenda 2063 and SDGs.pdf MPhil in Development Finance 11 MPhil in Development Finance Session 1 Africa in the 21st Century MPhil in Development Finance Outline • Background • Why African development? • What is development ? • SDGs? • Development Measures • GDP & Growth • Human Development Index • African Development Performance and • Overall • Individual Country Level • Explaining differences in performance MPhil in Development Finance 13 Some Initial “Stylized facts” • Economic Growth important but Economic Development much more • Africa Most African countries low income or lower middle income • Relative Economic performance (pre-Covid) “weak” • • • • Historically poor Recent significantly better Some evidence slowdown Big differences cross-country • Some Challenges • Vulnerability to External Market Shocks due to Commodity dependence • Poverty reduction weak relative to Asia • Specific regions inequality growing issue MPhil in Development Finance 14 Why African Economic Development? • African Economic Growth slow relative to elsewhere • Economic Development lagging • Different experience of development • Traditional focus • Productivity, markets • Structural transformation • Role of trade, Government Policy. • Recent extended focus • Geography, colonial legacy, ethnic diversity, institutions & political economy, culture, institutions. Rodrik (2016) MPhil in Development Finance Development in the African context Diversity of Africa • Map of Africa - giant jig-saw puzzle created during the scramble for Africa. • Consists of about 54 countries most of which were artificially created. • 3 times the size of the USA • Contains about 22% of the world’s total land area • 2nd largest continent, after Asia • 12 % of the world’s population MPhil in Development Finance Economic Growth Vs. Economic Development Economic Growth • a rise in national or per capita income and product. (Gross domestic product (GDP) or Gross national income (GNI)) • GDP – value all goods & services produced in country, GNI all income received by residents Economic Development • in addition to a rise in per capita income, implies fundamental changes in the structure of the economy • Not simply an increase in average income – concepts of “Equality” • Access to opportunity – e.g. education, health • Access to resources - e.g. water, energy, food • Distribution of income • Political development MPhil in Development Finance Economic Development ≠ Growth of Income • Lucas (1988) “By the problem of development I mean simply the problem of accounting for the observed pattern, across countries and across time, in levels and rates of growth of per capita income. • Streeten (1994) “[W]e should never lose sight of the ultimate purpose of the exercise, to treat men and women as ends, to improve the human condition, to enlarge people’s choices Economic Growth • a rise in national or per capita income and product. (Gross domestic product (GDP) or Gross national income (GNI)) Economic Development • in addition to a rise in per capita income, implies fundamental changes in the structure of the economy MPhil in Development Finance 18 Inclusive growth • AfDB (2012): economic growth that results in wider access to sustainable socioeconomic opportunities for a broader number of people while protecting the vulnerable • Asian Development Bank (ADB Outlook, 2012): growth process that ensures equity of opportunities based on three policy pillars: • sustained growth to create productive jobs for a wide section of the population; • social inclusion to equalize access to opportunities and • social safety net to mitigate vulnerability and risk to prevent extreme poverty. MPhil in Development Finance 19 Sen’s Entitlements and Capabilities • Entitlements – set alternative commodity bundles person can command in society given rights and responsibilities • Entitlements generate capabilities • Capabilities – What a person can do/ Freedoms to Control life • Entitlements – market but also society & political structure etc • Economic Development removal of ‘unfreedoms’ which leave people little choice and opportunity MPhil in Development Finance 20 Key Capabilities Being • able to live long • well-nourished • healthy • literate • well-clothed • mobile • able to take part in the life of the community • happy – as a state of being - may be valued as a functioning MPhil in Development Finance 21 Sustainable Development The Bruntland Report (1987) Not possible separate economic development from environment issues • Development can erode environmental resources • Environmental degradation can undermine economic development. • Poverty major cause and effect of global environmental problems. Sustainable Development • “meeting the needs of present generation without compromising the wellbeing of future generations” • sustainable development requires meeting the basic needs of all and extending to all the opportunity to fulfil their aspirations for a better life.” MPhil in Development Finance 22 Sustainable Development Goals •. • http://www.undp.org/content/undp/en/home/sustainable-development-goals.html MPhil in Development Finance 23 African Union Agenda 2063 . 1A high standard of living, quality of life and well-being for all citizens. 2Well educated citizens and skills revolution underpinned by science, technology and innovation. 3Healthy and well-nourished citizens. 4Transformed economies. 5Modern agriculture for increased productivity and production. 6Blue/ocean economy for accelerated economic growth. 7Environmentally sustainable and climate resilient economies and communities. 8A United Africa (Federal or Confederate). 9Continental financial and monetary institutions established and functional. 10World class infrastructure criss - crosses Africa. 11Democratic values, practices, universal principles of human rights, justice and the rule of law entrenched. 12Capable institutions and transformative leadership in place. 13Peace, security and stability is preserved. 14A stable and peaceful Africa. 15A fully functional and operational APSA 16African cultural renaissance is pre-eminent. 17Full gender equality in all spheres of life. 18Engaged and empowered youth and children. 19Africa as a major partner in global affairs and peaceful co-existence. 20Africa takes full responsibility for financing her development Goals. MPhil in Development Finance 24 African Union Agenda 2063 . 2063 Goals A high standard of living, quality of life and well1 being for all citizens. Well educated citizens and skills revolution 2 underpinned by science, technology & innovation. 3 Healthy and well-nourished citizens. 4 Transformed economies. Modern agriculture for increased productivity and 5 production. Environmentally sustainable and climate resilient 7 economies and communities. Africa takes full responsibility for financing her 20 development Goals. SDGs 1. No Poverty 4. Quality education 3. Good health 8. Good Jobs & Growth 2. No Hunger 6. Clear water & sanitation 10. Reduce inequalities 8. Good Jobs & 2. No Hunger Growth . . . . 9.Innovation & infrastructure . 11.Sustainable Cities . . . . 7. Clear Energy . . 13. Protect the Planet 15. Life on Land . . . https://au.int/agenda2063/sdgs MPhil in Development Finance 25 SDG 1: End poverty in all its forms everywhere • Target 1.1 By 2030, eradicate extreme poverty for all people everywhere, currently measured as people living on less than $1.25 a day • By 2030, reduce at least by half the proportion of men, women and children of all ages living in poverty in all its dimensions according to national definitions • Implement nationally appropriate social protection systems and measures for all, including floors, and by 2030 achieve substantial coverage of the poor and the vulnerable • https://sdgs.un.org/goals/goal1 MPhil in Development Finance 26 SDG2 : End hunger, achieve food security and improved nutrition and promote sustainable agriculture • Target 2.1 By 2030, • end hunger and ensure access by all people, in particular the poor and people in vulnerable situations, including infants, to safe, nutritious and sufficient food all year round • end all forms of malnutrition, including achieving, by 2025, the internationally agreed targets on stunting and wasting in children under 5 years of age, and address the nutritional needs of adolescent girls, pregnant and lactating women and older persons • double the agricultural productivity and incomes of small-scale food producers, in particular women, indigenous peoples, family farmers, pastoralists and fishers, including through secure and equal access to land, other productive resources and inputs, knowledge, financial services, markets and opportunities for value addition and non-farm employment MPhil in Development Finance 27 SDG 8 Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all Target 8.1 • Sustain per capita economic growth in accordance with national circumstances and, in particular, • at least 7 per cent gross domestic product growth per annum in the least developed countries https://sdgs.un.org/goals/goal8 MPhil in Development Finance 28 SDG 3: Ensure healthy lives and promote well-being for all at all ages By 2030, reduce the global maternal mortality ratio to less than 70 per 100,000 live births • By 2030, end preventable deaths of newborns and children under 5 years of age, with all countries aiming to reduce neonatal mortality to at least as low as 12 per 1,000 live births and under-5 mortality to at least as low as 25 per 1,000 live births • By 2030, end the epidemics of AIDS, tuberculosis, malaria and neglected tropical diseases and combat hepatitis, water-borne diseases and other communicable diseases MPhil in Development Finance 29 SDG 4 Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all • By 2030, ensure that all girls and boys complete free, equitable and quality primary and secondary education leading to relevant and effective learning outcomes; • By 2030, ensure that all girls and boys have access to quality early childhood development, care and pre-primary education so that they are ready for primary education MPhil in Development Finance 30 SDG 10: Reduce inequality within and among countries • By 2030, progressively achieve and sustain income growth of the bottom 40 per cent of the population at a rate higher than the national average • By 2030, empower and promote the social, economic and political inclusion of all, irrespective of age, sex, disability, race, ethnicity, origin, religion or economic or other status • Ensure equal opportunity and reduce inequalities of outcome, including by eliminating discriminatory laws, policies and practices and promoting appropriate legislation, policies and action in this regard; MPhil in Development Finance 31 SDG13 Take urgent action to combat climate change and its impacts • Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries • Integrate climate change measures into national policies, strategies and planning • Implement the commitment undertaken by developed-country parties to the United Nations Framework Convention on Climate Change to a goal of mobilizing jointly $100 billion annually by 2020 from all sources to address the needs of developing countries in the context of meaningful mitigation actions and transparency on implementation and fully operationalize the Green Climate Fund through its capitalization as soon as possible MPhil in Development Finance 32 Breakout Group : SDGs & Agenda 2063 Goals • Download Agenda 2063 and SDGs.pdf from Learning Hub • You will be asked to go to a breakout room • Remember your breakout group number • In the room with your colleagues - Identify someone who will report back • Discuss the following questions (questions also in pdf) • Choose either Agenda 2063 or SDGs • Identify 2/3 examples of complementarities and/or trade-offs between goals • Compare with other Goals – is there one set which are more useful? If so why? • 10-15 minutes MPhil in Development Finance 33 Feedback Person For Each Group • Go to the Feedback wall via the Learning Hub or Direct • https://padlet.com/euan17/cjpdum1qdo2g9v07 • Post Group Number and whether focus Agenda 2063 or SDGs • 2/3 Bullets of complementarities and/or trade-offs between goals • Is Agenda 2063 or SDGs more useful? MPhil in Development Finance 34 Income Growth Remains Important Anything that increases long-run rate of economic growth Can have large effects on living standards in the long run. Time(years) y= t (1 + g ) y0 t Income Growth growth rate =4% 8 Annual Growth rate per capita 10 25 50 1% 10% 28% 64% 2% 22% 64% 169% 7 6 5 4 3 2.50% 28% 85% 244% 2 1 4% 48% 167% 611% 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 MPhil in Development Finance 35 Development Indicators: World Bank – Country Classification all economies with populations of more than 30,000. Based on Gross National Income per capita (GNI per capita) (Atlas method using Exchange Rates/PPP also calculated) Source http://data.worldbank.org/news/2015-country-classifications Comparisons Method • Exchange Rates (ER) (not simply affected by relative prices) • Purchasing Power Parity (PPP)–foreign currency required to purchase identical set of goods • Use of ER exaggerates scale of developed –developing differences (many DCs goods & services cheaper) MPhil in Development Finance 36 Gross National Income per Capita . • World Bank GNI per capita Quintiles (PPP) 2011 World Bank eAtlas of Global Development http://www.app.collinsindicate.com/worldbankatlas-global/en-us MPhil in Development Finance 37 Measurement: Multi-dimensional measures Human Development Index (HDI) • Scaled - 0 (low) to 1 (high) • Geometric mean -Health (H) , Education (E), Income (I) Indices 1 3 1 3 HDI = H E I 1 3 • UNDP(2019) http://hdr.undp.org/sites/default/files/hdr2019_technical_notes.pdf MPhil in Development Finance 38 . Human Development Index 2017 (HDI) 0-1 (1 is better) • (HDI) (0-1) Max Roser (2014) - "Human Development Index (HDI)". Online at OurWorldInData.org. Retrieved from: https://ourworldindata.org/humandevelopment-index MPhil in Development Finance 39 HDI Versus GNI per Capita Ranks HDI Value Values HDI Rank GNI per capita Source UNDP Human Development Reports 2015 Statistical tables http://hdr.undp.org/en/data/tables/table-2 MPhil in Development Finance GNI per capita Rank 40 Diversity of Africa • Co-existence of rich and poor countries-see per capita income • Landlocked Vs. Coastal economies • Classifications based on • Regions: East (EAC), Central, North, West (ECOWAS), Southern (SADC) • Incomes • Based on colonial experience-Francophone, Anglophone and Lusophone Etc MPhil in Development Finance World Bank country classifications by GNI income/capita July 1, 2020 (new) July 1, 2019 (old) < 1,036 < 1,026 Lower-middle income 1,036 - 4,045 1,026 - 3,995 Upper-middle income 4,046 - 12,535 3,996 - 12,375 Group Low income High income > 12,535 Majority of African countries low or lower middle income > 12,375 https://blogs.worldbank.org/opendata/new-world-bank-countryclassifications-income-level-2020-2021 See also Nnadozie (2019) Chapter 2 World Bank (2016) classification https://datatopics.worldbank.org/worlddevelopment-indicators/the-world-by-income-and-region.html MPhil in Development Finance 42 Classification based on Colonial Legacy Colonial Map circa 1913 (Current Borders approximately indicated) Francophone (24) Anglophone (20) Lusophone (5) Nnadozie (2019) Chapter 2 https://commons.wiki media.org/wiki/File:C olonial_Africa_1913_ map.svg MPhil in Development Finance 43 Economic Development: Recent Experience % Growth/Capita by Region 8 6 4 2 -2 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 0 -4 -6 Sub-Saharan Africa South Asia Latin America & Caribbean East Asia & Pacific Rodrik (2016) WDI (2021) Per Capita GDP Growth • Early 2000 Significant improvement • Recent Slowing Growth MPhil in Development Finance 44 Growth Rates GDP/capita Selected Countries (1991-2019) 20 Botswana Cameroon 15 Congo, Dem. Rep. Congo Rep. 10 Cote d'Ivoire Eswatini 5 • Significant Diversity: Countries & Time Ethiopia Gabon 0 -5 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Ghana Guinea Kenya • Erratic Growth ? Malawi Mali -10 Mozambique Namibia -15 Nigeria Senegal -20 Source WDI(2021) MPhil in Development Finance 45 Examples Large Fluctuations - Absolute GDP/capita growth >15% (1991-2019) 50 • Conflict? 40 30 20 10 0 -10 -20 -30 -40 -50 -60 Central African Republic Chad Guinea-Bissau Mauritania Rwanda Sierra Leone MPhil in Development Finance 46 Average %GDP/capita growth 1991-2019 : Selected SSA Countries 5 4 3 2 1 0 -1 -2 Source WDI(2021) MPhil in Development Finance 47 Income Growth Remains Important Anything that increases long-run rate of economic growth Can have large effects on living standards in the long run. Time(years) y= t (1 + g ) y0 t Income Growth growth rate =4% 8 Annual Growth rate per capita 10 25 50 1% 10% 28% 64% 2% 22% 64% 169% 7 6 5 4 3 2.50% 28% 85% 244% 2 1 4% 48% 167% 611% 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 MPhil in Development Finance 48 Human Development Index . Max Roser (2014) - "Human Development Index (HDI)". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/humandevelopment-index MPhil in Development Finance 49 Human Development Index . Max Roser (2014) - "Human Development Index (HDI)". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/humandevelopment-index MPhil in Development Finance 50 Human Development Index . Max Roser (2014) - "Human Development Index (HDI)". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/humandevelopment-index MPhil in Development Finance 51 Human Development Index . Max Roser (2014) - "Human Development Index (HDI)". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/humandevelopment-index MPhil in Development Finance 52 Change in HDI by region: 1990-2014 (average annual %). UNDP(2016) Africa Human Development Report MPhil in Development Finance 53 Top 20 African countries with highest percentage change in HDI values, 2000-2014 UNDP(2016) Africa Human Development Report MPhil in Development Finance 54 Development Challenges • Historically, erratic and relative low growth • Often high dependence commodity exports, primarily natural resources. • Volatile International Commodity Prices UNTAD State Of Commodity Dependence (2014) (Commodity exports as % merchandise exports unctad.org/suc2014d7_en.pdf MPhil in Development Finance 55 Development Challenges • Early 2000s more impressive growth, • Diversity across countries • Pre-Covid suggestion growth rates falling • Covid Impact? MPhil in Development Finance 56 Development Challenges: Predicted Impact of Covid 19 on Growth in Sub-Saharan Africa Source: World Bank (2020) Assessing the Economic Impact of Covid-19 And Policy Responses In Sub-Saharan Africa April 2020 | Volume 21 An Analysis Of Issues Shaping Africa’s Economic Future MPhil in Development Finance 57 0 SYC 1980 1990 2000 2010 GHA MDG MOZ MWI NGA TZA ZAF ZMB .2 .4 .6 .8 1 ETH .2 .4 .6 .8 1 Poverty Headcount $2/Day .2 Poverty Headcount $2/Day .4 .6 .8 ETH GIN BDI TZA BDI MLI ZAR MWI BDILBR MDG MD TZA NER NER MOZ CAF MWI MOZ MDG TZA RWA MDG UGA MDG SWZ MDG RWA BFA RWA ZMB NGA ETH UGA UGA BFA ZMB NER ETH NGA TCD NGA UGA MLI ZMB MOZ MW CAF GIN SEN ZMB GMB BFA SWZ ZMB GIN ZMB NGA SEN CAF MLI UGA GHA GNB GHA GHA ETH MLI NGA SLE GNB UGA NER BEN COG ZMB BFA SEN LSO AGO GIN TGO MRT AGO KEN COM UGA MRT GHA LSO NAM LSO SW SEN KEN LSO GMB BWA STP KEN MRT CMR NAM GHA BWA CIV CIVMRT MRT CIV CIV SDN MRT CIV ZAF KEN ZAF ZAF CPV ZAF CIV CMR CMR ZAF CIV CIVCIV GAB .2 .4 .6 .8 1 1 Development Challenges: Poverty Headcount: Sub-Saharan Africa 1990 1995 2000 2005 20101990 1995 2000 2005 20101990 1995 2000 2005 2010 Year Year Graphs by ccode • $2 per day - 2005 PPP values Bluhm et al (2018) MPhil in Development Finance 58 CHN CHN FJI .2 THA 0 MYS MYS 1980 MYS THA THA THA THA THA MYS MYS THA MYS THA THA MYS MYS 1990 2000 Year .8 0 .2 .4 .6 THA MYS VNM .6 IDN LAO CHN VNM CHN TMP IDN LAO KHM TMP CHN VNM CHN IDN KHM LAO CHN IDN CHN CHN CHN KHM PNG VNM PHL IDNIDN PHL IDN KHM IDN PHL CHN KHM FJI VNM PHL VNM IDN PHL PHL PHL PHL THA THA CHN .4 THA VNM CHN IDN LAO IDN .2 Poverty Headcount $2/Day .4 .6 .8 CHN PHL THA IDN Poverty Headcount $2/Day CHN IDN IDN .8 CHN CHN 0 1 Poverty Headcount: East Asia & Pacific 1990 1995 2000 2005 20101990 1995 2000 2005 2010 Year 2010 Graphs by ccode • $2 per day - 2005 PPP values Bluhm et al (2018) MPhil in Development Finance 59 Development Challenges: Inequality • Kuznets Income share in Southern Africa + top 10 percent - bottom 40 % • Elsewhere relatively stable UNDP (2019) http://hdr.undp.org/sites/default/files/hdr2019.pdf MPhil in Development Finance 60 Some Initial “Stylized facts” • Economic Growth important but Economic Development much more • Africa Most African countries low income or lower middle income • Relative Economic performance (pre-Covid) “weak” • • • • Historically poor Recent significantly better Some evidence slowdown Big differences cross-country • Some Challenges • Vulnerability to External Market Shocks due to Commodity dependence • Poverty reduction weak relative to Asia • Specific regions inequality growing issue MPhil in Development Finance 61 Understanding Economic Development in Africa • Go to www.menti.com and use the code 69 06 18 • Link also in the chat • For you what are the key reasons (positive or negative) which explain Economic development experience in Africa and why it is so varied? MPhil in Development Finance 62 Development Challenges: Why Historic Poor performance? (Collier & Gunning, 1999) 1. Geography and population distribution: • • • • Tropical location & disease, Unpredictable Rainfall Low ratio coastline: interior - high transport costs, small states Landlocked Countries 2. Sparseness of population, • higher infrastructure costs, disseminating information, and integrating production and markets • Ethnic diversity • Colonial legacy • Conflicts • Democracy vs Autocracies MPhil in Development Finance 63 Development Challenges: Why Historic Low Performance? (Collier & Gunning, 1999) 3. Governance & Political Economy • • • • Public employment & Public Service Delivery Urban Bias Contractual Enforcement Resource Rents 4. Vulnerability to External shocks • Resource Dependence • Small size of countries & commodity export concentration 5. Aid dependency • Aid – beneficial or detrimental to growth and development? 6. Policy • Trade policies-high trade barriers, • Overvalued exchange rates MPhil in Development Finance 64 Summary • Background • Why African development? • What is development ? • SDGs? • Development Measures • GDP & Growth • Human Development Index • African Development Performance and • Overall • Individual Country Level • Explaining differences in performance MPhil in Development Finance 65 BREAK • Back 18.15 MPhil in Development Finance 66 MPhil in Development Finance Session 2. Savings Investment and Growth MPhil in Development Finance Overview • Aggregate Growth Models • Accounting for growth – Pathways and Factors • Factor deepening versus techical progress • Savings, Investment, Savings Gap in Africa • • • • Savings Gap Aggregate v Cross-Country Determinants of private savings Public v private investment Capital Efficiency • Domestic Resource Mobilization • Tax revenue • External Finance • Structural Adjustment (Introduction) • Agriculture, Manufacturing, Services • Future Agenda MPhil in Development Finance Growth, Saving & Investment “Stylized facts” • Aggregate growth models identify growth pathways & key factors • Concern over Domestic Resource Mobilisation & “Savings Gap” • Private Saving • Tax Collection • Savings and Investment Rates key growth factors (“Factor deepening”) • Overall Savings & Investment rates low in Sub-Saharan Africa • Diverse experience across countries • Savings and investment low due range of factors • Interest rates, Financial development etc • Falling Public Investment • Structural change also important potential source of growth • Weak industrialization • AU Agenda 2063 MPhil in Development Finance 3 Economic Development ≠ Growth of Income Income Growth Remains Important Anything that increases long-run rate of economic growth y= t Can have large effects on living standards in the long run. Annual Growth rate per capita y0 Income Growth growth rate =4% Time(years) 1% (1 + g ) t 8 10 25 50 10% 28% 64% 7 6 5 4 2% 22% 64% 169% 2.50% 28% 85% 244% 2 4% 48% 167% 611% 0 3 1 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 MPhil in Development Finance 4 Average %Growth GDP per capita Regions 5 1991-2019 : Selected SSA Countries 4 3 2 1 0 -1 Rodrik (2016) • What Explains Growth? -2 WDI (2021) • Africa: Historical Poor performance, • Early 2000 Significant improvement • Recent Slowing Growth MPhil in Development Finance 5 Accounting for Growth: Pathways Assume can capture GDP- function of capital, labour, technology, and way organizing production. • Y= Total Income, K= Capital Stock, L=Labour Force, A= Total Factor Productivity (TFP), • Production function f(.) how economy transforms technology, capital, labour into output. Initial Period 0 (Today) Y0 = f(A0, K0, L0) Sources of Output Growth • Factor accumulation/deepening • Increase in Capital Stock K (Private Investment, Private Investment (Spillovers?), Savings? ) • Increase (Effective) Labour Supply L (Population Growth, Human Capital Investment) • Total Factor Productivity (TFP) gains • New Technology (exogenous or endogenous). • Structural Change (Movement between Sectors – not explicit in framework dealt with later) MPhil in Development Finance 6 Potential Productivity Gains? Lower levels productivity per worker (Not TFP) Source World Millennium Goals Reports 2012 http://www.un.org/millenniumgoals/reports.shtml MPhil in Development Finance 7 Decomposition of Growth Korea & Taiwan 1960-1990 Output Growth Capital Share Growth in Labour Capital Share Growth Growth Total Factor in Productivity Labour (TFP) South Korea Share of growth 10.3% 0.30 13.7% 39.9% 0.70 6.4% 43.5% 1.7% 16.6% Taiwan Share of growth 8.9% 0.26 12.3% 35.9% 0.74 4.9% 40.7% 2.1% 23.3% Factor Deepening Source Young (1995) Also reported in De Janvry & Sadoulet Table 8.2 “Asian Miracle” for Korea & Taiwan: More Factor Deepening than Technical Change Recent– China/India different slightly Different – Both Factor Deepening & Technical Change Important (Bosworth & Collings 2008) MPhil in Development Finance 8 Factor Deepening & Growth per Capita • Capital Stock (K) – Positive Effects of Investment • Population (P) - Ambiguous • Positive if increases labour force (L) via Y0 = f(A0, K0, L0) Y0 • Negative Impact via denominator P0 MPhil in Development Finance 9 Historical Development: Growth Models 1 Harrod-Domar Model • Production Function. Capital:Output Ratio ππ • Saving Function Savings = s*National Income (s = savings rate) • Investment: All Savings to Investment. Capital Depreciation Rate πΏπΏ • Population Growth Rate • ππππππ πΆπΆπΆπΆπΆπΆπΆπΆπΆπΆπΆπΆ πΊπΊπΊπΊπΊπΊπΊπΊπΊπΊπΊ π π π π π π π π = ππππππππππππππ π π π π π π π π ππ ππππππππππππππππππππ πΊπΊπΊπΊπΊπΊπΊπΊπΊπΊπΊ − π π π π π π π π − πΆπΆπΆπΆπΆπΆπΆπΆπΆπΆπΆπΆπΆπΆ π·π·π·π·π·π·π·π·π·π·π·π·π·π·π·π·π·π·π·π·π·π·π·π· π π π π π π π π • Per Capita Growth ↑ savings rate ↑ Capital Efficiency ππ↓ Population Growth Rate ↓ MPhil in Development Finance 10 Historical Development: Growth Models 2 Solow Model –Key weakness of HD (No role for labour) • Y= Total Income, K= Capital Stock, L=Labour Force, A= Total Factor Productivity (TFP), Key Implications All countries growth rates converge. Poorer Countries (Lower k) grow faster! Constant Returns to Scale Saving Rate has no role! Production Function Y0 = f(A0, K0, L0) • Saving Function (s = savings rate) • Investment: All Savings to Investment. Capital Depreciation Rate πΏπΏ • Population Growth Rate MPhil in Development Finance 11 Convergence is the Exception Average Growth rate • No correlation between Average growth and starting position • If Converge poorer countries should have higher average growth rates Productivity in 1870 Rodrik, D The Past, Present, and Future of Economic Growth. 2013. MPhil in Development Finance 12 Historical Development: Growth Models 2 • • • • Harrod Domar Plausible – mobilizing saving and investment for growth No role for labour Impact of Population growth not captured properly • Solow • More plausible assumption about nature of technology • Growth - “Manna from heaven” exogenous technical change – International Public Good • Predictions growth convergence – empirically false • “All models are wrong some models are useful” MPhil in Development Finance 13 Historical Development: Growth Models 3 Endogenous Growth Theory • Model with Investment in Human Capital/Education – improves productivity of labour Key Implication • Endogenous growth function of savings rate, rate of investment physical & human capital • Model with TFP positive function of Public Investment (New Road reduces costs for all firms) (Externalities, Spillovers and Public Goods) Key Implication • Government Infrastructure Investment – Increasing returns to scale and long run growth MPhil in Development Finance 14 Summary Growth Models Extends Harrod-Domar Key Implications • Per Capita Growth – Savings rate, TFP Efficiency, Investment Rates Physical & Human Capital, Infrastructure Public Good Investment and Spillovers • Understanding factors and pathways • Determinants of savings and investment behaviour important – factor deepening • Open Economy - Savings & Investment not equal (Savings-Investment) = Trade balance + Government Budget Government Budget = Expenditure – Taxes MPhil in Development Finance 15 Go to www.menti.com and use the code 69 06 18 • Code also in Chat MPhil in Development Finance 16 Savings Gap Open Economy - Savings & Investment not equal (Savings-Investment) = Trade balance + Government Budget Government Budget = Expenditure – Taxes Savings – Investment Gap • Extent investment not financed via domestic savings • Low rate of savings in developing countries gives rise to savings gaps • Potential capital constraints if not filled by external financial flows (Foreign Direct Investment, Aid, Remittances etc, • Case for Domestic Resource Mobilization MPhil in Development Finance 17 Domestic Resource Mobilization Main resources available for development : • • • • • Domestic resources – private savings and government resources (Tax revenues). Private capital flows – including foreign direct investment, portfolio equity, and private sector borrowing. ODA, philanthropy and other official flows. External government borrowing. Remittances The Case for Domestic Resource Mobilization (Agenda 2063 Goal 20) • Domestic finance is less volatile than external finance • It permits country ownership of development policies and outcomes. • Reduces reliance on external flows and the risk of the Dutch disease. • Creates incentives for accountability and transparency public resources use • Reduces vulnerability to revenue losses from trade reforms MPhil in Development Finance 18 Investment vs Savings (% of GDP) 1996-2018 40.00 SSA Depending on Period 29.40 27.27 30.00 21.55 21.32 East Asia South Asia 35.00 25.00 Small Savings Gaps SSA Latin America 34.49 33.59 31.34 29.61 28.53 25.59 23.07 21.20 19.75 18.92 20.00 20.63 20.12 15.00 Lower rates of Savings and Investment 10.00 5.00 0.00 -5.00 3.97 3.16 1.51 -0.12 -0.87 -1.69 1996-2007 2008-2018 MPhil in Development Finance 1.71 0.37 Savings (% of GDP) 2011-2018 Selected Countries. Wide Crosscountry differences • Investment & Savings Rates • Savings Gap 50 • Resource Rich • Growing Strongly 10 Investment Rate Saving Rate 40 30 20 0 -10 -20 -30 Saving Gap (when negative) MPhil in Development Finance 20 Domestic Resource Mobilization: Determinants of Private Savings • Theoretical and empirical literature group factors under four headings • • • • income and growth variables financial variables demographic variables uncertainty measures and external variables. MPhil in Development Finance 21 Determinants of Savings: Income • Income - higher income per capita levels countries higher aggregate savings rate • Evidence e.g. SADEC Kapingura et al (2015) Cons Income Income Theory • Permanent Income Hypothesis - PIH • Income variable over lifetime – Households aim smooth Consumption • Periods borrowing & saving Consumption Time MPhil in Development Finance 22 Determinants of savings: Real Interest rate Real interest rate – effect ambiguous Substitution effect • Interest rate (opportunity cost) – price consumption today relative to postponing consumption until tomorrow. • Increase rate increase Price goes up – increase demand for consumption tomorrow Income effect • Depends on whether individual a saver (net lender) or borrower. • Net Saver receives net capital income. Higher interest rate increases income. Better off (Increase savings). • Net Borrower pays interest on borrowing. Servicing borrowing rises. Interest rate rise has negative income effect. MPhil in Development Finance 23 Determinants of savings: Real Interest rate Real interest rate – Overall effect ambiguous • Net Saver, income and substitution effect work in different directions. • Higher interest rates - substitution current for future consumption. If income effect dominates substitution effect, current consumption is higher than future consumption –hence savings fall. • Net borrower, income & substitution move same direction. A negative substitution effect reinforced by negative income effect both reducing consumption. • Empirical evidence interest rate changes have small substitution effects. Income effect dominant. Rise in interest rates increases current consumption of net lenders (savers) and reduce that of net borrowers. • Most households net borrowers. Current consumption reacts negatively to interest rate increases. MPhil in Development Finance 24 Determinants of savings: Real Interest rate • Different Pathway when Access to Credit restricted • No Access to credit - Household consumes what current income • Limited access to credit. Interest rate rises – Income effects only MPhil in Development Finance 25 Determinants of savings: Financial development • Deeper financial markets and strengthened regulation of financial institutions enhance saving and investment opportunities • Wider variety of financial instruments to channel savings and also by providing more security to investors. • “Financial depth” variables found to have positive effect across empirical studies • Financial development also increases availability of credit relaxing domestic credit constraints. • Some consumers may reduce savings – increased availability of credit, reduced risk. MPhil in Development Finance 26 Determinants of savings: Inflation Inflation rate π • Affects real interest rate (r) via nominal interest rate (i) ( r ≈ i- π ) • Proxy for macroeconomic uncertainty, higher uncertainty and pessimism may induce higher savings for precautionary motives • Alternatively unanticipated inflation may causes unanticipated cuts in real income and reduce savings. • Lahiri (1989), study of dynamics of saving in eight Asian countries, found inflation adversely affects the propensity to save. MPhil in Development Finance 27 Determinants of savings: Demographic factors • Age distribution of population, life expectancy and urbanisation ratio. • Age dependency ratio is negatively related to domestic saving rates. • PIH predicts Individuals negative savings when young and have low or no income, positive savings during productive years and negative savings when old and retired. • When the share of the working population relative to that of retired persons increases, saving is likely to increase • Life expectancy at birth negative impact expected via effect on the ageing of the population and reduction in working-age population. • Decline in savings would be expected in response to an increase in life expectancy. Via ageing of population and reduction in working-age population • Increased urbanisation may reduce need for precautionary saving, which is high in rural societies with greater volatility in income. MPhil in Development Finance 28 Investment in Africa Growth Theory Key Implications • Per Capita Growth – Savings rate, TFP Efficiency, Investment Rates Physical & Human Capital, Infrastructure Public Good Investment and Spillovers Investment crucial for long-term growth • Investors inject new capital, technology, competitiveness, new markets, and trade and jobs • Private investment (private firms) and public investment (government). • “To sustain average growth rates Africa requires investment rates of 25 % of GDP.. UNCTAD(2014) • Investment fluctuates sharply over the business cycle. MPhil in Development Finance 29 Investment (% of GDP) 1996-2018 “To sustain average growth rates Africa requires investment rates of 25 % of GDP.. UNCTAD(2014) 40.00 SSA South Asia 35.00 29.40 27.27 30.00 SSA 25.00 21.55 21.32 East Asia 34.49 33.59 31.34 29.61 28.53 25.59 23.07 21.20 19.75 18.92 20.00 Lower rates Investment Latin America 20.63 20.12 15.00 10.00 Investment = Gross Fixed Capital Formation 5.00 0.00 -5.00 3.97 3.16 1.51 -0.12 -0.87 -1.69 1996-2007 2008-2018 MPhil in Development Finance 1.71 0.37 Investment vs Savings (% of GDP) 2011-2018 Selected Countries. Wide Crosscountry differences • Investment 50 Investment Rate 40 30 • Resource Rich • Growing Strongly 20 10 0 -10 -20 -30 Saving Gap (when negative) MPhil in Development Finance 31 Gross fixed capital formation in Africa private and public (%GDP) Private GFCF Public GFCF “The general decline in public investment rates in Africa relative to the 1980s should be of concern to policymakers .. because recent studies suggest that public investment rates in Africa are below optimal levels” UNCTAD(2014) UNCTAD(2014) https://unctad.org/system/files/officialGross fixed capital formation = Investment document/aldcafrica2014_en.pdf MPhil in Development Finance 32 Efficiency of Capital :Incremental capital–output ratios across developing-country groups • ICOR (Incremental Capital: Output Ratio) measures degree of efficiency (No units of capital required per unit output ) • Higher ICOR – Lower efficiency • Productivity Capital in Africa has increased • Large diversion across countries MPhil in Development Finance 33 Determinants of Investment: Neo-classical Theory In Neoclassical Model Investment determined by changes in the desired capital stock. • Desired capital stock where firms earn largest profit. Depends on benefits & costs of extra capital • Benefit depends on marginal product of capital, MPKf. Marginal productivity capital falls as K ↑ • User cost of capital (UC) opportunity cost of unit of capital/year User cost ≈ real interest cost + depreciation cost. • Simple Implications • If MPKf > UC, Investment positive (K increases), as marginal benefits > the marginal costs. • If MPKf < UC, Investment negative (K decreases), as marginal benefits < the marginal costs. Changes in the desired capital stock & Investment/: • Any factor that changes user cost of capital also changes the desired capital stock: • e.g. real interest rate, depreciation rate, price of capital. • Any factor (that affect productivity of capital) shifts MPKf curve also causes change in desired capital stock: e.g. Technology, or labour force MPhil in Development Finance 34 Determinants of Investment: Modern Theory Neo-classical Theory “Ignores”/”assumes away” • Source of Finance doesn’t matter (“Miller & Modigliani”) • Access to finance assumed • Adjustment costs - firms seamlessly adjust • Expectations are rational Evidence • Source of Finance matters (Evidence Increased internal Cash flow increases investment) • Access to finance & Type of Finance matters (Credit constrained firms invest less) • Adjustment costs exist – slows adjustment of firms capital stock • Expectations not always rational/ “Animal spirits” MPhil in Development Finance 35 Break Out Groups • Download Saving & Investment Break Out.pdf • You will be asked to go to a breakout room • Remember your breakout group number • In the room with your colleagues - Identify someone who will report back • Discuss the following questions (Summary Determinants in pdf) • For at least one African country you have knowledge of, use the theoretical determinants and identify what you think are likely to be the most important factors (and why) in the case you have identified • You should prepare (2/3 bullet points each (savings and investment) with reasoning • 10-15 minutes MPhil in Development Finance 36 Feedback Person For Each Group • Go to the Feedback wall via the Learning Hub or Direct • https://padlet.com/euan17/vj1c6l6v9w9zgwaf • Post Group Number and Country discussed • 2/3 Bullets of Important Factors for Investment & Savings MPhil in Development Finance 37 Domestic Resource Mobilization • Domestic resources • • private savings government resources (Tax revenues). Open Economy Savings-Investment = Trade balance + Government Budget Savings-Investment = Trade balance + (Expenditure – Taxes) What about Government revenues/taxes? (Come back to Later) MPhil in Development Finance 38 Domestic Resource Mobilisation: Tax Revenues 2000-2018 • Total Government Revenue in Africa 24.5% • Lowest in World UNECA (2019) https://repository.uneca.org/handle/10855/41804 MPhil in Development Finance 39 Total Government Revenue In Africa, 2000-2018 UNECA (2019) https://repository.uneca.org/handle/10855/41804 MPhil in Development Finance 40 Government Revenue Selected Countries 2000-2018 UNECA (2019) https://repository.uneca.org/handle/10855/41804 MPhil in Development Finance 41 Trends In Tax Revenue And It Components In Africa, 2000-2018 UNECA (2019) https://repository.uneca.org/handle/10855/41804 MPhil in Development Finance 42 Tax Revenue Components: Selected Countries • Average tax revenues low in sub-Saharan Africa • Heavy reliance on resourcebased taxes in resource-rich countries • A small share of direct taxes (personal income +corporate) • A high share of trade taxes in some countries • Key challenges • Difficult to tax sectors – informal & agriculture • Corruption • Balancing equity & revenue • Need to broaden tax base UNECA (2019) https://repository.uneca.org/handle/10855/41804 MPhil in Development Finance 43 Fiscal Space: Debt Threshold 50% GDP 2016-2018 • “Fiscal Space” – possible extra borrowing for development • Negative means Debt/GDP > 50% in 2016-18 • Pre-Covid many African Government already heavily indebted UNECA (2019) https://repository.uneca.org/handle/10855/41804 MPhil in Development Finance 44 External Finance: Brief Overview Foreign capital led growth? • If Saving/investment constraint to economic growth in LDCs & Domestic Resource Mobilization low • Foreign capital could ensure high rate of investment. External Resources • External government borrowing • Many African government heavily indebted pre-covid • Private capital flows • • • ODA, philanthropy and other official flows. • • foreign direct investment, (>80% go to primary sector in Africa - mining and quarrying, and petroleum). portfolio equity, and private sector borrowing. Historically Africa largest ODA recipient Remittances • been most important source of capital flows after FDI around 7 per cent of African GDP in 2011. MPhil in Development Finance 45 SSA External Financing ($ Billion, 2015) 60 40 20 0 -20 Change in stock of external debt Net official development assistance and official aid received -40 Foreign direct investment, net inflows -60 Personal remittances, received MPhil in Development Finance 46 Aggregate Growth Models & Structural Adjustment Growth Models • Per Capita Growth – Savings rate, TFP Efficiency, Investment Rates Physical & Human Capital, Infrastructure Public Good Investment and Spillovers • Understanding – overall determinants of growth Ignores –important source of growth • Structural Adjustment • Movement resources across sectors MPhil in Development Finance 47 Sources of growth: Structural Adjustment • Three sectors Agriculture, Manufacturing, Services • Consider Total Factor productivity in Economy (TFP) ππππππππππππππππππππ %πΊπΊπΊπΊπΊπΊ πππππππππ %πΊπΊπΊπΊπΊπΊ πππππππππ %πΊπΊπΊπΊπΊπΊ πππππππππ ∗ ππππππππππππππππ + ∗ ππππππππππππππππ ∗ πππππππ π π π π π π π π π π π π π π π + = π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄π΄ ππππππππππππππππ ππππππππππππππππππππππππππ • Assume ππππππππππππππππ < ππππππππππππππππ πππππππ π π π π π π π π π π π π π π π ? • Growth Occurs if decrease resources (employment, capital) in agriculture and increase in manufacturing • Structural transformation characterized by • a shift from low- to high-productivity activities, • a decline in the share of agriculture in output and employment, and • an increase in the share of manufacturing and modern services in output. MPhil in Development Finance 48 Agric Importance falls During Development but Path not Uniform %Share of Labour in Ag • World Bank Development Report (2008) China Nigeria Brazil • Over period 1990-2005 • African Countries • Fall in % Share in Agric – Little per capita growth • Suggestive little growth via Structural Change GDP per capita MPhil in Development Finance 49 Growth in Manufacturing lagging • Share of manufacturing employment should increase as GDP increases • Africa Lagging Asia at all levels of GDP Rodrik (2016) MPhil in Development Finance 50 Outline • Aggregate Growth Models • Accounting for growth – Pathways and Factors • Factor deepening versus technical progress • Savings and Savings Gap • Aggregate v Individual Country • Determinants of Savings • Investment and performance in Africa • • • • • Aggregate v Individual Country • Public v private investment • Capital Efficiency Structural adjustment Agriculture, Manufacturing, Services Domestic Resource Mobilization External Finance MPhil in Development Finance African Union Agenda 2063 • Industrialization remains Key Goal • Transformed, Inclusive and Sustainable Economies • GDP will be growing at 7% and at least a third of the outputs will be generated by national firms. • Labour intensive manufacturing, underpinned by value addition to commodities and doubling of the total agricultural factor productivity will be attained by 2023 • ICT penetration and contribution to real GDP in absolute terms would be double of 2013 levels. • Regional industrialization hubs linked to the global value chains and commodity exchanges will be in place by 2023. • https://au.int/agenda2063/outcomes MPhil in Development Finance 52 UNTAD (2014) Report Messages & Recomendations Sustained transformative growth in Africa requires broadening sources of growth • Demand - Balancing contributions of consumption and investment • Supply - Shift from low- to high-productivity activities with and across sectors Boosting the level and rate of investment • Enhance domestic resource mobilization, • Broaden the tax base • Reversal of policy bias against public investment, • Address credit market imperfections, Reducing risk and uncertainty Ensuring that investment goes to strategic and priority sectors of the economy • Role for industrial policy and Central Banks Improve productivity of investment • Esp Public investment UNCTAD Others • local and foreign enterprises, Stemming capital flight, Using aid, international trade MPhil in Development Finance 53 Overview • Aggregate Growth Models • Accounting for growth – Pathways and Factors • Factor deepening versus techical progress • Savings, Savings Gap & Domestic Resource Mobilization • Savings Gap Aggregate v Cross-Country • Determinants of private savings • Tax revenue • External Finance • Investment in Africa • Aggregate v Cross-Country • Public v private investment • Capital Efficiency • Structural Adjustment • Agriculture, Manufacturing, Services • Future Agenda MPhil in Development Finance . MPhil in Development Finance 55