World Economic Trends
Future Position of the Economies
in Eastern and Southern Africa,
and Implications for Financial
Sector Development and
Management
Thorvaldur Gylfason
Overview
Where we are coming from
And where we could be going
Main
point:
Why money and finance are so
important from an economic and
social point of view
Public policies and institutions
make a difference for economic
growth.
GNP Per Capita, PPP-Adjusted,
1975-1998
7000
6000
5000
Angola
Botswana
Lesotho
Malawi
Namibia
Swaziland
Tanzania
Uganda
Zambia
Zimbabwe
4000
3000
2000
1000
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
0
19
Current International Dollars
Eastern and
Southern
Africa: A
Quick Glance
Growth of GNP Per Capita,
PPP-Adjusted, 1975-1998
Botswana
Swaziland
World
record in
growth
1965-90
Lesotho
Uganda
Malawi
Namibia
Zimbabwe
Botswana:
Star Performer!
Tanzania
Zambia
Angola
-2
0
2
4
6
Per Cent Per Year
8
10
12
Investment, 1960-1998
Lesotho
Botswana
Swaziland
Tanzania
Namibia
Zambia
OECD countries
invest about 20%
of their GDP.
Malawi
Zimbabwe
Quality
is key.
Angola
Uganda
0
5
10
15
20
25
Per Cent of GDP
30
35
40
45
Investment: Quantity and
Quality
Compare Botswana and Tanzania:
In Botswana, the share of State-Owned
Enterprises in total investment fell
from 16% in 1980-95 to 12% in 199097.
In Tanzania, the SOE share of
investment fell from 46% in 1985-90
to 23% in 1990-97.
Privatization helps improve
investment.
Growth and Investment,
1975-1998
Growth Per Capita (Per Cent Per Year)
12
Each ten percentage point
increase in the investment
ratio is associated with an
increase in per capita
growth by 1½% per year.
10
8
6
Uganda
4
Zimbabwe
Botswana
Swaziland
Lesotho
Malawi
Namibia
2
Zambia
Tanzania
0
0
-2
10
20
30
Angola
-4
Investment (Per Cent of GDP)
40
50
Trade Ratio, PPP-Adjusted,
1980-1998
Swaziland
Botswana
Lesotho
Zambia
Namibia
From 1988 to 1998,
the average trade
ratio rose from
21% to 28% in the
world as a whole.
Angola
Malawi
Zimbabwe
Tanzania
Uganda
0
10
20
30
Per Cent of GDP
40
50
60
Trade is Important
From 1988 to 1998, the average trade ratio
rose around the world:
Low-income countries: From 7% to 8%.
Middle-income countries: From 13% to 22%.
Low & middle-income countries: From 11% to
16%.
High-income countries: From 28% to 38%.
This is good news:
More trade means more efficiency and
more growth.
Growth and Trade,
1975-1998
Growth Per Capita (Per Cent Per Year)
12
Each ten percentage point increase
in the trade ratio is associated with
an increase in per capita growth by
almost 1% per year.
10
8
Botswana
Lesotho
6
Uganda
Swaziland
Malawi
4
Namibia
Zimbabwe
2
Tanzania
Zambia
0
0
-2
10
20
30
Angola
-4
Trade (Per Cent of GDP)
40
50
60
Gross Foreign Direct
Investment, PPP-Adjusted,
1975-1998
Botswana
Swaziland
Lesotho
Angola
Namibia
From 1988 to 1998,
the average FDI
ratio rose from 2%
to 4% in the world
as a whole.
Zambia
Tanzania
Uganda
Malawi
Zimbabwe
0.0
1.0
2.0
3.0
4.0
Per Cent of GDP
5.0
6.0
7.0
Trade In Capital is Important,
Too
From 1988 to 1998, the average FDI ratio
rose around the world:
Low-income countries: From 0.2% to 0.9%.
Middle-income countries: From 0.4% to 1.6%.
Low & middle-income countries: From 0.3% to
1.3%.
High-income countries: From 2.6% to 5.7%.
More trade in capital — more FDI! —
means more efficiency and more growth.
Growth and FDI, 1975-1998
12
Each ten percentage point increase in the
FDI ratio is associated with an increase in
per capita growth by 1% per year.
Growth Per Capita (Per Cent Per Year)
10
Botswana
8
Swaziland
6
Uganda
Lesotho
Malawi
4
Zimbabwe
Namibia
2
Tanzania
Zambia
0
0
1
2
3
4
5
6
-2
Angola
-4
Foreign Direct Investment (Per Cent of GDP)
7
8
Public Expenditure on
Education, 1960-1997
Namibia
Botswana
Zimbabwe
Angola
Swaziland
Lesotho
From 1980 to
1997, the same
ratio rose from
4% to 5% in the
world as a whole.
Zambia
Malawi
Tanzania
Uganda
0.0
1.0
2.0
3.0
4.0
Per Cent of GNP
5.0
6.0
7.0
Education is Very Important
From 1980 to 1997, public expenditure on
education rose around the world:
Low-income countries: From 3.2% to 3.2%.
Middle-income countries: From 4.2% to 4.9%.
Low & middle-income countries: From 3.5% to
4.1%.
High-income countries: From 5.6% to 5.4%.
More and better education is good for
growth.
Growth and Education,
1975-1998
Growth Per Capita (Per Cent Per Year)
12
Each two percentage point
increase in the education
expenditure ratio is associated
with an increase in per capita
growth by almost 1% per year.
10
8
6
Botswana
Lesotho
Swaziland
Uganda
Malawi
4
Zimbabwe
Namibia
2
Tanzania
Zambia
0
0
1
2
3
4
5
6
-2
Angola
-4
Public Expenditure on Education (Per Cent of GNP)
7
8
Agriculture, 1998
Tanzania
Uganda
Malawi
Zimbabwe
Zambia
From 1970 to 1998,
the share of
agriculture in GDP
decreased from 9%
to 4% in the world
as a whole.
Swaziland
Angola
Lesotho
Namibia
Botswana
0
10
20
30
Per Cent of GDP
40
50
Agriculture is Contracting
From 1970 to 1998, the share of
agriculture in GDP decreased around the
world:
Low-income countries: From 39% to 23%.
Middle-income countries: From 17% to 9%.
Low & middle-income countries: From 24% to
13%.
High-income countries: From 5% to 2%.
Less agriculture means more industry,
trade, and services, and almost surely
more growth.
Why Agriculture Contracts
It takes fewer and fewer farmers to feed
the rest of the population.
This is because farm technology steadily
improves while food demand per person
remains the same.
Remember how Europe became rich:
By letting agriculture gradually give way to
industry, trade, and services where
productivity — and pay! — is higher.
Growth and Agriculture,
1975-1998
Growth Per Capita (Per Cent Per Year)
12
10
Botswana
A 25 percentage point decrease in the share of
agriculture in GDP is associated with a increase
in per capita growth by 1% per year.
8
Uganda
Swaziland
6
Lesotho
Malawi
4
Namibia
Zimbabwe
2
Tanzania
Zambia
0
0
10
20
30
-2
Angola
-4
Agriculture (Per Cent of GDP)
40
50
What is the Upshot?
Economic growth responds to public
policy.
In particular, by encouraging
saving and investment of high quality
foreign trade and investment
education
... the government can help foster
rapid economic growth.
Sir Arthur Lewis Got It Right
Since the second world
war it has become
quite clear that rapid
economic growth is
available to those
countries with
adequate natural
resources which make
the effort to achieve it.
W. ARTHUR LEWIS
(1968)
What Else?
These lessons are borne out by experience
from around the world.
Additional lessons:
Too much inflation hurts saving, investment,
and trade — and thereby also growth.
Too much SOE activity hurts the quality of
investment and education — and growth.
Too much agriculture and, more generally,
natural resource dependence, if not well
managed, hurts education and trade — and
thereby also growth.
Too rapid population growth also impedes
economic growth.
Reservations
Even so, the question of rapid growth is, of
course, a bit more complicated.
We need to address a host of political,
social, and cultural questions as well as
questions of natural conditions, climate,
and public health — which would take us
too far afield.
But the main point remains:
To grow or not to grow is in large
measure a matter of choice.
Future Scenarios
Therefore, looking into the future, 10-20
years hence, we should not extrapolate
past trends like blind men.
Rather, we should perhaps ask ourselves:
How fast can our economies grow? — if
we do all the right things in the field of
investment, trade, education, and so on.
My answer is: Pretty fast!
Per capita growth of 3%-6% per year is a
reasonable target.
This would double, or perhaps even quadruple,
income per head every 25 years.
And Why Not?
This year, however, according to
the IMF, economic growth in Africa
is second only to that of Asia.
After all, in low-income countries, GNP per
capita grew by 3.7% per year on average
from 1965 to 1998 ...
... and by 1.7% if China and India are not
included.
In middle-income countries, GNP per capita
grew by 1.9% per year.
In high-income countries, GNP per capita
grew by 2.3% per year.
But in Sub-Saharan Africa, GNP per capita
contracted by 0.3% per year.
Turning Africa Around:
What Does It Take?
But, as Arthur Lewis pointed out a
generation ago,
and as I think Adam Smith understood,
there is good reason to believe that, with
good policies and appropriate
institutions, Africa can grow rapidly.
This would revolutionize the standard of
life among its peoples, like happened in
Asia.
Why Does This Concern
Central Bankers?
The reason is simple:
Recent economic theory and experience
indicate that high inflation is harmful
to economic growth.
How high is “high”?
My answer is: 15-20% per year, maybe
less.
Therefore, it is essential to reduce
inflation below this range, and keep
it there.
Inflation in Eastern and
Southern Africa, 1980-98
120
1980-90
Per Cent Per Year
100
1990-98
80
60
40
20
0
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Inflation Matters Because
Money Matters
Money greases the wheels of
production and exchange.
High inflation discourages money
holdings, and thereby impedes
economic growth.
Therefore, high inflation deprives the
economic system of necessary
lubrication.
Money and Quasi-Money in
Eastern and Southern Africa,
1970-98
40
1970s
1998
35
Per Cent of GDP
30
In OECD countries,
the same ratio is
generally 50-70%.
25
20
15
10
5
0
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The Paradox of Money
Monetary restraint is the best way —
the only way! — to make money
grow relative to income in the long
run.
Attempts to print money to make it
grow and grease the wheels are
counterproductive in the long run
because printing too much money
causes inflation.
Money and Inflation,
1990-98
Money and Quasi-Money 1998 (Per Cent
of GDP)
45
A 10 percentage point
increase in annual inflation is
associated with a decrease
in money and quasi-money
by 3% of GDP.
Namibia
40
Lesotho
35
30
Swaziland
25
Zimbabwe
Botswana
20
Tanzania
15
Zambia
Malawi
Uganda
10
5
0
0
10
20
30
40
50
Inflation 1990-98 (Per Cent Per Year)
60
70
How To Keep Inflation under
Control
This is not only a matter of sound
monetary policies, but also of
appropriate monetary and financial
institutions.
Therein lies the importance of recent
institutional reforms in several
countries, centered on increased
independence, accountability, and
transparency.
What’s the Story?
Increased independence makes it easier for
central banks to withstand political
pressure to print money.
This may be accompanied by laws or
regulations that restrict the government’s
ability to borrow from the central bank.
But increased independence, in a
democracy, must go hand in hand with
accountability vis-à-vis elected
representatives of the people as well as
transparency of central bank operations.
What’s the Story?
Empirical evidence indicates that countries
with independent central banks tend to
have less inflation than others.
Moreover, accountability and transparency
may help improve policy making by
reducing the likelihood of mistakes and
miscalculations, inside and outside
government.
This is why the IMF now tries to be as
transparent in its operations as the
member countries will allow.
In Conclusion: It Can Be
Done
The world economy is growing rapidly ...
... and will probably continue to do so.
There is good reason to expect Africa —
Eastern and Southern Africa, in particular
— to participate in the growth revolution.
This is because we now think we know how
to influence economic growth through
policy — more about which in Malta.
The scope for policy improvements is
particularly large in countries that have
not followed good policies in the past.
In Conclusion: It Can Be
Done
Therefore, the legacy of inadequate policies
that tends to be regarded as a sign of
weakness may be turned into strength.
There is, thus, a sense in which we can say:
The worse, the better!
Remember the main point of Gunnar
Myrdal’s Asian Drama (1968)?
It was that the Asian economies were incapable
of rapid economic growth!
I believe that those who make similar claims
about Africa will also be proven wrong.