Learning What Works
Anupam Basu, Evangelos A. Calamitsis, Dhaneshwar Ghura
©2000 International Monetary Fund
The Economic Issues series aims to make available to a broad readership of nonspecialists some of the economic research being produced on topical issues by IMF staff. The series draws mainly from IMF Working Papers, which are technical papers produced by IMF staff members and visiting scholars, as well as from policy-related research papers.
This Economic Issue is based on IMF Working Paper 99/51 "Adjustment and Growth in Sub-Saharan Africa." Citations for the research referred to in this shortened version are provided in the original paper, which readers can purchase ($7.00) from the IMF Publication Services, or download from www.imf.org. Pamela Bradley prepared the text for this pamphlet.
Africa is the world's poorest continent. But for the first time in a generation—amid all the bad news—there is hope for change. An increasing number of countries in sub-Saharan Africa are showing signs of economic progress, reflecting the implementation of better economic policies and structural reforms. These countries have successfully cut domestic and external financial imbalances, enhancing economic efficiency. They have given greater priority to public spending on health care, education, and other basic social services. In addition, there has been a growing movement toward more open and participatory forms of government that encourage cooperation between the state and civil society.
Nonetheless, the economic and social situation in sub-Saharan Africa remains fragile and vulnerable to domestic and external shocks, and the region has a long way to go to make up for the ground lost over the past two decades. Despite some upturn in economic growth rates, poverty is still widespread and in many parts of the continent extremely acute. Investment remains subdued, limiting efforts to diversify economic structures and boost growth. Furthermore, a number of countries have only recently emerged from civil wars that have severely set back their development efforts while, sadly, new armed conflicts have erupted in other parts of the continent. These conflicts and other adverse factors, notably poor weather conditions and a deterioration in the terms of trade, have led to some loss in economic momentum in the region over the past two years.
Sub-Saharan African countries therefore face major challenges: to raise growth and reduce poverty, and to integrate themselves into the world economy. Economic growth rates are still not high enough to make a real dent in the pervasive poverty and enable these countries to catch up with other developing nations. What is needed is a sustained and substantial increase in real per capita GDP growth rates in these countries, coupled with significant improvements in social conditions.
This pamphlet presents the results of an empirical analysis of the factors affecting economic growth in sub-Saharan Africa, using data for the period 1981–97 and a sample of 32 countries. The empirical work involved the estimation of a growth equation to identify the key determinants of per capita real GDP growth, including economic variables that reflect the influence of economic policy changes as well as other explanatory factors. On the basis of this analysis and a review of the evidence of economic recovery during 1995–97, using a much larger sample of countries, the pamphlet attempts to determine which policies appear to have been the most effective in terms of increasing economic growth and suggests the key elements of a policy framework that could promote sustainable economic growth and reduce poverty in sub-Saharan Africa.
Several underlying factors can affect the rate of output change. Key among these are the rate of investment, increase in the size of the workforce, and changes in economic policies. A country's macroeconomic policies will affect its growth performance through their impact on certain economic variables. For example, a high rate of inflation is generally harmful to growth because it raises the cost of borrowing and thus lowers the rate of capital investment; but at low, single-digit levels of inflation, the likelihood of such a trade-off between inflation and growth is minimal. At the same time, highly variable inflation makes it difficult and costly to forecast accurately costs and profits, and hence investors and entrepreneurs may be reluctant to undertake new projects. Likewise, given that financial resources in the form of domestic savings and foreign grants and loans are limited, a larger budget deficit will mean that more of those limited resources must be devoted to financing the budget deficit. Fewer resources will thus be available for the private sector. If the fiscal deficit increases to an unsustainable level, private investors' perception of country risk is likely to become increasingly negative and hurt private investment.
Finally, outward-oriented trade polices are conducive to faster growth because they promote competition, encourage learning-by-doing, improve access to trade opportunities, and raise the efficiency of resource allocation.
The evidence for sub-Saharan Africa suggests that the recent economic recovery was underpinned by a positive economic environment influenced—either directly or indirectly—by improvements in macroeconomic policies and structural reforms. The estimated growth equation indicates that per capita real GDP growth is positively influenced by economic policies that raise the ratio of private investment to GDP, promote human capital development, lower the ratio of the budget deficit to GDP, avoid overvalued exchange rates, and stimulate export volume growth. The key results are the following:
To what extent did the variables highlighted above play an important role in explaining the more recent economic recovery? To answer this question, IMF researchers looked at the experiences of a sample of 46 countries during 1995–97. The available data showed that sub-Saharan Africa grew significantly during 1995–97. The average annual growth rate of per capita real GDP, which was negative through most of the 1980s and –2.2 percent during the five-year period 1990–94, rose to 1.2 percent during 1995–97. Moreover, whereas per capita real GDP increased in 16 countries in 1990–94, twice as many countries registered positive growth rates during 1995–97. Those countries in the study that experienced negative or declining growth rates did so largely as a result of a combination of long-standing, deep-rooted economic problems and the debilitating effects of past or continuing political turmoil.
In the 1990s, while many countries implemented structural adjustment programs, several other countries experienced economic disruptions because of war. The data for 1995–97 show that the measured improvement in economic performance in sub-Saharan Africa is much stronger when countries that experienced either unsettled political (or conflict) situations or a stop-go pattern of program implementation are excluded from the sample data.
A closer look at the countries that achieved positive growth rates during 1995–97 reveals that these countries also made progress in a number of other areas. Specifically, many countries were successful in:
The empirical work undertaken highlights a number of key policy-related and conventional variables that have significantly affected the growth performance of sub-Saharan Africa during 1981–97. To a large extent, it has also shown that the positive evolution of these variables has played an important role in the economic recovery of the region during 1995–97.
Although the recent recovery has been encouraging, the region has a long way to go to make up for the ground lost over the past two decades and to integrate itself fully into the world economy. In particular, growth rates are not high enough to make a real dent in the pervasive poverty. There is thus an urgent need to raise per capita real GDP growth rates substantially and on a sustained basis. In this respect, the results of the empirical work offer the following elements of a policy framework that could be implemented to promote sustainable economic growth and reduce poverty in sub-Saharan Africa.
To enhance the region's growth performance, countries should seek to boost the ratio of private investment to GDP.
Although private investment has increased in many sub-Saharan African countries in recent years, it needs to rise much further to help achieve more dynamic and sustainable growth. Accordingly, governments should intensify their efforts to create an environment that encourages private investment, notably an environment that promotes confidence in the sustainability of appropriate macroeconomic policies; ensures that the necessary infrastructure and qualified labor are available; and creates and maintains a transparent, evenhanded, and efficient regulatory framework and justice system that safeguard property rights, adequately enforce contracts, foster healthy competition, and, more generally, ensure good governance.
In support of these efforts, governments should focus on delivering essential public services and basic infrastructure, as well as promoting human resource and social development.
Governments should increase the quantity and quality of basic health care, education, and other high-priority services, with a view to improving social indicators appreciably over the longer term, consistent with the internal development goals. In particular, they should undertake a vigorous campaign against the HIV/AIDS epidemic which constitutes a serious threat to the development of many sub-Saharan African nations. Concurrently, they should establish or reinforce well-targeted social safety nets to mitigate the possible adverse effects of some adjustment measures on the poorest and most vulnerable groups.
Governments should also continue to implement sound macroeconomic policies in order to fully restore and consolidate macroeconomic stability.
The evidence shows that the macroeconomic environment matters greatly for growth. Specifically, reducing the ratio of the overall fiscal deficit to GDP can help to increase growth appreciably. The reduction could be achieved through a combination of policies and measures, including implementing tax reform, strengthening the tax and customs administrations, and curbing unproductive outlays. With a cutback of the overall fiscal deficit, government borrowing from the banking system should be limited or eliminated, thereby providing greater scope for bank financing of the private sector and strengthening monetary management. Moreover, it is critically important for governments to pursue realistic exchange rate policies that align the real exchange rate with its equilibrium level, in order to promote the growth of exports and thus overall growth performance.
At the same time, most sub-Saharan African countries should move forward more decisively and on a more sustained basis to implement growth-conducive structural reforms, particularly privatization programs.
While some progress has been made in recent years, governments should accelerate the restructuring and privatization of public enterprises in order to reduce reliance on budgetary subsidies and transfers, expand the scope for private sector activity, and promote overall economic efficiency and growth. Enterprises remaining in the public domain, however temporarily, should be operated on a fully commercial basis, with independent managers making market-oriented pricing and employment decisions.
Financial sector reform can help to enhance growth by mobilizing increased savings, financing productive investments, and containing inflation.
In many sub-Saharan African countries, central banks still lack the necessary autonomy; financial sectors are thin and have difficulty in mobilizing domestic savings and attracting foreign private capital; banking institutions are fragile; and intermediation is inadequate. Therefore, steps should be taken to:
Trade liberalization can also help accelerate growth by promoting the competitiveness of domestic producers and speeding up sub-Saharan Africa's integration into the global economy.
Although the process of trade liberalization has advanced throughout the region, trade regimes are still significantly more complex and restrictive than elsewhere. Import tariff rates remain too high and too dispersed, in part because governments are very dependent on this source of budgetary revenue but also because of the prevalence of statutory and piecemeal exemptions. Eliminating these exemptions, preferably in the context of medium-term tax reform programs, would allow tariffs to be reduced more rapidly. At the same time, export taxes could be substantially reduced, if not eliminated.
Efficient regional integration would allow many countries to surmount the obstacles posed by their relatively small sizes, permit them to realize greater economies of scale, and increase their ability to trade on a global basis, thus further enhancing growth. In addition, trade liberalization would also help improve the quality of governance because complex and discretionary tax regimes are prone to abuse and create opportunities for corruption.
Finally, sub-Saharan African countries will need to implement the above policies and reforms on a comprehensive and sustained basis, if they are to achieve the desired goals of accelerating growth and reducing poverty.
Governments should explain to the public the trade-offs between the short-term costs and the long-term gains of structural adjustment programs, in order to build national consensus behind the reform process and benefit from a greater participation of civil society in the formulation and implementation of policies. In addition, governments will need to sustain their efforts, adapting them as necessary to changes in the domestic and external environment. Most important, efforts to sustain sound macroeconomic and structural policies will be more fruitful and the gains more widely shared across Africa if regional—as well as international—initiatives are taken to prevent and resolve the conflicts that continue to afflict the continent.
Both domestic and external factors contributed to sub-Saharan Africa's poor overall economic performance in the 1980s and early 1990s. Key constraints to growth included inappropriate economic policies, inadequate human capital development, and low levels of private investment. But for the first time in a generation, there is evidence of economic progress in an increasing number of countries in the region. Since 1994 aggregate economic performance has been improving, reflecting the implementation of sound macroeconomic and structural policies, often in the context of comprehensive adjustment and reform programs supported by the IMF and the World Bank.
Overall, however, progress has remained relatively slow, and hence reform efforts will need to be intensified to accelerate growth and reduce poverty in sub-Saharan Africa. The lessons learned from the successful experiences of many countries in recent years offer some useful policy guidance for further progress in the region. Recent developments have highlighted the critical importance of peace and security for sustainable growth and development. But, to be successful, Africa's own reform programs will need to be supported by more adequate external assistance and debt relief.