My IMF colleagues and I have spent the past week or so traveling through Africa for the launch of our October 2010 Regional Economic Outlook on sub-Saharan Africa. Both the outlook for Africa, and reactions to it, have been very positive.
The groups we met with were encouraged by our central message—Africa’s resilience to the global economic crisis has owed much to good policy management here, both before and during the crisis. They also welcomed our optimism about the prospects for growth in the region, tempered of course with concern about the continued risks to the global recovery. But policy-makers and others have also taken to heart our view that now is the time to start rebuilding some of the savings that were used to weather the crisis.
While I’m still here in Dakar, Senegal for the final leg of our trip, I wanted to share some of our thoughts on the ‘growth challenge’ in West Africa.
First, the good news. As in most of the continent, the countries in West Africa fared relatively well during the global financial crisis. The slowdown was mild and growth rates appear to have already bounced back to their pre-crisis levels.
However, there has been an intriguing longer-term difference between West Africa and other parts of sub-Saharan Africa. West Africa hasn’t been able to move into, and sustain, the higher rates of economic growth needed to make serious inroads in job creation and poverty reduction.
The growth challenge
We delve into the issue of what matters for long-term growth in the Regional Economic Outlook. We compared the experience of the eight countries of the West Africa Economic and Monetary Union (WAEMU)—Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo–with other countries in sub-Saharan Africa. These eight countries, which form a single trading block and have had a single, stable currency over the last fifteen years, have benefited from low inflation. But they have not done so well on growth.
While experience has varied between these countries, over the past fifteen years per capita incomes grew, on average, by less than 1 percent each year. In sub-Saharan Africa as a whole, the growth rate has been more than twice that; and more than four times that in the region’s highest growers.
The reasons for WAEMU’s slower growth are complex. No single factor or simple story emerges. But it was certainly not just because of initial income levels, natural resource endowments, or the location of WAEMU countries. Nor were global forces, namely world trade or prices, primarily to blame .
What’s holding back growth?
So, if external developments were not the main problem, there is room for the region to improve its own performance. Let me focus on the four factors that we found to be particularly noteworthy in impeding lasting growth.
- Periods of political instability were associated with particularly lackluster performance in the slower growing WAEMU countries—Côte d’Ivoire, Guinea-Bissau, Niger and Togo. This reflected, in part, political instability and the difficulties for macroeconomic management
- Private investment rates in most WAEMU countries have been noticeably lower than in other sub-Saharan African countries—in both the public and private sectors—with relatively little foreign direct investment.
- The region has had less success than sub-Saharan Africa’s best performers in establishing the right conditions for economic activity. For example, perceptions of governance remain weak. WAEMU countries have ranked low in the World Bank’s Doing Business Survey and other composite indicators.
- Inadequate physical infrastructure and weak public services, especially in education and health, also played a role. Underinvestment in physical and human capital undermines the private sector’s ability to produce goods and services efficiently.
Actions to raise growth
So, we believe that there is plenty that can be done to shift countries into a faster trajectory.
First and foremost, political stability is a necessary precondition for macroeconomic stability and sustaining improved performance. Countries in WAEMU also need to upgrade weak energy and transport infrastructure, and improve health and education standards. A more competitive, or efficient, private sector will require the assurance of good governance, including market-friendly regulations, effective financial sector supervision, and enforcement of laws.
Countries in the region will also need to make room for higher pro-growth government expenditure. This will require increasing revenues so critical investments can be made, building the capacity to safely attract and manage private finance, and improving the quality of spending. An important first step in this direction, already taken by some countries in the region, is to improve budget institutions, focusing particularly on improving financial management, prioritizing expenditures, and ensuring their high quality.
Encouragingly, the four higher-growing WAEMU countries—Benin, Burkina Faso, Mali, and Senegal—performed significantly better in the last fifteen years than they did in the fifteen years before that. So, I have every confidence that the region as a whole can realize its potential for higher growth, more jobs, and faster poverty reduction.