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So I figured I may as well go ahead with the economics paper of the day thing; if you want to be on the “mailing list” so I know to tag you whenever I make one, just PM me. You’ll notice the poll above, which includes a paper for broadly defined areas. They are, in order: international development, inequality and poverty, business cycles, the macroeconomic role of government and the microeconomic role of government.
If you want to see a specific area within these categories looked at (so you could choose pensions, tax policy, whatever for micro role of government; you could choose some stylised facts on business cycles, et cetera) just put it in the comments and I’ll try to include a relevant paper in tomorrow’s poll.
But, for today, we’re going to be looking at a paper by Paul Collier–“Why has Africa Grown so Slowly?”. If you don’t want to read my entire summary of the paper, you can skip to the conclusion.
[B]Introduction and context:[/B]
During the first half of the 1900s, Africa’s growth significantly outpaced that of Asia; and by 1950, the African sample had actually [I]overtaken [/I]the Asian sample. During the '60s, Africa was “increasingly free of colonialism”, and between 1960 and 1973, growth was more rapid than in the first half of the century. During this period, African growth and its composition was effectively indistinguishable from the circumstances of South Asia.
However, it was during the 1970s that African economies began to decline. Many nations became autocracies, and while African growth largely collapsed, Asia improved. Collier notes that since 1980, per capita GDP in sub-Saharan African has declined almost 1pc a year. [I]Thirty-two [/I]countries were poorer as of the paper’s writing (1999) relative to 1980.
Many different causes of slow African growth have been offered. Collier offers us a way of categorising these different explanations in a two-by-two matrix, with policy vs exogenous (or “destiny”) factors on one hand, and domestic vs external factors on the other. Prior to Collier’s paper, the debate was largely focused on external factors and whether or not they were exogenous or driven by policy. During the 1980s, the World Bank and the IMF identified exchange rates and trade policies as the main causes of slow African growth. Collier notes that it is indeed true that exchange rates for African nations are often over-valued, compounded by tariffs and trade restrictions.
The debate, however, has shifted over to potential domestic causes of slow growth. The debate regarding exogenous and policy-induced factors, however, is still a fierce one. Sachs has also contributed to the part of the debate revolving around domestic factors, and considers exogenous factors like Africa’s adverse climate–which leads to things like poor health and constrained agriculture–and the fact that high ethnic diversity may make it more difficult to develop an inter-connected economy.
In contrast to the domestic-exogenous viewpoint, Collier and Gunning (1998) have emphasises domestic-policy failings such as poor public service delivery and high bureaucracy. In the remainder of the paper, Collier examines the two-by-two matrix of explanations in turn, and looks to the growth of the 1990s to try and identify which factors are more important when it comes to potential African growth.
Africa has myriad geographic and demographic characteristics which put it in an initially weak position to take advantage of potential growth opportunities. Domestic-exogenous explanations focus on internal explanations which are [I]not [/I]chiefly affected by policy. Collier identifies [I]four [/I]domestic-exogenous factors which could lead to slow growth.
Much of the continent is tropical, and Collier notes that such regions of the world have high rates of diseases like malaria, as well as poor conditions for agriculture. Life expectancy has also been low, and fertility high–which, when combined with public health measures, led to a rapidly growing population. Africa has not yet experienced a “demographic transition” wherein fertility rates decline. One estimate, by Bloom and Sachs (1998), concludes that low life expectancy and high population growth account for practically [I]all [/I]of Africa’s poor growth. However, Collier doesn’t find this argument convincing, as such factors are [I]consequences [/I]of low income as well as causes.
The second domestic-exogenous factor identified which may help explain slow growth is the semi-arid nature and poor-quality soil of much of the continent, with largely unpredictable rain cycles. Soils, especially, disproportionately derive from a very aged type of rock which is low in micronutrients–vital for healthy development. It’s important to note however that, at some high-enough level, [I]everything [/I]in an economy is endogenous; Collier notes that Africa is probably capable of having its own agricultural revolution, but as Voortman et al. (1999) notes, it would largely depend on locality-specific packages of micronutrients. Collier also notes the declining amount of rainfall in semi-arid areas since the 1960s; estimates of the effects on growth haven’t been conducted, but since agriculture accounts for around 25pc of GDP in the region, it may be significant. Given the high risks of agriculture in Africa, Collier notes how households must use assets to smooth consumption over the long-run as opposed to invest, meaning they become trapped in a low-income and high-liquidity equilibrium.
The third factor identified is Africa’s very low population density. A consequence of this is high transportation costs, which have led to poor market integration and the use of trade for risk-sharing. Another consequence is Africa’s high natural resource endowments per capita, identified by Wood and Meyer[/url] (1998), which can lead to rising exchange rates from exports and make manufacturing less competitive internationally. Collier and Hoeffler (1998) also find that a dependence on natural resources greatly increases civil war, which is relatively common in Africa. Some authors, such as Easterly and Levine (1997), find that the high level of ethno-linguistic diversity as a result of low population density is the single most important reason for slow growth, acting through such channels as increasing the possibility of civil war. In a separate paper, [url=http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.163.6785]Collier refutes this, and shows that ethnic diversity is only a problem in autocracies, as they reduce growth rates by around 3pc and double the rate of project failure. In democratic African nations, high diversity has no impact on either growth or the quality of public projects.
The final characteristic of Africa which may harm growth prospects from a domestic-exogenous perspective is due to its colonial heritage. Africa has [I]much [/I]smaller countries in terms of population than other regions of the world; sub-Saharan Africa has a population half that of India, but divided into forty-eight states. Very small states/economies may be disadvantaged for a variety of reasons; societies may forego scale economies if they are relatively isolated, and as a result all domestic markets singularly are less competitive than in larger economies. However, Collier also rejects these, as regressions show state size does not appreciably affect a nation’s rate of economic growth.
After reviewing potential domestic-exogenous factors, Collier moves on to domestic issues caused by policy. Collier notes that the median African government during the '70s and '80s have been far less democratic than similar developing countries. Governments were often “captured” by the educated, urban population who had few agricultural or commercial interests. Accordingly, they expanded the public sector while imposing controls on private activity; both of which proved incredibly costly.
Public employment was often expanded for its own sake. In Ghana, by the late 1970s, the public sector accounted for 75pc of formal wage employment, in Kenya the figure was 50pc as late as 1990. In order to facilitate such high levels of public sector employment, the governments often cut non-wage expenditures which has lowered the quality of public services; and in the Ghanian public sector, dominant local ethnic groups received a 25pc wage premium over other groups. This combination of payment structures low wages, which primarily rewarded social connections, made it difficult to motivate public sector employees. And since public sector employment was viewed in the end in itself, nobody was held accountable for the poor quality of services, which Pradhan (1996) has identified as leading to low quality services despite high public sector expenditures.
Poor service delivery also impacts the private sector. In Uganda for instance, a survey of firms showed shortage of electricity as being the most important constraint on firm growth; it is not uncommon in Africa for the private self-supplying of electricity–through small-scale generators–to be almost as large as the total public supply of electricity. Lee and Anas (1991), for instance, find that own generators accounted for 75pc of small manufacturers’ capital equipment. Commercial courts are also much more corrupt, leading to significant issues with contract enforcement, making African economies significantly less competitive and reduces gains from trade. Poor public service delivery also handicaps households through channels such as poor education and healthcare. A survey of primary education expenditures in Uganda found that, of non-wage finances, under 30pc actually reached the schools.
A few nations, such as Ethiopia and Angola, have seen widespread price controls which significantly harmed private production even in the face of coercive targets. More common, however, was the incredibly high burden of regulation on the private sector. For many years, manufacturing firms in Kenya had to acquire “letters of no objection” from existing producers which led to predictably low levels of competition. One example of successful deregulation comes from Uganda, wherein the requirement for coffee to be transported by rail was removed; subsequently, the market for road haulage expanded and halved overall haulage rates.
Turning to agriculture, Collier identifies that–due to the government being mostly urban–agriculture was highly taxed and research in locality-specific packages of micro-nutrients was neglected. And, while the governments favoured manufacturing, policies surrounding trade and exchange rates meant production was only undertaken for small, domestic markets. Collier also addresses heavy financial market regulation, although he concludes this has not been a significant hindrance to growth for Africa.
For the penultimate set of possible factors, Collier moves on to external aspects of Africa’s economy which are not influenced by policy. First and foremost, he notes that most Africans live much further away from the coast or navigable rivers than most other regions in the world, which leads to higher transport costs for exports. Much of the African population also lives in landlocked countries, which means exports and trade are further hampered by political barriers. Collier notes that regressions find that being landlocked reduces a nation’s annual growth rate by around 0.5pc.
A further issue is that Africa’s exports are “concentrated in a narrow range of commodities”, which are harmed by volatile and declining prices. While the decline in the terms of trade for such commodities has certainly damaged African growth, Collier notes that Deaton and Millter (1995) find little evidence to support the idea that Africa’s overall–and atypical–exposure to volatile terms of trade have little effect in the short-run, but may have detrimental effects over a longer time-horizon. Investment is usually folded into short periods, which causes the unit cost of capital and destabilises the government’s budget as spending rises in booms but is then difficult to reduce subsequently.
Finally on the topic of external-exogenous factors, Collier turns to foreign aid. He notes the long debate surrounding whether or not aid is actually good for growth in Africa, with some–such as Peter Bauer–claiming aid reduces the incentive for good governance. Accordingly, since the 1980s, both the World Bank and the IMF have tried to make aid policy-dependent, although econometrics work finds no significant correlation between aid and policy changes. The effect of aid, however, [I]is [/I]policy-dependent, meaning aid has a substantial capacity to help growth under the right sort of regime. Bauer’s claim that aid has been a [I]cause [/I]of slow growth is rejected by Collier, although he does concede that Africa has missed a substantial opportunity for enhanced growth.
Finally, Collier turns to external factors influenced by policy. Throughout the 70s, 80s and 90s, it was not uncommon for African governments to adopt policies relating to exchange rates and trade which were unusually anti-export and accumulated a large amount of foreign debt. As noted by Dollar (1992), Africa has had much higher trade barriers and more mis-valued exchanged rates than any other region in the world. Exchange rates were often highly over-valued–reflecting the African elite’s desire for cheap imports–and tariffs and export taxes are atypically high. Those last two are also the result of a lack of other reliable mechanism for funding the government’s predictable expansion of the public sector.
In one case-study by Dercon (1993) shows that Tanzanian cotton exports would’ve been 50pc in the absence of crop export taxation.
While the literature has reached no clear consensus on the impacts of [I]moderate [/I]trade restrictions, Collier finds reason to think that such restrictions would be atypically damaging to Africa. Due to the small size of many African economies, trade restrictions of a certain height that larger economies like the US or the UK could circumvent have been significantly more detrimental to the less diversified and less competitive economies of Africa.
[B]Policy or exogenous factors? [/B]
Collier notes that the dichotomy presented throughout the paper is an over-simplification, as apparently exogenous features of Africa have been induced by policies and certain policies could reflect certain exogenous factors. Collier notes Sachs’s conclusion that demography accounts for nearly all of Africa’s slow growth, but rejects it on the grounds that it is more reasonable to think of high fertility rates as a [I]consequence [/I]of poor growth. He justifies this by pointing out that poor employment opportunities for women has failed to raise the opportunity cost of having children.
Also, the apparently exogenous factor of Africa’s population being concentrated towards the centre of the population can also be seen as [I]endogenous[/I], since it has resulted from the failure of coastal cities to prosper. In no small part due to policies that have been biased against such regions of the continent. Where policy was less biased, such as the Cote d’Ivoire, the coastal population grew so rapidly that it could support huge numbers of people coming in from the landlocked economy of Burkina Faso.
There is also further evidence for endogenous policies being the root cause of Africa’s malaise as the African nations which implemented the strongest economic reforms–such as Ghana and Uganda–had usually suffered some of the strongest economic crises beforehand. Africa has also lacked the continental role-models that other regions such as Asia–with the likes of Hong Kong and Singapore–have been able to look to; such role-models may be important, as information from good policies is both more evident and more easily accessible.
Collier argues that, in order to sort exogenous factors in slow growth away from contributory policies, we ought to look at African development over a long time horizon. Jared Diamond in [I]Guns, Germs and Steel [/I]offers a convincing argument that geographical factors constrained the development of African agriculture in the pre-colonial period. However, with the reduction of these constraints since colonisation, such explanations are not satisfactory to account for the past few decades. And, of course, the slow economic growth of the 1970s coincided with a period of policies which were more statist and biased against exports.
[B]Domestic or external factors?[/B]
Until the 1990s, there was broad agreement that Africa’s woes came mainly from external issues. Collier, however, argues that domestic policies largely unconnected to trade may be the main reason for Africa’s growth issues. Collier focuses on Africa’s failure to industrialise; while, at first, it may seem as if Africa’s failure to industrialise is due to it having a comparative advantage in natural resources, Collier notes that the level of African wages would make potential African manufacturing significantly competitive, but due to being locked in small domestic markets it hasn’t been able to exploit economies of scale.
It’s not unreasonable to suppose that African manufacturing could massively boost its productivity via entering the export market. While this is an external factor, there are significant domestic barriers to this: unreliable transport means firms have to maintain large inventories, telecommunications is much worse than in other regions, contract enforcement issues make firms unwilling to trade with new partners et cetera. These high transaction costs have a disproportionate effect on manufacturing relative to other industries like natural resource extraction.
So what can we take away from Collier’s paper on Africa? During the mid-1990s, some countries in Africa began to grow very rapidly, while others descended into social disorder. “Africa” became a categorisation of much less meaning as the internal economies diverged; Collier notes that the average improvements in performance and greater divergence between African economies is consistent with changes in policy as many of the worst exchange rate, fiscal and trade policies were improved.
However, the fastest growth in the continent coincided not only with policy improvements, but also with more favourable terms of trade. Investment in Africa is very low (as of the paper), sitting at around 18pc of GDP–compared to South Asia’s 23pc–and even this may understate African investment as capital goods are more expensive in Africa. Corrected for such regional differences, investment sits at about 9pc of GDP. Most of the shortfall in African investment is a result of low [I]private [/I]investment.
Collier finishes by saying the slow growth in Africa may have been due to poor external policies in the past, today the chief issue is domestically-oriented policies, most notably the poor delivery of public services. These are much more difficult to correct than exchange rate and trade policies, and most of the work in that area has been completed. Since [I]recent [/I]economic reforms in Africa are never regarded as credible by investors, there is a warranted degree of pessimism about Africa’s ability to attract private investment, which would ultimately be necessary for long-run growth. “Africa” as a category is still considered a useful category by investors, despite the fact that the cross-continental risk estimates are not warranted by the economic fundamentals of certain countries.
The perception of Africa as being universally high-risk may wane over time, but ultimately the committed reform of African governments in terms of domestic policy is the most promising way forward, despite its difficulties.