CHAPTER 6. Conclusion
- Kevin Carey, Sanjeev Gupta, and Catherine Pattillo
- Published Date:
- February 2006
Improvements in macroeconomic policies contributed strongly to the recovery of the fastest-growing economies of the 1990s and were strongest for countries with on-track IMF-supported programs. More favorable terms of trade also aided the stronger growth performance. However, different aspects of the growth recovery give mixed signals about its sustainability. While total investment has not increased significantly for the fast-growing economies (excluding Equatorial Guinea), TFP growth has improved strongly for the first time since the 1960s.
Clearly, the most challenging question facing sub-Saharan Africa is how to generate large sustained accelerations in growth rates. Probit model analysis suggests that accelerations are associated with real exchange rate depreciations that spur strong trade growth, improvements in broad measures of policy and institutional soundness, and are also accompanied by increases in investment and TFP growth. Improved TFP growth, particularly pronounced in countries with on-track IMF programs, most likely reflected efficiency gains stemming from countries’ implementation of macroeconomic and structural reforms. Encouragingly, a fair number of these countries succeeded in sustaining the acceleration for 10 years. They had stronger real exchange rate depreciations, higher investment, and lower debt burdens than countries that did not sustain their accelerations.
The in-sample predictive power of both the acceleration and sustained acceleration models, however, is relatively poor. Thus, many acceleration episodes occur when the explanatory factors in the model would not predict an acceleration, and many times, even though the variables associated with accelerations are favorable, an episode does not take place. There are clearly factors the model is not capturing, as well as country-level idiosyncratic factors that warrant further investigation in order to better guide policy.
Predicting the timing, or onset, of growth accelerations is even more difficult. Accelerations are spurred by economic liberalizations and political changes, and democratization plays an important role in the initiation of sustained growth accelerations. In-sample predictive power of the models is again poor, however.
Because growth is the most important long-run driver of poverty reduction, pro-poor growth policies overlap with growth policies. However, the rate of poverty reduction from a given rate of growth varies substantially across countries. Sub-Saharan Africa has experienced sizable changes in inequality since 1980, and it is important to analyze and orient policy toward growth, the elasticity of poverty to growth, and the distributional components of changes in poverty. Country-level analysis of pro-poor growth policies is at an early stage. While many of the emerging lessons relate to sectoral, or microlevel, issues several macroeconomic issues have also been highlighted as key to assessing a country’s ability to maximize the effect of growth on poverty. Among the issues are, for example, the importance of removing constraints to agricultural and rural sector growth, the potentially wide-ranging impact of infrastructure investments, and the management and allocation of aid inflows.
Some aspects of fiscal policy are moving in the right direction, but more progress is needed in this area and on trade and the financial sector to promote growth. Although reducing fiscal deficits in high-deficit countries is positively associated with growth, reductions below certain thresholds are associated with much smaller growth improvements. Reliance on domestic financing of fiscal deficits is declining, and the composition of spending is generally moving in favor of social sectors, but capital spending has declined and infrastructure is improving slowly. Progress on financial development in the region has been fragile and uneven. Financial development appears more strongly correlated with growth in conditions of greater macroeconomic stability. On trade, bold reforms are required to contribute to the overall growth strategy for Africa. Consistent with recent evidence in the literature, fast-growing countries in sub-Saharan Africa generally have better basic institutions than slow-growing countries. For the region as a whole, political institutions have continued to strengthen during the most recent period, but only very limited improvements in economic institutions have taken place since the second half of the 1990s.
Addressing the constraints on growth caused by the low levels of investment is a key priority for sub-Saharan Africa. The very limited investment response to reforms in the region is a concern, particularly given that increases in investment appear to be necessary for sustained growth accelerations. The World Bank’s 2005 World Development Report concluded that reducing the costs of doing business (from weak contract enforcement, inadequate infrastructure, crime, corruption, and regulation) and lowering policy-related risks and barriers to competition were key to improving the investment climate in developing countries. These obstacles are central for sub-Saharan Africa, where 16 of the top 20 countries in the world with the most difficult business conditions are located (World Bank, 2004a, 2004b).
There is also a role for well-targeted and efficient public investment that can crowd in private investment and productivity improvements. In addition to promoting domestic savings, higher aid inflows—consistent with absorptive capacity—and lower debt burdens are important for supporting higher and more efficient investment rates.
To make further progress in improving growth, sub-Saharan Africa must implement additional reforms. The record shows that reasonable jumps in growth rates that are sustained for 10 years are possible. Growth accelerations in these countries need to be sustained further and spread to other countries in the region. However, even countries that have sustained a 10-year growth acceleration need to do more, because substantially higher per capita growth rates are needed if these countries are to make big strides in reducing poverty.68