Prospects for Sustained Growth in Africa: Benchmarking the Constraints
Author: Mr. Simon Johnson, Mr. Jonathan David Ostry, and Mr. Arvind Subramanian
Publication Date:
26 Mar 2010
eISBN:
9781589069114
Language:
English
Keywords:
SP; growth country; African country; sub-Saharan Africa country; price level; developing world; growth case; Exports; Public expenditure review; Manufacturing; Real exchange rates; Africa; Sub-Saharan Africa
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A dozen countries had weak institutions in 1960 and yet sustained high rates of growth subsequently. This paper uses data on their characteristics early in the growth process to create benchmarks with which to evaluate potential constraints on sustained growth for sub-Saharan Africa. This analysis suggests that what are usually regarded as first-order problems—broad institutions, macroeconomic stability, trade openness, education, and inequality—may not now be binding constraints, although the extent of ill-health, internal conflict, and societal fractionalization do stand out as problems in contemporary Africa. A key question is to what extent Africa can rely on manufactured exports as a mode of “escape from underdevelopment,” a strategy successfully deployed by almost all the benchmark countries. The benchmarking comparison specifically raises two key concerns as far as a development strategy based on expanding exports of manufactures is concerned: micro-level institutions that affect the costs of exporting, and the level of the real exchange rate—especially the need to avoid overvaluation.

Abstract

A dozen countries had weak institutions in 1960 and yet sustained high rates of growth subsequently. This paper uses data on their characteristics early in the growth process to create benchmarks with which to evaluate potential constraints on sustained growth for sub-Saharan Africa. This analysis suggests that what are usually regarded as first-order problems—broad institutions, macroeconomic stability, trade openness, education, and inequality—may not now be binding constraints, although the extent of ill-health, internal conflict, and societal fractionalization do stand out as problems in contemporary Africa. A key question is to what extent Africa can rely on manufactured exports as a mode of “escape from underdevelopment,” a strategy successfully deployed by almost all the benchmark countries. The benchmarking comparison specifically raises two key concerns as far as a development strategy based on expanding exports of manufactures is concerned: micro-level institutions that affect the costs of exporting, and the level of the real exchange rate—especially the need to avoid overvaluation.

Conventional wisdom has long been negative on African growth. Sub-Saharan Africa is commonly regarded as destined to remain poor either because of its geography (including its unique disease burden) or its ethnolinguistic fractionalization (leading to repeated conflicts) or its deep-rooted corruption. The precise mechanisms vary, but a standard argument has been that Africa’s economic prospects are not bright because its longstanding problems are hard to fix.

In contrast, some more optimistic recent views hold that Africa either is improving by itself and/or could improve dramatically if more foreign aid were provided.1 Again, the precise mechanism varies, but these views are unified by much more positive assessments of Africa’s growth potential (although they disagree on how much additional funding through aid is desirable).

There is no doubt that Africa has done badly, on average and for the most part, not just over the past 20 to 40 years, but in fact since the beginning of modern economic growth in the 19th century. It is also indisputable that much of Africa is currently doing quite well—for the region south of the Sahara, growth in total GDP will likely have exceeded 5 percent in 2006 for the third straight year and per capita growth is running in the range of 3.5 to 4 percent in recent years.2 The controversy rather lies with how to think about the last decade or so, as well as the current situation and immediate future. In particular, are there indications that parts of Africa can sustain growth at rates that are consistent with lifting entire countries out of poverty—as East Asia did in the decades after 1960?

The key word here is “sustain.” Is today’s growth likely to be sustained for 10 or 15 or more years? We know that what is associated with growth accelerations is not necessarily what keeps growth going—for example, an increase in commodity prices sparked growth in much of Africa during the 1960s, but this growth proved hard to sustain as political conflicts developed.

There is not yet a unified theory of sustained growth. As a consequence, there is also not an accepted equation into which we can plug values to obtain the likely duration of a rapid growth spell. However, there are at least three plausible views regarding what is associated with crises and derails growth, that is, what tends to cause decelerations.

First, while weak economic and political institutions do not appear to prevent growth episodes, they are very much associated with severe crises and the derailment of growth (Acemoglu and others, 2003; Satyanath and Subramanian, 2007). It is hard to escape bad institutions. Good leaders can make a difference for a while, but when they leave office, countries with weak institutions (that is, autocracies) will often suffer a relapse (Jones and Olken, 2005a).

Weak institutions are associated with and arguably manifest in high degrees of inequality (Acemoglu, Johnson, and Robinson, 2005a). Inequality can curtail expansions both because societies with unequal distributions handle the distributional consequences of adverse external shocks poorly (Rodrik, 1999). Berg, Ostry, and Zettelmeyer (2008), looking at a broad panel of post-1945 accelerations, find that the duration of such episodes is negatively related to initial income inequality. Moreover, the effects seem to be very large, with each percentage point of the Gini coefficient raising the annual risk that a growth spell will end by between 7 and 15 percent, relative to the baseline.

Second, a greater propensity to experience conflict or civil strife might also prove to be a key factor curtailing growth accelerations. This might be part of weak institutions or, in some cases, it may be that formal institutions are strong while society remains deeply divided—and these divisions are sometimes manifest in damaging conflict.

Third, bad macroeconomic policies (particularly inflation), protectionism, and/or overvalued exchange rates may choke off growth in the tradable goods sector.3 This may make it harder to find profitable opportunities in the economy as a whole, or it may draw resources into imports in a way that proves unsustainable. Across a variety of methodologies, for example, overvaluation is robustly correlated with crises, even when controlling for deeper determinants of problems, such as inequality and institutions (Acemoglu and others, 2003; IMF, 2003 and 2005 and Johnson, Ostry and Subramanian, 2006).

In addition, there are at least two other possible explanations for poor longer-term growth performance that are particularly relevant for Africa: inadequate education and poor health.4 Both are symptoms of insufficient physical capital (that is, not enough schools and clinics) and initial levels of human capital that are “too low” to allow accumulation of further human capital (that is, not enough teachers and doctors to develop skills in healthy young people). Both of these factors could conceivably limit the returns on productive private investments—for example, some minimum amount of skill or a basic road network may be necessary to support a modern manufacturing sector. Perhaps there are temporary booms, based on commodity prices, and then collapses when prices fall because skills have not developed further.

What is the threshold level at which any of these indicators signal a potential problem with sustained growth? This is hard to know in the abstract and presumably depends on the context, including the interaction between various indicators. One plausible benchmark, however, is the recent (post-1945) experience of countries that started with weak institutions (and relatively low income levels) but nevertheless were able to sustain rapid growth. (There is, of course, not one definition of “rapid” growth; we look at various alternatives below.)

Relatively few (we count no more than 12—see below) initially poor countries have managed to sustain rapid growth (and improve their institutions) to an extent described below in the past 50 years. Almost all of these countries experienced a rapid growth in exports; in most cases the rapid increase in exports was of manufactures.5 In this paper, we examine whether any African countries show new signs of breaking away from the poverty path (through exports of any kind, or in some other way).

The data that would allow such a comparison (from the right time period—early in sustained accelerations) are not readily available; one contribution here is a data set that others can use (and criticize and, hopefully, improve).6 We therefore present our data in considerable detail, documenting the years covered by available sources and discussing the weaknesses.

The good news from this comparison is that, in terms of the standard concerns, the prospects for sustained African growth are not unfavorable. Broadly defined, institutions have improved. In some cases they have improved dramatically—this reflects the end of civil war (which often has destabilizing effects on entire regions) and, in some places, the strengthening of democracy. There is also widespread macroeconomic stability and there has been a great deal of trade liberalization (in the sense of opening to imports).7

However, the benchmarking suggests three important caveats to this positive assessment. First, in terms of specific economic institutions, as measured for example by the World Bank’s Doing Business project, there remains a wide gap between Africa and most other developing countries. In particular, the regulatory costs of exporting are high in much of Africa. These numbers have to be used with care because (1) we do not (and will likely never) know what these indicators were when East Asia took off, and (2) there are no data over time, so perhaps these measures have also improved in Africa. Still, this is a key issue for the future.8

Second, some African countries seem to have experienced significant real exchange rate overvaluation; there are also pressures for further appreciation (for example, due to higher commodity prices or aid inflows). In contrast, almost all the East Asian (and other) success stories avoided any episode of significant overvaluation during the entire period of sustained growth.9 There is a definite warning here for Africa, especially since there may be a need for these countries to diversify out of commodity dependence and to increase manufacturing exports as the East Asian countries did so successfully.

Third, health indicators in Africa are much less robust today than they were in most of the benchmark countries were when they started to grow. In part this is due to weaker public health systems, but in part it may also be due to the disease environment in Africa—for example, malaria has long been a particularly intense problem. Improving health is a first-order issue for its own sake; the impact on growth, however, remains unclear (Acemoglu and Johnson, 2006).

I. Constraints on Sustained Growth

Institutions

Economic thinking about growth has changed a great deal over the last 15 years. Post-war growth theory stressed the need to accumulate factors of production—capital, and unskilled and skilled labor—and to increase the productivity with which these factors are used. But it left unanswered what has proved to be the more basic and essential question: under what conditions do countries accumulate factors and improve productivity? To answer this, attention has turned increasingly to broad economic institutions.

Broad economic institutions are the set of laws, rules, and other practices that govern property rights. They also encompass the provision of law and order, and efficient bureaucracies. Good economic institutions create effective property rights for most people, including both protection against expropriation by the state (or powerful elites), and enforceable contracts between private parties. Although this definition is far from requiring full equality of opportunity in society, it implies that societies where only a small fraction of the population have well-enforced property rights do not have good economic institutions.10

Bad economic institutions mean insecure property rights for most people. Insecure property rights can arise from expropriation by the state or powerful elites (often manifest in the form of corruption) or from severe political instability (for example, failed states and conflict/postconflict situations). Serious crime and the collapse of the state’s capacity to maintain public order can very quickly undermine property rights. Thus, good economic institutions are essential to create markets and sustain efficient market transactions.

In the case of institutions, perceptions are key—if entrepreneurs can be confident that their property rights will be protected, they will be comfortable investing with relatively little in the way of formal rights. However, perceptions eventually need to be underpinned by actual protections, that is, if property can be stolen or expropriated, there should be recourse or appeal of some meaningful kind. Property rights are never perfect, and conflicts often emerge between alternative claimants on property. The issue is the extent to which property rights are protected, preferably by a fair and transparent process of dispute resolution.

The centrality of institutions in the growth process rests on the notion that if a country builds good institutions, entrepreneurs will invest in capital goods and ordinary people will invest in human capital; strong institutions will also reduce the likelihood of economic/financial crises curtailing a growth acceleration, and will smooth adjustment to adverse shocks that could also curtail an expansion. Empirical results from a range of authors over the past decade suggest that the magnitude of the impact of institutions is likely to be substantial. For example, in some estimates, an improvement in sub-Saharan Africa’s level of institutional development from its current average to the mean of developing Asia could be associated with as much as an 80 percent increase in its per capital income (from $800 to over $1,400).11 This long-run effect is likely to reflect the favorable impact of institutions on the duration of growth spells and the volatility of economic growth.

However, institutions do not necessarily have to be improved directly and immediately in order for growth to occur. The question is, therefore, if initial institutions are weak, what can we say—quantitatively—about the experience of countries as far as being able to initiate growth, and sustain that acceleration? And, in circumstances in which a durable acceleration takes place, to what degree is there also a virtuous circle with respect to improvements in the quality of broad institutions? These are the issues to which we now turn.

A Benchmarking Approach

There is a great deal of agreement on the qualitative issues that matter for sustained growth, but little hard guidance on the numbers, that is, when is a potential problem a real problem? For example, the recent Barcelona Consensus—drafted by a Who’s Who of growth economists—argues that while institutions matter, they are not the whole story.12 A similar point is sometimes made about macroeconomic constraints—for example, inflation can be a problem, but no one argues that low inflation is sufficient to ignite growth. What exactly are the critical constraints?

We develop and apply simple benchmarks, based on the experience of countries that plausibly (a) had weak institutions in 1960, and (b) sustained high rates of growth after 1960. Point (a) is important because we take seriously the concern that developing countries today may be different from European and other countries that either had good institutions already by 1850 or were well on their way to developing such institutions.13

Our benchmarks are therefore drawn from countries that have recently escaped poverty (or are well on their way) despite a difficult starting position, as measured by their economic and political institutions. The 12 countries that we characterize as having had weak institutions at the time of their growth take-off clearly scored poorly on a widely accepted measure of political institutions: on the Polity IV measure of constraint on the executive, which ranges from 1 to 7, their average score was 2.2 (compared with 7 for most advanced industrial economies) (Marshall, Jaggers, and Gurr, 2006).

An alternative would be look only at countries that escaped poverty despite weak initial economic institutions. Unfortunately, the standard measures of economic institutions are available only from the mid-1980s and, given that economic institutions likely improved over time in many of these rapidly growing countries, these are not appealing. However, Adelman and Morris (1971) compiled measures of economic and social institutions circa 1960 (actually 1958–63). Although their coverage is not as extensive as that of the Polity IV database used in this paper, they tell a broadly similar story of economic institutions not being strong at the time of the take-off of the sustained growth countries. Their best proxy for the quality of economic institutions is probably the “degree of administrative efficiency of public administration.” On this measure, the average score for the sustained growth countries in 1960 is about the average for a group of all developing countries.14

The benchmarking approach has several advantages. It is quite transparent—others may disagree with the construction of our criteria, but at least these criteria are clear. Also, while the composition of the benchmark can be criticized, once that benchmark is established our judgment of what is happening in Africa is driven just by the numbers (not by any preconceptions we may have about particular African countries).

The main disadvantage of this approach is that it does not incorporate any notion of a trade-off. For example, perhaps good performance on one dimension can compensate for weaker performance on another dimension. This being said, the benchmarking of Africa today against post-war growth success-from-initial-weakness stories does reveal a number of common features that appear to drive the latter and a number of common hurdles that African countries appear to need to overcome.

Cases of Sustained Growth Accelerations

Defining sustained growth accelerations cannot be an entirely objective exercise because it depends on the criteria for defining sustained growth and accelerations; in particular there can be long debate about the level of growth rates worthy of being regarded as high, and also the change in growth that deserves to be called an acceleration. Here we adopt the (well-known, but still debated) criteria from Hausmann, Pritchett, and Rodrik (2004). These yield a set of sustained growth acceleration that accord broadly with anecdotes of success stories—no notable successes are left out, and applying the same criteria in an even-handed fashion actually includes several cases that usually do not get much attention.

The exact criteria are as follows.15 Countries must have experienced: an improvement in growth rates of at least 2 percentage points per capita (this captures the idea of acceleration);16 sustained growth of at least 3½ percent per capita for seven years; and higher postacceleration income level than the preacceleration peak (this is to ensure that accelerations are not simply a rebound from a prior period of very bad performance, for example, due to wars or conflict or other shocks). In addition, growth per capita must remain above 3 percent after seven years, which captures the sense that good performance is sustained.

These criteria are actually quite moderate—leading to a doubling of income in 20 to 35 years. As we will see, there are (a few) countries that have greatly exceeded these growth rates on average. Nevertheless, these numbers offer a minimum level of performance that can reasonably be regarded as sustained growth.

Also, while the timing of these accelerations can be debated further, assigning a precise date is useful, because it allows us to focus our attention on the conditions that prevailed when the growth rate picked up (and shortly thereafter). Subject to data limitations, we can discern something about what was or was not a constraint, and this may be relevant for Africa today.

Our focus is on whether African countries can sustain growth despite weak initial institutions, so countries that had accelerations based on strong initial (around 1960) institutions already are excluded from our benchmark (the data are not perfect, but countries such as Botswana, India, Mauritius, and Sri Lanka are excluded from our sustained growth benchmark on this basis).17 (Botswana and Mauritius will appear in our African data, as that is based on geography, rather than country characteristics, but they will be treated there as potentially distinct experiences and separated out from our calculations of mean values.)

Applying these criteria gives 12 countries. Of these, 10 are usually regarded as manufacturing export-based models. Of the 10, all but two are East Asian: China, Indonesia, Malaysia, Singapore, South Korea, Taiwan Province of China, Thailand, and Vietnam. China and Vietnam obviously started their growth accelerations much later (around 1980, rather than around 1960), but they have shown consistently high growth rates since that time and fit our criteria. Tunisia and the Dominican Republic are the other manufacturing export-based successes.18

With respect to the other two countries, concerns about data quality limit any assessment of Egyptian performance.19 Only Chile appears to be a real exception to the rule of manufacturing-based export success. As such, it might be an interesting model for Africa and an alternative to the East Asian escape (from poverty) route. But even here, if we take seriously the Adelman and Morris ratings, it would appear that Chile had strong economic institutions already by 1960. As in the case of Botswana, these favorable initial conditions might have played a role in alleviating the effects of the natural resource curse.20 Moreover, in the case of Chile, while copper has been an important export, Chile has also developed agribusiness/aquaculture exports that are very high value-added products.

Why Did Manufacturing Exports Matter So Much (after 1960)?

This benchmarking strategy suggests we should pay attention to exports, and—perhaps—particularly to manufacturing exports. One possible reason is that manufacturing exports help create a middle class that favors further strengthening of institutions.

Theoretically, the idea is that institutions do not spring up unassisted or without some foundation of support from various social groups. Acemoglu, Johnson, and Robinson (2005a) review some historical evidence on this point, and argue that it is the interaction of economic and political power that produces (or changes) institutions. The literature that finds significant effects of institutions on outcomes may have drawn too much attention to a state variable (institutions) relative to the forcing variables (the power of various groups).21

In particular, expansion of trade may sometimes create profound changes in the distribution of economic power, with consequences for political power and, consequently, for institutions. This is one interpretation for the effects of the expansion of long-run trade through the Atlantic, to Asia and the New World, after 1,500 (Acemoglu, Johnson, and Robinson, 2005b).22 However, trade does not necessarily lead to better institutions; if the returns from trade fall into the hands of monarchs or a small elite, they may actually lead to a concentration of power and, ultimately, worse institutions.

Although we do not have definitive evidence on this point, we note that while the sustained growth cases began their growth episodes with weak political institutions, over time, they benefited from a virtuous circle in which economic and political institutions improved. This highlights the notion that institutions are not immutable, but can respond to economic and policy changes, and thus that the quality of broad institutions is not a permanent barrier to long-term growth. A significant number of countries with sustained growth have improved their institutions over time, thus laying the foundation for sound growth in the medium run.

For example, Indonesia, Korea, Taiwan Province of China, and Thailand witnessed a substantial strengthening of their political institutions. On the Polity IV scale that goes from one (weak institutions) to seven (strong institutions), Indonesia’s and Taiwan Province of China’s by four points, Korea’s by five points, Thailand’s rating improved by six points.

The possibility that institutional development occurs only when growth is driven by manufacturing exports is further suggested by the experience of countries whose exports have been natural resource-based. A number of such countries have experienced a surge in exports in the aftermath of terms-of-trade shocks without any commensurate improvement in the quality of institutions. In some ways, this is the crux of the natural resource curse. As rents to governments increase, there is even less incentive for them to work toward improving institutions (Ross, 2001).

Recent Literature on Accelerations and Sustained Growth

Our approach is closely related to part of the growth literature that has focused on the information contained in turning points in countries’ growth performance. This is a promising line of research because, by focusing on the correlates of accelerations or decelerations in growth, it avoids many of the pitfalls of cross-country growth regressions that attempt to explain developing countries’ average growth experience (where the average typically confounds periods of steep hills and cliffs, rather than the smooth upward paths of the industrial countries—a point emphasized by Pritchett, 2000). The papers by Rodrik (1999), Hausmann, Pritchett, and Rodrik (2004), Jerzmanowski (2006), and Jones and Olken (2005b) represent some initial attempts to uncover the informational content of growth transitions, though not surprisingly they conclude that there is a lot we still do not understand about the anatomy of growth transitions.

Of course, identifying the correlates of accelerations does not directly get at the issue of what makes growth sustained. Indeed, it is likely that what ignites growth is not the same as what curtails growth (Jones and Olken, 2005b): crises of one type or another, conflict, and macroeconomic instability seem to be strongly correlated with the end of growth spells, but the converse of these does not appear to be a particularly reliable indicator of what causes an acceleration in growth. A more fruitful approach may therefore be to look at the correlates of growth duration, that is, once a growth spurt has begun, how can it be kept going?

Berg, Ostry, and Zettelmeyer (2008) focus on growth duration, and point out that, whereas economically significant increases in growth are relatively common events in the developing world (including in Africa), much rarer are the very long sustained spells of the type that lifted many countries in East Asia out of poverty over the past few decades. The correlates of growth duration should thus have significant policy relevance. The authors use survival analysis to relate the probability that a growth spell will end to a variety of economic and political variables. They consider the role of democratic institutions, income inequality, health and education, external competitiveness, and a number of variables related to macroeconomic stability. While their results should probably still be viewed as somewhat preliminary, their conclusions are nonetheless strikingly similar to ones we arrive at in our benchmarking exercise.23

II. Recent African Growth Experience

To focus our attention on countries with potential for relatively high sustained growth, in the discussion below we divide the countries into two groups based on whether or not they attain a minimum threshold of growth over the past decade (Table 1a).24 We set the threshold low, to be as inclusive as possible. We therefore have 19 African countries that had per capita growth over the last decade above 2 percent, and the rest of the region that was below this threshold (31 countries for which we have data).

Table 1a.

Indicators for Selected Sub-Saharan African Countries, 1996–2005: Income, Growth, and Population

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Source: World Development Indicators (WDI) (November 2006 download), unless otherwise indicated.Note: All variables are averages for the period 1996–2005, unless otherwise indicated.

Real per capita GDP growth is the average of WDI and Penn World Table’s estimates for the period 1995–2004.

GDP is measured in national currency terms (WDI).

Weighted by population.

Table 1a reports basic growth measures for sub-Saharan Africa. Column 1 shows GDP per capita growth and column 3 shows total GDP growth. Two points are immediately obvious. First, while average GDP growth was respectable over the last decade (4.5 percent unweighted and 4.1 percent weighted by population), average GDP per capita growth was much lower (2 percent unweighted and only 1.4 percent weighted). Column 6 confirms in more detail that population growth remains high in most sub-Saharan African countries (there is much less variation across countries in population growth than in income growth). The fact that per capita GDP growth is slightly larger than per worker GDP growth (column 2) reflects the faster growth in labor force relative to the population, which is sometimes characterized as a demographic dividend.

It is worth noting that average growth rates for the 1990s are even being surpassed today. In fact, over the past few years, GDP per capita growth has accelerated. The IMF’s World Economic Outlook growth rate for Africa in 2004 was 3.6 percent and in 2005 it was 3.5 percent. The IMF currently expects growth of 3.9 percent in 2006 and 3.7 percent in 2007. Per capita growth rates in excess of 2 percent per annum are expected for most regions, except the CFA Franc Zone.

This said, there is a great deal of variation within Africa. Focusing just on per capita growth rates, there are a number of countries with growth over 3 percent per annum. Some of these countries were recovering from a civil war (Liberia). Others discovered oil (Angola, Cape Verde, and Equatorial Guinea.) But five others had growth above or close to 3 percent (Botswana, Lesotho, Mauritius, Mozambique, Rwanda, Tanzania, and Uganda) and another eight countries were around 2 percent. A few countries continue to decline, with Zimbabwe as the most notable outlier.

We turn now to the growth picture in the two groups of sub-Saharan Africa countries. The first column of Table 1a shows that average growth in Group 1 was 4.8 percent per annum over 1996–2005. If we exclude Botswana (diamonds and good institutions), Angola, Chad, and Equatorial Guinea (oil), Liberia and Rwanda (rebound from civil conflict) and Mauritius (a long-standing manufacturing export story and arguably good institutions), average growth was 3.1 percent. (We adopt the terms Group 1 and Group 2 for convenience; we are not passing judgment on any countries, just trying to look at the data in an informative manner.)

It is useful to test whether there was a difference in means between the Group 1 African countries and the sustained growth cases. Specifically, we report the p-value from a t-test where the null hypothesis is that there is no difference in means for the two groups.25

This test shows that if we take the entirety of Group 1, we fail to reject the null hypothesis that their average growth is the same as that experienced by the sustained growth cases. But this finding is driven by the presence of a number of outliers (the asterisked countries in Table 1a) whose growth reflects oil, rebound from civil conflict, or which had reasonably strong institutions to begin with. If we drop those countries, average per capita growth was 3.1 percent. This is significantly below what was experienced in our sustained growth benchmark countries (see Table 1b).

Table 1b.

Indicators for Sustained Growth Countries: Income, Growth, and Population

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Source: World Development Indicators (WDI) (November 2006 download), unless otherwise indicated.Note: The variables are averages for the period T to 2005, unless otherwise indicated, where T refers to the start of the growth episode.

Weighted by population.

Real per capita GDP growth is the average of WDI and Penn World Table’s estimates for the period 1995–2004.

GDP is measured in national currency terms. Growth rates are averages for the period T (the start of the growth episode) to L (2005), the latest year for which data are available.

The latest year is 2005.

III. Are Institutions Likely To Be A Constraint?

Table 2a focuses on the Group 1 sub-Saharan African countries with relatively high recent growth. The same data are reported for Group 2. Table 2b reports comparable data from our sustained growth cases; the notes to this table explain the exact time period from which the data are drawn (this is important as much of the relevant data are not available for exactly the time of acceleration).

Table 2a.

Indicators for Selected Sub-Saharan African Countries: Institutions and Costs of Doing Business

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Sources: World Bank, World Development Indicators (WDI) (November 2006 download); ICRG; Polity IV; and World Bank, “Doing Business” website: http://www.doingbusiness.org/ExploreTopics/PayingTaxes/.Note: Data are for the most recent 10-year period available, except for the sustained growth countries. Asterisk denotes countries with strong initial institutions or those recovering from conflict or experiencing a commodity boom.

Data from World Bank, WDI. For sustained growth countries, data refer to the average for the period T to L, where T refers to the start of the growth episode and L the latest year (2005).

Score ranges from 1 to 7. The higher the score, the more the constraints on the executive. The data refer to year 2004 for sub-Saharan Africa countries, and to the period T for sustained growth countries.

Score for economic risk ranges from 1 to 50. The higher the score, the lower the risk. For sustained growth countries data refer to 1984, and for sub-Saharan Africa economic risk to 2002.

Score investment risk ranges from 1 to 12. For sustained growth countries data refer to 1996, and for sub-Saharan Africa to 2006.

Score ranges from 1 to 6. The higher the score, the less the corruption. For sustained growth countries data refer to 1996, and for sub-Saharan Africa to 2004 or 2005.

For sustained growth countries, data refer to T or to the year closest to T for which data are available (see Table 8c).

The data are from the World Bank, “Doing Business” website. Data for all the countries including sustained growth countries are for the most recent period based on the survey of January 2006.

Mean for sustained growth countries adjusted by adding the change in world mean between 1970 and the average for the period 1996–2005. Year 1985 is used for Chad.

1: For constraint on the executive, Namibia is excluded since the earliest data on it is 1990; 2: For Economic risk and Investment risk, the averages are for year 1985. Namibia is excluded since the earliest data available on them are 1990.

Broad or General Institutions

The first standard measure captures the quality of broad institutions from the Polity data set. This measure is available for all time periods, so we can look at exactly the time of acceleration (or any other time).

Table 2b shows that constraint on the executive was low in most of the sustained growth cases at the time of acceleration (we call this time T; the exact date of T is shown in the first column of Table 2b). The average score was 2.2, and four of the 12 cases had the lowest possible score—Chile, Korea, Thailand, and Tunisia.

Table 2b.

Indicators for Sustained Growth Countries: Institutions and Costs of Doing Business

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Sources: World Bank, World Development Indicators (WDI) (November 2006 download); ICRG; Polity IV; and World Bank, “Doing Business” website: http://www.doingbusiness.org/ExploreTopics/PayingTaxes/.Note: Data refer to the start (T) of the growth episode, unless otherwise specified.

Average for the period T to L, where T refers to the start of the growth episode and L the latest year (2005).

Data refer to the period T. Score ranges from 1 to 7. The higher the score, the more the constraints on the executive.

Data refer to the mid-1980s (1984). Score for economic risk ranges from 1 to 50, and for investment risk from 1 to 12. The higher the score, the lower the risk.

Data refer to the mid-1990s (1996). Score ranges from 1 to 6. The higher the score, the less the corruption.

For sustained growth countries, data refer to T or to the year closest to T for which data are available (see Table 8c).

The data are from the World Bank, “Doing Business” website. Data for all the countries including sustained growth countries are for the most recent period based on the survey of January 2006.

In contrast, in the Group 1 of African countries, the average score today is 3.8 and only one (Sudan) has the lowest possible score. In terms of political institutions, as reported in the second column, most Group 1 African countries already have a higher score than did the sustained growth cases when their accelerations began. Institutions are not today very strong, but they are potentially good enough in much of Africa so as not to be an obvious constraint on sustained growth.26 It is also noteworthy that levels of inequality today in this group of African countries (column 7) are close to the average for the sustained growth countries when the latter started their growth spurt. This is promising in light of the finding in Berg, Ostry, and Zettelmeyer (2008) about the importance of inequality for sustaining growth spurts. It is countries in the second group that seem to have high levels of inequality, and hence poorer prospects for sustaining growth.

While comparable measures of the quality of broad economic institutions at the beginning of the sustained growth countries’ growth accelerations are unavailable, data from Adelman and Morris (1971) suggest that countries such as Indonesia, Korea, Thailand and even the Dominican Republic had improved their economic institutions substantially during the growth period. For example, Korea and Thailand that were ranked below the mean on “administrative efficiency” in 1960 saw their investment rating rise to about 1.5 and 2 standard deviations above the mean, respectively on a measure of investment risk in 1984. While less dramatic, Indonesia and the Dominican Republic also saw improvements in their institutions by 1984, with both countries moving from below average to substantially above average ratings on these measures. Available data are not good enough to ascertain the exact timing of these improvements but it appears that in the preponderance of sustained growth cases, the improvement in economic institutions happened relatively early in the growth acceleration. The World Bank (1993) has noted that China’s investment climate improved dramatically and relatively early during its growth acceleration.

For this reason, when the broad measures of economic institutions begin, in the mid-1980s, the scores for countries that accelerated in the 1960s are already good. The average score for economic risk (a composite indicator that contains the leading dimensions of economic institutions, such as corruption and rule of law) was 31.7 (out of 50), while for investment risk (an alternative measure) it was 7.1 (out of 12).

Note that for China and Vietnam, data from the mid-1980s are at or close to the time of acceleration (1978 for China and 1985 for Vietnam). Vietnam had a relatively low (that is, bad) score, of 5.0, at that time, while China was already at a relatively high 8.6 in terms of investment risk.

Remarkably, our Group 1 African countries have an average economic risk indicator of 31.7 and an investment risk just above 8. There is nothing here to indicate that broad economic institutions are worse in this part of Africa today than they were 20 years ago in our sustained growth cases. Most likely, many of the sustained growth cases began their accelerations with broad economic institutions that were no better than in much of Africa today.

The story in terms of control of corruption is more complicated. Column 6 in Table 2a shows the Kaufmann-Kraay index, which is out of 6 (higher is less corrupt), and which is normalized. In other words, our corruption measure is relative, while our other measures of broad institutions are in absolute terms, that is, everyone can improve in terms of the latter but not the former. These data are only available from the mid-1990s.27

Of the sustained growth cases, half of the countries had corruption scores of 3 or below in the mid-1990s. This is not very different from the preponderance of Group 1 African countries as of 2005. No doubt corruption is an important issue in many countries, but it does not appear to prevent growth. Nor does controlling corruption necessarily lead to growth.

In terms of testing for differences in means, we find no difference in the adjusted broad measures, but we do find Group 1 has significantly higher corruption than was the case for sustained growth countries (but recall that these data are for a later point in their growth experience).28

Costs of Doing Business

One area worthy of further attention relates to businesses’ costs of entry (the units here are hours of time and fraction of income per capita per annum) and to the costs of trading. These data are from the World Bank’s Doing Business database. These are plausible measures for the specific institutions that directly impact business.

In contrast to the measures of broad institutions, where the Group 1 African countries do well relative to other countries, in terms of these more micro measures, the picture is mixed.29

It is very surprising that the time for paying taxes is actually lower than in the sustained growth cases today (average of 229 hours in the Group 1 African countries vs. 348 in the sustained growth cases). On the total amount of tax payable, the Group 1 African countries rank about the same as the sustained growth cases—45 percent of gross profits on average.

It is on the costs of entry, that is, registering a new business, that African countries do worse than the sustained growth cases as well as the average developing country. In the average Group 1 country, costs are about 123 percent (measured in terms of per capita income) compared with 25 percent in the sustained growth cases and 78 percent in the average developing country. The t-test for differences in means confirms that Africa has a disadvantage in this category.

While there is a presumption that macro and micro institutions should broadly co-move, there can clearly be exceptions. One possibility is that macro and micro institutions could be measuring distinct functions that institutions perform. For example, while broad institutions such as the judiciary will determine the protection of property rights and enforcement of contracts, the costs of doing business measured at the micro-level could relate to ease of acquiring specific licenses, which could be the domain of other administrative institutions/authorities. Another explanation for the lack of co-movement could simply be time. Even where, say, laws and regulations relating to property rights can be relatively easily changed, their effective enforcement (which would be picked up at the micro-level) may take more time.

Finally, the measurement of micro-institutions has not yet acquired the prominence of their macro counterparts. Further work is required to understand the differences between macro and micro differences, and what policy levers are available to countries to remedy the high costs of trading and doing business more generally.

Conflict and Fractionalization

It is possible that while broad institutions in Africa are at reasonable levels, the problem could be the potential for, or actual, conflict. Wars of various kinds definitely have been an issue in Africa’s recent past.

Tables 3a and 3b explore this issue in more detail, using data from the Uppsala Armed Conflict Dataset. Interestingly, what we find here is that in terms of “all conflicts,” Group 1 African countries are not significantly worse than were the sustained growth countries at the start of their growth.

Table 3a.

Indicators for Selected Sub-Saharan African Countries: Conflicts

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Sources: PRIO, Uppsala Armed Conflict Dataset (Gleditsch and others, 2002).Note: 0: No conflict; 1: Minor (at least 25 deaths per year for every year in the period); 2: Intermediate (more than 25 but fewer than 1,000 deaths per year); 3: War (at least 1,000 deaths per year). T refers to year 2000 for sub-Saharan African countries.

Values are based on maximum value of any conflict (internal extra-state, interstate, or internationalized internal) during a year.

Mean for sustained growth countries adjusted by adding the change in world mean between 1970 and the average for the period 1996–2005.

Since average 1980 is for one year, only one value is valid and reported for each category; Namibia is excluded since the earliest data on it is 1990.

Table 3b.

Indicators for Sustained Growth Countries: Conflicts

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Sources: PRIO, Uppsala Armed Conflict Dataset (Gleditsch and others, 2002).Note: 0: No conflict; 1: Minor (at least 25 deaths per year for every year in the period); 2: Intermediate (more than 25 but fewer than 1,000 deaths per year); 3: War (at least 1,000 deaths per year).

Values are based on maximum value of any conflict (internal extra-state, interstate, or internationalized internal) during a year.

Looking at interstate conflicts, in the window of T–9 to T, there was actually less conflict in the Group 1 countries than in the sustained growth cases. However, in terms of internal conflict, there appears to have been more in Africa—most of this has been concentrated in a few countries, but it has still spilled out into wider regions (for example, Sudan-Chad, Liberia-Sierra Leone, Democratic Republic of Congo, and several neighbors.) The potential for more intense and disruptive conflict in Africa should not be discounted.

Tables 4a and 4b present various measures of societal fractionalization, which is an indicator of the potential for conflict. Societies can potentially fracture along different lines—ethnic, religious, or linguistic. These tables indicate that regardless of the measure, all African countries (Groups 1 and 2) fare significantly worse than the sustained growth cases. While the widely noted reduction in internal African conflicts over the last decade offers some basis for optimism, the divided nature of many of these countries should serve to temper such optimism.

Table 4a.

Indicators for Selected sub-Saharan African Countries: Social Fractionalization

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Sources: Easterly and Levine (1997); Fearon (2003); and Alesina and others (2003).
Table 4b.

Indicators for Sustained Growth Countries: Social Fractionalization

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Sources: Easterly and Levine (1997); Fearon (2003); and Alesina and others (2003).

IV. Trade Outcomes and Policies

Tables 5a and 5b look in more detail at trade outcomes and trade policies. Apart from micro institutions that may have hampered the export orientation of a number of African countries, trade policies—as well as the exchange rate to which we turn later—are other possible candidates.

Table 5a.

Indicators for Selected sub-Saharan African Countries: Trade Outcomes

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Sources: World Bank, World Development Indicators (November 2006 download) and World Integrated Trade Solution databases.Note: Data are for the most recent period available after year 2000, except for the sustained growth countries and unless otherwise specified.

Manufacturing corresponds to the products in SITC categories 5 (chemicals), 6 (basic manufactures), 7 (machinery and transport equipment), and 8 (miscellaneous manufactured goods), excluding category 68 (non-ferrous metals).

Correspond to the products in SITC categories 26 (textile fibers, not manufactured, and waste), 65 (textile yarn, fabrics, made-up articles, etc.), 85 (footwear), and 84 (clothing).

Data are averages for the period 1995–2000, and correspond to the products in SITC categories specified in footnote 2.

Data are averages for the period 1995–2000, and correspond to the products in SITC categories specified in footnote 3.

Data are averages excluding Singapore for the period T to T+4, where T is the first year of the growth acceleration.

Data are averages excluding Singapore for the most recent five years.

Table 5b.

Indicators for Sustained Growth Countries: Trade Outcomes

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Sources: World Bank, World Development Indicators (November 2006 download) and World Integrated Trade Solution (WITS) databases.

Average for the period T to T+4, except China (1984) and Dominican Republic (1974).

Average for the latest five years (2000 to 2004).

Manufacturing corresponds to the products in SITC categories 5 (chemicals), 6 (basic manufactures), 7 (machinery and transport equipment), and 8 (miscellaneous manufactured goods), excluding category 68 (nonferrous metals).

Correspond to the products in SITC categories 26 (textile fibers, not manufactured, and waste), 65 (textile yarn, fabrics, made-up articles, etc.), 85 (footwear), and 84 (clothing).

Averages are excluding Singapore.

Export Performance

The sustained growth cases generally attained great success in manufacturing exports. The average increase in the ratio of manufacturing exports to GDP for this group over their growth episode was 36 percentage points. For example, Singapore and, to a lesser extent, Korea and Malaysia, achieved a rapid increase in manufacturing exports at a very early stage: within the first five years of the growth spurt, the share of manufactured exports in GDP had risen by 7.3 percentage points for Singapore, and by about 2.5 percentage points for the other two countries. Clearly, there was two-way causality between export ratios and growth, but even to the extent that early rapid export growth was a proximate cause, it raises the question as to the underlying policy choices that facilitated this growth.

The average-export-to-GDP ratio is quite high in the Group 1 African countries—their average ratio of 31 percent is almost double that of the sustained growth cases at the time of their accelerations (19 percent). The Group 1 numbers are high in part because of Botswana (diamonds), Equatorial Guinea (oil), Mauritius (clothing), and Lesotho (clothing). Even if we drop the asterisked countries in Table 5a, the average remains at 25 percent, which is still high.

In terms of manufactured exports too, African countries do not start at a very great disadvantage compared with the sustained growth cases. Even after excluding the few African countries with high levels of manufactured exports relative to GDP (Botswana, Lesotho, and Mauritius), in most cases the ratio of manufactured exports to GDP is close to what it was for the sustained growth cases. This picture is similar if we focus on apparel, footwear, and textile exports—the traditional starting point for countries that export manufactures. Aside from Lesotho and Mauritius (and Swaziland, which is in the Group 2 countries), these exports are small at less than 0.5 percent of GDP but this was also true of the sustained growth cases.

The sustained growth cases, however, increased their manufactured exports dramatically. Table 5a seems to suggest that, at least during the last 10 years, there has not been any significant improvement in manufacturing or textiles exports from Africa. The question is whether the current policy environment is conducive to sub-Saharan Africa countries repeating the feat of the sustained growth cases over the medium term. On the one hand, the external trading environment facing sub-Saharan Africa countries is more difficult now because of the competition from Asian exporters, particularly China, India, and Vietnam. On the other, sub-Saharan Africa exporters face virtually duty-free access to the markets of industrial countries in manufactures thanks to the various preferential schemes in the European Union (“Everything But Arms”) and the United States (The Africa Growth and Opportunity Act) whereas barriers facing Asian exporters in the 1960 and 1970s were much higher than today.30 On balance, it is therefore difficult to assess whether today’s environment is actually more difficult for the sub-Saharan Africa countries.

Trade Liberalization

Countries do seem to become more open as they grow and this is borne out by the experience of the sustained growth cases. While it is true that some countries in the sustained growth group did not liberalize (and to some degree still have not—for example, China and Vietnam), the weight of the evidence points in a different direction, as the examples of Indonesia, Korea, Malaysia, Singapore, and Taiwan Province of China show. In terms of the aggregate data, the average percent of years that a country has been open (since the growth acceleration began) is 58 percent for the sustained growth cases.

The (perhaps) surprising fact is that many African countries are quite liberal on trade. Table 5a shows that the augmented Sachs-Warner measure for the Group 1 countries is 0.6 (out of 1, with higher meaning more liberal).31 They are more open than the sustained growth cases were at the comparable stage of their growth spurt (0.4 is the average on the Sachs-Warner measure for the sustained growth cases), and they are more open than the average developing country today (0.5 on the Sachs-Warner measure).

Exchange Rate Overvaluation

Anecdotally, one important factor that supported export growth in the sustained growth cases was the avoidance of exchange rate overvaluation.32 While this is hard to measure exactly, we have constructed the following, relatively standard, proxy for overvaluation.

First, following Frankel (2004), for every year beginning in 1960, we ran a cross-section regression of the log of a country’s price level relative to the United States (available in the Penn World Tables) on the country’s per capita GDP in purchasing power parity (PPP) terms. This equation captures (in a cross-section context) the Balassa-Samuelson effect, which predicts that as countries grow richer, the real exchange rate—measured by the price level relative to the United States—should appreciate. The predicted value of the real exchange rate from this regression provides a sense of equilibrium, while the difference between the predicted and actual real exchange rate is a measure of overvaluation.33

We look at average currency overvaluation (last five years for which data are available for the African countries and for the entire duration of the growth episode for the sustained growth cases), the longest consecutive spell of overvaluation, and the extent of overvaluation during that spell (Table 6a and 6b).34

Table 6a.

Indicators for Selected Sub-Saharan African Countries: Macroeconomic and Trade Policies and Outcomes

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Note: Data are for the most recent period available after 2000, except for the sustained growth countries.

For sub-Saharan Africa, data refer to the average for the last five years for which data were available, except for Djibouti, Eritrea, and Sudan, for which they refer to 1996. For the sustained growth countries, data correspond to the average for the period T to L, where T is the start of the growth episode and L the latest year for which data were available. The computation of overvaluation is described in the text.

For sub-Saharan Africa, data refer to the maximum annual overvaluation between 1970 and L, and for sustained growth countries, data refer to the maximum annual overvaluation between T and L, where the overvaluation for any year is computed as the average over the following five years.

The score ranges from 0 to 1, with higher values denoting more open regimes. For sustained growth countries, data refer to the year T.

For sustained growth countries, data are averages for the period T—4 to T+ 5, where T is the first year of the growth acceleration.

Mean for sustained growth countries adjusted by adding the change in world mean between 1970 and the average for the period 1996–2005.

For inflation, Benin and Namibia are excluded, since the earliest data on them are 1991; year 1981 data are used for Central African Republic and Malawi.