Growing Pains
| Author | Catherine Pattillo, Sanjeev Gupta, and Kevin Carey |
| Position | Senior Economist/Assistant Director/Consultant in the IMF's African Department |
With Africa's growth finally picking up, the challenge is to accelerate and sustain the pace to reduce poverty
After decades of economic stagnation, growth in sub-Saharan Africa (SSA) has picked up considerably, reaching an eight-year high of 5.6 percent in 2004. Only a slight dip in this rate was seen in 2005, with one-third of the oil-importing countries achieving rates above 5 percent. But most SSA countries will still not be able to achieve the Millennium Development Goal (MDG) of halving the 1990 level of poverty by 2015 without doubling their rate of growth-and about half the region's population now lives below the poverty line. Are the improvements in growth sustainable? And what types of growth strategies will contribute most effectively to reducing poverty? This article explores these questions, drawing on new analytical methods to assess Africa's growth performance over the past 40 years.
Between 1960 and 2003, real GDP per capita in SSA grew an average of 1.1 percent a year. This means that real per capita income was approximately the same in 2003 as in the mid-1970s, as the region steadily lost ground relative to both industrial and developing countries. But, since the mid-1990s, growth has accelerated. Average real GDP per capita growth increased to 2 percent in 1995-99 from -1.1 percent in 1990-94, with many countries sharing in the improvement (see Chart 1). However, during 2000-03, growth slackened for all of the subgroups in Chart 1 except the oil producers and resource-intensive countries.
[ SEE THE GRAPHIC AT THE ATTACHED ]
What spurred growth after 1995? First, in the fast growers, macroeconomic performance was stronger and average inflation was almost half that of the slow growers. Their fiscal deficits were also lower because of higher revenue collections, and they were more open to trade, as shown by higher ratios of exports plus imports to GDP (see Chart 2). And, in a major departure from the past, total factor productivity (TFP) increased markedly-most likely reflecting efficiency gains stemming from countries' implementation of macroeconomic and structural reforms. But total and private investment barely rose, except in the oil-producing countries.
[ SEE THE GRAPHIC AT THE ATTACHED ]
Should countries continue to lower budget deficits? Probably not. Studies have shown that reducing the deficit below 2-2.5 percent of GDP in countries that have achieved macroeconomic stabilization is not beneficial for growth. Our study confirms that countries whose deficits exceeded 2.5 percent of GDP were able to boost their growth rate by strengthening their fiscal position, whereas in countries with deficits lower than 2.5 percent of GDP, growth declined.
To shed more light on Africa's growth performance, it is useful to identify fast-and slow-growing countries. One way is through growth benchmarking, which ranks countries by their actual growth relative to their potential. A country's growth potential is determined by circumstances over which it may have little control, although its subsequent policy choices will affect the growth outcome. Benchmarking analysis quantifies this relationship by comparing actual and "expected" growth; the latter is derived from an estimated global relationship between growth and a set of factors beyond the country's control. This set includes variables that capture country...
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