Raising Growth and Investment in Sub-Saharan Africa: What Can Be Done?

• Author: Ernesto Hernández-Catá
• Position: Associate Director of the IMF's African Department

Sub-Saharan Africa must increase economic growth to reduce poverty and improve living standards. This article discusses some obstacles to growth in the region, as well as some policy actions that would improve its prospects.

Sub-Saharan Africa's long-term growth performance will need to improve significantly for the region to visibly reduce poverty and raise the standard of living to an acceptable level. Appropriate actions will also be needed to ensure that an adequate share of the growing income is devoted to reducing poverty-for example, by improving the delivery of social services. In view of the low level of per capita income in many sub-Saharan African countries, it is difficult to see how redistribution alone could provide a lasting solution to the problem of poverty unless the size of the pie increases markedly. The evidence from empirical studies suggests, in fact, that the income of the poor increases one for one with overall growth and that economic growth is one of the best ways to reduce poverty.

The key policy question for these countries and their development partners is how to spur economic growth. Empirical studies suggest that the contributions to growth of physical investment and total factor productivity (defined as the rate of growth of GDP that cannot be explained by capital formation or labor force growth) in sub-Saharan Africa have been low in comparison with other regions and have declined over time. These trends have reflected inefficiencies in resource allocation; poor delivery of public goods, notably health care and education; and the high risk of doing business in many parts of the region. Moreover, although the labor force has expanded rapidly, its productivity has remained relatively low because of generally poor standards of health and education.

Improving the environment for investment

In the 1990s, the ratio of investment to GDP in sub-Saharan Africa hovered around 17 percent of GDP, well below the ratios attained in the developing countries of Latin America (20-22 percent) and Asia (27-29 percent). The empirical evidence and international comparisons also suggest that the ratio of private investment to GDP is low in sub-Saharan Africa. This is worrisome for two reasons. First, private investment has been found to have a significantly stronger effect on growth than government investment-probably because it is more efficient and, in some countries, less closely associated with corruption. Second, official development assistance, which provides the financing for a large share of public investment in Africa, is declining.

Perhaps the primary reason for the low level of private investment in sub-Saharan Africa is the perception, held by both domestic and foreign investors, that the risk-adjusted rate of return on capital is low. Three major sources of risk appear to be particularly relevant: macroeconomic instability; inadequate legal systems-in particular, the difficulty of enforcing contracts; and political risk, especially armed conflicts. Reducing risk should greatly improve the attractiveness of holding assets in sub-Saharan Africa and, therefore, raise domestic investment and saving rates while reducing capital flight-a major problem in many countries in the region.

First, with respect to macroeconomic instability, the countries of sub-Saharan Africa have recently succeeded in cutting their budget deficits...