Economic Growth for Poverty Reduction in Africa: Recent History and Current Issues

Economic Growth for Poverty Reduction in Africa: Recent History and Current Issues Andy McKay University of Bath, UK Background Paper prepared specifically for the IV Mediterranean Seminar on International Development, Africa s Tragedy, Universitat de les Illes Balears, Palma de Mallorca September 2004 Comments welcome. a.mckay@bath.ac.uk

1. Introduction International statistics clearly show that among all regions of the world Sub-Saharan Africa shows the highest levels of poverty and worst human development outcomes according to most indicators. Moreover, while some regions of the world have made significant progress in terms of poverty reduction over the last two decades (notably in Asia), Africa has made substantially less progress over this period and in some of the relatively few countries for which evidence is available, poverty levels appear to have increased over the 1990s. Over the past two decades, the record of economic growth in Africa has been very poor: negative on average, averaging -0.7% over the 1980s and 0.6% over the 1990s compared to world averages of 1.1% and 1.3% respectively. Consequently, in 2000-02, per capita GDP in Sub-Saharan Africa was only around one fifth of the world average level (in purchasing power parity values), while it had been over one third of the world average level in the late 1970s. Many early cross country regression studies were unable to explain Africa s poor growth performance using the explanatory variables they used, such that the Africa dummy was frequently found to be statistically significant and negative. This paper will argue that for the central importance of reversing this poor growth performance in achieving faster poverty reduction and improved human development in future years. The ability to achieve this will of course depend on many factors, both internal and external to Africa. How to achieve this is massive question in its own right, much beyond the scope of this paper to address. This paper rather focuses on showing how growth, where it has been achieved (in Africa and elsewhere) has been a key factor behind poverty reduction before briefly reviewing some of the factors likely to be important for growth in Africa (which include issues discussed in some other presentations in this workshop, as well as other factors). The paper is structured as follows. The following section briefly discusses concepts of poverty and how they relate to economic growth. This is followed by a statistical examination of the record in Africa on growth, poverty reduction and human development, making some brief comparisons with other regions of the world. Section 4 then briefly discusses the factors that are likely to be important for growth, and considers their relevance in accounting for African growth performance. 2. Poverty and its relationship with growth There is a vast literature on concepts and measures of poverty, and this will not be discussed here; readers are referred to Blackwood and Lynch (1994) or Lipton and Ravallion (1995) for example for more detail. For purposes of this paper, focusing on African countries that are for the most part both Low Income Countries and Low Human Development Countries, the focus will be predominantly on absolute poverty: the failure to be able to achieve a required subsistence minimum. It is widely accepted that poverty is multidimensional in nature. This paper will focus both on income poverty (inadequate levels of income or consumption) and human development dimensions of poverty (notably education and health). Human development dimensions of poverty are commonly measured at a national (or regional 1

level within a country) by the Human Poverty Index (HPI-1; UNDP, 2004 or earlier years) or its components; but some components can also be identified at an individual level (such as illiteracy or non-enrolment at school). Economic growth, defined as growth in per capita GDP, will be an important factor which can influence the level of both income and non-income poverty. In the case of income poverty, following Datt and Ravallion (1992), there is a direct, definitional relationship between the growth in average household income (not quite the same as per capita GDP growth) and changes in income poverty: P = [P(µ 2, L π ) P(µ 1, L π )] + [P(µ π, L 2 ) P(µ π, L 1 ) ] + R where the poverty measure is denoted as P(µ t, L t ) where µ t and L t represent average income and the Lorenz curve respectively in period t. The first term here is the growth effect: the change in poverty is the Lorenz curve had remained unchanged, at a reference level represented by L π. The second term represents the redistribution effect: the change in poverty if mean income had remained unchanged at a reference level µ π. As this decomposition in practice is not exact a residual is required. However, as this clearly illustrates, the extent to which growth in average household incomes translates into reduction in income poverty depends on the distributional pattern of this growth. For a given average rate of growth, if this is accompanied by increasing inequality, then the poverty reduction impact will be less, and can even be negative if the incomes of those at the lower end of the distribution fall. Thus the relationship between growth in household incomes and poverty reduction also depends on how inequality changes. In addition, the initial level of inequality is also an important influence of the extent to which growth translates into poverty reduction. The extent to which a given rate of growth in household incomes translates into poverty reduction is summarised as the growth elasticity of poverty: the proportionate response of a change in a measure of poverty to a unit proportional change in mean income. The magnitude of the growth elasticity of poverty depends on many factors. For a given level and distributional pattern of growth, the initial level of inequality is one important influence of the extent to which this translates into poverty reduction: where initial inequality is higher, the growth elasticity of poverty will generally be lower. This makes intuitive sense, because in this case the poor will generally be further below the poverty line, and for instance so less likely to move above it. (In addition, the initial level of inequality is also important because there is now quite a lot of evidence from cross country studies that high levels of initial inequality tend to have an adverse effect on growth). In summary the relationships between growth in household incomes and poverty reduction are strongly mediated by inequality and how it changes in the process of growth (or recession). The relationships between growth and human development dimensions of poverty are less direct but nonetheless frequently strong, a point emphasised in the Human Development Report 2003 (UNDP, 2003) on the Millennium Development Goals. 2

Economic growth can relax constraints limiting human development outcomes, both at an individual or household level and at the national level; and through both private and public spheres. For instance increased household income can relax some constraints that prevent some children attending school, can make it easier to pay for health care or can enable a better diet. Growth at a national level increases the resources available for public spending in education and health (among other areas), which in turn can enable virtuous circles between human development and growth to be set in motion. Once again though the distributional pattern of growth will be important. In particular if the rich benefit more from growth then the private channels are likely to be less effective (except indirectly or possibly via remittances). The initial level of inequality is also likely to be important if public spending in more unequal societies is likely to benefit the poor less (as is highly likely). In summary, there is a good basis conceptually and based on existing international empirical evidence to think that economic growth can have a big impact on both income and non-income poverty, but this is not necessarily the case because it depends strongly on the distributional pattern of that growth and on how unequal the country is to begin with. 3. The record of growth and poverty reduction in Africa In much of Africa over the past 25 years the challenge has been to have any growth at all. Over this period purchasing power parity GDP values have declined, while in the world as a whole GDP values have increased substantially and quite consistently over this period. Some regions of the developing world have experienced large increases, most notably in East Asia and the Pacific where per capita GDP in 2002 is more than four times its value 25 years before. In South Asia average per capita GDP more than doubled over this twenty-five year period. Sub-Saharan Africa, which according to this indicator was better off than both these Asian regions in 1975, by 2002 now has the lowest level of per capita GDP in real PPP terms by some way. 3

Figure 1: Per capita GDP, constant 1995 PPP dollar values 8000 7000 6000 5000 4000 3000 2000 1000 0 1975 1976 1977 1978 1979 1980 Source: World Development Indicators, 2004. 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 East Asia & Pacific Latin America & Caribbean South Asia Sub-Saharan Africa World Figures for average per capita GDP growth rates over the past decades (Table 1, here not PPP values but still in real terms) confirm this pattern. Since the 1970s East Asia has known per capita growth rates averaging around 5% per annum, and South Asia has had per capita growth rates of around 3% annually since the early 1980s. By contrast Sub-Saharan Africa experienced consistent negative average per capita growth rates throughout 1980s and 1990s. World GDP grew relatively slowly over the 1980s and 1990s, but as already noted Africa fell much below this. Table 1: Average growth rates by decade and world region 1961-69 1970-79 1980-89 1990-99 2000-02 East Asia & Pacific 1.8 5.0 5.7 6.2 5.5 Latin America & Caribbean 2.4 3.3-0.2 1.2-0.4 South Asia 1.8 0.6 3.4 3.4 2.6 Sub-Saharan Africa 2.3 1.0-0.7-0.6 0.7 World 3.5 2.1 1.3 1.1 1.1 Source: World Development Indicators, 2004. These averages of course hide important variations across countries, and this will be considered shortly. First, however, it is valuable to consider what happened to poverty for these groups over the same period. The challenge in assessing progress in poverty reduction, both at a country level and for groupings as here, is the limited data available, especially before the 1980s. Even since this decade, at which time household and individual level started to be collected more systematically, there is a limited amount of data available. Many countries have no available estimates of poverty, or have estimates for only one or two points in time. Cross-country comparison is particularly difficult given differences in data collection methods and in 4

identifying comparable poverty thresholds. These issues though are a bit less serious for some non-income dimensions of poverty if similar surveys have been conducted across many countries (such as the Demographic and Health Surveys), or where similar indicators are otherwise measured (e.g. primary school enrolment rates). Nevertheless a lot of interest has focused on income poverty comparisons between countries and over time. The World Bank in particular has monitored trends in income poverty across different regions of the developing world. Recent results covering the period between 1981 and 2001 show a sharp contrast between Sub- Saharan Africa and other regions of the developing world (Figure 2, based on data taken from the study by Chen and Ravallion, 2004). The accuracy of these projections almost certainly becomes greater in more recent years due to the larger number of surveys on which they are based, but despite less accurate data in earlier years the trends are still likely to be robust. Over this period the proportion of the population living in poverty has fallen sharply in East Asia and quite quickly in South Asia, while the proportion has increased slightly in Sub-Saharan Africa. More dramatically, with population growth the absolute numbers living on less than the dollar per day poverty line have risen from 163 million in 1981 to nearly 313 million in 2001. Figure 2: Percentage of population living below one dollar per day 70 60 50 40 30 East Asia and Pacific Latin America and Caribbean South Asia SubSaharan Africa 20 10 0 1981 1984 1987 1990 1993 1996 1999 2001 Source: Chen and Ravallion (2004) These results clearly show a very strong association between growth and poverty reduction, with a very strong suggestion that it is the economic growth that has brought about the poverty reduction. As previously noted this relationship will also depend on how inequality changed over this period. There is similarly limited data to compare changes in inequality over time at individual country level and especially for these global regions. However, available country-level data suggests that poverty changes have not been mainly due to changes in inequality, as these have often been quite modest. But where inequality has increased somewhat, as in China post- 5

liberalisation, growth might have translated into even faster poverty reduction without this. For non-income poverty indicators there is less scope for making such comparisons across global regions, though somewhat more scope using individual country level data. But some indicators can be compared, though often over differing time periods (Table 2). Comparisons of infant mortality rates (a key measure of ill being) show much less improvement in Sub-Saharan Africa compared to other regions. Life expectancy in Africa has scarcely changed between 1970-75 and 2000-05, while it has increased by an average of at least nine years (and up to 13.5) in other regions. The HIV/AIDS pandemic is one (but only one) important factor contributing to this. However, Sub-Saharan Africa has made comparable progress in reducing illiteracy rates compared to other regions. Table 2: Trends in Selected Non-Income Poverty Indicators Infant mortality rate Life expectancy Illiteracy rate 1970 2001 1970-75 2000-05 1990 2002 East Asia 84 32 60.5 69.9 20.2 9.7 and Pacific Latin 86 27 61.1 70.6 11.4 15.0 America and Caribbean South Asia 129 69 49.8 63.3 53.0 42.4 Sub-Saharan Africa 139 108 45.2 46.1 49.2 36.8 All 108 61 55.5 64.7 32.7 23.3 developing countries Sources: Human Development Report, 2004, available online http://hdr.undp.org/statistics/data/ However, it is important to complement this regional analysis with a similar analysis at the individual country level (and indeed for different localities and other groups within individual countries), given the diversity of growth and poverty reduction experiences. 6

Table 3: Frequency distribution of average per capita growth rates of African countries, 1980 to 2002 Range of annual per capita GDP growth rate, 1980-2002 Number of countries Notes 4.0% and above 3 Botswana, Equatorial Guinea, Mauritius 2.0% to 3.99% 4 Cape Verde, Eritrea, Lesotho, Uganda 0.5% to 1.99% 12-0.49% to 0.49% 14-1.99% to -0.5% 8-3.99% to 2% 5 Côte d Ivoire, Liberia, Madagascar, Niger, Sierra Leone -4.0% or below 1 Democratic Republic of Congo Source: World Development Indicators, 2004. There has been a wide variety of growth experiences across different Sub-Saharan African countries (Table 3), with a few having achieved levels comparable to South Asian or almost East Asian levels (although special circumstances may apply in some cases). A number of countries have achieved low positive growth rates, but for 14 African countries their per capita GDP levels now are still very similar to their 1980 values. Half of Sub-Saharan African countries (23 out of 47) are worse off now in per capita GDP terms than in 1980. In four of the six worst negative growth experiences, conflict or political instability have played a key role, but this has also been a central factor in many other cases of negative growth over the period (e.g. Burundi or Zimbabwe). There is much less information available though on trends on income poverty for individual African countries, because this requires that countries have conducted comparable surveys to estimate poverty at two points in time. Comparable information on changes over time on indicators of non-income is available in a number of cases, especially through the Demographic and Health Survey where countries have conducted this more than once. Christiansen et al (2003) summarise available evidence for those African countries where such comparisons can be made, but here focusing specifically on the 1990s. This is based on eight countries, for all of which comparable information on income poverty can be obtained. In interpreting this though, it should be borne in mind that these results relate to what are probably atypical African countries for instance countries with sufficient capacity and political stability to be able to conduct large surveys at two or more points in time. In other words, these are countries whose poverty reduction record is likely to have been better than average within Sub-Saharan Africa. 7

Table 4: Growth rates and changes in poverty indicators for selected African countries over the 1990s Country Year Real consumption per capita Under five mortality rate Net primary enrolment rate Under five child malnutrition rate Income poverty Gini coefficient Positive growth cases Rural 1994 80 190 19 66 41 39 Ethiopia 1997 86 175 25 55 35 44 Ghana Mauritania Uganda Madagascar Nigeria Zambia Zimbabwe 1992 275 119 70 26 51 37 1999 304 104 82 26 39 37 1987 297.. 28 48 58 43 1995 361 149 41 23 35 39 1992 211 165 68 43 56 36 1997 258 162 86 39 44 38 Negative growth or stagnation 1993 223 170 48 50 70 43 1999 222 149 64 49 71 38 1992 206 136 94 38 43 51 1996 173 147 98.. 66 47 1991 362 192 73 40 70 59 1998 266 202 66 42 76 50 1991 595 80 83 30 26 68 1996 439 90 88 23 35 64 Sources: taken from Christiansen et al (2003), Tables 1, 2 and 3. Notes. 1. Consumption data is taken from national accounts data and expressed in constant 1995 $ values. 2. Reference periods for indicators not take from household surveys are for years as close as possible to the year of the survey. In Ethiopia such data are for the whole country, not just rural areas. 3. Child malnutrition is measured as the percentage of children stunted, with a Z score less than 2. Nevertheless, in growth terms this covers a range of experiences, four countries experiencing positive growth (here in private consumption expenditure as used by Christiansen et al, 2003), one experiencing little change and three explaining declines. Focusing first on the changes in non-income poverty measures that accompanied this, the four countries that grew over this period also showed falling under five mortality, falling under five malnutrition (except in Ghana where it remained unchanged) and increases in net primary enrolment rates. All three indicators also improved in Madagascar. But in the countries experiencing negative growth, some of all or the non-income poverty indicators deteriorated. All three indicators worsened in Zambia, which experienced the most negative growth (and had the highest under five 8

mortality rate to begin with). In Nigeria and Zimbabwe under five mortality rates also increased over this period, but primary enrolment rates still improved modestly. While it might be expected that the relationship between growth and non-income poverty indicators might be a more longer term relationship (e.g. because of the time required to construct health facilities), the results suggest even a short term association. Of course this does not imply that there is any causality between these observed short term changes, as there may be common factors accounting for both. And in any case, any causality between income and human development indicators could act in either direction or both. In looking at the income poverty results, tit is important to stress that the data are only comparable within countries and not between countries, because the poverty lines were estimated on a national basis and so are different in different countries. Focusing on within country trends, the income poverty headcount figures very much move as expected given the growth rates experienced in the different countries: poverty falls in rural Ethiopia, Ghana, Mauritania and Uganda; changes little in Madagascar; and increases, sometimes sharply, in Nigeria, Zambia and Zimbabwe. There are also quite large changes in inequality as measured by Gini coefficients, with recession in particular tending to be accompanied by narrowing inequality, so hitting the upper end of the distribution more. Inequality does increase in some countries experiencing growth and poverty reduction, but this is not a universal finding. There are significant variations though in the extent to which growth or recession translates into changes in poverty, and this is not just accounted for by the distributional pattern of this growth. Christiansen et al (2003) report growth elasticities of poverty, which for the periods considered here vary from 0.11 for Madagascar to a maximum of 1.30 in Nigeria. Of course what is important is to explain the variations in these growth elasticities of poverty, with the initial level of inequality being only factor. The structure of the income distribution relative to the poverty line is one other important issue. If many households fall just below the poverty line then it is likely to be easer for them to move above it. These growth elasticities of poverty are still quite low compared with other regions of the world. Here inequality would seem to be an important factor. Based on currently available data average inequality rates as measured by Gini coefficients are of a similar magnitude to Latin America, a fact not commonly recognised, and are somewhat higher than in South and East Asia (Anderson and McKay, 2004). Distributional patterns of growth have also been quite unequal in several countries This is true even in countries like Ghana where the Gini coefficients did not change much over the periods considered here. In this case the very bottom end of the distribution appeared to be worse off despite generally reducing poverty. Addressing inequality in Africa is a key issue in increasing the effectiveness of growth in translating into poverty reduction., both when growth is associated with increasing inequality high inequality and when inequality levels are high to begin with. The extent to which growth translates into the reduction of both income and nonincome varies from case to case, as would be expected given the presence of many intervening factors (not just related to inequality) and given variable relations between income levels and non-income outcomes. But this section has demonstrated strong 9

evidence of the importance of growth for poverty reduction across regions of the world and at a country level. The country case studies that Christiansen et al (2003) draw on show that a similar result is also observed for localities within a country (given that rates of economic growth and poverty reduction can often vary sharply by geographic region, socio-economic group etc.). 4. Factors underlying poor growth performance in Africa While not neglecting the importance of distributional issues, including for the growth elasticity of poverty, poor growth performance seems clearly to be a major factor behind the lack of poverty reduction in Africa. This raises the questions of the factors that underlie this poor growth performance. There is an extensive literature on this subject, both globally (e.g. Acemoglu, 2004; Rodrik, 2003, 2004; Temple, 1999) and with specific relation to Africa (e.g. Collier and Gunning, 1999; Bigsten and Fosu, 2004 and other papers in the same July 2004 special issue of the Journal of African Economies). There is not the space here to discuss these issues in detail here, rather this paper concludes with a brief summary of what some of the key explanations for slow growth in Africa are likely to be. Many of the issues are in fact other discussed in other papers at this workshop, including conflict; HIV/AIDS and other major illnesses; trade performance; the impact of aid; and policy coordination. Some of these factors will be discussed in more detail below. In production function terms, key factors influencing growth will be investment in physical capital, including infrastructure; and human capital. Africa s record in both private investment and infrastructure investment has been very poor, even in several relatively more successful countries. Collier and Gunning (1999) stress the capital exodus in Africa and consider it as largely a capital hostile region. Africa ins perceived by investors as a high risk environment, with Government actions or inactions playing a key role in maintaining this, for instance through lack of stability, credibility, poor management of public spending and inadequate infrastructure provision. A lack of investment has resulted in little employment creation, one of the factors that had been very important in many successful Asian experiences. In some respects Africa has made more progress in terms of human capital, notably in education, but there are questions about quality and inadequate employment opportunities for workers to benefit from this. In addition, human capital has been partly eroded by the HIV/AIDS pandemic and other worsening health outcomes. Other factors are important in addition, as confirmed by the extensive literature on factors influencing growth rates, much based on cross-country regression analysis. Three main areas that have been considered are openness, geography and institutions. There is quite strong evidence that outward orientation, notably in trade policy, is associated with faster growth, although also quite strong evidence that this may be conditional on domestic policies and institutions (Rodrik, 1999). Geographical factors, such as ease access to coasts or the size of a country, have also been emphasised as important determinants of growth. These factors may interact in that ease of access to the sea may be particularly important in small countries, due to the limited size of the domestic market and scope to exploit economies of scale (UNDP, 2003). But it is now increasingly argued that institutional factors are likely to be of central importance. Rodrik (2003) argues that good institutions matter both in 10

igniting growth and in sustaining it, with different institutional factors being important in each case. The latter institutional changes though are much more difficult. He also argues that there are no blueprint models for institutions. What matters is the attainment of a limited number of higher order principles, including some form of property rights, fiscal solvency and sound money, and market oriented incentives, and these can be associated with a variety of different institutional configurations. Other important requirements are adequate institutional arrangements to prevent conflict and manage adverse shocks, as well as to provide adequate social insurance against the effects of shocks. Sub-Saharan Africa has in many ways been disadvantaged in all three respects (restrictive trade policy; many small and landlocked countries and weak institutions in many areas). This itself is expected to be a major factor discouraging domestic and foreign investment. The Africa-specific growth literature identifies some key additional factors, including the impact of HIV/AIDS; urban bias in policy, meaning an inadequate focus on agriculture; poor fiscal management; ineffective service delivery, especially to poorer groups; and an inability to manage vulnerability and risk. A key factor for attaining growth is of course straightforward political stability, with the absence of this (or the presence of internal, or indeed cross-border, conflict) inevitably a key factor accounting for poor growth performance. This has clearly been an important factor in many African countries. But there can be a two-way causality here, in that the absence of growth itself may itself contribute to political instability, as for instance in pre-genocide Rwanda. Even in stable political environments, the extent of commitment to growth and the policies that is likely to require (including maintaining stable macroeconomic policies) remains a key issue, as demonstrated by the case of Ghana which has maintained a modest positive growth rate, is widely regarded as substantially below its potential. What then of the prospects for growth and poverty reduction in future? Returning to the other issues discussed in this workshop, measures to resolve conflict on a sustainable basis (such that the threat of political instability is gradually removed) are clearly a fundamental requirement without which little growth will occur, certainly in the conflict affected regions. Controlling the HIV/AIDS pandemic and reducing its economic impact (as achieved for example in Uganda) is clearly also very important. But many countries have only achieved modest growth even without facing these problems to a significant extent. Greater openness to trade is likely to be of particular importance for future growth, but many African countries ability to benefit from trade has been limited even in areas where trade barriers have not been binding. Poor infrastructure and consequent high transport costs is one factor. Aid has undoubtedly contributed to growth in a number of African countries, but questions need to be asked about the sustainability of this and about whether the aid has been optimally used. All these factors are important; but ultimately the actions of governments and the nature of political systems, which may mediate against tough decisions, may be some of the most important constraints on growth in Africa. References Acemoglu, D., S. Johnson and J.A. Robinson (2004) Institutions as the Fundamental Cause of Long-Run Growth, mimeo, April 2004, Massachusetts Institute of Technology: http://econ-www.mit.edu/faculty/index.htm?prof_id=acemoglu 11

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