Thursday, 6 October 2016

The Divergence & Sustainability Doubts of Africa’s Economic Growth

The October issue of the Africa Pulse report, a publication of the World Bank that highlights the state of economic growth in Sub-Saharan Africa (SSA), reveals that the region’s rate of economic growth for 2016 will be 1.6%. This is the lowest rate of economic growth that SSA would have registered for the last two decades and it is in fact lower than the previously forecasted 3% expansion of the real Gross Domestic Product (GDP) for 2016.

In addition, the 1.6% rate of economic growth is lower than that of the Emerging Markets & Developing Economies (EMDEs) which is projected to be 3.5% and the global growth rate of 2.3%. It marginally surpasses that of the advanced economies by a mere +0.1. However, it is expected that SSA’s economic growth rate will pick up in 2017 heading into the medium term. The World Bank analysts forecast that SSA will register an economic growth rate of 2.9% in 2017 and 3.6% in 2018.

Several factors have been identified as the causes of the slump in the economic growth for SSA in 2016. They include the incidence of low commodity prices in the global market, tight financial conditions in USA and the Euro Area that have occasioned a reduction of capital flows into the region, policy uncertainty in the domestic economies, droughts, political and security threats and the slowing down of the growth of China’s economy.

One startling fact documented in the report is the nature of economic growth exhibited by the respective economies of the states that make up SSA; some of the economies are registering relatively high rates of economic growth, a few are growing a bit slowly and others are experiencing a continuous contraction of their GDP.

The economies of Ethiopia, Rwanda, Tanzania, Cote d’Ivoire and Senegal are projected to register economic growth rates of above 6%. The performance of these economies has been attributed to several factors key among them; good monetary and fiscal policies, better business regulating environments, the diverse structure of the commodities exported and more effective public institutions.

On a general scale, this has an implication that the other countries’ economies that are playing catch-up with the aforementioned ones, and those whose economic performance is dwindling are operating in the middle or at the extreme end of the continuum that is an aggregation of the stated metrics. This is in fact where the divergence stems from and paints a picture of a continent fantasizing with the aspect of Africa Rising.

Primary Causes of the Economic Slump

Considering the general economic performance of SSA, there are more doubts than hopes in light of the envisaged economic resurgence of the region in the second decade of the 21st century. Externally, the continued internationalization of capital and the global integration of different regional economies cannot be disregarded or disputed for that matter. The global financial crisis of 2008 and the Eurozone Crisis thereafter are deeply interlinked to the decline in the economic growth rate of SSA. As a direct result of this, the financial resources funneled to the SSA region have significantly decreased and this is especially with regards to the flow of capital to the region. The aftermath of the crises has resulted in the crafting and drafting of stricter monetary and fiscal policies in the USA and in Europe. The USA and the Euro Area are still gravitating towards the equilibrium hence the effects of the adjustments.

One of the primary causes of this decline in the economic growth of SSA has been the decreasing commodity prices in the global market. This has greatly affected the commodities from SSA that are exported to Europe, the Americas and Asia.  The commodities that have largely been affected are oil and the minerals. The increase in the supply of oil has resulted in low prices of the product and this has seriously dented the African economies that are dependent on it. The economies dependent on the minerals have also experienced the economic misfortunes in the world market.

To a larger extent, Nigeria and South Africa which make up 50% of the GDP of SSA, experienced near-recession situations in their respective second quarters. Nigeria chiefly depends on oil while South Africa’s economy is largely fueled by the revenues realized from the minerals. Other countries such as Botswana, Angola, Chad, and the Democratic Republic of Congo among others have suffered from this.

Sustainability of the Growth Momentum

Before the economic slump that began in 2015, SSA had registered an average economic growth rate of approximately 5% per year for over ten years. The paradox from the sustained economic growth rate was the failure to cut on the levels of poverty and unemployment in the region. This is perhaps a pointer that the growth was not anchored on feasible policy frameworks.

The sustainability of the economic growth of SSA is a mirage basing on the prevailing form and nature of the economic model of the region. An interesting fact is the growth and expansion of the service sector compared to the manufacturing sector whose growth is relatively slower. The other regions of the world, in the course of their economic growth and subsequent structural transformation, the manufacturing sectors were developed into the largest contributors of their GDPs. This should trigger economic curiosity in light of the different nature of SSA’s growth trajectory.

Logically, a thriving manufacturing sector creates the economic momentum through the backward and forward linkages with the other sectors within the economy. The failure to heavily invest in the manufacturing sector has led to the failure to diversify the exported commodities.

The doubts in the sustainability of the growth momentum of SSA can be traced to the peripheral role played by the agricultural sector. The sector contributes 30% of the region’s GDP and 2/3 (67%) of the region’s labour force but its total factor productivity is very low compared to the other regions of the world. To effectively reduce the poverty and unemployment levels in SSA, special attention must be paid to the agricultural sector. Its development through the establishment of agro-based industries will further create other external industrial linkages which will set up a stronger foundation for the manufacturing sector and a vibrant service sector.

Back On Track: Fundamental Policy Prescriptions

The future of SSA is bright but the formulated policies need to reflect the current situation and address the reality on the ground. The economies of SSA have to diversify the commodities that they export. This entails value addition of the products and even diversification of the markets in which the commodities are exported to. This will reduce the uncertainties associated with the fluctuations of the commodity prices.

The development of the agricultural sector should be prioritized given its contribution to the region’s GDP and the labour force in the sector. The policies formulated ought to focus on the sector’s commercialization, leveraging on technology and special programmes tailor-made to harness the productivity of the smallholder farmers.

More investments should be made in the manufacturing sector. The investments in this sector should mirror the on-going investments in infrastructure.

Above all, the SSA countries must create friendly business environments that encourage, promote and attract investors both domestically and externally. Intertwined to this is the need to ensure that there is a lot of efficiency in the public sector such as a reduction in the red tapes and the levels of corruption.

Addressing uniformly the challenge of economic growth divergence is a challenge in itself as different SSA states have a lot of dynamism as far as economic management is concerned. But the divergence is a cause to worry about as it may lead to cases of immigration which often precipitate the xenophobic effects. This is why the growth trajectory of SSA ought to be consistent and in due course sustainable.

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