Juggernaut: How the Rise of Developing Countries Is Reshaping the World Economy

Africa’s economic growth has accelerated

After stagnating for much of its postcolonial period, economic growth in Africa began accelerating after the mid-1990s. GDP increased by an average of 4.6 percent a year from 1999 to 2008, more than doubling its pace from the previous decade. Lower middle-income countries saw the strongest economic expansion, growing 6 percent a year from 1999 to 2008 as commodity prices boomed in the 2000s. But the acceleration was widespread and included South Africa, an upper middle-income country that accounts for more than a quarter of Sub- Saharan GDP. Seventeen African economies—12 of them low income—grew at an average annual rate of 5 percent or more in the decade leading up to 2008, up from only 7 in the previous decade. Crucially, the continent’s per capita income grew at an average of 2 percent a year in the 2000s, finally ending the continent’s long period of decline.

Africa’s growth also accelerated more than that of developing economies in other regions, if from a low base. Its GDP growth rate doubled, while growth in East Asia and the Pacific, South Asia, Latin America, and the Middle East and North Africa (MENA) rose by factors of only 0.7 to 1.6.

Despite the marked uptick, the region’s 1999–2008 growth rates remained in the bottom half of developing economy growth rates. Countries in Africa grew slower than those at corresponding income levels in East Asia and the Pacific, Europe and Central Asia, and South Asia.

But absolute poverty persists

Sub-Saharan Africa’s growth in part reflected rapid population growth rather than rapid increases in per capita income. For example, per capita income in low-income African economies grew at about one-fourth the pace of those in low-income economies in East Asia and the Pacific, including Laos, Myanmar, and Cambodia.

Recall that per capita income in Africa started from an abysmally low level, and that base levels matter. Even if Africa’s per capita income continues to grow at 2 percent a year for the coming decade, its per capita income will only gain $460 (in purchasing power parity, or PPP, terms). In contrast, if per capita income in Japan—one of the richest and slowest growing economies in the world—grows by just 1 percent a year over the same period, its absolute gain would be more than seven times that in Africa, and the gain alone would be nearly 70 percent higher than Africa’s current per capita income. So, the absolute income gap will widen considerably even if Africa makes proportional gains.

Very low initial incomes and slower growth also explain why Africa continues to lag behind other developing regions in eradicating absolute poverty. Although the share of Africans living on less than $1.25 a day declined from 58 percent of the total population in 1990 to 46 percent in 2005, the number of people living in poverty rose from nearly 300 million to 380 million. Other poor developing regions made much greater strides. East and South Asia, which had poverty rates comparable to Africa’s in 1990, respectively reduced their poverty rates by 38 and 11 percentage points by 2005, thanks to decades of sustained, rapid economic growth.

Resources and external developments were not the whole story

Resources were a major part of the growth picture in Sub-Saharan Africa. In resource-rich economies—where rents from resources account for more than 10 percent of government revenue, and which represent nearly one-third of the continent’s GDP—output grew 6 percent a year over 1999–2008—about twice the growth over the previous decade and higher than the 4.7 percent growth in the non–resource-rich economies. Oil-exporting economies benefited from the rise in oil prices, which surged from an average of $15 a barrel in 1998 to about $100 a barrel in 2008. (2) As a result, their GDP growth more than doubled to 6.6 percent—2 percentage points higher than that in oil-exporting Middle East and North Africa economies and more than any other major country grouping in Sub-Saharan Africa.

The rise in the price of commodities, which account for more than 70 percent of Sub-Saharan exports, drove an improvement in the region’s terms of trade. Oil prices were largely responsible, as oil exporters there and in the Middle East saw the largest advances in terms of trade, compared with a much smaller increase in Latin America and a decline in developing Asia. Higher prices of other raw materials, such as minerals, also helped Africa.

New sources of external demand and finance also boosted growth

Rising trade with fast-growing developing economies also helped Africa’s exports, which more than quadrupled from 1998 to 2008. The share of developing economies in Africa’s extra-regional trade climbed from less than 20 percent in 1995 to 33 percent in 2008. China has become a major player in Africa, more so than in other developing regions. Its share in Africa’s exports rose 10 percentage points in 1998–2008, compared with 6 percentage points in Middle East and North Africa’s exports and 4 percentage points in Latin America’s.

And inward foreign direct investment (FDI) surged with Africa’s trade, particularly in oil-exporting economies, which received nearly half the FDI flows into Africa from 1999 to 2008. Net inflows of FDI reached about $35 billion in 2008, after averaging around $17 billion in 1999–2008, a more than fourfold increase from the previous decade’s $4 billion average. But even this impressive growth lags behind that of other developing regions—Eastern Europe and Central Asia, Middle East and North Africa, and South Asia—which also started from relatively low levels.

Non–resource-rich economies also grew

Natural resources do not tell the whole story. The region’s 36 non–resource-rich countries, though lagging behind the resource-rich, more than doubled their growth rate to nearly 4 percent from the previous decade, mainly due to fast-growing services.

Top performers in this group include Ethiopia, Mozambique, and Uganda, which grew by an average of 7 percent or more a year in the decade before the financial crisis. Non–resource-rich economies also showed substantial improvements in trade and foreign investment, though at much lower rates than the resource-rich and especially oil-rich economies. The exports of non–resource-rich economies gained 4.7 percentage points of GDP between 1989–1998 and 1999–2008. This trailed the 8.1 percentage point rise in resource-rich countries, reflecting the more favorable external environment for resource-related exports. FDI also increased sharply to 2.5 percent of GDP from a low base, still lower than the 2.7 percent for resource-rich economies.

Services have become the new drivers of growth

Growth in non–resource-rich economies occurred broadly across sectors, especially services, the major source of output in non–resource-rich economies, at more than 50 percent of GDP (figure 8.4). The rise of services largely reflects higher public spending in education and health, as well as expanded private activity in real estate, hotels, restaurants, and banking.

Agriculture and manufacturing saw their shares of GDP fall in both groups of countries—worrisome, given their potential for productivity gains. Industry rose in resource-rich economies due to growth in mining and construction, not in manufacturing. In Nigeria, a major resource-rich economy, the decline in manufacturing was accompanied by a sharp rise in services, signaling the “Dutch Disease.” (3)

Better policies contributed to faster growth

Better macroeconomic management clearly helped Africa, with good progress in reducing inflation and budget deficits. Between 1989–1998 and 1999–2008 average inflation fell by two-thirds in lower middle-income economies and by half in most low-income (excluding Zimbabwe) and upper middle-income economies. Africa’s two largest economies, South Africa and Nigeria, respectively reduced their inflation rates by 50 and 66 percent. In the 2000s, nearly 30 of the 45 Sub-Saharan countries enjoyed single digit inflation—10 more than in the 1990s. Low-income and lower middle income economies also saw inflation drop substantially more than in developing countries elsewhere.

Thanks to large fiscal surpluses in oil-exporting economies in the 2000s— averaging 6.3 percent of GDP—Africa’s fiscal balance (including grants) turned from a deficit of 2.6 percent of GDP in 1997–2002 to a surplus of 1.3 percent in 2008. In some countries, such as Botswana, funds were established using rents from mineral wealth to provide for public debt service. The continent’s average external debt as a percentage of GDP also fell by a quarter between 1989–1998 and 1999–2008, due in part to faster economic growth and debt relief under the Heavily Indebted Poor Countries (HIPC) initiative. This reduction was bigger than that in other developing regions.

Africa also made substantial gains in education enrollments. Gross primary school enrollment rose from 78 percent in 1999 to 97 percent in 2008, secondary school enrollment from 24 percent to 33 percent. Those increases were greater than those in other developing regions, but enrollments remain far lower in Africa. Most African economies face a severe shortage of highly educated people, critical to sustaining the current growth momentum.

Trade reform helped Africa integrate further into the global economy, though tariffs have fallen by less than in other developing regions. In the two decades leading up to 2008, tariff rates for manufactured products fell by about 46 percent in Africa, compared with more than 70 percent in all developing economies.

But greater openness paid dividends in higher exports: between 1989–1998 and 1999–2008 exports of goods and services as a percentage of GDP increased 5 percentage points to 32 percent in Sub-Saharan Africa—comparable to increases of 5.6 to 7.6 percentage points for Latin America and the Caribbean, Middle East and North Africa, and South Asia.

Despite the improvements, Africa remains hobbled by major policy and institutional weaknesses, greater than those facing other developing regions. At around 46 percent of GDP, foreign debt in Sub-Saharan Africa is still 10 percentage points higher than that in Latin America and Middle East and North Africa. Inflation is still above 10 percent in about 15 African countries.

And even with some recent successes—which placed countries such as Rwanda among the top global reformers in the World Bank’s 2010 Doing Business Index—the business climate in Africa remains enormously challenging, particularly for starting a business, obtaining credit, and securing investor protections. Sub-Saharan Africa ranked lower than all other developing regions in all but two of the nine components of the World Bank’s index (dealing with construction permits and enforcing contracts). Lower middle-income economies—including large countries like Cameroon and Nigeria—scored particularly poorly, all ranking in the bottom half of the world’s 53 lower middle-income economies.

Perhaps the most significant improvement has been the decline in violence. The number of state-based conflicts—which had severely impaired growth in many African countries—fell from 16 in 1999 to 6 in 2005 (figure 8.5). Democracy is also becoming more established across the continent, with a clear shift toward more elections and stronger political institutions, particularly in some of the top performing economies, such as Ghana.

But the region still has work to do. Major conflicts—in Chad, Darfur, and Somalia, for example—remain unresolved. And the region continues to score poorly on World Bank governance indicators—such as political stability, rule of law, and government effectiveness—which could affect its ability to grow. And despite the increase in parliamentary elections, dominant executives persist.

Endnotes

(1) This chapter ia adapted from Ali and Dadush 2011.
(2) According to the IMF’s definition of oil-exporting economies, oil exports account for 30 percent or more of merchandise exports in such countries. This group includes Angola, Cameroon, Chad, Republic of Congo, Equatorial Guinea, Nigeria, and Sudan.
(3) The “Dutch Disease” refers to the negative consequences of a resource boom, including declines in manufacturing and competitiveness, as the exchange rate appreciates and wages rise.