growth charts by MaryJeanMenintigar

VIEWS: 1,443 PAGES: 7

More Info
									       Economic Diversification and Str uct ur al Challe nges
           Outline of presentation at The Nordic Africa Initiative Meeting on

             Trade and Development – What is at Stake for Africa

                    in Dar es Salaam, Tanzania, 24-25 November 2004



                                     Thorvaldur Gylfason*


      ne of the major policy challenges facing Africa as well as most of the rest of the
      developing world is to find ways to make sure that the main pillars of economic
    Ogrowth around the world are sound also at home. What are these pillars? With
some simplification, they can be said to be four: education, investment, exports, and
economic diversification. Let me briefly discuss each of them in turn.
    First, education is good for growth. Economic theory and empirical evidence seem
to suggest that more and better education of the work force encourages long-run
growth by making labor more productive. The cross-country evidence is rather strong
– surprisingly so, perhaps, because the available quantitative measures of education
reflect inputs into the education system rather than the output from the system, i.e.,
teaching rather than learning, and thus fail to take the quality of education into
account. Even so, investment in human capital is crucial, especially the education and
empowerment of females in societies where they have in the past been accorded fewer
education opportunities than males (Chart 1). The empirical evidence also suggests
that education of males is good for growth (Chart 2).
    In second place, investment is also good for growth. It is almost surely no
coincidence that, since the 1960s, Southeast Asia’s rapid economic growth was
accompanied by high rates of saving and investment (about 30-40 percent of GDP)
while sub-Saharan Africa’s relative economic stagnation went hand in hand with low
rates of saving and investment (about 10 percent of GDP). For further comparison, the
OECD countries have saved and invested about 20 percent of their GDP in this

*
          The author is Professor of Economics at the University of Iceland and Research Fellow at
CEPR (Centre for Economic Policy Research) in London, England, and CESifo (Center for Economic
Studies – ifo Institute) at the University of Munich, Germany. Address: Faculty of Economics and
Business Administration, University of Iceland, 101 Reykjavík, Iceland. Tel: +354-525-4500. Fax:
+354-552-6806. E-mail: gylfason@hi.is
                                            2


period, and their economies grew less rapidly than those of Southeast Asia and more
rapidly than those of Africa. The empirical cross-country evidence suggests that
saving and investment are conducive to long-run economic growth (Chart 3). The
evidence extends to foreign as well as domestic investment (Chart 4). A large amount
of saving and investment is not enough to secure rapid growth, however, because, to
make a lasting difference, the investment must be of high quality; sheer volume is not
enough. Hence the need for efficient banks and other financial institutions that can
direct household savings to worthwhile investment projects.
   Third, openness to the rest of the world is important for growth. Empirical
evidence seems to suggest that various measures of openness to trade and financial
capital movements are positively related to long-run economic growth across
countries (Chart 5). This is not surprising: trade benefits most of those who engage in
it by extending the scope of their domestic markets beyond their national borders and
by enabling them to specialize their economic activity according to their comparative
advantages, provided that the gains from trade are fairly distributed across countries.
Exports are good for growth in many ways: for one thing, they facilitate imports of
goods and services and also of fresh ideas and know-how. Exports are thus a form of
education. It is, therefore, not surprising to see that impediments to external trade such
as imports tariffs are detrimental also to economic growth (Chart 6).
   Fourth and last, the composition of exports matters as well as its volume. In
particular, manufacturing and services exports seem especially conducive to economic
growth over the long haul because they are typically more high-skill labor intensive
and more high-tech capital intensive than primary exports, and they are, therefore,
likely to confer more growth-enhancing spillover benefits on other industries and the
national economy as a whole (Chart 7). For this reason, economic diversification
away from excessive reliance on agriculture and natural-resource-based economic
activity is likely to encourage economic growth over time. Once more, education is
key to the successful modernization of a predominantly agricultural society. Farm-
based economies tend to be poor and to grow slowly. Therefore, modernization must
involve a major transfer of resources from agriculture to manufacturing, trade, and
services (Chart 8). This, of course, is how America and Europe grew rich.
   So what can be done in Africa? I want to suggest the following broad guidelines.
   First, there is a need to strengthen education, by devoting more public resources to
the provision of more and better education at all levels as well as by creating stronger
                                            3


private incentives to families and individuals to acquire more and better education.
This is, indeed, an important policy challenge in many other countries, not least
because the public sector has in many cases proved reluctant to share its historical
responsibility for the provision of education with the private sector and to accept
market-based incentives as a guide to a more efficient allocation of resources to and
within the education system. Further, the structure of wages, including the distribution
of labor income between males and females, must be compatible with strong
incentives to each individual to acquire the best theoretical and practical education
available.
   Second, there is a need to encourage increased domestic and foreign investment,
and to create and foster an entrepreneurial environment in which investment projects
are motivated by profits rather than by politics. This requires a healthy division of
responsibilities between the private sector and the public sector, generally though not
necessarily always with minimal political interference in economic life. Specifically,
this strategy may call for a careful review of the business investment climate,
including the exchange rate policy regime, banking, and finance. Further privatization
of state-owned enterprises would help in this regard. It would probably also help to
grant the Central Bank as well as the Judiciary increased independence with
undiminished accountability.
     Third, there is a need to find ways to avoid an excessive reliance on the public
 sector in areas of production and provision of services that in many other countries
  have been left to the private sector. Private enterprise has proved to be a powerful
  engine of economic growth around the world. One of the sources of power of this
growth engine is the continuous creation and development of small businesses, some
 of which gradually grow to medium or large size. Economic diversification calls for
   both a broadening of the range of goods and services produced for export and a
transfer of various tasks presently performed by the government to the private sector.
A strong and energetic private sector with ready access to a well-educated work force
 will most likely find ways to broaden its export base as long as the business climate
 provided by the government is conducive to growth. Economic diversification also
   requires appropriate incentives for the expansion of manufacturing and services,
  including (a) stable prices that protect domestic currencies from overvaluation that
stifles exports and (b) measures to rein in socially disruptive competition for access to
  natural resource rents with associated corruption and lack of democracy as well as
                                                                                           4


                                                                                   human rights.

                                                  61 500
                                                             C             e er ead
                                                              hart 1. Incom P H and Secondary Education 2001 (Girls)
       Log                                                                                                                                 Africa
                                                40 000

                                                                                                                                          America
                                                                                                                                            s

                                                20 000
                                                                                                                                            Arab
                                                                                                                                          countrie
                                                                                                                                              s
                                                10 000
                                                                                                                                           Asia
GDP per capita, PPP (current international $)




                                                7 000
                                                                                                                                          Europa
                                                5 000


                                                3 000


                                                2 000




                                                1 000




                                                500




                                                      210
                                                            0.09       20     30     40     50     60     70        80   90         106

                                                                     School enrollment, secondary, female (% net)             Lin




                                                  61 500
                                                             C             e er ead
                                                              hart 2. Incom P H and Secondary Education 2001 (Boys)
                                                                                                                                           Africa
       Log




                                                40 000

                                                                                                                                          America
                                                                                                                                            s

                                                20 000
                                                                                                                                            Arab
                                                                                                                                          countrie
                                                                                                                                              s
                                                10 000
                                                                                                                                           Asia
GDP per capita, PPP (current international $)




                                                7 000
                                                                                                                                          Europa
                                                5 000


                                                3 000


                                                2 000




                                                1 000




                                                500




                                                      210
                                                            0.09       20     30     40     50     60     70        80   90         105

                                                                     School enrollment, secondary, male (% net)               Lin
                                                                                                  5



                                                  61 500
                                                               C             e er ead  om            ent
                                                                hart 3. Incom P H and D estic Investm 2001
                                                                                                                                                             Africa



       Log
                                                40 000

                                                                                                                                                             America
                                                                                                                                                               s

                                                20 000
                                                                                                                                                             Arab
                                                                                                                                                           countrie
                                                                                                                                                               s
                                                10 000
                                                                                                                                                              Asia
GDP per capita, PPP (current international $)



                                                7 000
                                                                                                                                                             Europa
                                                5 000


                                                3 000


                                                2 000




                                                1 000




                                                500




                                                      210
                                                              -20     0         2     3   4   5       8   10            20        30      50         120

                                                                             G                              DP
                                                                              ross capital formation (% of G )                                 Log




                                                  61 500
                                                               C             e er ead
                                                                hart 4. Incom P H and F              ent
                                                                                       oreign Investm 2001
                                                                                                                                                             Africa
       Log




                                                40 000

                                                                                                                                                             America
                                                                                                                                                               s

                                                20 000
                                                                                                                                                             Arab
                                                                                                                                                           countrie
                                                                                                                                                               s
                                                10 000
                                                                                                                                                              Asia
GDP per capita, PPP (current international $)




                                                7 000
                                                                                                                                                             Europa
                                                5 000


                                                3 000


                                                2 000




                                                1 000




                                                500




                                                      210
                                                            0.00092                                            5   10        20    50   100          1 360

                                                                          G                                      DP
                                                                           ross foreign direct investment (% of G )                            Log
                                                                                             6



                                                  61 500
                                                                C             e er ead
                                                                 hart 5. Incom P H and Exports 2001
                                                                                                                                                Africa



       Log
                                                40 000

                                                                                                                                               America
                                                                                                                                                 s

                                                20 000
                                                                                                                                                 Arab
                                                                                                                                               countrie
                                                                                                                                                   s
                                                10 000
                                                                                                                                                Asia
GDP per capita, PPP (current international $)



                                                7 000
                                                                                                                                               Europa
                                                5 000


                                                3 000


                                                2 000




                                                1 000




                                                500




                                                      210
                                                            0.0000128             50                  100               150              185

                                                                         E                                    DP
                                                                          xports of goods and services (% of G )                   Lin




                                                  61 500
                                                                C             e er ead
                                                                 hart 6. Incom P H and Import Duties 2001
                                                                                                                                                Africa
       Log




                                                40 000

                                                                                                                                               America
                                                                                                                                                 s

                                                20 000
                                                                                                                                                 Arab
                                                                                                                                               countrie
                                                                                                                                                   s
                                                10 000
                                                                                                                                                Asia
GDP per capita, PPP (current international $)




                                                7 000
                                                                                                                                               Europa
                                                5 000


                                                3 000


                                                2 000




                                                1 000




                                                500




                                                      210
                                                              0.01           20        30        40         50     60         70         82

                                                                             Import duties (% of tax revenue)                      Lin
                                                                                                        7


                                                  hart         e er ead
                                                 C 500 7. Incom P H and E
                                                 61
                                                                              ic iversification 2001
                                                                         conom D
                                                                                                                                                               Africa



       Log
                                                40 000

                                                                                                                                                              America
                                                                                                                                                                s

                                                20 000
                                                                                                                                                                Arab
                                                                                                                                                              countrie
                                                                                                                                                                  s
                                                10 000
                                                                                                                                                               Asia
GDP per capita, PPP (current international $)



                                                7 000
                                                                                                                                                              Europa
                                                5 000


                                                3 000


                                                2 000




                                                1 000




                                                500




                                                      210
                                                            0.000001       20       30        40        50        60        70        80    90         105

                                                                       Manufactures exports (% of merchandise exports)                           Lin




                                                  61 500
                                                               C             e er ead
                                                                hart 8. Incom P H and Agriculture 2001
                                                                                                                                                               Africa
       Log




                                                40 000

                                                                                                                                                              America
                                                                                                                                                                s

                                                20 000
                                                                                                                                                                Arab
                                                                                                                                                              countrie
                                                                                                                                                                  s
                                                10 000
                                                                                                                                                               Asia
GDP per capita, PPP (current international $)




                                                7 000
                                                                                                                                                              Europa
                                                5 000


                                                3 000


                                                2 000




                                                1 000




                                                500




                                                      210
                                                              0.07          20           30        40        50        60        70        80          95.5

                                                                                A                               DP
                                                                                 griculture, value added (% of G )                               Lin

								
To top