does africa need industrial policy

8/6/2019 Does Africa Need Industrial Policy

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y Over the past five years, the biggest improvements in CPIA scores were registered byGhana, Rwanda, Zambia and Mozambique, while Eritrea, Chad and Zimbabweexperienced the largest deteriorat ion. Seven of Africa¶s nine oil exporters (Angolaand Nigeria were the exceptions) saw their CPIA scores decline.

y For Africa as a whole, most of the improvement in policies and institutions was in thecategory called ³economic management ²́essentially macroeconomic and fiscal

policies. The average scores on the other dimensions²structural policies, equity andsocial inclusion, and public management²stagnated. While some countries showedimprovements along these other dimensions, an equal number of countries saw their scores go down.

y W hy Don¶t W e See Poverty RatesConverging?

y Submitted by Martin on Tue, 07/07/2009 - 14:30.y Sub-Saharan Africa now has the highest incidence of extreme poverty, such as judged

by the World Bank¶s $1.25 a day poverty line . Granted, Africa has shown encouragingsigns since the mid 1990s of reversing its past record of relatively poor performanceagainst poverty. (The crisis has probably brought that progress to a halt this year, butthe continent will hopefully be back on track in due course.) But the problem is thatdeveloping countries which start out with a high incidence of poverty, including manyof those in Africa, typically do not enjoy a higher subsequent pace of povertyreduction. The overall incidence of poverty is falling in the developing world, but nofaster in its poorest countries. We do not see ³poverty convergence.´

y That is puzzling if we accept two widely-held ³stylized facts´ about economicdevelopment, namely that there is an ³ advantage of backwardness ´²higher growthrates in poorer countries²and that there is an ³ advantage of growth, ´ whereby ahigher mean income tends to come with a lower incidence of absolute poverty. Thereis empirical support for both views, though with qualifications. The advantage of

backwardness should mean that countries starting out with a high incidence of povertyand lower average incomes should see a higher subsequent growth rate and (hence)higher pace of poverty reduction.

y In a new paper, ³ Why Don¶t We See Poverty Convergence? ,´ I suggest a solution tothis puzzle. When households face borrowing constraints, I find that a high initial levelof poverty slows consumption growth for a given level of mean consumption. A highincidence of poverty also entails a lower subsequent rate of progress against poverty atany given growth rate (and poor countries tend to experience less steep increases in

poverty during recessions).y Thus, for many poor countries, the growth advantage of starting out with a low mean

income is lost due to a handicap associated with the high initial incidence of poverty.However, the same study finds that high current inequality (as found in many African

countries) is only a handicap to growth and poverty reduction if it entails a highincidence of poverty relative to mean consumption.y This dynamic ³disadvantage of poverty´ appears to sit side-by-side with other factors

impeding poverty reduction, such as human underdevelopment and policy distortions.Future research needs to better understand this important handicap faced by poor countries in their efforts to become less poor.

y

y A South African puzzle



y Submitted by Sandeep on Mon, 07/06/2009 - 16:35.y In recent months, the external sector in South Africa has strengthened in ways that are

somewhat perplexing. The strengthening has partly to do with weak import demanddue to the economic slowdown. But the surprising aspect has been sustained inflowsof foreign portfolio investment in South African domestic securities. Just as the newson the real sector and fiscal balances has gotten worse, somewhat paradoxically

foreign investors¶ appetite for South African securities has grown. Negative reports oneconomic performance have been unrelenting -- recession and higher unemployment,

biggest declines on record in manufacturing and mining, battering of the automobileindustry, and a much-larger-than-anticipated fiscal gap. Yet, the Rand stood at a 10-month high against the US dollar on June 30, whereas currencies in Brazil, India andRussia had lost much more ground against the greenback. The country issued a 10-year, US$1.5 billion bond on international markets in May, and it was oversubscribedseveral times over at a modest spread of 368 bp over LIBOR. By end-June, foreignershad net purchased about US$4.5 billion of bonds and stocks on South African markets.

y No doubt, foreigners are attracted by the country's good record on macroeconomicstability, financial sector discipline, and rapidly rising investment in infrastructure,although they may be deterred by its large current account deficit. But that record hasnot changed in recent months. So what explains this seeming dichotomy between

progressively bad news on economic performance and strengthening interest of foreign portfolio investors? A penny (or 8 South African cents, which would have

been 10 cents in April) for your thoughts.

y Romance and economicsy Submitted by Shanta on Wed,

07/01/2009 - 10:17.y A friend sent this photograph ,

with the following caption: ³Don't letthe recession take the flame out of your romantic lives! There's alwayssunshine in Africa! Resourcefulness atits best.... Anything to keep the wheelsturning!´

y The picture and captionreminded me of the song ³ Girl, your marginal benefits« ´ which could beviewed as a painless way to learn

microeconomics, or a quirky love song.

y M adagascar: a transition...but

challenges are coming soon y Submitted by NoroAndriamihaja on Mon, 06/22/2009 -16:30.

y So far the dialogue betweenthe main political parties has failedto produce an agreement on the wayforward for a return to a democraticGovernment. For the time being, the



economy continues to deteriorate but has shown some resilience due to two factors;y (i) Fi scal Pol icy: The strict fiscal policy pursued by the authorities has helped stabilize

key financial indicators (interest rates, inflation, and the exchange rate)

(ii) The dual imp act of the cr i si s on pr ivate sector and households: A segment of theeconomy has been seriously affected (such as tourism, textile and construction)

resulting in job losses in urban areas. In contrast to these vulnerable sectors, a largefraction of the Madagascar economy has been isolated from the current recession(likewise they benefited less from growth in good times) because of the good riceharvest.

y Three main challenges in the near future: (i) the payment of salaries to communityteachers when classes will open in September, (ii) the reaction of textile companies tothe uncertainty surrounding the US decision to maintain Madagascar as part AGOA,(iii) investment and planting decisions for the rice counter-season.

y The question is will the Government be able to pass those tests in the absence of a political agreement?

y To see the full report on the Madagascar economy, click here

y Critiques from inside the W orld Bank y Submitted by Shanta on Tue, 06/09/2009 - 09:08.y While my blog posts seemed to elicit a fair number of comments, I had been

wondering how many of them, if any, were coming from my World Bank colleagues. Last Friday, I got to find out. Our Internal Communications departmentran a story on the Bank¶s intranet with the headline ³The effects of the globalrecession on Africa will be permanent, says Africa Chief Economist.´ The story thenlinked to my blog post, ³ Why aid to Africa must increase ´. My first reaction to someof the comments was ³Ouch!´

y One person said, ³[Please] note that this is the same man who was saying (not too longago) that South Asia would not be impacted by the crisis!´ Touché. I had a blog postin January 2008 in my former South Asia blog that took the forecast for U.S.economic growth at that time, and inferred that the effect of the subprime crisis onSouth Asia would be mild. But most people were not forecasting such a big recessionin the U.S. and elsewhere at that time. Of course, the bigger recession had a bigger impact on South Asia, although every South Asian country benefited from the fall inoil prices.

y Another person said: "The effects of global recession on Africa will be permanent!What nonsense. Who is the presumed seer who knows all about the future? And whatwill the effect on other places be? This is not a conversation rather it is purveyance of stereotypes under the guise of analysis, something that is very common at thisinstitution. Disgusted."

y I¶m sorry he or she is disgusted, but I was referring to specific effects, such as children

being pulled out of school or infants dying before their first birthday. It doesn¶t take a"seer´ to realize these are permanent effects.y Finally, there was a comment that was reminiscent of some I received on the original

blog post: ³This is a very politically correct and highly convenient argument to make.Sure, let's pump in more aid into a continent that is already reeling with aiddependency, and where aid has done so little. Can we all PLEASE be a bit moreresponsible before calling for µmore aid¶?´

y It¶s good to know these debates are going on inside the World Bank too.



y T he problem with economistsy Submitted by Shanta on Thu, 05/14/2009 - 11:43.y I flinched when, at a recent BBC World Debate Zeinab Badawi asked Bob Zoellick

why, when there are so many economists at the World Bank, they couldn¶t doanything about protecting developing countries from the impact of the global

crisis. Were we asleep at the wheel? Montek Ahluwalia gave us temporary respite by pointing out that the economists in the industrialized countries didn¶t see the globalrecession coming even in their own countries, much less that it would spread to poorer countries.

y But this begs the question of why economists didn¶t forecast the global financial andeconomic crisis. Recently there have been two thoughtful pieces addressing thisquestion.

y John Kay (hat tip to my colleague Apurva Sanghi) faults economists¶ desire to developa general theory of everything. Meanwhile, Barry Eichengreen (hat tip to Dani Rodrik )says that there is no problem with economic theory, but a problem with its application:

y In fact, large swaths of modern economic theory focus squarely on the kind of generic problems that created our current mess. The problem was not an inability to imaginethat conflicts of interest, self-dealing and herd behavior could arise, but a peculiar failure to apply those insights to the real world.

y My own thinking is closer to Barry¶s. Incorporating the factors that created problemsin the financial markets makes the theory complex. But to be effective in the realworld, to be able to communicate economic ideas, you have to simplify. Sometimes,you start believing your simplifications as if they were the general theory.

y W hy aid to Africa must increasey Submitted by Shanta on Mon,

05/25/2009 - 15:14.y In rich countries, when

economic growth declines by three or four percentage points, people losetheir jobs and possibly their houses,

but they regain them when theeconomy rebounds. In poor Africancountries, children get pulled out of school²and miss out on becoming

productive adults. In some cases,children die before they have a chance to go to school. If the current growth collapse is

typical of the ones Africa has experienced in the past, an additional 700,000 Africanchildren may die before their first birthday.y In short, the effects of the global recession on Africa will be permanent. So the idea

that aid may be threatened because of the recession in rich countries seems to have thelogic backwards. Precisely because the effects in rich countries are temporary,resources should go to places where they may be permanent. Of course, there are

political pressures to spend domestically. But do politicians in rich countries reallythink that a few more votes are worth more than the lives of the infants who will die asa result of the recession?



y Furthermore, the relatively modest sum spent on aid to Africa in the past decade wasat least partly responsible for the continent¶s rapid growth. From 1998-2008, aid toAfrica was increasing and economic growth was accelerating (to over 6 percent in2007); poverty was declining and human development, especially primary schoolcompletion rates and the spread of HIV/AIDS, was improving. African countries hadstrengthened their macroeconomic policies²inflation had dropped to half its level in

the mid-1990s²so that aid was more productive. Private capital was flowing in at afaster rate than in any other continent. All of these developments have come to agrinding halt because of the global economic crisis²a crisis that was not remotely thefault of Africans. By increasing aid to Africa, the international community has achance to reverse this trend and prevent a temporary shock from having permanentconsequences.

Increasing aid to Africa is not a solution. Submitted by Ben Sande-Otieno (not verified) on Thu, 06/11/2009 - 14:31.

The idea that increasing aid to Africa during this global economic down turn can prevent permanent consequences is simplistic. Empirical evidence shows that many countries inAfrica are in fact not poor, but are simply poorly mismanaged. From a governance

perspective, they suffer from endemic political corruption.

While discussion of the nexus of political corruption is not the issue at hand, the depth andimpact to African societies is obvious. When children are pulled out of schools to be factorsof production, reflects on the lack of proper educational policies. Where such policies mayexist (if at all) there is no political will to enforce them.

Resource rich African countries can surpass some developed countries not only in

productivity, but also in economic development if they build effective structures for sustainable development. Such structures must ensure transparency and accountability inresource development, distribution and utilization.

As long as the African political arena is controlled by leaders and parties that are devoid of empathy and integrity, the vicious cycle of poverty, disease and destitution will remain. Noamount of foreign aid can undo in Africa what a reservoir of political corruption has sustainedfor decades.

does africa need industrial policy

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