Abstract
A dozen countries had weak institutions in 1960 and yet sustained high rates of growth subsequently. This paper uses data on their characteristics early in the growth process to create benchmarks with which to evaluate potential constraints on sustained growth for sub-Saharan Africa. This analysis suggests that what are usually regarded as first-order problems—broad institutions, macroeconomic stability, trade openness, education, and inequality—may not now be binding constraints, although the extent of ill-health, internal conflict, and societal fractionalization do stand out as problems in contemporary Africa. A key question is to what extent Africa can rely on manufactured exports as a mode of “escape from underdevelopment,” a strategy successfully deployed by almost all the benchmark countries. The benchmarking comparison specifically raises two key concerns as far as a development strategy based on expanding exports of manufactures is concerned: micro-level institutions that affect the costs of exporting, and the level of the real exchange rate—especially the need to avoid overvaluation.
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Notes
The Commission on Africa (often referred to as the Blair Commission) articulated the first view; see also Collier and O’Connell (2006). The UN Millennium Project, headed by Jeffrey Sachs, has taken the second position.
The IMF growth forecasts for 2007 are 6.3 percent for GDP and 4.4 percent for GDP per capita, though it should be acknowledged that there is a well-established optimistic bias in these forecasts (Timmermann, 2006). These estimates are based on treating sub-Saharan Africa as one country, that is, they are averages across countries weighted by GDP. Table 1a provides alternative calculations for aggregate growth.
In principle, growth could be sustained without growth in the tradable goods sector. In practice, this does not seem to happen in developing countries as they converge toward standards of living in the rich countries. Either tradable goods are particularly important in productivity growth directly, through some form of spillover, or this sector has important indirect effects (through its demands for better institutions).
Taken literally, these views would tend to suggest there should never be growth, rather than a problem with sustaining growth.
To be clear, we are not claiming any causal effect from exports to growth. We are merely pointing out the association and suggesting that this warrants serious attention.
We use standard international sources. There is a great that could be done, however, by digging into national statistical records. Hopefully, what we present here will serve as a preliminary guide to such investigations.
Recent debt reductions have helped. See IMF and World Bank (2006).
We do not know why measures of broad and specific institutions paint such a different picture. Leading data sources suggest that economic institutions have improved almost everywhere in the world since they became a standard measure (roughly in the mid-1990s). There is a strong possibility that a version of the Lucas critique applies—using historical performance (of broad institutions) to guide policy actions can be misleading. Alternatively, it might be thought of as the Goodhart effect—any number that becomes a target for policy loses its meaning (while the underlying phenomenon does not necessarily change.)
Experience in Latin America since 1960 suggests that repeated bouts of overvaluation are damaging to both exports and, more broadly, to growth; see Berg, Ostry, and Zettelmeyer (2008) for more analysis and discussion.
In a number of resource-rich economies, property rights are reasonably protected in the resource sector itself, but similar protection may not exist economy-wide.
See also Acemoglu, Johnson, and Robinson (2001) and Rodrik, Subramanian, and Trebbi (2004) for the empirical analysis that gives rise to these estimates.
This is also known as the Barcelona Development Agenda (see www.barcelona2004.org/esp/banco_del_conocimiento/docs/agenda_eng.pdf). The Barcelona participants were Olivier Blanchard, Guillermo Calvo, Daniel Cohen, Stanley Fischer, Jeffrey Frankel, Jordi Galí, Ricardo Hausmann, Paul Krugman, Deepak Nayyar, José Antonio Ocampo, Dani Rodrik, Jeffrey D. Sachs, Joseph E. Stiglitz, Andrés Velasco, Jaime Ventura, and John Williamson. On these issues, there seems to have been considerable convergence with World Bank views; see http://www1.worldbank.org/prem/lessons1990s/chaps/frontmatter.pdf.
While we do not necessarily agree with the arguments and interpretation of historical evidence in Chang (2005), we do agree that it may be unreasonable to expect poor countries today to see improving their institutions as a necessary condition for growth.
There are nine sustained growth countries for which this measure is available (China, Malaysia, and Singapore are missing), and their average is 51.1. For the sample of 74 developing countries for which Adelman and Morris provide data, the average is 47.7 with a standard deviation of 30. Adelman and Morris provide a letter code and a separate conversion to a numerical scale; we applied this scale to the above calculations.
We exclude from our sample industrial and transition countries. This excludes, for example, Ireland, Portugal, and Spain, which have sustained high growth over at least part of this period; a number of transition countries are also on the verge of qualifying, if their growth holds up.
While our real interest is in cases of sustained and high growth rates, the fact that many sub-Saharan African countries have been stagnating means that attaining high growth will almost inevitably require an acceleration. Thus, identifying the features associated with such accelerations is likely to be useful.
Although India did not grow very rapidly from 1960 to 1980 (per capita growth rate of 1.7 percent per year), it experienced a dramatic improvement in performance thereafter (close to 4 percent per year after 1980). Rodrik and Subramanian (2004) argue that this turnaround, which was sustained for at least 10 years without significant policy reforms, could be attributable to the fact that India had previously significantly underperformed relative to the quality of its institutions. In this view, a small change in the policy environment allowed these institutions to come into play and boost its growth record.
The Dominican Republic recently experienced a major banking crisis and growth has decelerated. GDP growth per capita averaged 0.2 percent between 2000 and 2004, but bounced back to 7.3 percent in 2005. Tunisia seems to fall into the East Asian pattern of having weak political institutions initially, but achieving manufacturing-based export success through a combination of consistently competitive exchange rate and government assistance to manufacturing. If we had set the growth threshold slightly higher, for example, at 4 percent, the Dominican Republic, Egypt, and Tunisia would not have qualified as sustained growth cases, but the other countries would still have qualified.
Part of this concern stems from the puzzling coexistence of sustained growth over a 25-year period and a decline in the share of overall exports relative to GDP of about 8 percentage points.
We need to be careful in assessing the prospects for countries, such as Gabon or Sao Tomé and Principe, where oil reserves are large relative to the economy. Some oil exporters have done very well since 1960, for example, Brunei, Saudi Arabia and other small Gulf states; they do not make it into our set of benchmark countries due to lack of data.
Rajan (2006) also stresses the potential importance of constituencies relative to institutions. However, he puts more emphasis on increasing education as a key lever that develops progrowth constituencies.
Keep in mind that this early “Atlantic trade” was much more about commodities than manufactures. They key point is who controls the rents and the extent to which these can be seized by the state, rather than the precise content of the cargo.
Apart from the role mentioned above that inequality appears to play in limiting the duration of growth spells, there appears to be a significant effect of high inflation and exchange rate crises as risk factors. Reducing inflation from 50 to 10 percent, for example, halves the risk of a downbreak in growth in any given year. Sharp currency depreciations (currency crises), following periods of significant overvaluation, also appear to be significant predictors of the end of growth spells.
Given the discrepancy between the different sources of growth data, we averaged the growth numbers for each country from two sources: the World Bank's World Development Indicators and the Penn World Tables, version 6.2. However, there is clearly an interesting and important question as to the reasons for the deficiencies in African growth data across sources—an issue to which we hope to return in the future.
The sample for the t-test includes the countries in Group 1 and the 12 sustained growth countries. We report the test for two types of comparison. In the first, we compare the means of the Group 1 countries for the period 1993–2002 with the corresponding means for sustained growth countries at the time of their growth acceleration. In the second, we adjust the mean value of a variable for the sustained growth countries for the trend increase in that variable for the world as a whole. Specifically, we calculate the mean value of the variable for the world sample for 1970 and for the period 1993–2002. We subtract the latter from the former and add this difference to the mean for the sustained growth countries at time T. The rationale for the second comparison is that the improvement in performance of the Group 1 countries might just be due to “grade inflation” which may not reflect a true improvement in performance. When the p-value is high it means that we cannot reject the null hypothesis that the means for the African group are the same as those of the sustained growth countries. A low p-value denotes a statistical difference in performance between the two groups.
Indeed, the p-value for the t-test of similar political institutions between Group 1 countries and the sustained growth countries is rejected, but in the direction of suggesting that the former had significantly better institutions.
The original Kaufmann-Kraay index, which is a measure of relative performance, ranges from minus 2.5 to plus 2.5. Our transformation changes the range from 1 to 6, which we achieve by adding 3.5 to the original value.
In an earlier version of this paper, the sample of Group I countries was slightly different but that did not alter the basic conclusions that we obtain for the sample used in this version.
Comparisons between African countries and sustained growth cases in relation to the costs of doing business should be treated more cautiously because, unlike in the rest of the paper, countries are being compared at the same point in real time and not the same point in “acceleration” time.
Of course, some of this duty-free access is undermined by onerous rules of origin (Mattoo, Roy, and Subramanian, 2003).
The Sachs-Warner (Sachs and Warner, 1995) measure is a broad measure of trade liberalization and incorporates data on tariffs, quantitative restrictions (QRs), black market premium, export marketing boards, and whether a country has a socialist regime. This measure was updated by Wacziarg and Welch (2003).
Conditions for success in global markets might be slightly different today than in the 1960s and 1970s, when the Asian countries succeeded: for example, reputation (for quality and reliability) has become very important in today's manufacturing based on global production chains. Hence, a competitive exchange rate is by no means sufficient to guarantee export success.
We estimate the following cross-section equation for every year since 1960 for the sample of all countries: log p i =α+β log y i +ɛ i where p is the log of the price level for country i in terms of the United States, and y the level of per capita PPP GDP. Our measure of overvaluation is then: overval i =log p i −(α̂+β̂ log y i ). We average this measure for each country over the relevant time period. Clearly, there are alternative ways of measuring overvaluation that are parsimonious in only considering relative income as a determinant of real exchange rates. But the key point is that here the relationship is estimated over the very long run—in effect when we run the annual cross-sectional regression, what we are assuming is that PPP will apply over the very long run, spanning the period over which the United States and other Organization for Economic Development and Cooperation countries have become rich and others have not. Implicitly, the timeframe for estimating the PPP relationship is 300 to 00 years.
Spells of overvaluation are consecutive periods for which our measure of overvaluation is positive.
It is noteworthy that the sustained growth countries avoided overvaluation even in cases where there were substantial aid inflows (for example, Indonesia, in the 10-year window around its acceleration, had aid-to-GDP of 24 percent).
Aid-to-GDP at current levels is high compared with the initial starting point of most sustained growth cases, though it is lower than the aid levels received by Indonesia at the time its takeoff, suggesting perhaps that the present level of aid should not inevitably constrain, one way or another, these countries’ ability to enjoy sustained growth. While, Rajan and Subramanian (2005) provide evidence that aid and the consequent exchange rate overvaluation have a significant negative effect on exports of manufactures, it is possible that countries can mitigate the adverse effects through policy changes, such as improvements aimed at enhancing productive efficiency.
This would need a mechanism through which growth worsens health sufficiently to prevent further investments in human capital. Alternatively, people might be willing to acquire basic skills (for an acceleration) but not more advanced skills (to sustain growth). In the British Industrial Revolution, perhaps for 50 years during the 19th century, health probably worsened, yet growth continued.
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Additional information
*Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the Sloan School of Management, MIT. Jonathan D. Ostry is Deputy Director of the Research Department at the IMF. Arvind Subramanian is a Senior Fellow at the Peterson Institute for International Economics. Work on this paper was undertaken while Johnson was a visiting scholar in the IMF's Research Department, and Subramanian was Assistant Director of the Macroeconomic Studies Division of the Research Department at the IMF. This paper is a revision of a background paper prepared for the National Bureau of Economic Research's Africa meeting in April 2006 and was also presented at the Peterson Institute of International Economics. The authors thank participants, and particularly Fred Bergsten, Martin Feldstein, and Ben Jones, as well as colleagues at the IMF for helpful comments. The authors are also grateful to Manzoor Gill and Murad Omoev for superb assistance with the data.