Review of Growth Diagnostics in Africa: Review of Growth Diagnostics in Africa:

Emerging Findings & QuestionsEmerging Findings & Questions

Iza LejárragaIza LejárragaDevelopment Research DepartmentDevelopment Research Department

African Development BankAfrican Development Bank

World Bank Inclusive Growth AnalyticsWorld Bank Inclusive Growth AnalyticsVienna, July 1, 2009Vienna, July 1, 2009

OverviewOverview

Introduction: What We Learn from 15 GDsIntroduction: What We Learn from 15 GDs

Going Down the HRV Tree in AfricaGoing Down the HRV Tree in Africa Is it Finance?Is it Finance? Is it Low Social Returns?Is it Low Social Returns? Is it Inadequate Appropriability?Is it Inadequate Appropriability?

Towards a “Spatial Mindset”: Regional ApproachTowards a “Spatial Mindset”: Regional Approach

Other Issues for Contextualizing GDs to AfricaOther Issues for Contextualizing GDs to Africa

Making Sense of 15 GDs in AfricaMaking Sense of 15 GDs in Africa

HRV plus extensions applied in 15 African countriesHRV plus extensions applied in 15 African countries(WB, DFID, MCC, Harvard, AfDB). See table.(WB, DFID, MCC, Harvard, AfDB). See table.

Depth and rigor applying method vary considerably, Depth and rigor applying method vary considerably, making comparability and use of findings difficult. Also, making comparability and use of findings difficult. Also, binding constraints might have changed…binding constraints might have changed…

In a region where “everything needs fixing” but there In a region where “everything needs fixing” but there are extremely limited resources and low capacities, are extremely limited resources and low capacities, prioritization is key. We are doomed to choose!prioritization is key. We are doomed to choose!

Allowing the country to shape the framework and tools Allowing the country to shape the framework and tools we use, rather than the other way round.we use, rather than the other way round.

Going Down the Tree in AfricaGoing Down the Tree in Africa

High cost of financeLow return to economic activity

Low social returns Low appropriability

government failures

market failures

geography

low human capital

bad infra-structure: energy & transport micro risks:

security, crime, corruption

macro risks: financial,

monetary, fiscal instability

self-discovery externalities

coordination externalities

Low domestic savings + bad international finance

bad local finance

High risk High cost

Low competition

Problem: Low levels of private investment and entrepreneurship ρτ1rσ

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Is it High Cost of Capital?Is it High Cost of Capital?

From 15 GDs, none constrained by low financeFrom 15 GDs, none constrained by low finance Not particularly high interest rates or spreads; reductions in interest Not particularly high interest rates or spreads; reductions in interest

rates have not spurred increases in investments rates have not spurred increases in investments Low correlation between credit/GDP and investments Low correlation between credit/GDP and investments Firms don’t complain about credit availability or cost per se; rather, Firms don’t complain about credit availability or cost per se; rather,

complaints relate to application procedures or high collateral (SMEs)complaints relate to application procedures or high collateral (SMEs)

Impact of global crisis: absent international finance, will low Impact of global crisis: absent international finance, will low domestic savings and poor intermediation become binding?domestic savings and poor intermediation become binding?

Other issues to look at:Other issues to look at: Role of remittances in funding small & medium-sized enterprises Role of remittances in funding small & medium-sized enterprises Impact of ODA in financing investments (esp. post-conflict states)Impact of ODA in financing investments (esp. post-conflict states) Impact of foreign loans (Chinese) on investments Impact of foreign loans (Chinese) on investments

Is it Low Social Returns?Is it Low Social Returns?

Geography (0 GDs)Geography (0 GDs) Unclear definition in GDs, odd policy message: what can governments do?Unclear definition in GDs, odd policy message: what can governments do? Often subsumed in infrastructure (e.g., landlocked geographies) or in Often subsumed in infrastructure (e.g., landlocked geographies) or in

government failures (e.g., natural resource management)government failures (e.g., natural resource management) Growth is locational: proximity to growth poles matters (WDR 2009) Growth is locational: proximity to growth poles matters (WDR 2009) A closer look at climate change (long-term mindset)A closer look at climate change (long-term mindset)

Human Capital (2 GDs)Human Capital (2 GDs) Find low returns to education: what about returns to those who migrate?Find low returns to education: what about returns to those who migrate? Linkages between HIV/aids & malaria and expected returns to educationLinkages between HIV/aids & malaria and expected returns to education Importance of analyzing the informal sector (meet the hippos!)Importance of analyzing the informal sector (meet the hippos!) A closer look at ethnic fragmentation (Collier, Easterly)A closer look at ethnic fragmentation (Collier, Easterly)

Infrastructure (9 GDs)Infrastructure (9 GDs) Difficult to eliminate based on price signals, hence can easily be a residualDifficult to eliminate based on price signals, hence can easily be a residual Energy: high incidence of private generators in surviving firmsEnergy: high incidence of private generators in surviving firms Transportation and connectivity: passage in Mozambique affecting Malawi’s Transportation and connectivity: passage in Mozambique affecting Malawi’s

access to Nacala port; inefficient Mombassa port affecting Uganda/Rwanda.access to Nacala port; inefficient Mombassa port affecting Uganda/Rwanda. Emphasis on hard infrastructure, whereas the greatest ‘bang for the buck of Emphasis on hard infrastructure, whereas the greatest ‘bang for the buck of

infrastructure reform’ may well be in soft infrastructureinfrastructure reform’ may well be in soft infrastructure A closer look at regulatory issuesA closer look at regulatory issues

Is it Inadequate Appropriability?Is it Inadequate Appropriability?

Government Failures (7 GDs)Government Failures (7 GDs) Can be difficult to discern when government interventions are perceived Can be difficult to discern when government interventions are perceived

by private agents as ‘expropriating’by private agents as ‘expropriating’ Lack of security, civil strife, and high crime (as opposed to property rights Lack of security, civil strife, and high crime (as opposed to property rights

and contract enforcement in LAC)and contract enforcement in LAC) Fixed appreciated exchange rates seem to be constraining growth of Fixed appreciated exchange rates seem to be constraining growth of

(non-mineral) tradable sector(non-mineral) tradable sector Neighborhood effects also pose expropriation risksNeighborhood effects also pose expropriation risks

Market Failures (2 GDs)Market Failures (2 GDs) Surprisingly, find relatively high incidence of new exports (as opposed to Surprisingly, find relatively high incidence of new exports (as opposed to

the case in LAC, where cost discovery seems to prevail)the case in LAC, where cost discovery seems to prevail) Problem may not be in the discovery, but in the premature deaths! Problem may not be in the discovery, but in the premature deaths! Once a new product is profitably produced, need to discover new market Once a new product is profitably produced, need to discover new market

opportunities and how to exploit them: discovery not just about productsopportunities and how to exploit them: discovery not just about products May also need greater export deepening in existing products before you May also need greater export deepening in existing products before you

can achieve sustainable diversification and sophistication.can achieve sustainable diversification and sophistication. Other market failures can explain lack of diversification: information Other market failures can explain lack of diversification: information

asymmetries, training externalities, increasing returns to scale.asymmetries, training externalities, increasing returns to scale.

Emerging Patterns: Africa & AmericasEmerging Patterns: Africa & AmericasBinding Finance

Binding Returns

Lack Complementary Factors Lack of Approproability

Countries (in ascending order, by GDP per capita)

Low

Ag

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ate

Savi

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Bad

Loca

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Bad

Inte

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iona

l Fi

nanc

e

Poor

G

eogr

aphy

Bad

Infr

astr

uctu

re

Low

Hum

an

Capi

tal

Gov

ernm

ent

Failu

res

Mac

ro &

Mic

ro

Risk

s

Mar

ket

Failu

res

Malawi C BC C C Tanzania C C Burundi C BC C Zambia BC BC Kenya BC C Benin BC BC C Nigeria BC BC Rwanda BC C Uganda BC Senegal BC C The Gambia BC C Egypt BC Morocco BC BC Namibia BC BC C

AFRICA

South Africa BC BC Haiti C BC Nicaragua C BC C Guyana BC BC Bolivia C BC Paraguay BC C Guatemala C C BC Colombia C C BC Peru C C BC El Salvador C BC Belize BC Brazil BC Panama BC Chile C C BC Trinidad & Tobago BC BC

AMERICAS

Argentina C BC

After the Diagnostics, What are the Therapeutics?After the Diagnostics, What are the Therapeutics?

BeninBenin No policy recommendations No policy recommendations in the reportin the report

NigeriaNigeria CB for project prep infrastructure; CB for project prep infrastructure; electricity tariff reform, etc. electricity tariff reform, etc.

BurundiBurundi N/A, exercise not completedN/A, exercise not completed RwandaRwanda No policy recommendations in the No policy recommendations in the reportreport

EgyptEgypt Tax reform; licensing & Tax reform; licensing & cumbersome regulationscumbersome regulations

SenegalSenegal N/A, exercise not completedN/A, exercise not completed

GambiaGambia N/A, exercise not completedN/A, exercise not completed South South AfricaAfrica

Policy recommendations in 6 areas: Policy recommendations in 6 areas: trade, labor, struct transf, otherstrade, labor, struct transf, others

KenyaKenya Reforms on infrastructure, Reforms on infrastructure, integration, business cost etcintegration, business cost etc

TanzaTanzaniania No policy recommendations in the No policy recommendations in the reportreport

MalawiMalawi No explicit recommendation No explicit recommendation (market-determined exch rate)(market-determined exch rate)

UgandaUganda Trade policy, financial system, Trade policy, financial system, infrastructure, macro managm, etcinfrastructure, macro managm, etc

MoroccoMorocco Export-led strategy: Export-led strategy: trade, trade, RER, X promotion, corp tax, etc.RER, X promotion, corp tax, etc.

ZambiaZambia No specific policy recommendation, No specific policy recommendation, broad areas for action identifiedbroad areas for action identified

NamibiaNamibia Labor reform ; reform of CET and Labor reform ; reform of CET and other policies under SACUother policies under SACU

Expanding ‘Context-Specificity’: GDs Beyond BordersExpanding ‘Context-Specificity’: GDs Beyond Borders

The appropriate context for the GD is the countryThe appropriate context for the GD is the country

Sovereignty is at the level of the nationSovereignty is at the level of the nation Most data and indicators also developed at the level of the nationMost data and indicators also developed at the level of the nation Many problems, and their solutions, are at the level of the countryMany problems, and their solutions, are at the level of the country

In Africa, the region can also be critical for the diagnosticIn Africa, the region can also be critical for the diagnostic Handicapped borders: problem of ‘ghost countries’ (Pritchett)Handicapped borders: problem of ‘ghost countries’ (Pritchett) Neighborhood effects (Collier) and growth spillovers (Venables)Neighborhood effects (Collier) and growth spillovers (Venables) Small economies and landlocked geographies create inter-dependenciesSmall economies and landlocked geographies create inter-dependencies Integration and movevement of factors of production (West Africa)Integration and movevement of factors of production (West Africa)

Regional lenses can bring additional insights to domestic GDsRegional lenses can bring additional insights to domestic GDs Capture external complementary factors and distortions more systematicallyCapture external complementary factors and distortions more systematically Represent cost-effective options for addressing BCs: national therapeutics areRepresent cost-effective options for addressing BCs: national therapeutics are prohibitively expensive for the average African country (e.g., energy, tertiary HK, etc)prohibitively expensive for the average African country (e.g., energy, tertiary HK, etc) Help lock-in political commitment and give continuity to growth-oriented policiesHelp lock-in political commitment and give continuity to growth-oriented policies

A regional approach may also present challengesA regional approach may also present challenges Unequal returns from relaxing the BCs across countriesUnequal returns from relaxing the BCs across countries Lack of executive power of regional institutions (RECs)Lack of executive power of regional institutions (RECs) Loss of policy space in a growth strategyLoss of policy space in a growth strategy

A ‘Spatial GD Mindset’: Regional ApproachA ‘Spatial GD Mindset’: Regional Approach

Given the inter-dependencies, small size, and fragmentation of African economies, Given the inter-dependencies, small size, and fragmentation of African economies, constraints binding national growth may be influenced or even generated by regional constraints binding national growth may be influenced or even generated by regional problemsproblems. The most binding constraint may be beyond national borders!

Examples of Examples of national symptomsnational symptoms with with regional syndromesregional syndromes: GD Namibia (lack of : GD Namibia (lack of diversification ascribed to CET/SACU policies); GD Uganda & Rwanda (infrastructure diversification ascribed to CET/SACU policies); GD Uganda & Rwanda (infrastructure constraint relates to port inefficiency of Mombasa/Kenya) ; GD Cape Verde (human capital)constraint relates to port inefficiency of Mombasa/Kenya) ; GD Cape Verde (human capital)

National Symptom

National Syndrome

Regional Syndrome

National Capacity to Treat Syndrome

Insufficient National Capacity to Relax BC

National Capacity to National Capacity to Treat SyndromeTreat Syndrome

Insufficient National Capacity to Relax BC

National Diagnostics & Therapeutics:First Best

National Diagnostics & Regional Therapeutics: ODA & Technical Support

Regional Diagnostic & National Therapeutics: Partial Response, likely to be ineffective

Regional Diagnostics & Therapeutics:First Best

Expanding Diagnostic & Therapeutic SpaceExpanding Diagnostic & Therapeutic Space

Decisions of firms and households may be affected by regionDecisions of firms and households may be affected by region Externalities & distortions affecting a country may be generated in regionExternalities & distortions affecting a country may be generated in region Central planner’s scope of action expanded to the regionCentral planner’s scope of action expanded to the region

Regional externalities

Regional distortions

Price of regional complem. factors

Regional appropriability

risks

Region could be supra-national or sub-national, depending on the spatial context of the externalities, distortions, complementary factors affecting national returns.

Open Issues: GD Exercises in AfricaOpen Issues: GD Exercises in Africa

Is a Growth Diagnostic relevant for all African countries?Is a Growth Diagnostic relevant for all African countries?

Is growth the societal objective in all African countries?Is growth the societal objective in all African countries? In some countries the objective is peace: growth may or may not help in the short termIn some countries the objective is peace: growth may or may not help in the short term It may be deceptive to believe that growth helps achieve all societal objectivesIt may be deceptive to believe that growth helps achieve all societal objectives

Are there minimum conditions for a GD exercise to be effective?Are there minimum conditions for a GD exercise to be effective? How reliable (and useful) is the exercise in the absence of data (e.g., post-conflict environments)?How reliable (and useful) is the exercise in the absence of data (e.g., post-conflict environments)? Under what conditions do GDs feed into policy (e.g., PRSP timeline, political support) ?Under what conditions do GDs feed into policy (e.g., PRSP timeline, political support) ? Assess the benefit of the GD, and its opportunity cost if there are more pressing needsAssess the benefit of the GD, and its opportunity cost if there are more pressing needs

What is the appropriate scale of application, by sectors or economy-wide?What is the appropriate scale of application, by sectors or economy-wide? Many African countries have dual economies, each with different needs Many African countries have dual economies, each with different needs The constraint binding one sector will not necessarily bind another sectorThe constraint binding one sector will not necessarily bind another sector What if relaxing a BC in one sector intensifies the BC to a different sector?What if relaxing a BC in one sector intensifies the BC to a different sector?

Should demand play a role in growth strategies?Should demand play a role in growth strategies? Growth theory is driven by the production function (supply); but need to sell output to realize profit!Growth theory is driven by the production function (supply); but need to sell output to realize profit! Should we assume that demand for African goods is infinite (given small domestic markets and high Should we assume that demand for African goods is infinite (given small domestic markets and high transaction costs to access foreign markets; maturity and saturation of more sophisticated products.)transaction costs to access foreign markets; maturity and saturation of more sophisticated products.) Even if demand is infinite, still have to figure out where it is and how to exploit itEven if demand is infinite, still have to figure out where it is and how to exploit it

Maximizing the “Development Impact” of GDsMaximizing the “Development Impact” of GDs

ResearchGenerating Evidence on

Binding Constraints

Customizing HRV to African economies

Research Partnerships

Capacity Development Training Workshops

Establishment of ‘Growth Desks”

Financing local research proposals

Political SupportMainstream into PRSP process

African Peer Review Mechanism

Ratings for Project Finance

Generating evidence here…

…helps stimulates this

Developing capacity here… …helps stimulates this

Thank you very much for your attention!Thank you very much for your attention!

2009 African Competitiveness Report

2009 African Economic Outlook www.AfricanEconomicOutlook.org

Don’t miss in your African Don’t miss in your African

Growth Analytics Toolkit!Growth Analytics Toolkit!