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Summary

After stagnating for much of the postcolonial period, economic growth in Africa has accelerated since themid-1990s. Improved terms of trade, better macroeconomic and education policies, and greater demand forservices helped Africas annual GDP growth rate more than double to 4.6 percent from 19992008 com-

pared to the previous decade. Impressively, GDP in African economies accelerated more quickly than that ofdeveloping economies in other regions.

To continue this growth, Africa must overcome numerous challenges. Africa suffers from low investmentand savings rates, a lagging demographic transition as the continents high fertility rate creates a bulge in thenumber of young people requiring education, low productivity, and a low level of exportseven as exportprices have increased.

Still, Africa also has a number of long-term growth opportunities. By developing ties with emerging econo-

mies such as China and India, Africa will be able to export more goods abroad, particularly as income andwages in those countries grow. The emergence of a middle class in Africa will also create more demand.

To ensure Africa successful ly moves up the development ladder, policy makers must improve the continentsgovernance and business climate, allowing it to compete successfully with other poor but increasingly dy-

namic developing regions. Specic steps include:

Improve the investment climate.Africa must take small stepssuch as reducing the cost of reg-istering and closing a businessand make fundamental reformssuch as strengthening the rule oflawto make the business environment more predictable. Improving trade logistics will also helpAfrica reap new opportunities as production processes become more globalized.

Raise agricultural productivity.Few sectors offer greater room for improvement than agriculture,as Africa has the lowest cereal yield per hectare of any developing region. Africa should use geneticallymodied seeds, complementary fertilizers, and more efcient farming to boost crop yields.

Whither Africa? March 3, 2011

Shimelse Ali and Uri Dadush


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Invest in a skilled labor force.Policy makers must raise the quality ofeducationfor example, through increasing enrollment in the sciencesand improving skills such as numeracy and problem-solvingto close thewidening innovation gap with other developing regions. Highly skil led

workers make up the largest share of Africas emigrants. Adequate com-pensation, better job opportunities, a strong business climate, and easy

access to information technology will help African economiesretain skilled workers.

Africas continuedand acceleratedgrowth over the long term is by no meansguaranteed. But if policy makers can build on their successes so far and tackletougher second-generation reforms, they can help Africa become more competi-

tive, improve productivity, and increase per-capita incomes well into the future.

Africas improved growth performance in recent years has been widely noted.Gross domestic product (GDP) grew by an average rate of 4.6 percent annuallyfrom 19992008, more than twice its pace in the previous decade. While theeconomic expansion was strongest in oil-exporting and other resource-basedeconomies, the acceleration was widespread.

Africas increase in growth was associated with a number of favorable factors.Most notable was its improved terms of tradea measure of the difference be-tween the growth of export and import pricesand better policies, especially inmacroeconomic management and education.

These improved macroeconomic policies helped Africa weather the economiccrisis reasonably well; its growth in 2009 surpassed that of Latin America,

Europe, and Central Asia, but was not nearly as high as that of developing Asiaand the Middle East. Dependence on agriculture and limited nancial l inkagesto the global economy helped Africa absorb the external shocks. The region,however, suffered a 12 percent loss in its terms of trade in 2009, as well as asharp decline in capital ows and a slowdown in remittances.

Despite its overall growth, Africa faces many economic challenges. The advancein its per-capita income continues to lag behind that of other developing regions.Furthermore, fundamental economic factors needed to sustain growthsuch as

low rates of savings and investmentremain weak.

Given this mixed picture, it is too soon to say whether Africas new growth pat-tern will persist and even intensify, which it must do to catch up signicantlyto other regions. But new hope exists that continued reformsespecially thoseaffecting governance and the business climatecould lay the groundwork forsustained advancement on the worlds poorest continent.

Despite its

overall growth,

Africa faces

many economic

challenges.


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Recent Performance

After stagnating for much of its postcolonial period, economic growth in Africahas accelerated since the mid-1990s. GDP increased by an average of 4.6 per-cent a year from 19992008, more than twice its pace in the previous decade.Seventeen African economiestwelve of them low-incomegrew at 5 percentor more in the decade leading up to 2008, up from only seven economies duringthe previous decade (gure 1).

The economic expansion was strongest in lower middle-income economies,which grew by 6 percent a year from 19992008; this growth was largely drivenby oil and mineral exporters that enjoyed the commodity prices boom in the2000s. But the acceleration was widespread throughout the continent and in-cluded South Africa, an upper middle-income country that accounts for morethan one-quarter of Sub-Saharan Africas GDP.

Continued

reforms

especially

those affecting

governance and

the business

climate

could lay the

groundwork

for sustained

advancement

on the worlds

poorest

continent.

*Except South Africa, these economies grew by an annual average of more than 5 percent over19992008.

**Actual size of Nigerias population is 150 million, actual value of Equatorial Guineas averageGDP growth rate over 19992008 is 23.2.

Africas growth also accelerated more than that of developing economies inother regions, albeit from a dismally low level. The doubling of Sub-SaharanAfricas GDP growth rate from low levels compares with much smaller propor-

tional risesby factors of 0.7 to 1.6in East Asia and the Pacic, South Asia,Latin America, and the Middle East and North Africa (MENA). This is alsotrue when Sub-Saharan African countries are compared with those in the sameincome group in other regions.

Figure 1. TOP PERFORMING AFRICAN ECONOMIES*

Equatorial Guinea**

Angola

Sierra Leone

Nigeria**

Botswana

Ethiopia

Mozambique

Rwanda

Uganda

SudanTanzania

Mali

Liberia

Ghana

Burkina Faso

GambiaCape Verde

South Africa

0

20

40

60

80

100

120

3 4 5 6 7 8 9 10 11 12 13

Population(millions)

GDP Growth (average, 19992008)

Resource-rich Non-resource-rich Manufacturing-based

Source: World Bank

Size of the circle indicates relative total GDP


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Crucially, the continent nally ended its long period of negative per-capitaincome growth, as per-capita income grew by an average of 2 percent per year inthe 2000s.

Despite the marked uptick in growth, the regions growth rates from 19992008remained in the bottom half of developing economies. Countries in Africa grew

more slowly than those at corresponding income levels in East Asia and thePacic, Europe and Central Asia, and South Asia (gure 2). For example, per-capita income in low-income African economies grew at about one-fourth thepace of those in low-income economies in East Asia and the Pacic, includingLaos, Myanmar, and Cambodia.

Figure 2. GDP GROWTH (19992008 AVERAGE, %)

East Asia & Pacific

Europe & Central Asia

South Asia

Sub-Saharan Africa

Latin America & Caribbean

East Asia & Pacific

South Asia


Sub-Saharan Africa

Middle East & North Africa



East Asia & Pacific


Sub-Saharan Africa


0 1 2 3 4 5 6 7 8 9 10

UPPER MIDDLE-INCOME

LOW INCOME

LOWER MIDDLE-INCOME

Source: World Bank and authors calculations

When making comparisons with other developing regions, it is important to

recall that per-capita income in Africa started from an abysmally low level, and

that base levels matter. For example, even if Africas per-capita income continuesto grow at 2 percent per year for the coming decade, its per-capita income willonly gain $460 (in purchasing power parity, or PPP, terms) over that time. Incontrast, if per-capita income in Japanone of the richest and slowest-growingeconomies in the worldgrows by just 1 percent a year over the same period, itsabsolute per-capita income gain will be more than seven times greater than thatof Africa, and the gain alone will be nearly 70 percent higher than Africas cur-

rent per-capita income. As a result, the absolute gap in income will widen consid-erably even if Africa makes proportional gains.


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Very low initial levels of income and slower growth also help to explain whyAfrica continues to lag behind other developing regions in eradicating absolutepoverty. Though the number of Africans living on less than $1.25 a day declinedfrom 58 percent of the total population in 1990 to 50 percent in 2005, in abso-

lute terms, the number of people living in poverty rose from nearly 300 millionto 380 million.

In addition, other poor developing regions made much greater strides in reduc-ing poverty over the same period. East and South Asia, which had poverty ratescomparable to Africas in 1990, reduced their poverty rates by 38 percentagepoints and 11 percentage points, respectively, by 2005, owing to their sustainedrapid economic growth over the past few decades.

Widespread Growth Across Countries and Sectors

While resources and improved terms of trade are an important part of theimproved growth performance in Africa, nonresource-rich, low-, and middle-income economies also grew. Growth occurred broadly across sectors, withservices playing an important role.

Resources are a Big Part of the Growth Picture

The rapid pace of growth in the ten lower middle-income African economieswhich registered the strongest expansion among different income groups in theregionrelies signicantly on the four oil-exporting economies in this group:

Angola, Cameroon, the Republic of Congo, and Nigeria. Nigeria and Angolawhich account for about two-thirds of the regions lower middle-income econo-miesexpanded by 5.6 percent and 11.1 percent per year, respectively, from19992008. Comparing the decade 19992008 with the previous one, annualGDP growth in the oil-exporting countries increased by 3.7 percentage points,

compared to about 0.9 percentage points in the six nonoil-exporting lowermiddle-income economies, which include Senegal and Cote dIvoire.

In resource-rich economieswhere rent from resources accounts for more than10 percent of government revenue and represents nearly one-third of the conti-nents GDPoutput grew by 6 percent annually over 19992008about twice

that of the previous decade and higher than the 4.7 percent growth in the nonresource-rich economies. Among the resource-rich economies, oil-exporting

economies1 beneted from the rise in oil prices, which surged from an averageof $15 a barrel in 1998 to about $100 a barrel in 2008. As a result, oil-exportingeconomies GDP growth has more than doubled to 6.6 percent: 2 percentagepoints higher than in oil-exporting MENA economies and marks the highestgrowth rate among major country groupings in the region.

Very low initial

levels of incom

and slower

growth also he

to explain why

Africa continue

to lag behind

other developin

regions in

eradicating

absolute

poverty.


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Growth Has Come From More Than Resources

Resources do not tell the whole story, however. The 36 nonresource-richeconomies in the region more than doubled their nearly 2 percent growth in theprevious decade, mainly due to a fast-growing service sectoralthough their

growth still lagged behind resource-rich economies. Top performers in this

group include countries such as Ethiopia, Mozambique, and Uganda, which grewby an average of 7 percent or more per year in the decade before the crisis.

Nonresource-rich economies also showed substantial improvements in tradeand foreign investment, though at a signicantly slower rate than in resource-rich economies, especially oil-exporting ones. Exports of nonresource-richeconomies increased by 4.7 percent of GDP between 19891998 and 19992008.

However, this trailed the 8.1 percent of GDP in resource-rich countries, re-ecting the more favorable external environment for resource-related exports.

Foreign Direct Investment (FDI) also increased sharply to 2.5 percent of GDPfrom a low base over this period, but still remained lower than the 2.7 percent ofGDP that resource-rich economies attracted in the previous decade.

Services Have Become the New Drivers of Growth

Growth in nonresource-rich economies occurred broadly across sectors, withservices making an important contribution. In contrast to resource-rich econo-mies, the service sector in nonresource-rich economies was the major source ofoutput, accounting for more than 50 percent of GDP, and increased as a share of

GDP. The share accounted for by agriculture and manufacturing, meanwhile, fellslightly (gure 3).

Figure 3. SECTORS VALUE ADDED (% OF GDP)

0 20 40 60

NONRESOURCE-RICH ECONOMIES

Source: World Bank

Services

Industry

Agriculture

Manufacturing

19891998 19992008

0 20 40 60

RESOURCE-RICH ECONOMIES

Services

Industry

Agriculture

Manufacturing

19891998 19992008


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Figure 4. CONTRIBUTION OF SECTORS TO GROWTHIN VALUE-ADDED GDP (19992008 AVERAGE, %)

0 2 4 6 8 10

Source: World Bank and

authors calculations

Agric ultu re

Industry

Services

Uganda

Mozambique

Ethiopia

Rwanda

Sudan

Burkina Faso

Tanzania

Ghana

Mali

An analysis of sectoral contribution to economic growth2in nine selected top-performing nonresource-rich African economies3which grew by more than5 percent from 1999 to 2008shows that services accounted for more than40 percent of economic growth in nearly all nine economies, making them the

primary driver of growth (gure 4). The rise of services largely reects increasedpublic-sector spending in education and health, as well as expanded private-sec-

tor areas such as real estate, hotels and restaurants, and banking.

Lack of Progress in Manufacturing

Though diversication toward services is important, the decline in the share andcontribution of agriculture was not accompanied by an increase in manufactur-ing. While agriculture was the largest contributor to total value-added GDPgrowth in the 1990s in most of the top-performing nonresource-rich econo-

mies, its share contribution to GDP growth ranged from 9 percent in Uganda to38 percent in Ethiopia.

This decline is partly due to low productivity growth in the sector and the rapidgrowth of services. However, while a modest increase in industry accompaniedthe substantial r ise in services, industrys ability to help sustain growth in

the long term is limited. Most of the increase in industry came from non-manufacturing activities, such as mining and construction.

The share of manufacturing value-added in the GDP of most of these nonresource-rich economies also fell in 19992008 compared to the previousdecade. In Uganda and Sudan, where the GDP share of industry increased bymore than 10 percentage points, manufacturing contributed very little.


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Even in resource-rich economies, the share of manufacturing fell on average.In Nigeria, a major resource-rich economy, the decline in the share of manufac-turing was accompanied by a sharp rise in the share of services, signaling theDutch Disease.4

What Propelled Africas Growth?

Understanding the policies and external environment behind Africas improvedgrowth and its performance relative to other developing regions offers moreinsight into how Africa can improve its economy in the coming years.

Africa Compared: The Policy Factor

Better macroeconomic management has clearly helped Africa. The continentmade signicant progress in reducing macroeconomic imbalances, including

budget decits and ination, over the past decade.

Between 19891998 and 19992008, average ination fell by two-thirds inlower middle-income economies, and by half in most low-income (excludingZimbabwe) and upper middle-income economies. Africas two largest econo-mies, South Africa and Nigeria, reduced their ination rates by 50 percent and

66 percent, respectively. In the 2000s, nearly 30 of 45 African countries enjoyedsingle-digit inationten more countries than in the 1990s. Low-income andlower middle-income economies also saw ination drop substantially comparedto developing countries in other regions.

Thanks to large scal surpluses in oil-exporting economies in the 2000swhichaveraged 6.3 percent of GDPAfricas scal balance (including grants) turnedfrom a decit of 2.6 percent of GDP in 19972002 to a surplus of 1.3 percentof GDP in 2008. The continents average external debt as a percentage of GDP

also fell by one-quarter between 19891998 and 19992008, due in part to fastereconomic growth and debt relief under the Heavily Indebted Poor Countries(HIPC) initiative. This reduction was bigger than those in other developingregions. In some countries, such as Botswana, funds were established using rentsfrom mineral wealth to provide for public debt service.

The region also made substantial gains in education enrollment. Gross primaryschool enrollment rose from 78 percent in 1999 to 97 percent in 2008, while sec-

ondary school enrollment increased from 24 percent to 33 percent over the sameperiod. Though education enrollment remains far lower in African countriesthan in other developing economies, the increases in enrollment over the lastdecade were greater than those in other developing regions. Nevertheless, mostAfrican economies face a severe shortage of highly educated people, a segmentof the population critical to sustaining the current growth momentum.

Most African

economies

face a severeshortage of

highly educated

people, a

segment of

the population

critical to

sustaining the

current growth

momentum.


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Africa has also become more integrated through trade. Between 19891998 and19992008, exports of goods and services as a percentage of GDP increased by5 percentage points to 32 percentcomparable to increases of 5.6 to 7.6 percent-age points for MENA, South Asia, and Latin America and the Caribbean. Trade

reforms have also reduced tariffs in Africa, though less than in other developingregions. In the two decades leading up to 2008, tariff rates for manufactured

products fell by about 46 percent in Africa, compared to a decrease of more than70 percent in all developing economies. Still, high transaction costs, such asbackward infrastructure and inefcient customs procedures, remain constraintsto regional integration.

Despite these improvements, Africa remains hobbled by major policy and in-

stitutional weaknesses, which are greater than those faced by other developingregions. At around 46 percent of GDP, foreign debt in Sub-Saharan Africa is still10 percentage points higher than that in Latin America and the Caribbean orMENA. Ination is still above 10 percent in about fteen African countries.

And even with some recent successeswhich placed countries such as Rwandaamong the top global reformers in the World Banks 2010 Doing BusinessIndexthe business climate in Africa remains enormously challenging, withlow scores in ease of starting a business, obtaining credit, and securing inves-

tor protections. The average rank of Sub-Saharan Africa was the lowest amongdeveloping regions in all but two of the nine components of the World Banksranking (dealing with construction permits and enforcing contracts). In particu-lar, lower middle-income economieswhich include large countries like Nigeriaand Cameroonscored poorly, with all countries ranking in the bottom half ofthe 53 lower middle-income developing economies.

The number of state-based conictswhich severely impaired growth in many

African countries in the pasthas fallen in Africa, from sixteen in 1999 to six in2005, and democracy is becoming more established across the continent (gure 5).

The business

climate in

Africa remains

enormously

challenging,

with low

scores in ease

of starting

a business,

obtaining crediand securing

investor

protections.

Figure 5. NUMBER OF STATE-BASED ARMED CONFLICTSIN SUB-SAHARAN AFRICA

Source: Human

Security Gateway

Database

1990 1992 1994 1996 1990 1992 1994 1996 1998 2000 2002 2004 2005

18

16

14

12

10

8

6

4

2

0


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There has been a clear shift toward more elections and stronger political institu-tions, particularly in some of the top performing African economies, such asGhana. However, the region still has work to do. There are still major conictssuch as in Darfur, Chad, and Somaliathat have not been resolved. The region

also continues to receive low scores on World Bank governance indicatorsincluding political stability, rule of law, and government effectivenesswhich

could affect its ability to grow in the future. Furthermore, despite the increase inthe number of parliamentary elections, executive dominance still persists.

Africa Compared: The External Environment

More than other developing regions, Africawhere commodities accounted formore than 70 percent of exportshas beneted from signicant improvementin its terms of trade since the mid-1990s. The terms of trade for Africas goods in19992008 were about 7 percentage points higher than in 19891998, comparedto a much lower increase in Latin America and a 1.4 percentage point decline indeveloping Asia (gure 6). Oil exporters in the Middle East and Africa saw thelargest advances in terms of trade, helped by the surge in oil prices over the pastdecade. A similar increase in the price of other raw materials, such as minerals,also helped Africa.

Figure 6. TERMS OF TRADE OF GOODSAverage Annual Change (percent)

-4 -2 0 2 4 6 8 10 12

19992008

19891998

Source: IMF


Sub-Saharan Africa


Central & Eastern Europe

Developing Asia

The jump in Africas exportswhich increased more than four-fold from 19982008also reects its rising trade with fast-growing developing economies. Theshare of developing economies in Africas extra-regional trade increased from

nearly 20 percent in 1995 to 33 percent in 2008. Primary products, such as oiland agricultural commodities, accounted for 75 percent of Africas exports tonon-African developing economies in 2008, up from 55 percent in 1995.


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In addition, China has become a major player in Africa, more so than in otherdeveloping regions. China increased its share of Africas exports by 10 percentagepoints from 19982008, compared to a 6 percentage point increase in MENAsexports and a 4 percentage point rise in Latin Americas exports.

The increase in Africas trade has been accompanied by a surge in inward FDI,

with nearly half of the FDI ows into Africa from 1999 to 2008 going to oil-exporting economies. Net inows of FDI reached about $35 billion in 2008 andaveraged around $17 billion in 19992008, a more than four-fold increase fromthe previous decades $4 billion average. However, even this impressive growthlags behind that of other developing regionsEastern Europe and Central Asia,MENA, and South Asiawhich also started from relatively lower levels.

Some Factors Likely to Restrain

Africas Long-Term Economic Growth

The policy factors that have spurred growth acceleration in the past decade areencouraging. Nevertheless, fundamental weaknesses in Africasuch as low ratesof savings and investment, as well as inadequate structural diversicationofferreasons for caution.

Low Investments and Savings

The investment rate in Africa has remained below 20 percent of GDP in thepast decade, the same rate as the previous decade and much smaller than the3035 percent rate in the most successful developing regions that have man-aged to sustain growth for a long period, such as China or Indonesia (gure7). In large economies such as South Africa, Nigeria, and Ethiopia, investmentrates averaged around 19 percent of GDP in each of the past two decades, morethan 10 percentage points below that of rapidly growing Asian countries such asThailand and Vietnam.

Encouragingly, FDI accounts for a larger share of this total investment, by morethan doubling from a small base. However, FDI tends to ow to traditionalsectors, such as mining and petroleum, and African economies need to raise the

level of domestic investment to support the development of productive sectors.

Investment in the region has been constrained in part by weak resource mo-bilization. In addition to underdeveloped nancial intermediaries and other

institutional weaknessessuch as inadequate infrastructure and lack of politicalstabilitywhich reduced the capacity to mobilize savings, incomes are too closeto subsistence levels in many instances to allow for savings. Domestic savingsrates, around 16 percent, are much lower than the 2540 percent in developingAsia, showing Africas dependence on foreign sources of capital, such as aid andloans, to nance investment.


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Lagging Demographic Transition

Given limited resources, an important obstacle to sustained growth of per-capitaincome and productivity in the coming years is Africas lagging demographictransition,5which causes a bulge in the number of young people requiring educa-tion. High levels of population growth, reecting the fertility rate of ve birthsper womanmore than twice the rate in most other developing regionsandan age-dependency ratio of around 85 dependents for every 100 workerswhich

is 2540 percentage points above those of other developing regionspresentclear challenges to providing adequate human capital formation. However, thislagging demographic transition will also provide a window of opportunity in the

long term as fertility rates and the age-dependency ratio decline. According toUN projections, the fertil ity rate in Africa could fall to three births per womanby 2030 and below 2.5 births by 2050, as female education improves and family-planning services become more readily available.

The labor forcenearly 500 mil lion people strong currently, about half the sizeof Chinasis expected to increase by 50 percent in the coming fteen years asthe youth population ages. This enormous infusion of labor will likely induce

high growth of aggregate output in Africa. Whether this translates into highgrowth of per-capita GDP will depend on governments ability to invest in edu-cation and, most importantly, on the quality of education outcomes.

Figure 7. INVESTMENT (% OF GDP)

Source: World Bank

1989

East Asia & Pacific


South Asia



Sub-Saharan Africa

40

35

30

25

20

15

10

1991 1993 1995 1997 1999 2001 2003 2005 2007


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Low Productivity

Africas slow growth in the past has been characterized by little or no improve-ment in total factor productivity, the portion of output not explained by theamount of inputs used in production. Thus, future growth will depend on ad-

vances in technological capabil ities and other contributors to total factor produc-

tivity, not just on the accumulation of labor input and xed investment.

To evaluate Africas capacity to increase total factor productivity, an index mea-suring the capacity to absorb foreign technologywhich reects measures ofcapacity (e.g., education) and the business climate, including openness to tradeis computed. Components of the index include education, infrastructure, gover-nance, and business climate.6

Of 30 developing economies evaluated, representing the ve largest economiesfrom each of the six World Bank developing regions, four large African econo-

miesNigeria, Angola, Kenya, and Ethiopiafall in the bottom quarter of thesample, due mainly to low scores in governance, education, and infrastructure.South Africawith its relatively high scores on business climate and governanceindicatorsis ranked in the top ten countries and offers better prospects to ac-celerate productivity growth.

The average infrastructure and education indexwhich includes paved roads,Internet usage, and secondary education enrollmentfor the ve largestAfrican economies lags more than 20 percentage points behind the average ofthe 30-country sample. Despite recent advances in Internet and mobile phoneaccess, investment in Africas infrastructure remains limited. In contrast, Central

European and East Asian economies such as Poland and Thailand are especiallywell placed to improve productivity further, thanks to improved infrastructure.

Disappointing Export Performance

Though rising exports contributed to Africas improved growth performance,most of the rise in exports came from prices rather than volumes. The volume ofexports grew by 4.7 percent per year on average over 19992008 compared to theprevious decadeconsiderably lower than the 16 percent increase in the value ofexportsand slower than the 5.7 percent in the previous decade. The increase in

export value was also more than offset by an accompanying increase in imports.

As a result, the region saw a slight deterioration in its trade balance, while mostother developing regions saw improvements. Furthermore, while the share ofAfricas exports in GDP improved by about 5 percentage points to 32 percent overthis period, it was the smallest increase among developing regions of the world.

Despite recent

advances

in Internet

and mobile

phone access,

investment

in Africas

infrastructure

remains limited


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Most countries in the region remain primary product exporters, except for a feweconomies such as South Africa and Mauritius, where manufactures accountfor more than 50 percent of total exports. Primary products, such as oil andagricultural commodities, accounted for 75 percent of Africas exports to non-

African developing economies in 2008, up from 55 percent in 1995. Accordingto the United Nations Conference on Trade and Development, the Africa export

concentration index increased by 82 percent from 19952009, from 0.23 to 0.42,reecting Africas increasing dependence on a limited number of commodities.

Furthermore, the share of inter-Africa trade in the regions total exportsonly11 percent in 2008 and little improved from the previous decadeis muchlower than that of other developing regions, reecting constraining factors such

as high transaction costs and the limited complementary nature of exports inAfrica. Africas export market share was also almost unchanged over the last twodecades at around 2 percent of world exports.

Volatile and Downward-Trending Commodity Prices

Africas over-dependence on commoditieswhich accounts for more than70 percent of total exportsmakes the region vulnerable to external shocks.

Primary commodity priceswhich have declined historically relative to manu-factured goodsmay not only remain highly volatile but also resume theirsecular decline.

Primary commodity prices have declined historically relative to manufacturedgoods, with estimates of long-term decline ranging from -0.6 to -2.3 percent per

year.7

Interrupting their long-term trend, commodity prices have surged since2002 and terms of trade of goods for Africa have increasedby an average of 6.5

percent annually over 20022008, compared to a 0.4 percentdecline in the decadebefore that (gure 8).

While the long-term downward trend may have been temporarily interrupted bydemand increases for many commodities from fast-growing developing coun-tries, it is likely that increased investments and technological progress will causesupply to increase as well.

The ongoing and projected slowdown of global population growth will also slow

commodity demand growth. For example, food production can increase greatly,as recent Food and Agriculture Organization (FAO) and Organization forEconomic Co-operation and Development (OECD) estimates show that an ad-ditional 1.6 billion hectares could be cultivated, up from 1.4 billion hectares cur-rently. If that happens, the gradual downward trend in the prices of commoditiesrelative to manufactured goods may return.


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Factors That Could Boost Long-TermEconomic Growth

Despite these challenges, Africa also faces a number of long-term opportunities:reorientation of economic ties toward fast-growing emerging economies couldincrease demand for its resources; the emergence of a middle class within Africaand increased urbanization will support domestic demand; rising wages in China

and other developing countries will expand markets and also allow more roomfor Africa to compete in manufactures. The challenge will be for policy makersto take advantage of these opportunities to permanently boost Africas economy.

Mushrooming Economic Ties With Emerging Economies

While Africa has a long history of trade with Europe and other advanced econo-mies, it now sends about half of its exports to other developing countries. This

is mainly driven by its rapidly rising trade with Asian economies; Asias shareof Africas trade doubled to 28 percent over 19902008. Increased demandfor commodities in developing economies, particularly those in Asia, will helpAfricas economy by seeking its resource exports. By mid-century, China andIndia are expected to be among the top three export destinations for Africa, ac-

counting for one-third of its exports.8

This trend is likely to continue as projections suggest that the share of world trade

held by developing countries will more than double over the next forty years,reaching nearly 70 percent by 2050. The reorientation toward developing econo-mies will also reduce Africas vulnerability to a growth slowdown in advancedeconomies, with the EU and the United States expected to account for only aquarter of Africas exports by 2050, down from more than 50 percent in 2006.

Figure 8. TERMS OF TRADE OF GOODS (% CHANGE)

Source: World Bank

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

19891998

19992008

15

10

5

0

-5

-10

-15


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Emergence of a Middle-Class Consumer in Africa

Africas economic growth in the long term will also be supported by the emer-gence of middle-class consumers and increasing urbanization. For example, in1998, six large African economies9which account for two-thirds of the conti-

nents GDP and more than one-third of its populationhad nearly 40 million

people in the Global Middle and Rich (GMR) class with annual incomes of atleast $4,000 (in 2005 PPP). In just ten years, the size of the GMR in these coun-tries increased by 60 percent and reached 61 million people.

Reecting rising average incomes and under plausible income distribution as-sumptions, many African economies in the next few decades will have a largeproportion of the population in the GMR. Specically, Ghana, Kenya, and

South Africawhich represent about 35 percent of the continents GDPwillhave 4050 percent of their populations in this class. As more African house-holds enjoy disposable income, they will likely spend a substantial share of it on

household and personal products, durable goods, and services, representing apotential boon for African suppliers and supporting economic growth with adomestic source of demand.

This emergence of the middle class will also be accompanied by increasing ur-banization, which will likely support growth, especially in services. In 1990, less

than 30 percent of Africans lived in cities, compared to 40 percent today (about300 million people, close to that of Indias urban population). The 4 percentannual rate of urbanization observed in Africa over the last decadetwice thatof Latin America and a third higher than that of East Asiasuggests the urbanpopulation will continue to increase signicantly.

Rising Incomes and Wages in China and Elsewhere

The rise of wages in large emerging economiesand the accompanying rise ofa large middle classwill likely open some space for Africas exports. In China,for example, the GMR class is expected to grow from about 120 million peoplein 2009 to 780 million people in 2030 and 1.1 billion people in 2050. As wagesand capital/labor ratios rise in these most successful developing economiesand grow closer to those of advanced economies, new markets for Africa willopen up. This may also open a door to low-wage countries in Africa to advance

exports of low-wage manufacturers.


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Policy Recommendations

Africas recent performance is best interpreted as a rst step up the developmentladder. The continent has made genuine inroads on rst-generation reforms,namely macroeconomic stability and openness to the world. For the climb tocontinue, African countries must tackle much tougher second-generation re-forms, such as improvements in governance and the business climate. Suchreforms will enable it to compete for investment and for markets with other poorbut increasingly dynamic developing regions.

Improve the Investment Climate

A major component of improving productivity and competitiveness in the longterm is increasing the rate and effectiveness of domestic investment. While manyAfrican economies have made signicant institutional reforms to improve their

business climate, private investment is still constrained by high transaction costsand the perceived uncertainties of doing business.

Some elements needed to improve the business climate include small steps suchas reducing the cost of registering and closing a business; improving the customsinspection process by replacing paper-based data systems with an electronic datasystem, for example; and reducing the costs associated with bureaucracyinother words, cutting the red tape. Such detailed reforms would help make invest-ment easier and more attractive.

More fundamental reforms include strengthening the rule of law, thus making

the business environment more predictable. This may include reforming prop-erty law to improve investor protections and creating and nurturing an efcientlegal environment to enforce contracts and resolve disputes. Such reforms areimportant for all investors, and particularly foreign investors, who are operat-ing in an unfamiliar environment and can easily choose to go elsewhere. Theseinvestors bring not only needed foreign capital but also technological capabilityand business knowledge that can spill over into the rest of the economy.

A sustained effort to improve trade logistics is also needed to reap new opportu-nities in emerging trends in global trade, where production processes are dividedinto many stages and carried out in different locations. While African countrieshave been able to attract FDI by targeting their abundant natural resources,more incentives are needed to attract FDI that involves manufacturing.

While African

countries have

been able to

attract FDIby targeting

their abundant

natural

resources,

more incentive

are needed

to attract FDI

that involves

manufacturing.


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18

Reforms in so-called backbone sectorssuch as power, telecommunications,transport, and nancehelp improve efciency throughout the economy. Inresource-rich economies, there may also be a need to improve mining codes byincreasing transparency and accountability of contracts and introducing effective

regulatory regimes.

Raise Agricultural Productivity

While agriculture contributes more than 30 percent of GDP and 70 percentof employment, Africa has the lowest cereal y ield per hectare of any develop-ing region. Few sectors offer greater opportunities for improvement. Policy

makers need to develop a plan for harnessing science and technology to providea substantial increase in agricultural productivity. Africa needs to use geneti-cally modied seeds and their complementary fertilizerswhich have resultedin a dramatic yield increase in most of the developing worldas well as moreefcient farming to boost crop yields. However, these approaches need to betailored to countries and agro-ecological zones.

Invest in a Skilled Labor Force

Clearly, improving education in Africa is an important element of developing theskills required to increase productivity and be competitive in a global market-place. While many countries have made signicant progress in increasing enroll-ment and graduation ratesespecially at the primary and secondary educationlevelsthere is still a great need to provide quality education through such skillsas improving numeracy, problem-solving, and critical thinking skil ls. At theuniversity level, increasing enrollments in sciencessuch as the engineering and

medical eldsis important to close the widening innovation gap with otherdeveloping regions.

Highly skilled workers constitute the largest share of all emigrants from Africa.Policy should target how to keep these skilled professionals. This will be particu-larly helpful for small economies, such as Cape Verde and Mauritius, which bothhave large segments of their population educated at the tertiary level and a largeshare of emigrants. Retaining skilled professionals requires, among other things,adequate compensation, better employment opportunities, a strong business

climate, and easy access to information technology. In addition, countries with alarge Diaspora populationsuch as Nigeria, Ghana, and Ethiopiacould drawon their skilled labor force to facilitate trade, investment, and technology trans-fer, including through temporary or permanent return to Africa. Technologytransfer from abroad may take the form of adapting innovations in organiza-tional and institutional structures, which are important to improving labor andcapital productivity.


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Conclusion

The widening gaps in income and in governance and business climateindicatorscompared with those of other developing regionssuggest that therate of productivity advance in Africa will continue to be slow, and some of therecent optimism may not be fully warranted. Prospects for sluggish growth inindustrial countriesstill Africas main export destinationand the likelihoodthat commodity prices wil l continue to show high volatil ity also argue forcaution. In addition, commodity prices may decline as supply responds to

high prices. Both domestic savings and investment rates in Africa remainmuch lower than successful emerging economies that have seen large growthacceleration in the past.

However, there is clearly new hope for Africa, grounded in improved stability,the rise of an African middle class, and the opportunity presented by strongerlinks with fast-growing emerging markets. In the long term, as wages rise in

these countries, Africas comparative advantage could shift toward manufactures,and new export growth opportunities may open upallowing the worlds poor-

est continent to make real, sustained economic progress.

Notes

1 According to the IMFs denit ion of oil-exporting economies, oil exports account for 30

percent or more of merchandise exports. This group includes Angola, Cameroon, Chad,Congo Republic, Equatorial Guinea, Nigeria, and Sudan.

2 Each sectors contribution to total value-added growth is computed by using data on sec-toral growth and sectoral share of GDP.

3 These economies include Uganda, Mozambique, Ethiopia, Rwanda, Sudan, Burkina Faso,Tanzania , Ghana, and Mali.

4 The Dutch Disease is related to the negative effects of a resource boom and reects thedecline in manufacturing activities and competitiveness as the exchange rate appreciates

and wages rise.

5 Delayed demographic transit ion describes populat ion change when a country moves from

high to low fertility and mortality rates as part of economic development.

6 For a detailed explanation of the methodology behind the computation of the index, see

Uri Dadush and Bennett Stancil, The World Order in 2050, Policy Outlook, CarnegieEndowment for International Peace, 2010.

7 Roman Grynberg and Samantha Newton, Commodity Prices and Development(Oxford: Oxford

University Press, 2007).8 See Uri Dadush and Shimelse Ali , The Transformation of World Trade, Policy Outlook,

Carnegie Endowment for International Peace, 2010.

9 These include Angola , Cameroon, Cote dIvoire, Kenya, Nigeria , and South Africa.

There is clearly

new hope

for Africa,

grounded

in improved

stability, the

rise of an

African middle

class, and the

opportunity

presented

by stronger

links with

fast-growing

emerging

markets.


20/20

SHIMELSE ALIis an economist in Carnegies International EconomicsProgram.

URI DADUSHis senior associate and director in Carnegies new InternationalEconomics Program. His work currently focuses on trends in the global econ-omy and the global nancial crisis. He is also interested in the implications of the

increased weight of developing countries for the pattern of nancial ows, tradeand migration, and the associated economic policy and governance questions.Dadush previously served as the World Banks director of international tradeand before that as director of economic policy. He also served as the director ofthe Banks world economy group, leading the preparation of the Banks agshipreports on the international economy.

CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE

The Carnegie Endowment for International Peace is a private, nonprot orga-nization dedicated to advancing cooperation between nations and promotingactive international engagement by the United States. Founded in 1910, its workis nonpartisan and dedicated to achieving practical results.

As it celebrates its Centennial, the Carnegie Endowment is pioneering the rstglobal think tank, with ourishing ofces now in Washington, Moscow, Beijing,Beirut, and Brussels. These ve locations include the centers of world governance

and the places whose political evolution and international policies will most de-termine the near-term possibilities for international peace and economic advance.

2011 CARNEGIE ENDOWMENT FOR INTERNATIONAL PEACE