Report on Economic Outlook in Africa (EOA)

Report on the Economic Outlook in Africa (EOA) 2013

OECD Development Center

Summary:

– Africa has experienced sustained economic growth over the past 15 years and, despite the global recession and political instability in several countries in the region, is expected to continue growing at an average rate of 4.8% in 2013 and 5.3% in 2014.

– Creating productive jobs and reducing poverty are the main challenges for African growth.

– The structural transformation of African economies should lead to the creation of both new activities and more productive jobs.

– Ensuring the development of the natural resources sector, particularly through diversification, investment in infrastructure and human capital, and optimization of resource taxation, should enable African economies to accelerate their structural transformation.

Introduction

The African Economic Outlook (AEO) 2013 is the 12th edition of the annual AEO report, which presents economic, social, and political developments on the African continent. Over the past five years, two institutions, the UNDP and the ECA, have joined the AfDB and the OECD Development Center, which initiated the project, thereby improving the report’s geographical coverage and the quality of the analyses provided. Indeed, from covering 22 African countries in 2002, the 2013 AEP report provides growth forecasts for 52 out of 54 African countries (excluding Somalia and South Sudan) and country summaries for 53 African countries (all excluding Somalia).

The AER report, which is aimed at public decision-makers, development partners, private and institutional investors, researchers, etc., has the following main objectives:

– to broaden the knowledge base on African economies;

– to provide valuable support for economic policy and investment decision-making (particularly for donor intervention);

– to ensure capacity building for economists in partner institutions, as well as local experts in the countries covered.

1 – Economic performance and prospects for the African continent

How have African countries performed economically in recent years? What are the prospects for Africa? What macroeconomic factors explain this performance and these prospects? Does the strong performance of African economies have an impact on human development? What is the state of political and economic governance in Africa? These questions are addressed in the first part of the 2013 AEP report.

Good growth prospects for the continent:  » Growth continues despite headwinds from the global economy »

The authors of the report expect growth of 4.3% in 2013 and 5.3% in 2014[1]on average for the African continent. This represents a decline from the 6.6% growth rate in 2012. Nevertheless, as the report points out, if Libya is excluded from these forecasts, we see an improvement in the continent’s average growth. The Libyan economy suffered from the virtual halt in oil production during the conflict, causing Libyan GDP to fall by 59.7% in 2011. According to the report, this sharp decline in Libyan GDP reduced the continent’s average growth by 0.8 percentage points to 3.5%. Conversely, the rebound in Libyan growth in 2012 (+95.5%), due to the rebound in oil production, is estimated to have increased the continent’s average growth by 1.4 percentage points to 6.6%. The growth rate for the continent excluding Libya is estimated at 4.2% in 2012, with growth forecasts of 4.5% in 2013 and 5.2% in 2014 (see Figure 1 below).

Figure 1: Economic growth in Africa (%)

Notes: e: estimates; f: forecasts

Source: PEA 2013 report, p. 18.

In terms of regional performance, West Africa is expected to record the most impressive economic growth, with forecasts of 6.7% and 7.4% for 2013 and 2014, respectively. Central Africa and East Africa rank second and third respectively among the continent’s most dynamic regions, with expected growth rates of over 5% in 2013 and 2014. The continent’s two other regions, North Africa and Southern Africa, have relatively less favorable prospects.

With stagnant growth in 2011 followed by a rebound in 2012, the growth outlook for North Africa remains optimistic, with 4% growth forecast for 2013 and 2014. This is despite renewed social and political tensions in several countries in the region and the uncertainties they raise for economic growth. Southern Africa, which saw its growth rate fall below 4% to 3.7% in 2012, is expected to see growth return to above 4% in 2013 and 2014, according to the report.

Non-inclusive growth

Despite the continent’s good economic performance (on average), poverty remains a major problem in many countries. The authors point out that in many countries, growth will not be sufficient to bring about a significant reduction in poverty. Ensuring that economic growth has a significant impact on human development is, according to the authors, one of the major objectives of most African countries.

African growth driven by domestic demand

The 2013 AEP report emphasizes the contribution of domestic consumption to African growth. On the demand side, growth is supported by consumption (private and public) and investment (private and public). The rise in private consumption, the primary driver of African growth, is mainly due to urbanization and rising household incomes, linked in particular to increased remittances from migrants (see, for example, Economic Commission for Africa, 2013). Growing urbanization[2]and the emergence of an African middle class should boost the growth of service-related sectors, particularly telecommunications and banking, and consumer goods. According to McKinsey, consumer spending in Africa is expected to reach $1.4 trillion in 2020, up from $860 billion in 2008. This would represent more than half of the continent’s total GDP, estimated at $2.6 trillion in 2020 (see McKinsey, 2010).

Net exports contribute negatively to growth, due to the larger increase in imports. However, it is important to distinguish between oil- and food-importing countries and oil-exporting countries. The latter have, on average, large current account surpluses, while the structural current account deficit of oil-importing countries widened in 2012, reaching -7.5% of GDP. However, on average, despite a decline in imports at the height of the crisis in 2008-2009, imports rose rapidly to reach a level in 2011 that was higher than before the downturn. Furthermore, the authors emphasize two points in particular. On the one hand, the structure of imports shows the prevalence of imports of capital goods (including telephone equipment, transport vehicles, etc.), which since 2000 have accounted for around 35% of total imports. Second, food imports exceed the sum of imports of oil, metals, and other raw materials (i.e., more than the GDP of Kenya, Africa’s^{10th largest economy}, in 2011).

Figure 2: Contribution of demand components to African GDP* in percentage points

*excluding Libya

Source: PEA 2013 report, p. 27.

In terms of African exports, despite their historical importance to developed countries (EU and United States), two trends are worth noting. On the one hand, there has been a decline in African exports to developed countries; on the other hand, there has been an increase in trade with emerging countries over the period 2000-2011. Thus, while African exports to the EU and the United States fell from 47% to 33% and from 17% to 10% respectively, African exports to China jumped from 3.2% to 13% between 2000 and 2011.

The authors of the report nevertheless note that  » Africa would benefit from trading more with itself. » Indeed, the report highlights the untapped potential of intra-African trade. According to the authors, strengthening regional integration and improving access to the markets of the largest economies could open up new opportunities for all.

Foreign financial flows to Africa: the importance of migrant remittances and the continent’s growing integration with emerging economies

According to the report, foreign financial flows to Africa, and sub-Saharan Africa in particular, reached a new record in 2012 with $186.3 billion (9.2% of African GDP). Significantly, these flows are dominated by migrant remittances, which exceed aid and foreign direct investment. With regard to the latter, the authors note the growth in investment from emerging countries and the resulting prospects for diversification[3].

Alongside these promising developments, the report points out that many African countries remain dependent on development aid while being vulnerable to shocks, particularly climate shocks and commodity price shocks, which, given the stagnation in development aid, casts some doubt on the economic prospects of these countries.

A recovery in tax revenue growth

African countries have seen an increase in tax revenues, which rose from $466 billion in 2010 (26.6% of total GDP) to $513 billion in 2011 (26.8% of total GDP). Most of this increase came from higher taxes on natural resources, which can be explained in particular by rising commodity prices and demand for commodities from emerging countries (China, India, and Brazil).

Nevertheless, it is important to note that the outlook for both global commodity prices and demand for commodities is stable, if not declining. This is due in particular to the slowdown in growth in emerging countries and the gloomy economic outlook in Europe.

Civil unrest: Protests vs. Violence

This section concludes the first part on Africa’s macroeconomic outlook by presenting the evolution of civil tensions on the African continent from 1996 to 2012 and highlighting the challenges facing the continent.

Figure 3: Demonstrations and civil violence, 1996-2012

Source: PEA 2013 report, p. 97.

The report specifies that a significant proportion of the demands made during the protests of recent years, mainly in sub-Saharan Africa, are economic in nature: employment/wages, cost of living, etc. In fact, economic growth over the last 15 years has not led to a significant increase in jobs, even though the population continues to grow at a steady pace. Therefore, we cannot yet speak of Africa’s « takeoff. » To achieve this, according to the authors of the report, African countries must accelerate the structural transformation of their economies in order to meet the challenge of employment but also to make growth more inclusive.

2 – Structural transformation and natural resources

What is the current state of structural transformation in Africa? What are the links between structural transformation and natural resources? How can structural transformation based on natural resources be promoted? These questions are addressed in the thematic chapter of the 2013 PEA report, which emphasizes the role that natural resources could play in the economic growth of African countries.

Positive structural transformation in Africa

Structural transformation is defined as the reallocation of economic resources from less productive activities to more productive ones. This involves both the emergence of new, more productive activities and the shift of resources and labor from traditional activities to new ones. According to the report, Africa has been undergoing positive structural transformation (measured by the structural component of total factor productivity) since the 2000s, when we began to see a shift of labor to the most productive sectors. However, according to the authors’ estimates, accelerating structural transformation, i.e., the reallocation of labor in particular to the most productive sectors, could lead to a more rapid reduction in poverty on the continent.

Structural transformation remains hampered, however, by a low-skilled workforce, the length of learning processes in manufacturing, and barriers to business productivity (narrow markets, poor public services, limited access to finance, labor costs). Nevertheless, Africa benefits from its comparative advantage in natural resources, the under-exploited « potential » of the primary sector, and the opportunities offered by both favorable terms of trade and demand for resources from emerging countries. Given these factors, the authors recommend  » structural transformation based on natural resources. » This would involve promoting the development of the natural resources sector, both agricultural and extractive, by ensuring diversification of activities within the sector, investing in infrastructure and human capital, strengthening the institutional and regulatory framework governing its activities, etc.

However, the authors acknowledge the risks that such a strategy would pose to African economies in terms of dependence on a few products. They identify several conditions for « overcoming dependence, » ensuring economic diversification, and overcoming (common) obstacles to structural transformation and the exploitation of natural resources.

Finally, what public policies should be implemented to promote structural transformation based on natural resources? The figure below describes the four levels of public policy intervention identified by the authors.

Figure 4: Levels of public policy intervention

Source: PEA 2013 report, p. 163.

The « fundamentals » include the provision of quality public services, a favorable institutional and regulatory environment, etc. The « natural resource-specific context » refers in particular to exploitation rules and property rights, while natural resource management and the active promotion of structural transformation refer respectively to the optimization of resource taxation and capacity building, among other things.

Thus, according to the authors, investing to remove barriers to the development of the natural resource sector could lead to the structural transformation that would enable the continent to address the pressing challenges it faces.

3 – Discussion of the 2013 PEA report

By adopting a methodology that combines political and economic analysis, the 2013 PEA report stands out for its originality and is of definite interest to public decision-makers and private investors. Furthermore, the use of microeconomic data to support the results of macroeconometric models makes the latter much more credible than in most reports of this type.

Nevertheless, the 2013 PEA report could be criticized for not addressing crucial issues such as sustainable development or the challenges/implications of Africa’s « takeoff » for its trading partners, particularly Europe.

In a discussion bringing together specialists in African economic and political issues, Marc Raffinot, senior lecturer at Paris Dauphine University, also highlighted: (i) the limitations of a « continent-level » analysis, particularly given the heterogeneity of African countries; (ii) and the difficulties in providing a clear answer to the question: « Will the relatively rapid growth recorded by Africa in recent years continue? » While Mr. Raffinot reiterates the relevance of analyzing industrial transformation, he nevertheless emphasizes the problems of endogeneity that make it difficult to identify a causal link between structural transformation and development. Mr. Raffinot notes that the impact of foreign direct investment (FDI) depends on structural transformation and that « not all FDI is equal, » referring in particular to the work of Ndulu, B. J., Challenges of African Growth (2007). Added to this is the fact that the generally pro-cyclical nature of FDI considerably reduces its value for the development of the poorest countries.

With regard to political analysis, Mr. Raffinot notes several points in the 2013 PEA report which, in light of the economic literature on elites, the state, the distribution of power, and its impact on growth (see, for example, North, Wallis, and Weingast (2009); Acemoglu, Robinson, Torvik, (2013)) may prove to be somewhat weak. Thus, the authors make the need to establish « accountable institutions that establish power sharing and keep rent-seeking behavior at bay » a fundamental condition for structural transformation. However, as North et al. (2009) point out, the creation and distribution of rents in « closed social orders » is a means of controlling violence and is inherent in the « social order. » Mr. Raffinot concluded his presentation with questions about the analytical tools used by the authors of the PEA report. These included the value of making projections for countries such as Egypt, based on assumptions of « gradual improvement in global economic conditions…and the return of peace to countries that continue to suffer from political instability. »

Thus, while the comments below do not call into question the value of the 2013 PEA report, one of the most comprehensive in terms of geographical coverage of the African continent, they nevertheless serve as a reminder that certain issues important to the continent’s development warrant further analysis.[4]. They therefore invite readers of the PEA report to consult other, more thematic publications on the continent that are intended to fill these gaps.

Notes: