Information about Sub-Saharan Africa África subsahariana
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I. Patel
Published Date:
December 1992
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Information about Sub-Saharan Africa África subsahariana
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Resource Gaps and Financing for Growth in Africa

Benno J. Ndulu*

Sustained growth is associated with an economic structure that can respond flexibly to exogenous shocks and with an indigenous capacity that can manage change effectively. In this context, the record of African economies has been mixed over the past three decades. From the 1960s to the early 1970s, emphasis was placed on rapid growth. The external environment was relatively benign, and African economies focused largely on expanding output from primary sectors and developing supportive infrastructure. Industrialization was characterized by import substitution involving simple products and processes.

In the 1970s, greater emphasis was placed on structural transformation. Industrialization, entailing an expanded coverage of products and processes, was pushed strongly, often at the expense of agriculture both in terms of investment and producer incentives. Linked to this attempt at structural transformation were major investments in education, health, and urban development, although these also reflected a concern for basic needs. Sectors characterized by higher rates of growth in productivity were expected to fuel growth in the economy as a whole and also to furnish skills that were in short supply. The 1980s featured major external shocks that threatened to wipe out previous advances in living standards and in the transformation of economic structure. African governments became increasingly aware of the need for active and effective macroeconomic policies to stabilize economic activity and facilitate adjustment to changes in domestic and external conditions.

In the coming decade, most governments will need to develop realistic approaches to structural transformation and to revive economic growth on a sustainable basis. A central issue therefore is how growth in the capacity to produce will relate to desired changes in structure and the likely availability of finance. Important lessons can be drawn from the experience of the past three decades, and especially the last one, that will condition the prospects for growth and the strategies for financing it.

The first lesson is that a weak economic structure renders African economies vulnerable to exogenous shocks. Of particular note is the import-dependent nature of investment and production. Investment requires capital goods that are not produced domestically. As a result, domestic savings cannot be transformed into investment goods unless there is foreign exchange. Empirical investigation has also shown that imports of intermediate goods are the single most important determinant of capacity utilization. Thus variability in import capacity translates more or less directly into variability in utilization and in the expansion of productive capacity (Helleiner (1986) and Khan and Knight (1988)). Import capacity is thus fundamental to sustaining growth and development. Other attributes of a weak economic structure are rudimentary technology in agriculture, usually the dominant sector, and an institutional setting unable to respond flexibly to rapidly changing conditions.

The second arises not simply from the open nature of African economies but the fact that their ties with the developed world have tended to be procyclical, with the result that the impact of any external shock is amplified rather than dampened. The evidence of the past decade suggests that world recession weakens demand for African primary exports and reduces net resource transfers, thereby exacerbating downturns in domestic economic activity. The rise in real interest on external debt during the first half of the 1980s widened the gap between overall financing needs and resources forthcoming from foreign, as well as domestic, sources. Susceptibility to major shocks, as manifested in the deterioration in external terms of trade, greater volatility in net inflows of external resources, and increased resource transfers through external debt servicing significantly reduced the latitude for measures aimed at sustainable growth and development.

Third, African economies are characterized by a degree of government involvement in the economy that goes beyond the more conventional task of redressing market failure. In most African countries, the state has acted as the principal modernizing agent in the productive sphere as well as the key instrument for income distribution. It follows that fiscal performance is crucial not only for social welfare but also for future growth. Hence, gaps in fiscal resources and in their effective use assume a special significance.

The next section of this paper outlines the principal features of the economic crisis that emerged fully in most African countries toward the end of the 1980s. A summary of the present situation follows, which underscores the fragility of most economies, and hence the importance of pursuing policies that will sustain growth through desirable changes in economic structure. The final section poses a set of issues, in the form of policy choices, that pertain to the financing of economic activity in the coming decade.

The Economic Crisis

Sub-Saharan Africa’s rate of growth started to decelerate in the latter half of the 1970s. This rate of decline worsened during the first half of the 1980s (Table 1) and can be attributed to a combination of exogenous shocks and misdirected policies. Here though, we highlight only those aspects bearing on our concern with the financing of and likely constraints to future economic growth.

Table 1.Basic Economic Indicators for Sub-Saharan Africa in Growth Terms(In percent)
1965–731973–801980–871980–851985–87/88
Gross domestic product
Total5.92.50.50.131.7
Per capita GNP3.10.5-2.9-3.7-1.5
Total consumption per capita1.90.5-3.4-2.6-7.3
Private consumption
Total3.92.61.1
Per capita1.3-0.2-2.0
Public consumption
Total9.07.0-0.7
Investment9.84.0-8.2
Exports volume (total)15.10.2-3.6-3.9-2.6
Agricultural exports-0.8-1.6-2.61.0
Imports volume3.77.6-7.1-7.8-5.3
Agriculture2.2-0.31.3-0.11.6
Manufacturing10.18.20.6
Implicit GDP deflator7.56.815.2

Sources: The World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth; and African Fconomic and Financial Statistics (washington, 1989).

Sources: The World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth; and African Fconomic and Financial Statistics (washington, 1989).

Key among the exogenous shocks were the deterioration in the external terms of trade, cuts in the net inflow of external resources, and a rise in real interest on foreign debt. The collapse of primary commodity prices and rise in import prices between 1978 and 1980 resulted in a rapid deterioration in the external terms of trade for African countries, with the exception of a few oil exporters. The barter terms of trade for sub-Saharan Africa dropped annually by 4.2 percent between 1980—87. The income terms of trade declined even faster at 5.8 percent annually since the output of exports was dropping each year by 1.6 percent. After 1985, growth of 1 percent in the output of agricultural exports was more than offset by an annual decline in the barter terms of trade, leading a further drop in the income terms of trade of 7.3 percent annually between 1985 and 1988 (Ndulu (1990)).

Foreign savings, defined as the deficit on the current account plus net unrequited transfers, fell drastically as a proportion of gross domestic product (GDP) during the first half of the 1980s. From an average of 11 percent of GDP in 1980/81, it declined to 6.6 percent in 1985, a drop of 40 percent (Table 2). When adjusted for the rise in the real rate of interest on the foreign debt, foreign savings declined even more steeply, from 8.2 percent of GDP in 1980/81 to 3.7 percent in 1985, a cut of 55 percent (Table 2).

Table 2.Resource Gaps Closure in Sub-Saharan Africa, 1980–87(In percent)
FORSAV/

GDP
AFORSAV/

GDP
FD/GDPRIM/GDPNOTG/

FD
DCR Growth
19809.57.4-9.526.828.921.1
198111.68.9-10.824.726.821.9
198211.58.8-11.623.323.520.9
19839.16.5-10.420.931.117.0
19846.83.8-10.219.833.312.0
19856.63.7-10.919.631.016.2
19869.0-11.419.832.315.5
1987-11.419.333.9

Sources: The World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth; and African Economic and Financial Statistics (washington, 1989).

Note: FORSAV = Foreign savings = Negative of current account balance plus unrequited net transfers; AFORSAV = FORSAV less interest payment on foreign debt (foreign saving available for current use); FD = Overall fiscal deficit (excluding grants); RIM = Real imports; NOTG = Net official transfers to the government; DCR = Domestic credit.

Sources: The World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth; and African Economic and Financial Statistics (washington, 1989).

Note: FORSAV = Foreign savings = Negative of current account balance plus unrequited net transfers; AFORSAV = FORSAV less interest payment on foreign debt (foreign saving available for current use); FD = Overall fiscal deficit (excluding grants); RIM = Real imports; NOTG = Net official transfers to the government; DCR = Domestic credit.

Two serious misdirections in policy can be associated with economic stagnation during this period. The first was misguided investment policies, which caused a decline in the return to investment, the reason being that while foreign resources had played a significant role in financing an expansion in capacity, the rate of capacity utilization depended mostly on domestically mobilized resources, which grew much more slowly. The steep decline observed in capacity utilization over the past decade and a half is partly attributable to this mismatch between domestic and external flows of financial resources and largely explains the very disturbing drop in the productivity of investment from an average of 83.8 percent between 1961 and 1973 to only 6.2 percent during 1980-87 (World Bank (1989a)). Thus, respectable rates of investment in sub-Saharan Africa, averaging over 20 percent of GDP between 1973 and 1980, never yielded the anticipated contribution to real growth. The second misdirection pertains to macroeconomic policy. Although most governments eventually reacted to the crisis with major changes in macroeconomic policy, many of them, at least initially, believed that the shocks their economies were experiencing were temporary. As a result, these governments borrowed heavily from domestic and external sources to maintain real economic activity and consumption and did not meaningfully address underlying distortions in incentives and major rigidities in their economies. In retrospect, these two policy failures aggravated the adverse effects of external shocks to which African economies have been singularly vulnerable.

In terms of resource gaps, the crisis manifested itself in three ways. First, there was a rapid decline in the gross domestic savings rate from 22 percent in 1980 to 12.6 percent in 1985. Coupled with a decline in foreign savings (Table 3), this trend caused a steep cut in domestic investment from 20.2 percent in 1980 to 12.1 percent in 1985. Although investment then recovered to 16 percent of GDP between 1985—87, there was only a negligible rise in domestic savings of 0.4 percent to about 13 percent. As a result, not only growth but even the maintenance of economic activity became directly dependent on the vagaries of foreign resource inflows. Although some governments tried to respond through inflation taxation, this strategy proved untenable in political and economical terms.

Table 3.Evolution of Resource Caps: Sub-Saharan Africa 1965–87(In percent)
1965198019851987
Gross domestic investment/GDP1420.212.116
Excluding Nigeria1520.015.716
Gross domestic saving/GDP1422.012.613
Excluding Nigeria1514.313.811
Fiscal deficit (excl. grants)/GDP-9.6-10.6-11.4
Excluding Nigeria-9.9-10.9-11.8
Import surplus ratio (imports/exports)1068978111
Excluding Nigeria10611590112

Sources: The World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth; and African Economic and Financial Statistics (washington, 1989).

Sources: The World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth; and African Economic and Financial Statistics (washington, 1989).

Second, owing to the import-dependent nature of African economies, the decline in export earnings and the steep fall in foreign resource inflows during the first half of the 1980s led to a decline in production, investment, and consumption. Import volumes were cut back at an annual rate of 7.8 percent between 1980–85 (Table 1). These cuts were disproportionately larger for consumer and intermediate imports because official foreign assistance was still largely limited to the financing of projects. The resultant steep decline in capacity utilization in import-dependent sectors led to a continuing fall in real output and growth. In the absence of additional external financing, the only means of closing this resource gap was to cut real domestic activity.

Third, the resource balance on the fiscal side deteriorated badly. The tax base shrank because of the decline in the growth in incomes and a rise in tax evasion. The growth in public sector revenues fell drastically behind that of expenditures. Between 1980 and 1982, the fiscal deficit jumped quickly from 9.9 percent of GDP to 11.6 percent. It was financed by continued inflows of foreign resources and by inflation taxation (Table 3). Between 1982 and 1985, the fiscal deficit did contract, but more as a result of massive cuts in expenditure rather than increases in revenue. From an average of 7.4 percent of total expenditure between 1980 and 1984, government interest payments rose to 13.3 percent in 1985–87. The share of expenditures available for real discretionary spending, net of interest payments, dropped between 1980 and 1987, with the steepest decline occurring during 1982–84. In per capita terms, the decline was even steeper (Ndulu (forthcoming)). These cuts translated into a virtual halting of scheduled investment in new infrastructure, a deterioration in the existing stock, and cuts in the delivery of social services. Since 1985, the fiscal deficit, exclusive of external grants, has widened, reflecting some recovery in public expenditures that has been largely financed by foreign grants, which are noninflationary.

Observations Concerning the Present Situation

The past four years have seen African countries shift away from policies aimed at closing resource gaps solely through recessionary measures to those that combine stabilization with growth. Five preliminary observations can be drawn from their experience to date.

  • (1) The revival in growth over the last four years has been very fragile. Good rains and external resource inflows largely account for the concurrent improvement in growth and reduction in internal and external imbalances that has been observed in some countries.
  • (2) Although revamped incentive structures have led to modest increases in output, these have been small and slow because of the poor condition of supportive infrastructure, which had deteriorated badly during prolonged economic crisis. Revival of economic activity will take time and its encouragement, through sustained financing of investment in supportive infrastructure and the application of appropriate incentives, will be necessary.
  • (3) Foreign resources will be needed for two other reasons. First, continued deterioration in the external terms of trade has significantly reduced the benefit forthcoming from adjustment measures. Second, servicing of the foreign debt constitutes a large leakage of resources otherwise available for financing growth and development.
  • (4) Although an expanded inflow of external resources is essential to initiate economic recovery, growth over the longer term can only be sustained through the effective mobilization of own resources. Furthermore, since economic performance is so sensitive to variations in import capacity, a fundamental improvement in export performance is essential.
  • (5) The difficulty of financing the external debt through surpluses on the trade account will likely be compounded by the need to transfer such surpluses internally to government, which must service virtually all of the debt. Governments may have to run fiscal surpluses (apart from their interest obligations) to meet these requirements and may therefore end up cutting badly needed programs to rehabilitate supportive and social infrastructure. This outcome would have serious adverse consequences for long-term growth. Although currently confronting only middle-income oil importers in sub-Saharan Africa, this “double transfer” problem would result in a shift from “real” external constraints to “financial” ones (Taylor (1990)) in other debt-ridden African countries during the 1990s.

Issues for the Nineties

We conclude by examining four issues, posed in the form of policy choices, that will bear directly on efforts of African governments and donors to revive and sustain economic growth in the coming decade.

To What Extent Will Growth Potential Be Constrained by Inadequate Finance or by Its Ineffective Use?

African economies have experienced a precipitous fall in real growth rates in spite of considerable investment and earnest attempts at structural transformation. The mobilization of adequate financial resources, from domestic and foreign sources, will clearly be important. However, our preceding discussion of the African experience has also illustrated the critical importance of using such resources much more efficiently than has been the case hitherto. Governments must pursue macroeconomic policies and apply incentives that raise the effectiveness of financial resources, which will be in short supply (Killick (1990)). Africa simply cannot afford to waste these scarce resources.

Should Financing Policy Give Priority to Expanding Capacity or to Making Better Use of Previous Investments?

Much of the capital stock in African economies lies idle or is seriously underutilized. Foreign exchange will be in short supply. In most cases, countries must choose whether to use foreign exchange to reactivate this idle capacity or expand existing capacity. Recent empirical evidence from five African countries’ economies, namely, Nigeria, Tanzania, Uganda, Zambia, and Zimbabwe (Taylor (1990)), suggests that external finance will generate much greater returns if it is used to improve utilization rather than expand capacity.

While caution should be exercised so as not to revive bad projects, available evidence does suggest the desirability of first exploiting the presence of idle capacity over the medium term. Other activities should complement this approach in order to remove operational bottlenecks, so as to first exploit the potential benefits of earlier investment. For donors this strategy implies greater fungibility in their assistance by relaxing stipulations that direct it mainly toward project financing and link import support strictly to those investments financed by them in the past.

Does Emphasis on Sustained Growth Necessarily Imply Sacrificing Redistributive Aims?

The African experience suggests that a redistributive policy that is not founded on the growth of real economic activity cannot be sustained. This contention does not imply the obverse, namely, that growth alone will alleviate poverty through a so-called trickle-down effect. There is in fact strong empirical evidence to the contrary (Kanbur (1987)). The economic crisis of the past decade has, however, clearly illustrated that unless the real resource base is growing, governments will be forced to cut the delivery of essential social services and will eventually lack the capacity to respond to a growing demand for public goods and services over the longer term. Very recent evidence suggests that public expenditure can be restructured so that governments can promote rapid growth and at the same time finance programs targeted toward the poor in order to relieve poverty (United Nations Development Program (1990)). While external resources will clearly be helpful in this regard, the feasibility of pursuing these dual aims will depend on whether scarce financial resources are being used to revive growth in the most efficient way possible.

What, in the Final Analysis, Is Africa’s Potential for Growth?

The answer depends in part on the time frame under consideration. The modest projection of 3.2 percent a year set out in a major IBRD study for 1988-95 (World Bank (1989a)) is belied by the actual performance of some countries that are recovering at rates in excess of 6 percent annually over the past two years. Projections of such high growth rates over the medium term, that is, five years may not be unreasonable in light of the considerable latent capacity lying idle in many African economies. While projected rates should be lower over the longer term, because growth in production will depend increasingly on investment in additional capacity, reference to the historical record alone may understate Africa’s growth potential. Assuming a more benign international environment and the consistent application of a more coherent set of sound economic policies, African economies should be able to grow at rates comparable to other regions of the developing world.

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*

I am indebted to my colleague, Jeffrey Fine, for incisive comments and suggestions. Any errors are my own.

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