Week 1.1: Economic Growth in Africa Takashi Yamano

1. Development Issues in AfricaSpring 2006 Week 1.1: Economic Growth in Africa Takashi Yamano

2. The Economics of Being Poor • Most people in the world are poor. • If we knew the economics of being poor, we would know much of the economics that really matters. • Theodore W. Schultz • Nobel Lecture: The Economics of Being Poor, • Journal of Political Economy, • 1980, vol. 88: 639-651.

3. The Economics of Being Poor • Most of the world’s poor people earn their living from agriculture. • If we knew the economics of agriculture, we would know much of the economics of being poor. • Theodore W. Schultz • Nobel Lecture: The Economics of Being Poor, • Journal of Political Economy, • 1980, vol. 88: 639-651.

4. Development Issues in Africa • Objective: • To apply economic theory to economic problems in Sub-Saharan Africa • to obtain broad descriptive information on various economic and social problems in Sub-Saharan Africa • To develop academic communication skills • Methods: • Lectures and Student Participations • Plan: see Syllabus

5. Week 1Economic Growth in Africa:

6. Economic Growth in Africa • Today’s contents • Overview • Evidence from Cross-country Models • Does History solve the Africa mystery? • Can political reform provide solutions?

7. Map of Africa

8. Phase 1: Pre and Post Independence Period in 1955-1973 • Economic History in Africa Phase 2: Oil Crisis and Export Goods Price Declines in 1973-1980 >> Debts Expansion Phase 3: Adjustment Period in 1980-1995 Phase 4: Post Washington Consensus Period in 1995-presence Phase 5: Some Bright Spots?

9. Annual Growth Rate (%) • Economic Growth GNI per capita in 2000 and 2004

11. Best and Worst Performers in the 1990s

12. GNI in US$ in 2004 (% in total SSA) South Africa (43%) Kenya (3%) Angola (4%) Sudan (4%) Nigeria (12%)

13. Source: Deaton (1999) Journal of Economic Perspective vol. 13: 23-40

14. Countries that are missing Economic Growth rates in 1970s: • Angola, Cape Verde, Comoros, E. Guinea, Eritrea, Ethiopia, Guinea, Mauritius, Mayotte, Mozambique, Namibia, Tanzania, Uganda • War and Conflict in 1960-2001 • Angola, Burundi, Chad, Congo-Brazzaville, Congo (Zaire, DRC), Eritrea, Ethiopia, Guinea-Bissau, Liberia, Mozambique, Namibia, Nigeria, Rwanda, Senegal, Sierra Leone, Somalia, South Africa, Sudan, Uganda, Zimbabwe

15. Cross-Country Regression Models • There are serious problems with cross-country regression models • Missing data • Missing variables • Poor quality in data • Small number of observations • We can still obtain some insights

16. Cross-country Regression Studies • Easterly and Levine (1997) QJE • “Africa’s Growth Tragedy: policies and ethnic divisions” • Africa’s high ethnic fragmentation explains poor economic policies and performances. • Sachs and Warner (1997) JAE • “Sources of slow growth in African Economies” • Africa’s slow growth can be explained in an international cross-country framework: • Poor economic policies • Africa’s lack of openness to international markets • Lack of access to the sea • Tropical climate/diseases

17. Easterly and Levine (1997) QJE • “Africa’s Growth Tragedy: policies and ethnic divisions” • Ethnic diversity explains a substantial part of public choices, political instability, and other economic factors associated with long-run growth. Ethnic Diversity Economic Growth Public Policy Choices

18. Ethno-linguistic Fractionalization Index (ETHNIC)

19. AFRICA dummy remains significant ETHNIC weakens as policy choices are included

20. Ethnic Diversity, Political Instability, and Policy Choices ETHNIC is correlated with (+) Schooling (-) Financial Depth (+) Black Market Premium (-) Infrastructure But not with Assassinations Fiscal surplus

21. Easterly and Levine (1997) QJE Summary • Africa’s poor growth is associated with • low schooling, political instability, underdeveloped financial systems, distorted foreign exchange markets, high government deficits, and insufficient infrastructure. • Ethnic diversity is closely associated with • Low schooling, underdeveloped financial systems, distorted foreign exchange markets, and insufficient infrastructure Ethnic Diversity Economic Growth Public Policy Choices

22. Englebert (2000) WD • “Solving the Mystery of the African Dummy” • African Dummy remains significant in regression models, suggesting that specifically African characteristics, not captured by explanatory variables, exist. What is it? • Hypothesis: the lack of historical continuity from the pre-colonial to the post-colonial period constraints the options available to African policy makers. Legitimacy Problem!

23. How to measure legitimacy?

24. Legitimate countries in Africa • 10 out of 38 in the data: Botswana, Burundi, Cape Verde, Ethiopia, Lesotho, Mauritius, Rwanda, Sao Tome, and Principe, Seychelles, and Swaziland • Non-legitimate countries outside Africa: • Latin America: Bolivia, Guatemala, Peru, Ecuador • Asia: India, Indonesia, Malaysia, the Philippines

25. Comparison between Legitimate and Non-legitimate

26. Englebert (2000) WD Summary • Legitimacy is correlated with policy choices • Legitimacy is an important determinant of economic growth: legitimate states grow 2.2 % faster than their non-legitimate counterparts • Results call for a greater integration of political science into the study of economic growth. • There are reasons (e.g., legitimacy) for bad policy choices. Economists need to know about them.

27. Further Readings • Acemoglu, Johnson, and Robinson (2001). “Colonial origins of comparative development: an empirical investigations,” AER, 91 (5): 1369-1401. • They divide colonialism into Settlement and Extractive: • Settlement: Institutions that protect property rights were created and helped post-colonial development. • Extractive: Resources were only extracted, and institutions that protect property rights did not develop. • Settler mortality had a large impact on choosing settlements. • The authors show that • Mortality >> Settlement/Extractive >> Institutions >> Economic Growth

28. Source: Acemoglu, et al. (2001) AER vol. 13: 23-40