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Growth, Inequality and Poverty Reduction in Africa

Growth, Inequality and Poverty Reduction in Africa. Francisco H. G. Ferreira. The World Bank and IZA. Lusaka - 19 September 2014. OUTLINE. An African “growth profile” Effects on poverty, mediated by inequality Four key policy areas Macroeconomic management under receding tailwinds

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Growth, Inequality and Poverty Reduction in Africa

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  1. Growth, Inequality and Poverty Reduction in Africa Francisco H. G. Ferreira The World Bank and IZA Lusaka - 19 September 2014

  2. OUTLINE • An African “growth profile” • Effects on poverty, mediated by inequality • Four key policy areas • Macroeconomic management under receding tailwinds • Investment in human and physical capital • Promoting growth in the places and sectors where the poor are… • … and creating social protection and promotion systems that enable them to share in growth elsewhere.

  3. “AFRICA RISING”: TWO DECADES OF SUSTAINED ECONOMIC GROWTH …reversing two lost decades from the mid-70s to the mid-90s.

  4. ALTHOUGH REVERSING ABSOLUTE DIVERGENCE WILL TAKE LONGER Standard of living levels remain very low, relative to developed countries. • “Fast-growing SSA” are defined as countries that experienced at least one growth spurt (3.5% p.a. growth in real GDP per capita, for at least five contiguous years) in 1995-2012

  5. IN MANY WAYS, THIS HAS BEEN “HIGH-QUALITY” GROWTH… • Africa’s growth has been strongly investment driven,rather than consumption-driven. • Growth has also been associated with rapid increases in foreign trade – both imports and exports. Note: The figure depicts the median cumulative growth of the different components of aggregate demand for a sample of 44 Sub-Saharan African countries over the period 1995-2012. The data on the components of aggregate demand (household consumption, investment, government consumption expenditure, exports and imports) was originally computed in US dollars at 2005 prices. Source:  World Bank, Africa’s Pulse, Volume 9.

  6. BUT THERE ARE IMPORTANT CAVEATS: GDP growth in SSA, China and other developing countries Source: World Development Indicators

  7. BUT THERE ARE IMPORTANT CAVEATS: 1. Per capita growth is less impressive due to rapid population growth GDP growth in SSA, China and other developing countries GDP growth per capitain SSA, China and other developing countries Real GDP per capita growth Source: World Development Indicators

  8. Fragile and conflict-affected states grow markedly more slowly than non-fragile countries. • There are also substantial differences between resource-rich and non-resource-rich countries 2. Growth performance varies significantly across countries PER CAPITA GROWTH RATES 1995-2012: Fragile: 1.2% Non-fragile: 2.3% Non resource-rich: 1.7% Resource-rich: 2.6% Note: The Index presented in this figure depicts the cumulative growth in real per capita GDP from 1995 to 2012 across 44 Sub-Saharan Africa. Resource rich countries (9 oil and 12 non-oil) are those with average rents from natural resources (excluding forests) that exceed 5% of GDP in 2006-2011. Fragile countries (16) are defined as having either a harmonized CPIA rating of 3.2 or less, or presence of UN and/or regional peacekeeping or peacebuilding missions during the past 3 years.  Source:  World Bank, Africa’s Pulse, Volume 9.

  9. Agriculture and manufacturing account for a declining share of GDP in the region. • The natural resource sector (which includes mining as well as construction) and the services sectorhave grown faster than the economy on average, and account for increasing shares. 3. Growth performance also varies significantly across sectors, within countries Note:  The resources sector includes construction, mining and quarrying, and gas, electricity and water. Sectoral value added information is in US dollars at 2005 prices from the World Development Indicators. The figure shows the median cumulative growth of the value added of the different sectors for a 44 Sub-Saharan African countries over the period 1995-2012. Source:  World Bank, Africa’s Pulse, Volume 9.

  10. ECONOMIC TRANSFORMATION As a result, Africa’s structural transformation is bypassing manufacturing. Fast-Growing SSA Countries, Resource Rich Fast-Growing SSA Countries, Non Resource Rich Source: World Bank, Africa’s Pulse vol. 9 Note: Resources sector includes mining and quarrying, construction and electricity, gas and water

  11. OUTLINE • An African “growth profile” • Effects on poverty, mediated by inequality • Four key policy areas • Macroeconomic management under receding tailwinds • Investment in human and physical capital • Promoting growth in the places and sectors where the poor are… • … and creating social protection and promotion systems that enable them to share in growth elsewhere.

  12. AFRICA’S RECENT ECONOMIC DYNAMISM HAS REDUCED POVERTY. BUT NOT BY ENOUGH… • SSA continues to account for one third of those classified as “extremely poor” globally • In the last twenty years, extreme poverty fell by 8% in Africa, compared to 44% in East Asia. Source: PovcalNet.

  13. THIS REFLECTS THE REGION’S LOW GROWTH ELASTICITY OF POVERTY… Growth Elasticity of Poverty Reduction, 2000-2010 Five most populous countries by region*, except Poland and Sri Lanka. * For which data is available. Source: estimates based on PovcalNet.

  14. A PARENTHESIS ON THE GROWTH ELASTICITY OF POVERTY Recall that a Lorenz curve with parameters π is given by So And So, at the poverty line: Denoting time derivatives by dx:

  15. … WHICH IN TURN REFLECTS HIGH INEQUALITY… Most African countries have high levels of consumption or income inequality, relative to the rest of the world. Seven of the ten most unequal countries in the world today are in SSA. Consumption Survey Income Survey Sub Saharan Africa Source: PovcalNet, most recent survey available.

  16. …AND A GROWTH PATTERN THAT IS OFTEN NOT INCLUSIVE In Malawi, average p.c. household consumption grew by 6.5% between 2004-2010. But whereas the top 5% of the population experienced annual growth rates of almost 8%, the bottom 5% grew by between 1% and 3%. Source: estimates based on household surveys from “Survey-based Harmonized Indicator Program (SHIP)”

  17. INEQUALITY OF OUTCOMES REFLECTS LARGE INEQUALITIES OF OPPORTUNITY… Rich-Poor Gaps in Proportion of 15-19 Year Olds who have Completed Grade 6 Source: DHS. http://econ.worldbank.org/projects/edattain. Most recent survey available shown.

  18. WHAT DOES THIS MEAN FOR THE FUTURE?BY 2030, AFRICA’S POVERTY CAN BE REDUCED FROM A HALF TO BETWEEN A QUARTER AND A THIRD OF THE POPULATION $1.25-day headcount (%) * Scenario 1 projects each country’s historical GDP per capita growth rate over the 2000-2010 period forward to 2030. Scenario 2 does the same using mean household survey incomes. Both scenarios assume distribution-neutral growth. Source: PovcalNet and staff estimates based on Chen, Kleineberg, Kraay, Lanjouw (2013).

  19. BUT WITH SIMILAR ASSUMPTIONS HOLDING ELSEWHERE, MOST OF THE WORLD’S POOR WOULD THEN LIVE IN AFRICA 63% of the world’s poor in Africa $1.25-day headcount (%) 78% of the world’s poor in Africa * Scenario 1 projects each country’s historical GDP per capita growth rate over the 2000-2010 period forward to 2030. Scenario 2 does the same using mean household survey incomes. Both scenarios assume distribution-neutral growth. Source: PovcalNet and staff estimates based on Chen, Kleineberg, Kraay, Lanjouw (2013).

  20. TO SUM UP • Poverty in Africa remains high, and the pace of reduction remains slow • Sustained economic growth in the next two decades is essential for progress • But it is not sufficient: • Growth must be more inclusive • With falling inequality – in outcomes and opportunities.

  21. OUTLINE • An African “growth profile” • Effects on poverty, mediated by inequality • Four key policy areas • Macroeconomic management under receding tailwinds • Investment in human and physical capital • Promoting growth in the places and sectors where the poor are… • … and creating social protection and promotion systems that enable them to share in growth elsewhere.

  22. THE EXTERNAL TAILWINDS THAT SUPPORTED THE REGION IN THE 2000s ARE NOW RECEDING… • Metal and mineral prices rose by 99.4% between 2000 and 2013. Since December 2010, they have fallenby 25%. Source: Development Prospects Group

  23. …WHILE FISCAL AND CURRENT ACCOUNT BALANCES HAVE GENERALLY WORSENED IN THE LAST DECADE Change in Current Account Balance (% GDP) and Fiscal Balance (% GDP), 2000 - 2012 Change in Current Account Balance, % GDP 20 10 0 -10 -20 -300 -200 -100 0 Change in Fiscal Balance, % GDP Resource Rich Resource Poor If terms of trade deteriorate and capital flows become less abundant, countries with low fiscal and current account deficits will fare much better. Source: World Economic Outlook, International Monetary Fund

  24. HUMAN CAPITAL: LEARNING OUTCOMES COMPARE POORLY WITH THOSE ACHIEVED ELSEWHERE Proportions of Grade 8 students scoring at “low”; “intermediate / high”; and “advanced” benchmarks (Math, TIMSS 2011)

  25. IN PART BECAUSE OF SYSTEMIC FAILURES IN SERVICE DELIVERY Source: DHS. http://econ.worldbank.org/projects/edattain. Most recent survey available shown.

  26. ON THE PHYSICAL CAPITAL SIDE, INFRASTRUCTURE REMAINS SCARCE AND VERY EXPENSIVE IN AFRICA Median prices to final user in Africa (relative to South Asia) Causes include lack of scale economies, geographic fragmentation and lack of competition. Consequences include higher costs transmitted downstream to infrastructure users, and hence reduced competitiveness and diversification. Source: Africa Infrastructure Country Diagnostic, 2010

  27. BEYOND “BETTER” FACTOR ACCUMULATION, PRODUCTIVITY GROWTH ALSO NEEDS LOOKING AT… • Except in fast-growing resource-rich countries, Africa’s growth has been driven more by factor accumulation than by productivity growth. • Promoting productivity growth across all economic sectors is a key priority, including in agriculture, where 60-70% of people work. Note: Fast-growing countries are those that experienced at least one growth spurt (3.5 percent per annum growth in real GDP per capita for at least 5 contiguous years) in 1995-2012. The criteria identifies 22 fast-growing countries in the region (13 resource rich and 9 non-resource rich). Source:  World Bank, Africa’s Pulse, Volume 9.

  28. OUTLINE • An African “growth profile” • Effects on poverty, mediated by inequality • Four key policy areas • Macroeconomic management under receding tailwinds • Investment in human and physical capital • Promoting growth in the places and sectors where the poor are… • … and creating social protection and promotion systems that enable them to share in growth elsewhere.

  29. CHANGING THE DISTRIBUTIONAL PROFILE OF AFRICA’S GROWTH CAN HAVE LARGE IMPACTS ON POVERTY – $1.25-day headcount 2030 47% Inequality change (%) Gini 2010: 57.4 Source: estimates based on household surveys from “Survey-based Harmonized Indicator Program (SHIP)”

  30. CHANGING THE DISTRIBUTIONAL PROFILE OF AFRICA’S GROWTH CAN HAVE LARGE IMPACTS ON POVERTY – AND IT CAN BE DONE! A 10 percent fall in the Gini coefficient over a 20 year period can yield as much as 6 percent additional poverty reduction. Latin America: Declining income inequality by country: 2000-2011 Annual change of Gini in % Source: Lustig (2013)

  31. GROWTH THAT TAKES PLACE IN RURAL AREAS – WHERE MOST OF THE POOR LIVE – IS MOST EFFECTIVE IN REDUCING POVERTY Population share Contribution of urban and rural areas to population, poverty reduction and consumption growth in Uganda, 2005–09 Share of poverty reduction • Econometric evidence from China, India and Brazil suggests that the geographic and sector composition of growth affects the overall growth elasticity of poverty. • In Africa, most of the growth has not been coming from the places and sectors where the poor are. • Most of the poverty reduction comes from very specific growth sources Shares in total consumption growth Source: Kaminski and Christiaensen2013

  32. OUTLINE • An African “growth profile” • Effects on poverty, mediated by inequality • Four key policy areas • Macroeconomic management under receding tailwinds • Investment in human and physical capital • Promoting growth in the places and sectors where the poor are… • … and creating social protection and promotion systems that enable them to share in growth elsewhere.

  33. GROWTH THAT TAKES PLACE “AWAY FROM THE POOR” MUST ALSO BE HARNESSED • The natural resource sector is seldom directly pro-poor • The rents it generates should be re-invested • Building human and physical capital to replace the natural capital being depleted • Cash transfers targeted to the poor must have a place in that investment portfolio Annual transfer to each poor person ($1.25 a day) from 10% of natural-resource fiscal revenues in selected countries. Note: number of poor for Equatorial Guinea calculated using national poverty line. Source: Estimates of natural resource fiscal revenues from Devarajan and Giugale (2013)

  34. THE “CCT REVOLUTION” IN SOCIAL PROTECTION… • Since the late 1990s, conditional cash transfers have shown that: • Good targeting is possible • Transfers increase family incomes and reduce poverty • Households use the transfers to improve nutrition…

  35. …IS COMING TO AFRICA. …increase investments in human capital; 8% 23% 41% UCTs Average impact of cash transfers on the odds of school enrollment (and 95% confidence interval) Results from a systematic review of 8 unconditional and 27 conditional cash transfer interventions (Baird et al. , 2014) 36% CCTs 24% 48% 1.0

  36. FAMILIES SYSTEMATICALLY INVEST PART OF WHAT THEY RECEIVE …and even to save and invest in physical and financial capital as well! “Five years ago when my oldest daughter was in school and we received money from PROGRESA, we saved 600 pesos to buy wood and the other materials for building a chicken coop, and with what was left we bought a few chickens. Since then, we have raised many chickens that we sometimes sell, and we collect 10 to 15 eggs per week that we eat ourselves.” - Oportunidades beneficiary in rural Mexico, August 2004, cited in Gertler, Martinez and Rubio-Codina (AEJ: Applied Economics, 2012)

  37. FAMILIES SYSTEMATICALLY INVEST PART OF WHAT THEY RECEIVE Community Based Conditional Cash Transfers in Tanzania – Some Results (endline) Note: Investment in livestock refers to additional goats and chickens purchased by treatment households. Additional annual average non-food expenditure by treatment households measured in Tanzanian Shilling (TSH). Children’s assets refers to the higher likelihood of treated children to own shoes in percentage points. Source: charts based on results from Evans, Hausladen, Kosec and Reese (2013)

  38. CONCLUSIONS • Sustained economic growth is essential to the fight against poverty in Africa • Macroeconomic prudence reduces vulnerability to receding tailwinds • Investment in human and physical capital must become more effective (quality as well as quantity) • But growth is not sufficient: shared prosperity will require a reduction in inequality(of outcomes and opportunities) • Boost productivity in agricultural and rural off-farm jobs • Cash transfers are a real policy option

  39. THANK YOU

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