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Drivers of Economic Growth in Africa DRIVERS OF ECONOMIC GROWTH IN AFRICA Occasional Paper No. 29, 2017 THE A FRICAN C AP ACITY BUILDING F OUNDA TION © 2017 The African Capacity Building Foundation 2 Fairbairn Drive, Mount Pleasant Harare, Zimbabwe Produced by the Knowledge and Learning Department The African Capacity Building Foundation First printing September 2017 All rights reserved This Occasional Paper establishes that African countries need to pursue economic diversification and structural transformation vigorously using appropriate policies and institutions that address inclusive growth priorities. In addition, good governance and a committed national leadership with a developmental vision are crucial ingredients. Any capacity building interventions have to be crafted taking these priorities into account as well as the contextual factors that determine a particular country’s economic direction. The African Capacity Building Foundation (ACBF) does not guarantee the precision of the data included in this work. The boundaries, colors, and other information shown on any map in this work do not imply any judgment on the part of the Foundation concerning the legal status of any territory or the endorsement or acceptance of such boundaries. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the ACBF Executive Board or Board of Governors. For additional information on our knowledge products, projects, and program operations, as well as other ACBF activities, please visit our website at http://www.acbf-pact.org. ISBN: 978-1-77937-055-6 DRIVERS NOMI GROWTH N AFRICA: pportunities, inancing, and Capacity ssues PREFACE According to Agenda 2063, African people aspire to “a prosperous Africa based on inclusive growth and sustainable development.” Countries are aware that the “Africa rising” discourse needs to lead to ider access to sustainale socioeconomic opportunities for the maority— while protecting the ulnerale—in an enironment of fairness euality and political plurality. Many frican countries hae enjoyed strong economic rowth since 000. fter sia Africa has een the second-fastest rowing reion in the orld oer the past decade. ut higher economic rowth has not translated into etter liing standards lower poerty rates or higher employment rates. overty is still a scourge in many frican countries. nemployment is rising een as these countries achiee higher growth rates and greater inestments and trade olume. hy? hat capacity uilding is reuired to deelop sustain and share the enefits of higher economic performance in frica he CBF has produced this paper under its supported trateic tudies roup to prooke discussion encourae further inestigation and define the critical capacity challenges to tackling the rowth-euality disconnect in frica. The paper shows that inestment human capital formation det, and overseas deelopment assistance drive Africa’s economic growth. It recommends paying attention to capacity, which is critical to making Africa’s growth sustainable and inclusive. Continental, regional, and national long-term rowth plans reuire stronger capacities to improe economic oernance alin national and subnational institutions, coordinate planning and financing ministries, and cultiate a culture of committed leadership to stir economies hen times are hard and execute recoery plans ithout policy reersals. In addition to establishing think tanks and policy institutes and strengthening indiidual and institutional capacities throughout the continent enerating knowledge ill enhance eidence-ased policymaing processes. Building the capacities for policy analysis and economic manaement remains a priority. e hope that staeholders and deelopment partners ill oin us to continue strengthening human and institutional capacity for sustainable deelopment in frica. Professor mmanuel nadozie Executie ecretary he African apacity uilding oundation iii ACKNOWLEDGEMENTS This occasional paper was prepared under the supervision of the nowledge and earning (K&L) epartment, guided by its director, r. homas Chataghalala unthali. ithin the &L epartment, this paper was coordinated by r. obert antchouang, enior nowledge Management xpert, and r. arassou iawara, Knowledge anagement xpert. The paper was produced as part of the African Capacity uilding oundation ACBF) trategic Studies roject, which aims to provoke discussion and raise awareness about strategic issues of importance to Africa and its development agenda. trategic studies topics were selected through a consultative process by members of the olicy Institutes Committee and the Strategic tudies roup. pecial thanks to members of both networks. In addition, we thank the trategic Studies roup for its critical review of the manuscript. The ACBF wishes to acknowledge the efforts of the researcher who conducted the study from which this paper was generated, r. Abbi M. edir. The oundation also thanks all agencies, ACBF partner institutions, and individuals in the countries where this study was conducted that provided the data and information that made the paper’s completion possible. This paper benefited from insightful comments by rofessor ichael lummer and rofessor Timothy haw, eternal peer reviewers. It also benefited from internal reviews by ACBF staff. About the African Capacity Building Foundation The African Capacity Building Foundation (ACBF) is Africa’s premier institution in capacity building. stablished in ebruary 991, ACBF builds human and institutional capacity for good governance and economic development in Africa. he oundation has empowered governments, parliaments, civil society, private sector, and higher education institutions in more than countries and six regional economic communities. It supports capacity development by way of grants, technical assistance, and knowledge generation across the continent. ACBF’s vision is that of an Africa capable of achieving its own development. About the Strategic Studies Group The trategic tudies roup SSG) is an ACBF network of global development eperts and practitioners made up of the ACBF olicy Institutes Committee, selected development partners, international development specialists, and the ACBF-supported training programs and university partners. The S assists the Foundation in identifying key policy and emerging issues requiring the attention of the oundation and its stakeholders. The S works with the ACBF to identify research themes and advises the oundation on strategic and pertinent issues that need special attention. It also serves as a “review panel” that shapes, eamines, and evaluates the high-level studies undertaken by the oundation. iv v COTNT PREFACE III ACKNOWLEDGEMENTS IV ABBREVIATIONS VII EXECUTIVE SUMMARY 1 CHAPTER 1. INTRODUCTION 3 Background 3 Study’s structure 5 Africa’s development, potential, and role in global partnerships 5 Social and political dimensions of Africa’s growth 6 Challenges to Africa’s growth 7 Opportunities for Africa’s growth 7 artnerships for infrastructure and technology transfer and to curb illicit finance flows 10 CHAPTER 2. DRIVERS OF AFRICA’S GROWTH 12 Fied effect model 12 ynamic panel system generalied method of moments estimator 13 conometric evidence 14 CHAPTER 3. IS DEBT-FINANCED GROWTH SUSTAINABLE? SOVEREIGN DEBT AND SOVEREIGN BONDS 18 Total and net eternal debt 18 overeign bonds 18 Sound macroeconomic management to limit the risy rush to borrow 19 CHAPTER 4. WHY IS AFRICA’S GROWTH NOT INCLUSIVE? CAPACITY ISSUES AND THE WAY FORWARD 22 CHAPTER 5. RESULTS AND INTERPRETATIONS 24 APPENDIX. ROBUSTNESS CHECK FOR THE ECONOMETRIC EVIDENCE 26 BIBLIOGRAPHY 30 vi AREVIAIONS ACB African Capacity uilding oundation FDI Foreign direct investment FE Fixed effect GDP Gross domestic product GMM eneralized method of moments HIPC Highly ndebted oor ountries IMF International Monetary und MDR Multilateral ebt elief nitiative OA Official development assistance OCD Organisation for conomic o-operation and evelopment SAP Structural adustment program SDG Sustainable development goal UNDP United ations evelopment rogramme All dollar amounts are .S dollars unless otherwise indicated. vii viii EXECUTIVE SUMMAY Africa’s economic, social, and political history largely determines its current economic development he eternally imposed structural adjustment programs and reform initiatives of the 80s and 90s failed to promote productivity, employment, and poverty reduction. Since 2000, most African countries registered remarkable growth, but this growth failed to reduce ineuality Some African countries have strong development states that organize economic activities and regulate the private sector and other development actors such as civil society organizations. Economies’ growth is driven by large public investment in infrastructure and other growth-enhancing sectors but with visible urban bias and ever greater borrowing. espite encouraging gross domestic product epansion over the last years, many African countries do not perform well on human development, as recent nited Nations evelopment Programme UNDP) reports show So we must investigate whether this growth is inclusive and sustainable given its reliance on debt or policy and research purposes, we must eamine the drivers of Africa’s recent growth, recognizing the diversity of the continent’s institutional quality, income growth, geographical location such as having coastal access or not), and resource endowment such as mineral- or oil-rich versus mineral-poor or non-oil economies). Using longitudinal data on a large dataset, this study provides the following:
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