Press Release No:2007/131/AFR
Infrastructure, Investment, Innovation & Institutional Capacity: The Four Big “I”s needed to achieve growth in Africa

Washington, United States of America – Boosting economic growth in Sub-Saharan Africa is dependent, to a large extent, on expanding infrastructure investments, improving the investment climate, harnessing skills for innovation and building institutional capacity across the continent, a World Bank study released 2006-11-09 says.

The Four Big “I”s, as the study: Facing the Challenges of African Growth: Opportunities, Constraints, and Strategic Directions calls them, are among the most critical areas demanding action if Africa is to make up for missing two decades of global growth or replicate the growth models that have lifted millions of people out of poverty in other regions of the developing world.

“Africa is on the move and is perched on the cusp of breaking out of the long economic stagnation of the 1970s and 1980s. The last ten years have seen renewed growth and improved governance across a number of African states, setting the stage for taking advantage of opportunities that are emerging from a rapidly changing world economy,” said Gobind Nankani, the World Bank’s Vice President for the Africa Region.

“African economies have shown that they are capable of short spurts of robust growth. The challenge, as the study confirms, remains one of sustaining such a pace for longer periods and ensuring that the majority, notably the poor, women, youth and other marginalized groups contribute to and benefit from that growth,” Nankani added.

“Africa’s slow and erratic growth performance, particularly when compared to other developing regions, has been identified as the single most important reason behind its lagging position in eradicating poverty. Extreme poverty (spending less than a dollar a day on basic necessities of life) rose from 36% of the population in 1970 to around 50% of the population (300 million people) in 2000,” explained John Page, the World Bank’s Chief Economist for the Africa Region. Africa hosts only 10% of global population, yet it is home to 30% of the world’s poor.

The study notes that inequalities have a major influence on the efficacy of growth in reducing poverty. There is need to pay greater attention to this dimension of poverty reduction to complement the impact of accelerating growth, particularly by enhancing the income-earning opportunities for the poor more than for other income-earning segments, or by enabling their greater participation in the growth process. Uncharacteristically high levels of age dependency have also created fiscal and household pressures to care for overwhelming number of young at a time when few countries have enhanced the employability of youth through job creation and vocational training.

The study sets out to answer three key questions:

• (i) what are the opportunities and options for growth available to the diverse range of African countries;
• (ii) what are the major constraints to exploiting these opportunities and
• (iii) what are the strategic choices to be made by African governments, as well as development partners, including the World Bank, in supporting actions taken by African countries.

Its findings, based on an analysis of 45 years of Africa’s growth, recommend, among others, prudent management of rents from resources and of shocks and the need for countries to look beyond creating conditions for attracting new investors to measures that help raise productivity of existing and new investments.

The study finds that a distinct characteristic of Africa’s long-term growth experience is its historical U-shape, featuring a deep and prolonged contraction of growth from 1974-1994, a period sandwiched between the moderately high growth rates of the 1960s and after the mid-1990s.

“Per capita growth rates of around 2 per cent in the early 1960s rose to nearly 5 per cent by the end of that decade, then fell steadily through the early 1970s, turned negative during the mid-1980s, and then climbed back to around 2 per cent since the mid-1990s,” explained Benno Ndulu, the author of the study who is also an Advisor to World Bank Vice President for the Africa Region and Manager of the Partnership Group.

The global deceleration of the 1970s, which began with a set of shocks to energy and tropical commodity market, took many African countries into outright contraction lasting about 20 years – the lost decades – but by 2005, African growth had rebounded to the levels of the 1960s and with more diversified economies. Since 1995, more than one-third of the countries in Sub-Saharan Africa are growing at average rates exceeding 5%.

Two primary factors accounted for Africa’s slow growth over the lost decades: a relatively low rate of capital accumulation and a low growth rate of productivity for the investments that are made in the region compared to productivity in other developing regions.

“Although per capita incomes for Africa and East Asia were virtually the same in 1960, by the end of the 20th century, Sub-Saharan Africa’s per capita income – even after adjusting for differences in purchasing power – was less than one-fourth of East Asia,” Ndulu added.

With the exception of Botswana and Mauritius, growth in the rest of Sub-Saharan Africa has been episodic in the four decades since 1960 resulting in the region falling further behind the rest of the developing world and in income levels regressing relative to the levels in 1960.

In 2004, per capita income for a group of nine African countries had actually regressed relative to the levels in 1960. These include Angola , Central African Republic, Comoros, Madagascar, Niger, Senegal, Sierra Leone, DRC, and Zambia. The same year (2004), the per capita incomes of 13 middle income African countries were several-fold higher than 1960 levels. Although these countries together are home to 13% of Africa’s population they account for a combined total of 66% of all incomes earned in the region, the study reveals.

Zambia’s and Cote d’Ivoire’s per capita income have hardly progressed relative to their levels in 1960. Somalia and Liberia have lost significant ground in terms of income levels relative to the early 1960s.

Capital flight from Africa has made a dire situation worse. In 1990, it was estimated that Africans held up to US$360 billion, or 40% of their wealth, outside Africa. This compares with only 6% in East Asia and10% in Latin America.

The study holds that the continent is capable of regaining the pace of robust growth it experienced between 1960 and 1973. It urges African countries to create the right conditions to benefit from opportunities offered by the growing global economy and by information-based technology. Key among these conditions is the need to lower indirect costs that seriously constrain export-led growth, invest in skills and support innovation to spur productivity and competitiveness.

The report identifies opportunities, constraints and strategic choices that face African countries in their quest for achieving the growth necessary for poverty alleviation. It includes a broad menu of strategic options that countries can use in developing growth strategies, underlining the importance of good governance and bureaucratic efficiency; the importance of innovation (technological progress) in raising productivity and competitiveness; and the need to address infrastructure shortcomings, notably in transportation and energy. The study emphasizes two dimensions of policy action: the need for African countries to avoid policy distortions (“sins of commission”) and the need to address the issue of under-provision of public goods to support the growth process (“sins of omission”).

“In Africa, the costs of contract enforcement difficulties, inadequate infrastructure, crime, corruption and regulation can amount to over 25% of sales or more than three times what firms typically pay in taxes,” Ndulu explained.

The assessment in the study uses the benchmarks of other developing countries to compare the state of institutional, policy, and regulatory frameworks; business regulations and their enforcement; adequacy and quality of infrastructure; stability of the macro economy; protection of property rights; and functioning of the financial system.