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East Asia and Africa growth experience: why divergence?
East Asia and Africa growth experience: why divergence? Andrea Presbitero Introduction The economic performance of East Asian countries from the 1960s to the 1990s was so exceptional that it is generally called the “East Asian Miracle”. In the same years, the African countries experienced a period characterized by an astonishing lack of growth, that induced Easterly and Levine [1997] to speak of the “Africa’s Growth Tragedy”. This contrast is dramatic because the two regions started both from similar level of per capita income, economic structure and, to some extent, human development. The results of this widening gap in the growth process are now reflected in dramatic differences in per capita GDP, as well as in many other socio‐
economic indicators. The implications and the effects of a 40 years long period of growth (or lack of growth) are much more than the simple divergence in income: differences in the extent of poverty, inequality, health and education are just some of the aspects affected by the growth process. However, the aim of this essay is focused exclusively on the determinants of growth, without taking into account the effects: the objective is to try to identify the variables that has caused the huge gap in per capita income between Africa and East Asia. In the following sections I will present the variables which are generally considered the key determinants in the growth process, the explanations given by the literature for the East Asian Miracle and the possible causes of the Africa’s tragedy. Because of a generally less attention given to African topics, I prefer to dedicate a greater attention on the Africa’s tragedy, which also seems to be more debated and ambiguous that the East Asian Miracle. Even if there is a general agreement about the adoption of bad policies as cause of the African lack of growth and about the causal relationship between the quality of institutions and the quality of the policies, there is still a gap to fill in the discover of the main reasons behind the low quality of African institutions. Finally, I will try to infer some lessons that Sub‐Saharan Africa could learn from the East Asian success story, looking also at the experience of Botswana. 1
East Asia and Africa growth experience: why divergence?
Some data about EA and SSA economic growth Looking at the economic performance 1 of East Asia (EA) and Sub‐Saharan Africa (SSA) (data from the Penn World Tables (PWT), [Heston, Summer and Aten, 2002]) it is clear that in the last 50 years the two regions grew following different paths. Starting from a quite small difference in per capita GDP (EA GDP in 1960 was 0.3 times the SSA GDP), they ended with an amazing difference: the mean East Asian GDP in 2000 was 13.500$, while the African GDP was only 2439$. The difference has risen to a factor of 4.6, and this is reflected in the annual difference of the rate of growth (1950‐2000), which was 0.6% in the African case and 4.4% in the case of EA. The figure below shows this amazing gap 2 . In a broader view, between 1960 and 2000, the average world growth rate of real per capita GDP was 1.8% per year, varying from a maximum of 6.4% for Taiwan to a minimum of –
Divergence
3.2% for the Democratic Republic 14000
of Congo. The real 12000
effect of this dramatic difference in the 10000
economic performance 8000
is that Taiwan has 6000
raised its real GDP by 4000
a factor of 13 (from 2000
$1430 to $18,730 in 0
2000), while the SSA
EAST ASIA
Congolese GDP pc GDP 2000
pc GDP 1960
lowered by a factor of 0.3 (from $980 to $320 in 1995). Of the 16 countries that experienced negative rate of growth, 14 are SSA countries and, in mean, the continent grew only 0.6% per year [Barro and Sala‐i‐Martin, 2003]. These stunning data induced Easterly and Levine [1997] to speak of the “Africa’s Growth Tragedy”. During the same period, the East Asia region experienced a path of sustained growth, so long and exceptional to be called “East Asian Miracle” [World Bank, 1993]. Here I look only at the date about per capita GDP, but it is important to keep in mind that this is only one of the indicator of the development of a country or a region. Nonetheless, also for other measures, as education and health, the gap between the two region increased in the last decades. 2 The data used are referred to 40 SSA and 10 East Asian countries, including China, and to the period 1960‐2000, except for some countries for which are used the most recent data available. The Real GDP is expressed in constant prices. See PWT [Heston et. al., 2002] for further details. 1
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East Asia and Africa growth experience: why divergence?
Lawrence and Thirtle [2001b] claim that East Asia and Africa has not shown any convergence trend along the last 40 years, instead, the gap between the two regions became wider and wider. Looking at eight countries (four African and four from East Asia) that were in similar condition in 1960 they underline the striking differences that originated in four decades: the “Asian‐African divergence [is outlined not only by the differences in per capita GDP, but also by other indicators,] especially in manufacturing growth and exports, and in human capital indicators” [Lawrence and Thirtle, 2001b, page 3]. The determinants of economic growth The literature has used an incredible quantity of variables, approximately 60‐
70, to explain the economic growth, starting from the most obvious linked to investment and saving to others related to religion, ethnicity and society. Following Sala‐i‐Martin [1997] and Barro and Sala‐i‐Martin [2003], I will summarize the effect of the most used and significant variables on the growth process 3 . Among all the possible variables that one could include in a regression 4 , some of them appear to be significant (21 on 59, according to Sala‐i‐Martin [1997]) and few others are strongly or robustly related to growth: the East Asian dummy, the primary school enrolment rate in 1960, the average investment rate, the initial level of GDP, life expectancy in 1960. The theory of economic growth predicts a conditional convergence and specifies some variables as the key determinants for the growth process. To test for conditional convergence, the GDP at the initial period is included in the regression, as well as its squared value: the results generally support the theoretical prediction and the magnitude of this effect seems to be large. Educational attainment and life expectancy are positively correlated with growth, while fertility rate and the ratio of government consumption on national GDP are negative linked. The index for the rule of law has a positive effect, as well the measure of openness, the domestic investment and the terms of trade. The democracy variable, which capture the degree of democracy of a nation, shows a non‐linear relationship with growth: its effect increases starting from a negative level as the degree of democracy rises, then reaches A brief and clear summary of the most important determinants of the growth process is also in Rodrick [2003, ch. 1], Sachs and Warner [1997] and Crafts [2000, section II]. An interesting critic to the significance of some of these variables for the SSA experience, like education and geography, is in Freeman and Lindauer [1999]. 4 The basic regression of real per capita GDP (Y) for a group of countries on a set of explanatory variables (X) is in the classical form: Yt = α + β 1 X 1 + β 2 X 2 + ... + β n X n + ε t and cover the period 3
1960‐1995 or, more recently, the period 1960‐2000. This is the reason why many variable are referred to 1960 3
East Asia and Africa growth experience: why divergence?
a peak and starts to decline, slowing growth for countries which have already achieved a substantial amount of democracy. Finally, the inflation rate has a little negative effect, which is marginally significant. Savvides [1995] provides support to this evidence for the African experience, finding in particular a positive relation between political freedom and growth 5 . Nonetheless, he underlines the lack of robustness of this results and the fact that they remain highly controversial in the literature. The “East Asian Miracle” The very huge literature that has investigated the EA miracle 6 , looking both at the region as a whole and at the single country experience, has originated a debate about the factors that mostly contributed to the economic growth. Here I reassume briefly the main positions 7 , emphasizing the determinants of the Asian success with the aim of comparing them with the African experience. The World Bank [1993] neo‐classical thesis puts a lot on emphasis on the high rate of investments (also private), both in physical and human capital, which account for roughly two thirds of the EA economic performance. The “market friendly” view underlines the great importance of limited government intervention, macroeconomic stability, high openness to international trade, strong competition between firms and heavily investment in human capital. Finally, the other key source of development was the rapid productivity growth: one third of the East Asia growth could be explained by increased efficiency (TFP). This last point is contested by Young [1993] and Krugman [1994], who claim that the rise in EA productivity was not so extraordinary high to justify the belief in the dynamic gains from an outward orientation. The economic performance of East Asia is due to an incredible accumulation of inputs, labour and capital, and re‐
allocation of resources, rather than by gain in efficiency. This “contrarian” view is somehow pessimistic, because incorporate the idea of the decreasing returns and so of a natural slowdown 8 . Sarel [1996] reviews the literature and finds that the growth in TFP is an important determinant of the miracle. However, he points out other possible explanations, related especially to trade openness, massive investments and the He finds not significant the education coefficient, but this could be due to the poor quality of the enrolment data. 6 The spectacular economic growth in East Asia facilitated also a reduction in poverty and inequality and an improvement in life expectancy. 7 A clear and synthetic exposition of the debate about the EA miracle is in Hastings [1998]. 8 Even if this is not the subject of this essay, could be interesting to look at the difference reactions that the advocates of these two approaches had after the Asian crisis. 5
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East Asia and Africa growth experience: why divergence?
initial conditions of the East Asian countries, which were significant better off than other countries in terms of education, equality of land and income, fertility and mortality rate. The free market approach is not the only one: other authors has shown that the government choices were not totally conform to the neoclassical model. The “revisionist” argue that in EA there was a development state that played a fundamental role in the resource allocation, the construction of infrastructures, the development of an efficient school system and the assurance of high profitability to the investments through low interest rate. There were many forms of policy intervention, from the subsidized credit, to public investment in research and the development of export marketing institutions. Finally, Sarel mentions also the agnostic approach which outlines the great heterogeneity of East Asian economics, that experienced intervention strategies in some countries and a free market approach in others, or also re‐distributive versus neutral policies. This approach points out also that the relationship between policy and growth is not so clear because the direction of causality is sometimes ambiguous. “The Africa’s Tragedy” The literature, starting from Barro [1991], has originally found that being located in Sub‐Saharan Africa could have an adverse effect on growth. The per capita GDP growth rate, even controlling for education, life expectancy, term of trade, rule of law and other variable generally thought to be significant seems to be explained also by a dummy created ad hoc for Africa, which enter in the regression with a significant negative coefficient of 0.11%. However, in subsequent works (Barro, [1997] and Barro and Sala‐i‐Martin, [2003]), the author, using panel data instead of cross sections, found the Africa dummy no more significant. Nevertheless, other studies, as reported by Englebert [2000] and Savvides [1995], kept on including the Africa Dummy in the regression and found it statistically significant and with a strong magnitude. Easterly and Levine [1997] observe that, even controlling for the ethnic differences, the Africa dummy is still significant and its negative effect on growth varies from –1.4% to –
1.2%. Barro and Sala‐i‐Martin [2003, page 555], looking at the robustness of the variables included in the growth regressions, argue that the dummy for SSA is “negatively related to income growth […] implying that […] sub‐Saharan African countries had income per capita growth rates between 1960 and 1996 that were […] 1.28 percentage points […] below the level that would be predicted by the countries’ other characteristics”. In many studies, the Africa dummy has yielded a negative and significant coefficient, but some authors are able to explain the economic performance of the 5
East Asia and Africa growth experience: why divergence?
African continent in a broader cross‐section model, controlling for further variables which should determine economic growth. Hoeffler [2001] shows that an augmented Solow model, which takes into consideration the specific country effects, can account for the differences in growth experienced by African region: low investment ratios and high population growth rates are sufficient to explain the lack of growth of SSA. Savvides [1995] asserts that another factor that delays the African growth could be a low degree of political freedom. Easterly and Levine [1995] observe that spillovers of growth performance from neighbouring countries multiply the impact of the other variables, and make the Africa dummy not significant. Sachs and Warner [1997, pag.1] argue that there is no “need to invoke a special explanation unique to Sub‐Sahara Africa”. Their results 9 confirm the importance of geography, an exogenous determinant of growth, because tropical climates have harmful effect both on labour productivity (via diseases) and soil fertility. At the same time, looking at the relative importance of the quantitative impact of these variables, the main sources of slow growth are not exogenous factors like geography or natural resources, but international trade policies, market‐supporting institutions and government savings. Moreover, there are experience which testify that market oriented and pro‐growth reforms might work also in Africa: the Botswana astonishing economic performance is one of the best examples. However, as brightly emphasized by Englebert [2000, page 1822], to substitute a regional dummy with policy choices is just replacing a measure of ignorance with another. The main question remains: “why do most African governments tend to adopt policies that are inimical to growth?” There is a general consensus that poor institution quality, through its effect on policy decisions, is a key factor in the lack of SSA growth, but the reasons behind are highly debated: they are probably an inheritance of the colonialism, but other variables, as ethnic and linguistic divisions are often considered. This is not an easy issue, because the causality relation seems to go in both direction and endogeneity is an hard problem to solve. Englebert [2000] finds the regional dummy for SSA not significant once he introduces a policy index (it is a mean of the most common indicators used to evaluate the intensity of neo‐patrimonial policies) in the regression. He justifies the poor African performance and its bad policies with the introduction of a “legitimacy variable” 10 . Adding this variable the Africa dummy remains not significant and the They include in the regression a dummy for a land‐locked country and another for tropical climate (both with negative sign), and control for natural resource abundance (this is negative related with growth, because of the so‐called Dutch disease). 10 State legitimacy is a “dummy variable [that] takes the value 1 when a state is historically determined, 0 otherwise. It tries to capture either the historical continuity of state institutions (noncolonized areas), the 9
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East Asia and Africa growth experience: why divergence?
impact of the policy index is strongly reduced, suggesting that state legitimacy – affecting policy choices – is a robust determinant of economic growth: its effect could account for 40% of the average growth gap between Africa and East Asia. Nonetheless, there are also other possible explanations suggested by the literature. One of the most debated topic is the linguistic and ethnic division suggested by Easterly and Levine. The authors find an answer in the selection of growth‐retarding policies in the greater African ethnic diversity. This variable (ETHNIC) is a good indicator of ethnic conflicts and wars and points out the countries where the “struggle for power was so absorbing that everything else, including development, was marginalized” [Ake, cited in Easterly and Levine, page 1241]. ETHNIC is strongly and negatively correlated with growth and its inclusion weakens the effect of the other policy indicators, suggesting that the ethnic diversity could affect growth also in an indirect way through its influence on policy decisions. Nevertheless, the Africa dummy is still significant and this arises many critics because, even if the aim of the authors is to show that ETHNIC affects public policies, the results are not completely satisfactory. In other words, the second problem (what influence policy) might be partially solved, but the mystery of the African dummy is still there. Englebert [2000] and Sachs and Warner [1997] argue that ethnic heterogeneity does not have any further explanatory power to their regressions. Sachs and Warner look also at the relationship between ethnic diversity and poor policies: they argue that even if ETHNIC is correlated with openness and institutional quality, it could be that other factors (the colonialism heritage) explain the SSA’s policy choices and also “that the ethno‐linguistic fractionalisation might itself be caused by poor economic and geographic conditions” [Sachs and Warner, page 20]. Acemoglu, Johnson and Robinson [2001, page 1395] claim that difference in institutions are the root of the large cross country income gap and investigate the determinants of this diversity: they conclude that “differences in colonial experience could be a source of exogenous differences in institutions”. What Sub‐Saharan Africa could learn from East Asian miracle? There is no general agreement about the determinants of growth, especially for the African experience, but there might be some lessons that Africa could learn from the East Asia performance. Hastings [1998] looks at the Namibia case, that, because of relatively recent independence, could and should look at the Asian experience to avoid to repeat the same errors of other SSA. The EA success delivers some lessons: the importance of education and human capital, the need for a embeddedness of the post colonial state into precolonial relations of authority, or, more generally, the lack of “clash” between precolonial and postcolonial political institutions” [Englebert, 1995, page 1827]. 7
East Asia and Africa growth experience: why divergence?
macroeconomic stability, the promotion of manufactured exports and a more equitable and re‐distributive economic growth. Namibia seems to follow some of these prescriptions, but other SSA are far away from this model. Sachs and Warner [1997] gives a lot of weight to trade policies and argue that African countries should open their markets: the African economies which adopted the EA policies (trade openness, higher government savings and institution quality) performed better than the rest of the region. Nonetheless, SSA still suffers from other structural factors related to geography (landlocked state, Dutch disease and illness), but these constraints could be addressed and the economic growth is not prevented. They estimate that Africa could have reached a per capita rate of growth of GDP of 4.3% if it had followed the policies adopted by East Asian countries, still considering the adverse geographical condition of SSA. As stated by Rodrik [2003], the geography is not a destiny and its negative effect could be overcome by good institution and governance. Easterly and Levine [1997] find that ethnic diversity has a large direct and indirect effects on the magnitude of the growth gap in the two regions, and conclude that ethno‐linguistic fractionalisation has played a fundamental role in Africa’s growth tragedy. However, the non‐ETHNIC variables (some policy indicators about financial distress, government spending, political instability, human capital) explain 2.6% of the 3.4% of the estimated growth differentials between SSA and EA. Generally, the main reasons of slow growth are identified in a broad class of government policies less prone to free markets, to investment in infrastructure and in human capital than in East Asia. This is stressed by Savvides [1995], who includes also a lack of political freedom, and by Englebert, who explains the different policies adopted as a results of the historical legitimacy of the states. Part of the gap between per capita GDP in EA and SSA nowadays is due to the different initial conditions, much favourable for EA, and to structural factors related to geography, but this is not all the story. What seems to have caused the divergence process between the two regions is the adoption of “good policies” in one case and “bad policies” in the other. And, as discussed above, it is not clear what are the real factors behind the institution quality. Certainly, the exogenous factors are not the only reasons of Africa’s tragedy and, moreover, they are not the most important: this is an optimistic message, supported by some country experience. Botswana, although its geographical position, its unfavourable initial conditions and its bias to Dutch disease, was the country with the highest rate of per capita GDP growth in the last four decades in the world 11 . The possible explanations could be found in the low level of ethnic diversity and in the limited effect of colonialism, which both allowed to reach a sense of As along all this essay, the focus is on the economic performance of a country, therefore here I will not discuss other aspects of Botswana experience, even if it is important to remember that there are many problems about inequality and, especially, HIV/AIDS. 11
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East Asia and Africa growth experience: why divergence?
nationality and good institutions; but also in the adoption of the East‐Asian policies, especially for what concerns the international trade. According to Acemoglu, Johnson and Robinson [2003, page 113], Botswana was and is still able to manage the wealth deriving from its abundant resources thanks to its good institutions, but “these institutions emerged in part as a result of a unique juxtaposition of historical conditions and political factors, which obviously cannot be duplicated”. This is not a fully optimistic conclusion, anyway the Botswana experience is not isolated and outlines that some structural factors are not so determinant: there are some African countries with a lot of natural resources that could look at this experience. Concluding remarks In the previous sections I have summarized the most important determinants of economic growth, with a particular interest on the East Asian and Sub‐Saharan Africa experience. It is not actually clear which are the real causes of the African tragedy: there is a large agreement on the lack of growth and market oriented policies, due mainly to the poor institutional quality. However, there is a great debate on the relative importance of such policies: should be given more weight to investment in human capital, to a trade openness policy or to the basic investment in infrastructure? Maybe the answer is in a balanced choice, also looking at the positive EA experience. The optimistic message derived from the recent literature is that SSA is not “destined” to this poor performance: the structural constraint has certainly the effect of slowing the development process, but they could be overcome by sensible economic policies implemented by good institutions. On the other hand, even if the mystery of the Africa dummy seems to be solved, there is not a general agreement about the determinants of the low quality of African institutions. There is still another source of ignorance that should be filled, whether one wants to find more detailed policy recommendations and solutions for the African continent. Freeman and Lindauer [1999] state that Africa has failed to growth because of its institutional environment, which resulted in political turmoil, wars, corruption and unstable regimes. This is certainly true, but still this is not the a priori source of SSA tragedy: economic growth has been stifled by bad policies, which are due to poor institutions: the main problem is to understand the key determinants of institution quality. State legitimacy, colonial experience and ethnic diversity are probably related to this issue, but it seems to be far away from a definite answer. 9
East Asia and Africa growth experience: why divergence?
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East Asia and Africa growth experience: why divergence?
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