Many people think that Africa’s growth takeoff since the mid-1990s has been simply a commodity story—a ride fueled by windfall gains from high commodity prices. However, in its latest Regional Economic Outlook: Sub-Saharan Africa a team of economists from the IMF’s African Department come to quite a different conclusion: success in most of the fastest-growing economies in the region was not driven by natural resources. Sound policy making, stronger institutions, and better governance played a much bigger part.
Six fast-growing countries in Africa
Six countries (Burkina Faso, Ethiopia, Mozambique, Rwanda, Tanzania, and Uganda) were closely looked over the 1995–2010 period. All of these countries realized real per capita growth of more than 3 percent per year and were not, for the majority of the period, natural resource producers. Their individual stories varied of course:
• Burkina Faso worked hard on its institutions and focused early on medium-term macroeconomic planning. It also skillfully managed the cotton sector, which is important for the country and provides a living for a large number of poor people.
• Ethiopia, by far the most populous country in the sample, accelerated growth by actively supporting agriculture and certain export products and services (cut flowers, tourism, and air travel).
• Mozambique attracted significant foreign investment and other external capital flows in the late 1990s, which funded capital-intensive megaprojects to produce and transmit electricity and gas, with the former used to produce aluminum.
• Rwanda rebounded strongly after achieving political stability, underpinned by a national recovery strategy that successfully focused on specific sectors, such as tourism and coffee.
• Tanzania achieved sustained high growth by three well sequenced waves of macroeconomic and structural reforms, which reached across all sectors.
• Uganda launched significant macroeconomic and structural reforms that stimulated private investment and diversified its export base to include nontraditional products.
A virtuous circle
But what they had in common was a virtuous circle—all six countries put in place stable and medium term–oriented economic policies and launched important structural reforms to improve the competitiveness of the economy. This helped attract higher aid flows and made it possible for these countries to receive debt relief, and the gains translated into fiscal space to expand social spending and capital investment, in particular infrastructure, which in turn contributed to higher growth.
Which sectors contributed to this sustained growth performance? With the exception of Ethiopia, services made the largest contribution, reflecting the rapid development of telecommunications for example. But agriculture also remained an important contributor to growth, employing the bulk of the active labor force in most sample countries. Manufacturing, on the other hand, still accounts for a relatively limited share of total output, suggesting that structural transformation is progressing only slowly. But that may be changing. Available data show that both investment and productivity have been increasing steadily, and with expenditure on education rising in all sample countries the latter is likely to continue.
The critical importance of institutions
The study revealed clearly the importance of strong institutions. Using the Worldwide Governance Indicators database compiled by the World Bank, the fast-growing countries outpaced the res of sub-Saharan Africa in four out of five dimensions: control of corruption, government effectiveness, political stability, and regulatory quality. Financial sector deepening has also played an important role, with growth rates in credit to the private sector outpacing other countries in sub-Saharan in all sample countries except Ethiopia. At the same time, access to financial services remains limited in all of the countries, suggesting that there is ample scope for further growth.
Foreign aid also rose significantly in the high-performing countries, with significantly higher levels of grants than other low-income countries in sub-Saharan Africa. Did aid lead to better economic performance or did aid follow good performance? The direction of causality is difficult to determine and may in fact run both ways. Improved economic management and stronger institutions are likely to have made these countries more attractive aid recipients for some development partners. But at the same time, these factors are also likely to have allowed countries to make better use of aid and of the additional fiscal space that it granted them, notably for public investment.
Looking ahead, tough challenges remain, but the opportunities are equally significant. Despite rising public and private investment, infrastructure gaps still remain large. Without improvements in transport infrastructure and, in particular, in energy provision, it will be difficult for these countries to sustain their growth performance. And natural resources, while not dominant for these countries in the past, are becoming increasingly important following recent discoveries, for example of massive natural gas reserves in Mozambique and Tanzania. Harnessing these resources for the benefit of all, and avoiding some of the well-known economic challenges of large resource flows, are likely to be key to future success across sub-Saharan Africa.