Title page
Economic growth in Africa
By
Obinwogo Udechukwu Emmanuel
08183820
BS/UG/092/10
Carried out in 30 African countries
8,549
26 April 2011
Supervised by: David Bywaters
Dissertation submitted to the University of Hertfordshire
In partial fulfilment of the requirements for the degree of
BA (Hons) Economics.
Acknowledgements
With gratitude to God, I would like to acknowledge with affection the untiring encouragement and support given to me by my parents’ sir & Lady E.U Obinwogo. I acknowledge with gratitude my biggest sister Mrs. Uche R. Anyaene who is my back bone financially, academically and morally throughout my stay in Britain and throughout my study in the University. I also recognize Mr David Bywaters whose excellent guidance and support leads to the completion of this paper. I would like to thank my lecturers Mr Thomas Gareth, Dr Ya pin, Frank Currie and Mrs Sheila Luz who helped me academically and give me the privileges to share in their knowledge. My thanks also go to my brothers and sisters, cousins’, friends and well wishers who supported me by way of advice etc. Finally a special thanks to ASU university of Hertfordshire for their guidance throughout the writing of this paper.
Abstracts
This paper illustrates on the current endogenous-growth methodology to study the reasons behind variations in per capita growth rates across Africa. However, the outcomes specify that different economic issues with initial conditions, investment, population growth, trade orientation, inflation, financial development, and the growth of the government sector add considerably to Africa economic growth. Adding together the economic variables, political freedom is found to contribute considerably to economic growth. Finally, a lot of evidence was found to shows that economic growth by CFA Franc countries was not well evaluated in contrast to other African countries.
Table of contents
Page
Chapter 1 1
1.0. Introduction 1
1.1. Objective of the research 2
Chapter 2 4
2.0. Review of literature 4
Chapter 3 10
3.0. Methodology 10
3.1. Testing 11
Chapter 4 14
4.0. Findings and Analysis 14
4.0.1. Table 1 14
4.1. New growth theories test 15
4.1.1. Inflation 15
4.1.2. International trade 15
4.1.3. Fiscal policy 15
4.1.4. Financial development 16
4.2. Political freedom and Economic growth 18
Chapter 5 20
5.0. Conclusion 20
Chapter 6 22
6.0. Policy Recommendations 22
6.1. Economics 22
6.2. Social 22
6.3. Political 23
Reflection 24
References 25
Bibliography 29
Appendices 30
Chapter 1
1.0. Introduction
Growth is what all economy tries to realize for the good of everybody in general. However, “advancing, extra invention, increase in wage, education at the highest level and advancement in technologies” is what each and every country attempt to achieve and the end of the day. Although, some economists argue that achieving all this, does not mean that we are living an enhanced life. Or is it just following enhancement model? On the other hand, economic growth are full of positives points such as improve in infrastructures, urban development, higher education, globalization, creates employment, higher wages for workers, improved living standards for the residents, and the list can go on to infinity. But that is not at all time the case; the world consists of economies of various sizes and shapes. “Some countries are very rich, while some are extremely unfortunate”. Some economies tend to grow at a very high rate, while some are not growing at all. So in thinking about economic growth it is necessary to give a clear understanding how it is related in African continent, and this will be discussed in this paper.
Economist defined economic growth, in the first place as the annual increase in the nation’s total output of goods and services (i.e. her national product), it is noted that economic growth can either be positive or negative. Fosu (1990) however, said that if an economy of a country is shrinking, as in the case of economic recession or depression, such country is said to have “Negative economic growth”. But will have positive economic growth when the economy is booming. However the key topic of discussion in this paper is the economic growth in African countries. For the purpose of this work, many African countries will be looked into in-depth for clear understanding.
International statistics clearly explain that Africa in the midst of all other regions of the world has the utmost levels of poverty and worst human development results following the outcomes of most indicators and this was blamed on negative economic growth. Moreover, Englebert (2000) stipulated that while some regions of the world have made considerable progress in their aspect of economic growth and poverty reduction over the last two decades (notably in Asia), Africa to a large degree, has made less growth over this era. Moreover, some of the comparatively few countries for which proof is obtainable, rate of poverty appear to have increased over the 1990s. The fact that the problem of economic growth is not new nor did it originates in Africa should be acknowledged, as all countries of the world were at one time or other developing countries.
There have been revivals of interest in the determinants of long-run economic growth in Africa as have seen in the last few years. The new endogenous theories of economic growth have stimulated research in identifying the factors behind the distinctions in long-run growth rates across countries in Africa.
Savvides (1995) said that huge majority of the literature has used the cross section data consisting either entirely of developing countries (EDCs) or join developed and developing countries together. A lot of these studies on cross-sectional have brought in a dummy variable in explanation for differences across geographic groups. Particularly, a dummy variable for Africa has given a “negative and significant coefficient” over and over again (as has one for Latin America). There is an organized examination of the factors supporting and deterring economic growth in these countries as the relatively poor performance of these countries has received substantial interest in public policy debates. On the other hand, investigations by several studies on the detailed features on African countries economic growth have been shown, but at the same time there is also evidence that the study of economic growth in Africa is not complete.
1.1. Objective of the research
One of the objectives of this research is to level out this imbalance in the literature. This study makes use of panel data in learning the causative factors to economic growth across Africa. However, the impact of various economic factors recognized by the current endogenous growth methodology is examined. There are also two reasons why the chosen cross-section was combined with time-series data. At first, Easterly et al. (1991) suggested that combining time-series with cross-section data is essential since the EDCs growth performance explains considerable differences over time. Moreover, any country-specific effects are possible to be captured. Secondly, it permits the sample size to be expanded, especially when there is a small sample of the countries under study. Additions to the investigation of the determinants of economic growth, this study also scrutinize the relative presentation of a subgroup of African economies, including the CFA Zones Savvides (1995).
There have been recent studies by quite a lot of researchers (e.g. Assane Pourgerami, 1994; Devarajan de Melo, 1987, 1990; Elbadawi Majd, 1992; Guillaumont, et al, 1988) on this issue using several regression analyses or the control group approach. It appeared that some countries do better than others in this study. The record of the African economic growth over the past two decades has been very poor: negative on average, averaging -0.7% over the 1980s and –0.6% over the 1990s compared to world averages of 1.1% and 1.3% respectively. Englebert (2000), stated that in 1960-92, Africa per capita GDP was less than one fifth of the world average level (in purchasing power parity values), while it had been over one third of the world average level in the late 1990s. Many early studies on cross country regression were not able to give clear explanation of the cause of poor growth performance in Africa by using the explanatory variables, as a result, “the Africa dummy” was frequently found to be statistically significant and negative. More so, as have noted earlier, the CFA countries appeared to perform better than other African countries in earlier periods, their relative performance worsened during the latter part of the 1980s and 1990s. This study has also been focused to test the relative performance of the two groups of countries.
My other objective is to examine the determinants factors of economic growth in Africa countries and to assess the degree of difference performance applications within the context of models of Africa economic growth as copied from recent work in growth theory. Small sample from a growing literature is selected and reviewed in chapter 2. They have been selected principally for their theoretical wholeness, ease of understanding and transparency. Chapter 3 presents the methodology for testing the determinants of growth across African countries. Subsequently, an empirical findings and analysis is presented as well as considering the impact of political freedom on Africa economic growth in chapter 4. Conclusions and recommendations are presented in chapter 5 and 6 respectively. While many of this paper address policy implications, they have been chosen basically for their usefulness in policy design.
More also, this is based on my conviction that policy analysis must be preceded by an adequate understanding of the way in which an economy functions and can be implemented in African countries as a whole.
Chapter 2
2.0. Literature review
Africa economic growth has been studied recently by several researchers and some of their results are been reviewed in this chapter.
This chapter re-examine some recent studies starting with the significant study of Easterly & Levine (1997). Easterly and Levine examined the causes of poor economic growth rate in Africa, the least in the midst of all region of the developing world. They firstly investigated the regressing rate of economic growth (GDP per capita) on initial GDP per capital, log of years of schooling (using the barro and lee data) and some other variables so as to describe economic policies or conditions. They discover important descriptive power for most of these variables, together with a positive impact of years of education. They added dummy variables for some African countries, and came out with a conclusion that they are always negative and highly statistically significant.
However, Easterly and Levine’s paper focused not only on education but also on “ethnic fragmentation “that is diversity of tribal groups in most African countries. The argument is that bad policies, corruption and social unrest, all of which can reduce economic growth are been caused when there are many ethnic groups in a country. When the variable for ethnic fragmentation was added by them, it is highly statistically significant, despite the coefficients of the Africa dummy variable on the years of education variable remain statistically significant. The evidence that ethnic disintegration in some African countries contributes to the lower rate in the years of education and has an effect on some variable as well was shown by them.
Bloom and Sachs (1998) on the other hand investigated on geography and demography and afterwards suggested that most part Africa countries have their geography and demography poorly positioned for positive economic growth. They gave the list of the geographic features that reduce growth in Africa’s economy which is as follows, low and highly variable rainfall, highly exposure to solar radiation (which leads to high evaporation rates of scarce water) due to being centred close to equator, large areas of land far from any ocean or navigable river, and poor soils. They also argues that to a certain extent due to geography and partly for unknown reason, some Africa countries in Sub-Sahara region suffers from a very high prevalence of debilitation diseases for both human and livestock, such as malaria, AIDS, schistosomiasis, Onchoceriasis(river blindness), and trypanosomiasis (cattle sleeping sickness). Bloom and Sachs at last argue that Africa’s economic growth has also been slow down by her high rate of population growth. They show regression study that supports their point of view. Furthermore, the last two decades of the twentieth century were marked globally by what Huttington (1991) labelled the “third wave” of democratization. This “wave” did not leave Africa unaffected.
Understanding the nature, causes and consequences of political instability in Africa has attracted the attention of researchers from both developed and developing country in recently because of the now recognized positive relation between stability and growth. Fosu (1992) studied the impact of political instability on the economic growth of some African countries from 1960 to 1986. He came to a conclusion that economic growth can be impeded by common political instability. More so, the most part of Collier and Hoeffler (2003) work in a particularly through econometric analysis conclude that main resource dependence (functioning as primary commodity exports as a percentage of GDP) is correlated with a higher risk of divergence. In this analysis the chance for economic improvement is a powerful incentive for armed conflict and hence a strong driver for political instability in developing polities. Although the Collier and Hoeffler explanation for the cause of political instability has been criticised by some scholars who identifies his methodological approach as problematic (Sambanis 2002; de Soysa 2002; Ross 2004).
Brunetti et al (1998) argue that African countries are one of the major beneficiaries of external aid to encourage economic development. Through high levels of corruption, it is likely that those external aids will be diverted into private wealth, therefore impeding development. Since colonial days, Africa’s economic growth has been powered by foreign direct investment (FDI) to a great extent. In spite of the huge amount of natural resources and FDI aids to African countries, an African economy has been shrinking in both relative and absolute terms in recent years (African Development Bank 2000). This is to a certain extent due to corruption in African countries. Corruption in African countries tends to be of the decentralized and disorganized type in which paying a bribe to one official does not guarantee that a service will be provided. Ndikumana (2007) argues that the type of corruption in Africa is likely to be more unfavourable to growth and development than the centralized and controlled type found in Asia and other developed countries. For all these reasons, it is most likely that corruption could have a various consequences on economic growth and development in African countries than elsewhere.