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Nordic Journal of Political Economy

Volume 28 2002 Pages 147-179

Marginalisation in the Context of Globalisation: Why Is Africa so Poor?

Rune Jansen Hagen

Today, thirty-eight countries in Sub-SaharanAfrican are classified as low-income countries,eleven are middle-income countries, and onlyone is a high-income country; GNP per capitameasured in terms of PPP is $1440 in Africa,compared to the world average of $6300;thirty-three of the forty-eight countriesdesignated as least developed by the UN areAfrican; and thirty-four of the forty-twocountries covered by the HIPC-initiative areAfrican.2 These numbers illustrate that it doesseem like Africa is being marginalized in the

world economy, and that the question whichmakes up the subtitle of this paper is ofimmense importance. Needless to say,answering it is an exceedingly difficult task.Clearly, no monocausal theory is – or will everbe – able to tell us the full story. The situationis complicated by the fact that whereas we, inan ideal world, would be able to take thevarious theories to data on incomes and theirpostulated determinants, in the real world, weoften do not have information about many ofthe variables deemed important by theorists.

Rune Jansen Hagen1

Marginalisation in the Context of Globalisation:Why Is Africa so Poor?

1. Department of Economics, Norwegian School of Economics and Business Administration, Helleveien 30, 5045Bergen, Norway. E-mail: [email protected]. Helpful comments from Kjetil Bjorvatn, Alexander Cappelen,and Bertil Tungodden as well as participants at the conference “Globalisation and Marginalisation” arranged bythe Research Council of Norway and the Nordic Journal of Political Economy are hereby gratefully acknowl-edged. The usual disclaimer applies.

2. Throughout this paper, Africa and Sub-Saharan Africa are used synonymously.

Africa is the poorest region the world, and appears to be slipping further behind. This essayexplores and systematises the literature that deals with why this is so. Four major lessonsare suggested. The first is that the history and geography of Africa constitute impedimentsto economic development; the second is that in many African states growth-retardingpolicies have been pursued; and the third that there are intimate links between the region’sstructural characteristics and its policy regimes. These three conclusions hint at an Africanpoverty trap. The fourth lesson is that it is up to the Africans themselves to prove this proposition wrong. JEL-codes: O1, O2, O3, O4

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In addition, the quality of data from develop-ing countries is generally poor, and Africandata is certainly no exception to this rule.

Thus my aim is a modest one: it is to sys-tematically review the factors emphasised inthe academic literature on this subject.3 Thisliterature, which is both voluminous andrapidly expanding, already contains severalexcellent reviews by economists as well asother social scientists. My contribution ismore in terms of an overall framework illus-trating the interrelationships among the vari-ous explanatory factors, as well as in modestchanges in focus. Relative to economists suchCollier and Gunning (1999a), for example, Iput somewhat greater emphasis on the longshadows cast by history through the impact ofcolonialism on the character of the currentAfrican states. Relative to other social scien-tists such as Chabal and Daloz (1999), I nat-

urally focus on economic mechanisms to agreater extent, and rely more on quantitativeevidence.

Figure 1 presents an outline of my explana-tory framework. I will start by discussing thetwo primary sources of structural features ofAfrican societies, namely geography and his-tory. These combined to shape the initial con-ditions facing the newly independent Africanstates: their endowments of economicresources as well as the social, economic, andpolitical institutions in place. Since structuralcharacteristics change only slowly, it is possi-ble that they have continued to exert an influ-ence on African economic development fromthe 1960s to date. However, even if institu-tions are not rapidly changeable, they are notwritten in stone either. Likewise, endowmentsdo change over time. Moreover, they are influ-enced by economic policies and market struc-tures. Hence, I have included the possibilityof feedback from the consequences generatedby institutions and endowments to theirdeterminants. Economic policies, discussed insection 3, play a particularly important role inthis respect. Various explanations for the gen-erally dysfunctional policies that have beenpursued by governments in post-indepen-dence Africa are surveyed in section 4. In sec-tion 5 I discuss the role of external actors ingeneral and aid donors in particular. Section6 contains a summary as well as my conclu-sions.

Structural FactorsAfrica, the LaggardTable 1, which is based on Maddison (1995),displays data for the per capita income level in

148 Rune Jansen Hagen

3. Needless to say, within the constraints of this article I will have to talk about African countries in fairly generalterms, try to describe an “average” and compare it with other regions of the world, something that will inevitablymask differences within Africa.

History

Geography

Endowm ents

Institutions

Structure of Economy and MarketsInstability, risk, uncertainty

Dysfunctional policiesAid dependence

Figure 1.The structure of the argument

HistoryGeography

EndownmentsInstitutions

Structure of economy and marketsInstability, risk, uncertainty

Dysfunctional policiesAid dependence

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the main regions of the world from 1820 to1992. We see from the table that the averageincome in Africa has always been below theworld average in the period covered. Indeed,it is actually below the average income in theother regions in every year except 1950. In thissense, the marginal position of Africa in theworld economy is nothing new.4 This suggeststhat there is something intrinsic to the Africancondition, so to speak, which hinders eco-nomic development. In fact, many empiricalstudies of economic growth have found thatafter controlling for various explanatory vari-ables a dummy variable for African countriesis negative and statistically significant. Whatbasic factors might explain the enduringlagging of Africa? As suggested in figure 1, thehistory and the geography of the continent areprime suspects. I will discuss these in turnbefore I end this section by looking at threefeatures of contemporary Africa that are func-tions of both.

ColonialismOne peculiarity of the African continent isthat its territory was almost completely colo-nialised by various European powers. Thereare arguments – such as the resource transfersthat took place from the colonies to theirrulers – which suggest that colonialism hascontributed to the low levels of income weobserve today. However, there are also argu-ments to the contrary, for example, that thecolonial powers created physical infrastruc-tures such as ports and railways that theybequeathed to the new independent states.Moreover, the issue that we would like toresolve is whether these countries are better orworse off today than they would have been ifthey had not been colonised at the end of thelast century. Unfortunately, the counter-factual can never be established with anyreasonable degree of accuracy and so there willalways be room for debate about the neteconomic effects of colonialism.

However, I think a persuasive case can be

Marginalisation in the context of globalisation: Why is Africa so poor? 149

4. Furthermore, here the countries of North Africa are included. These countries, which are usually separated fromthe states of Sub-Saharan Africa for analytical purposes, a convention that I adhere to in this paper, are gener-ally more affluent than their southern neighbours.

Table 1.GDP per capita in 1990 international dollars

Year Western Western Southern Eastern LatinEurope offshoots Europe Europe America Asia Africa Average

1820 1292 1205 806 750 715 550 450 6611870 2110 2440 1111 1030 800 580 480 9201913 3704 5237 1753 1557 1515 742 575 15921950 5123 9255 2025 2604 2614 727 792 22381973 12288 16075 6029 5742 4750 1680 1274 43291992 17384 20850 8273 4608 5294 3239 1318 5539

Source: table 1.2, p. 20 in Maddison (1995).Notes: Western Offshoots are Canada, USA, Australia, and New Zealand. Africa includes countries north of Sahara.

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made for negative effects of colonialism on thepost-independence economic development ofSub-Saharan Africa via the institutions ofgovernance bequeathed to the Africans. Whilethere are contrarian voices, an accumulatingbody of research documents the impact of thecolonial state on the political and bureaucraticinstitutions of the new states. Englebert(2000: 1823) puts it this way:5

“Of all the regions in the world, Africa hasthe highest proportion of countries where theprocess of state creation was exogenous totheir societies and where the leadership, orruling class, inherited the state rather thanshaping it as an instrument of its existing ordeveloping hegemony. … Even those whobenefited from chiefly status in customarysystems did not enjoy nationwide founda-tions to their power by virtue of the hetero-geneity of the pre-colonial systems comprisedin the state. … The state became thereforeeither a potential resource to be appropriated,or the possible instrument of the dominationof other groups to be resisted.”

I will argue that this is a major reason whyAfrican post-colonial states are more accu-rately described as “predatory” rather than“developmental”, focused on resource extrac-tion and redistribution towards narrowpowerful groups instead of broad-based accu-mulation. Frequently noted characteristics ofAfrican countries over the last four decadessuch as heavy taxation of export agriculture(and urban bias more generally), rampant

corruption, and excessive debt accumulationmight reasonably be seen as the consequencesof the artificial nature of the state in a contextwhere the allegiance of most individuals is notto the “nation”, but to family, kin, or religiousor ethnic group. Moreover, the arbitraryborders imposed by the colonial powers arealso arguably a major reason why violentconflict has been commonplace in Africa afterindependence in every possible form: coups,rebellions, and wars. Empirical studies showthat poverty feeds violence (see e.g. Collierand Hoeffler 2000 and Elbadawi and Samba-nis 2000) and that political instability ingeneral and political violence in particularinhibits investment and growth (c.f. Alesinaet al. 1996 and Alesina and Perotti 1996).Hence, this might be a mechanism that trapsAfrican countries at a low level of economicdevelopment.

There is in fact some quantitative evidencefrom regressions that supports this line ofthinking. Englebert (2000) finds that hisdummy variable for state legitimacy hasstatistically significant explanatory power ingrowth regressions covering up to onehundred and thirty-three countries from1960 (or independence) until 1992. Greaterlegitimacy translates into higher rates ofgrowth, and, moreover, eliminates the signif-icance of the infamous Africa dummy. Bertoc-chi and Canova (1996) find that severalfeatures of an African country’s colonial statushelp explain its growth performance afterindependence. Specifically, they argue thatdependencies did better than colonies and


5. Several historians of colonialism argue in a similar vein. For example, Fieldhouse (1986: 56) is of the opinionthat “… only a very partial metamorphosis of the colonial state and society had taken place before decolonisa-tion; the new nation state inherited a tradition of autocracy barely tempered by democracy and a society unitedonly in the now irrelevant call to eject the imperialists.” Similarly, Young (1994: 283) asserts that “… the colo-nial state during its phase of construction in most cases created entirely novel institutions of domination andrule. Although we commonly described the independent polities as “new states,” in reality they were successorsto the colonial regime, inheriting its structures, its quotidian routines and practices, and its more hiddennormative theories of governance.”

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that British and French colonies did betterthan Italian and Portuguese ones. Grier(1999) also presents evidence supporting theproposition that the identity of the colonisingpower has mattered for growth rates. In hissample, British ex-colonies did better thanSpanish ex-colonies over 1961–1990, andthese in turn outperformed those that hadbeen colonised by France. Finally, Acemoglu,Johnson, and Robinson (2000) show that themortality rates of European settlers at the timeof colonisation affect the level of income percapita of the colony in 1995. Their claim isthat where the environment was inhospitableto permanent European settlements, theEuropeans set up extractive institutions whosenegative effects have persisted until today.Where the colonisers could establish perma-nent settlements (such as in Australia,Canada, New Zealand, and the US), however,they imported the good governance structuresof their mother countries to a great extent.

The degree of institutional inertia positedby Acemoglu, Johnson, and Robinson (2000)is clearly extreme. There are also potentialproblems with these studies, as with mostregression analyses.6 However, even those whodo not find these results as persuasive as I do,will have a hard time arguing that the low qual-ity of African political and bureaucratic insti-tutions has not affected economic develop-ment on the continent over the recent decades.

Location and Physical GeographyEven though the exact numbers in table 1 areextremely uncertain estimates, there is little

reason to doubt that Africa was the poorestregion of the world even before its societieswere subjugated to European rule. Mostdepressingly, after forty years of independenceand very substantial amounts of foreign aid,the average income in Africa is only about thesame as that of Western Europe in the firstdecades of the nineteenth century! A secondcharacteristic of Sub-Saharan Africa thatmerits attention in this connection is itsphysical geography. Climate, soils, location,and the like have recently attracted consider-able interest from economists trying toexplain cross-country variations in incomelevels and growth rates.

For instance, Bloom and Sachs (1998)argue convincingly that climatic factors serveto reduce the productivity of man, land, andfarm animals in the tropics. The favourableconditions created for such debilitatingdiseases as malaria, river blindness, and sleep-ing sickness exemplify these problems. Otherdrawbacks include poor soils, low and highlyvariable rainfall, and plant pests. Since Africahas the highest proportion of the populationin the Tropics of any major world region, it isparticularly poorly endowed by MotherNature in this respect.7 In fact, Bloom andSachs (1998) claim that for important foodcrops such as cereals yields are lower in thetropics, with Africa below even the tropicalaverage. Moreover, with large areas being of amarginal character in terms of agriculture,population densities have been low in manyparts of the continent. In 1998 the region had26.6 people per square kilometre, compared


6. For instance, Englebert sees legitimacy as being a function of the degree to which the state is rooted in pre-colonial political institutions. While this might be a reasonable definition, a potential weakness of his empiri-cal analysis is that the legitimacy variable is a subjective measure constructed by himself.

7. When the Tropics are defined to be the area between the Tropics of Cancer and Capricorn, 91% of the land areaof Sub-Saharan Africa lies therein (Gallup, Sachs, and Mellinger 1998: 66). This is much more than the regionwith the second highest percentage, Latin America (73%). Using ecological measures of the Tropics, the per-centage drops to 62% (Mellinger, Sachs, and Gallup 1999: 25). In this case Africa is surpassed by South Asia(70%), but is still far above the world average of 40%.

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to a world average of 45.3. Low populationdensities limit market size, which in turnlowers rates of technological innovation. Incombination with poor infrastructure, thisalso creates natural market segmentationthrough high transport costs.

In addition, Bloom and Sachs (1998) listsix important difficulties for transport withinand out of Africa, among them large distancesfrom major world markets, the highest pro-portion of landlocked states of any continent,and the absence of rivers which are navigableby ocean-going vessels into the interior of thecontinent. These factors increase transportcosts and thus serve to reduce the profitabilityof trade both within the continent and withthe rest of the world. Studies demonstrate thatthese effects can be sizeable. For example,UNCTAD (1999a) presents data indicatingthat total freight costs on imports as a per-centage of import value is more than 11% inAfrica compared to a developing country aver-age of 8%, and asserts that in thirty-one outof forty-three countries costs were fifty per-cent higher than the latter figure. Moregenerally, Radelet and Sachs (1998) show thatnatural geography has a strong influence onshipping costs, with high shipping costs inturn causing low growth of manufacturedexports and GDP per capita.

That there is something to this line of rea-soning is almost self-evident. As JohnKenneth Gailbraith (1951: 693) put it fifty

years ago: “if one marks off a belt a couple ofthousand miles in width encircling the earthat the equator one finds no developed coun-tries … Everywhere the standard of living islow and the span of human life is short”(quoted in Kamarck 1976: 4). While hisbandwidth is too large today because of therapid growth of the countries of South-EasternAsia, Mellinger, Sachs, and Gallup (1999)calculate that in 1995 the average income oftemperate regions measured in terms ofpurchasing power was four and a half timesthat of tropical ones. Factoring in the distrib-ution of the population between the coast andthe interior, they find that areas in the tem-perate zone lying within one hundred kilo-metres of the coast have six times the GDP percapita of interior tropical regions. As Sub-Saharan Africa has the highest proportion ofits population in non-coastal tropical areas ofany continent, I think that the evidence servesto demonstrate that this structural factor ispart of the answer why Africa is so poor.8

Moreover, it seems capable of explaining whythe continent stays poor as well: Sachs andWarner (1997) demonstrate that tropicallocation and landlockedness contribute toexplaining the slow growth of Africaneconomies over 1965–90.9

Nevertheless, while important, the case forgeography as a determinant of Africa’s low lev-els of income could be overstated.10 For exam-ple, while the continent’s disease ecology


8. If one takes a really long-run view of human history, it might also explain why Africa was colonised by the Euro-peans (Diamond 1999: 398-399): ”Europeans entering Africa enjoyed the triple advantage of guns and othertechnology, widespread literacy, and the political organization necessary to sustain expensive programs of explo-ration and conquest. ... [A]ll three arose historically from the development of food production. But food pro-duction was delayed in Sub-Saharan Africa (compared with Eurasia) by Africa’s paucity of domesticable nativeanimal and plant species, its much smaller area suitable for indigenous food production, and its north-southaxis, which retarded the spread of food production and inventions.”

9. Similarly, in the regressions of Bloom and Sachs (1998), the percentage of land area in the tropics has a nega-tive and the coastal population density a positive impact on growth in seventy-seven countries over 1965–90.Both variables contribute to the lower rate observed in the African countries relative to the non-African ones.

10. See as well the comments by Collier and Udry on Bloom and Sachs (1998).

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surely contributes to the population’s poorhealth, which in turn is one explanation fortheir low levels of income, the reverse is alsoevidently true; poverty is a factor causing illhealth. Furthermore, the inadequate healthsystems of African countries have undoubt-edly contributed to the prevalence of diseasesthat no longer poses a threat to public healthin other parts of the world. In turn, the sorrystate of health services is not only a functionof the low levels of revenues of Africangovernments; misplaced priorities and ineffi-cient spending has played a role too. This isimportant because policy failures might berectified, and the international communitycan contribute so that poverty becomes less ofa constraint with respect to health status. Thesame can be said of other consequences of thelocation of Africa on the map of the world.Hence, while geography is shaping and con-straining African development, it is notdetermining it.11 I return to the implicationsof this important distinction in the finalsection. In the remainder of this section Idemonstrate how Africa’s geography in com-bination with its history have played majorroles in forming its most important socio-economic characteristics, and show that post-independence policies have tended toreinforce rather than counteract these forces.

History and Geography Combined I: Private Sector InstitutionsIt is arguably the case that Africa has some ofthe strongest social institutions in the world.These have played an important part in theeconomies of the continent: family and kin-

ship groups have provided insurance againstidiosyncratic risks, effected intergenerationalredistribution, and helped manage commonpool resources. The origins of these arrange-ments are to be found in the extreme risks(especially the risk of starvation) facing indi-viduals in pre-industrial societies living on themargin of subsistence and lacking govern-ments that could solve collective action prob-lems through coercion.12 Since, as we haveseen, the natural conditions for agricultureand animal husbandry have been un-favourable in many parts of Africa, the needfor institutions that help alleviate the adverseconsequences of negative shocks to output hasbeen strong. Over the course of history thisprobably helps explain why primordial affili-ations have evolved to become focal points ofthe economic lives of most individuals.13

While their importance remains particularlystrong in rural areas and in agriculture, theyare of note in the urban setting too, with socialnetworks influencing the workings of boththe manufacturing and the trade sector.

These institutions might be described asconstrained efficient. That is, they are efficientgiven the environment in which they work,but this does not mean that they have no coststo go with their benefits. For example, sinceinsurance entails redistribution ex post, indi-viduals who experience a bumper harvestmight find it optimal to renege on theirpromise to distribute some of the excess overtheir subsistence needs to members of theirnetwork who have been less fortunate. Thistype of moral hazard might be countered bythe threat of exclusion from the network in


11. Furthermore, as noted by Collier and Gunning (1999a), fixed factors such as physical geography cannot readilyexplain changes in economic performance over time.

12. See e.g. Posner (1980) and Fafchamps (1992).13. Functionalism is of course an ever-present danger in these types of explanations. However, Collier and Gunning

(1999a: 79) argue that there are variations in social arrangements across lowland and highland areas in Africawhich are explicable in terms of differences in the conditions facing agriculture.

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the future if the problem of ensuring survivalis static. However, if individuals are able toaccumulate assets and thus self-insure againstfuture negative shocks, the threat might notbe sufficient to stop them from opting out ofthe solidarity network. Therefore, the accu-mulation of wealth has often been viewed associally unacceptable (and has faced socialsanctions), which of course has a clear costfrom a social point of view.

Such costs of constrained efficiency arisein the “modern sectors” as well.14 Of course,in general the specific sources of uncertaintythat make personalised long-term relation-ships the preferred mode of operation in thesesettings differ. However, generically they areequivalent. For example, in the same way asthe lack of government in primitive societiesprecludes compulsory insurance and thusforce people to substitute blood ties and socialsanctions for government fiat, the fact thatpublic institutions do not function properlywith respect to contract enforcement is onemajor reason why entrepreneurs need todevise their own ways to guard against moralhazard in business. But even though thesemechanisms provide private benefits byreducing transaction costs, they lead to socialcosts through lost gains from trade: when rela-tionships are valuable because they save onsearch and screening costs, they might preventoutsiders from entering the market and insid-ers from grasping new business opportunities.

The most extraordinary example of theimpact of the environment on the formationof social institutions is what many consider tobe the archetypical African community: thetribe. Firstly, the low population density pro-duced by its physical geography is probablythe major reason why Africa has the highest

level of ethnolinguistic fragmentation of anyregion in the world. Secondly, it is often heldthat groups founded on primordial ties areimmutable. However, many current Africantribes, while to some extent based on prioraffiliations, were formed in response to theoccupation by Africa of the colonial powers(see e.g. Davidson 1992). That is, they wereconstituted as political coalitions to enhancethe bargaining power of Africans relative tothe Europeans.

I will return to the discussion of the roleplayed by these ethnic groups or coalitions inthe public sphere below. Here it suffices tonote that recent research seems to indicatethat ethnicity only plays an indirect role in theprivate sector. That is, ethnicity facilitates theformation and strengthening of business net-works because of the importance of personalreferral in establishing contacts and socialis-ing in perpetuating economic relationships,and both of these processes often take placewithin ethnic groups. This might be due toethnic groups as such being too large to pro-vide the foundation for personalisedexchange. On the other hand, there is someevidence that the family, albeit being a muchsmaller group, plays a minor role in marketexchange as well. Family members might helpentrepreneurs in establishing their firms (byproviding loans, for example), work withthem, or be a source of business through refer-ral. Other than that, entrepreneurs seem toprefer to keep business outside the family. Alikely explanation is that their social obliga-tions interfere with how they might operate inmarkets, for example because they are obligedto provide family or kin with goods at belowmarket prices.

These observations suggest the somewhat


14. Confer e.g. Fafchamps (1996, 1999, 2000), Fafchamps and Minten (1999, 2001), Fafchamps, Gunning, andOostendorp (2000), and Bigsten et al. (2000a).

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speculative conclusion that Africa’s strongsocial institutions, although being adapted tothe problems facing static agricultural soci-eties, are not well suited to modern economiclife. Their emphasis on redistribution taxesentrepreneurship, innovation, and wealthaccumulation. While they might form thebasis of networks of personalised exchange,such networks limit the scope of the market,reduce competition, and hinder diversifica-tion into new types of activities.15 Still, it isimportant to note that these arrangements areendogenous to weaknesses in public sectorinstitutions, and therefore likely to change iffor instance the rule of law could be morefirmly established in African states.

History and Geography Combined II:Landlocked Countries In many discussions of the special problemsof landlocked countries, an implicit viewseems to be that these are caused solely by theirgeography. But this is only partly true, becausesome trade costs are incurred when goods arecrossing the borders of transit countries.Examples are duties to the governments oftransit countries, costs of delays involved inclearing customs, and bribes to customs offi-cials and employees of publicly ownedproviders of transport services in order toensure a speedy transit (UNCTAD 1999a,b).Thus, the arbitrary carving out of the Africancontinent into juridical entities performed bythe colonial powers, which has left so manyAfrican countries without access to the ocean,is partly to blame for the fact that their inter-

national trade is costly. This drawback isrendered even more disadvantageous byanother consequence of the quest for colonies,namely, that most African states are small interms of population. Close to 50% of the pop-ulation lives in the five largest states, andtwenty-two countries have a population of lessthan five million. This means that the domes-tic markets are small, which in turn makesinternational trade more important for thelevel of welfare that can be achieved. Whencross-border trade is made less profitable dueto the problems connected with long dis-tances and border transit, many Africans arethus doubly disadvantaged by the arbitraryborders that have been imposed on them.

Still, African governments are not therebyexonerated of blame. UNCTAD (1999a)claims that in Africa, intra-national transportcosts are for the most part higher than inter-national transport costs. This partly reflectsthe fact that transport infrastructure is lackingin both quantity and quality. While factorssuch as low population densities contribute tomaking it costly to build adequate infrastruc-tures and low levels of income and rudimen-tary tax systems make public funds scarce, thestory is hardly complete without adding fail-ures of policies and governance in the post-independence period (UNCTAD 1999a: 11):“[transport s]ervices were expensive and unre-liable because of a lack of commercial orien-tation, the absence of competition, cumber-some regulations which too often served asopportunities for petty corruption, and incen-tive structures which often favoured inertia


15. Platteau (1994: 552-553) reasons in a similar manner: ”[t]hrough personalisation and clientelisation of theirrelations with trade partners, members of traditional societies have thus succeeded in establishing and sustain-ing the trust required for more or less stable economic exchanges to take place. Yet, precisely because of the wayfollowed to solve the trust problem, the scale of these exchanges is necessarily restricted: in other words, limita-tions on the size of the (natural) community space as well as on the scope of personalised relations with non-community members … lead to a situation in which only a few trade opportunities are captured. Obviously,the division of labour cannot be developed very far in such a context.”

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rather than efficiency. Further, transportparastatals often drained rather than con-tributed to public finance, and there weremuddled priorities, including urban bias inthe provision of infrastructure and neglect inthe maintenance of existing infrastructures.”Hence, even though the problems of land-locked countries are for real, 16 and Africa hasmany such states, the continent’s troubles can-not be put down to structural factors alone.

History and Geography Combined III: Primary Commodity DependenceAnother characteristic feature of Africaneconomies that is a function of naturalendowments, colonial history, and post-inde-pendence policies is their extreme dependencyon a few primary commodities for most oftheir export earnings. Since many Africancountries are abundantly blessed with naturalresources, their static comparative advantagein international trade is in the production ofprimary commodities (Wood and Mayer1998). The colonial powers did little tochange this, preferring their colonies to besuppliers of raw materials to their ownmarkets and manufacturing industries. Whilemost African governments have pursued tradeand industrial policies aimed at fosteringdomestic manufacturing and processingindustries, they have rarely succeeded inachieving export diversification. Ng and Yeats(1997) demonstrate that on average the oppo-

site is true: a strong concentration has takenplace. Whereas in 1962–64 the share of thethree largest products in total exports was36.5% in Sub-Saharan Africa, it was 62.3%in 1991–93.17 The numbers in table 3 inWood and Mayer (1998) show that in 1990the share of total merchandise exports in theregion made up by unprocessed primary prod-ucts was 76.1%. If one adds processedprimary products, the dependency of Africancountries on such goods for their exports iseven more pronounced (87.8%).18

There are three major dimensions to thisdependence. Firstly, there is the debate overwhether economic development can beengendered through resource-based growth.The view that manufacturing is moredynamic than agriculture was widespread atthe time that African states became indepen-dent and has been influential throughout thepost-colonial period. Indeed, it has evenbecome ingrained in common parlance: theterm “industrialised countries” is often usedto denote rich countries. The presumptionthat technological progress is faster in manu-facturing than in agriculture has provided theintellectual foundations for policies aimed atfavouring the former, usually at the expense ofthe latter. However, the fact that rich coun-tries are mostly industrial and poor countriesusually produce (unprocessed) primary com-modities does not necessarily reflect causality,nor does casual observation constitute proof


16. For instance, Limao and Venables (1999) find that the median landlocked country in their sample has trans-port costs which are 58% higher than the median coastal country and UNCTAD (1999a) show that for land-locked Africa freight costs on imports relative to import value were more than seven percentage points higherthan the African average (which, as already noted, is in itself much higher than the developing country aver-age).

17. According to Svedberg (1991), only two (Chad and Mauritius) out of the thirty-three countries in his Sub-Saha-ran African sample diversified into manufacturing in 1970-85 compared to 1954-69.

18. In the following countries a single commodity constituted 75% or more of the total value of exports in 1990(Deaton 1999, table 1): Angola (oil, 93%), Botswana (diamonds, 80%), Burundi (coffee, 75%), Chad (cotton,85%), Congo (oil, 85%), Gabon (oil, 75%), Guinea (bauxite, 76%), Niger (uranium, 83%), Nigeria (oil, 96%),and Zambia (copper, 88%).

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of a superior rate of technological progress inmanufacturing. Martin and Mitra (2001)actually produce evidence to the contrary,namely that total factor productivity growthhas been significantly faster in agriculture overthe period 1967–92. Moreover, they find thatconvergence in levels of agricultural produc-tivity has been rapid across their sample coun-tries, suggesting that innovations disseminatefast. This is potentially good news to Africancountries; as noted, agricultural productivityis generally low there. It could be counteredthat the green revolution largely passed thecontinent by. However, this is probably due topolicy failures such as excessive taxation ofexport agriculture and poor public services(Collier and Gunning 1999a).

How are we then to explain the findingthat countries with higher shares of naturalresources in exports tend to grow more slowly(Sachs and Warner 1995, 1997)? The answerseems to be that within the framework of theweak political institutions of most Africancountries, high levels of resource rents havelead to wasteful rent-seeking by both peacefuland violent means.19 Once again there is somehope hidden within the causes of despair,because if better governance structures can beconstructed (admittedly a big if in the Africancontext) the bounties of nature might beturned into the sources of prosperity theyshould be.

Secondly, there is the longstanding con-troversy over the path of the prices of primaryproducts relative to manufacturing. Thefamous Prebisch-Singer hypothesis, formu-lated in the 1950s, is that this path is down-ward sloping due to for example the develop-

ment of synthetic substitutes for primaryproducts such as rubber and natural fibres. Onthe other hand, theories that focus on non-renewable resources predict that as theseresources are depleted, their relative price willrise. The controversy over whether the com-modity terms of trade are in a secular declineor not has not been resolved (Deaton andMiller 1996). Not surprisingly, the answerdepends on the period covered.20 Moreimportantly, not all developing countries relyprimarily on primary commodities for theirexports, and even among those that do, thecomposition of their exports varies so muchthat aggregate commodity price indices saylittle about the evolution of the terms of tradeof a specific country.

According to Collier and Gunning(1999a), there is a consensus that the terms oftrade of the countries of Sub-Saharan Africahave declined since the 1980s. However, theestimated size of the decline varies from 6%to 36%. In an earlier study, Gersovitz andPaxson (1990) found that the real prices of arange of commodities that are important inAfrica’s exports had all fallen over 1950–87.Though, the changes were not statisticallysignificant. Cashin and Patillo (2000) uncoverlittle evidence of trends in the net barter termsof trade of individual African countries over1960–96, but note a weak tendency towardsdecline for many of these since the late 1970sor early 1980s. It is thus difficult to saywhether the level of primary product priceshas contributed to African poverty when oneconsiders changes over the last half of the 20th

century, but there is reason to believe that afall in the terms of trade is one cause of the


19. See e.g. Mehlum and Moene (2001), Collier and Hoeffler (1998, 2000), and Svensson (2000).20. Bleaney and Greenaway (1993) find that over 1900-91 the commodity terms of trade were declining, but very

slowly, so that fluctuations around trends were much more important than the trend itself. Moreover, they showthat the size and statistical significance of the trend vary between sub-periods.

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disappointing economic performance of thelast twenty years or so.

There is more evidence to the point thatthe third feature of dependence on primaryproducts, that export earnings become highlyvolatile, plays a significant part in depressinglevels of income and their growth rates in Sub-Saharan Africa. Export earnings are volatiledue to a combination of quantity shocks, suchas crop failures caused by drought, and priceshocks, which in most cases can be consideredexogenous since generally African countriesare too small to affect world market prices.The conventional wisdom has been that suchshocks inhibit growth. Deaton and Miller(1996) have challenged that wisdom. Theyfind that the net impact of positive shocks to

commodity prices is to increase the level ofGDP in Africa. However, their methodologyassumes that prices revert to trend. While thismight be reasonable in many cases,21 it doesnot allow them to capture long-term effects.Other empirical studies do tend to confirmthe conclusion of Collier and Gunning(1999b: 36): “[t]he overall effect of the typi-cal positive shock in [our] sample is eventu-ally substantially to reduce output, despite theeffect being strongly positive at the time of theshock.” Available evidence suggests that this isdue to trade shocks having a negative impacton the efficiency of investment.22

Thus, it is probably not coincidental thatin the post-independence period, African eco-nomic performance has been weaker, on aver-


21. In the sample of Cashin and Patillo (2000), about half of the countries experience short-lived shocks (four yearsor less) to their terms of trade. For about one third the shocks are estimated to be permanent.

22. Bleaney and Greenaway (2001) uncover a weak negative effect of terms of trade volatility on GDP growth over1980-95 in their panel of fourteen African countries; Guillaumont, Jeanneney, and Brun (1999) estimate thatthis variable has a negative effect on growth in a sample of fifty-four developing countries (of which nearly halfare African) over 1970-80 and 1980-90; and Dawe (1996) find that instability of export revenues lower growthin a cross-section of eighty-five countries for the years 1970-85. The first study does not register an impact ofterms of trade volatility on investment, whereas the last two find that investment is an increasing function ofinstabilities with respect to trade so that the negative effect on growth is through investment efficiency. Thelatter result seems intuitively reasonable, and is, moreover, in line with the case study evidence presented inCollier, Gunning, and associates (1999).

Table 2.Population-weighted growth rates of GDP per capita

1966–71 1971–76 1976–81 1981–86 1986–91 1991–96 1966–96

Sub-Saharan Africa 2.3 0.9 -0.8 -1.3 0.0 -0.7 0.0Middle-East and North Africa 1.1 4.4 -1.0 0.8 -0.7 1.2 1.8South Asia 1.0 -0.3 2.9 2.4 2.1 2.4 1.7India 2.4 0.6 1.7 2.8 3.3 4.7 2.6Latin America and Caribbean 3.8 4.0 2.0 -0.6 -0.1 1.4 1.8OECD 4.0 2.5 1.9 1.9 2.2 1.4 2.3East Asia and Pacific 4.0 4.4 5.0 6.6 4.5 5.3 4.3China 4.1 1.0 7.0 9.7 6.4 11.2 6.5

Notes: GDP per capita is measured in constant local currency units.Source: Author’s calculations based on data from World Bank (1998).

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age, since the mid 1970s (table 2). In the1970s these countries had to cope with boththe two oil price shocks, which affected mostof them negatively, as well as a boom in othercommodity prices, which increased the pricesof some major African export commoditiessuch as coffee. Moreover, the numbers in table2 demonstrate that evaluated jointly, thecountries of Sub-Saharan African have notmanaged to produce aggregate economicprogress since the mid-60s. Even worse, in thelast 20 years covered by the table GDP percapita has fallen on average. This abysmal eco-nomic performance has prompted statementslike “African economic history since 1960 fits theclassical definition of tragedy: potential unful-filled, with disastrous consequences” (Easterlyand Levine 1997: 1203). It has also generatedan outpouring of academic and policy ori-ented papers analysing what has gone wrong.

Economic Policies and Growth Hares and tortoises in the growth raceSomething has indeed gone wrong, for at the

beginning of the 1960s it was not given thatAfrica should be a laggard in the growth race.This can be exemplified by comparing Ghanaand South Korea. Ghana was the first colonyin Sub-Saharan Africa to become indepen-dent. Under the leadership of the charismaticKwame Nkrumah, the country symbolisedthe bright future of the countries on the con-tinent. In 1960, the per capita GDP of Ghanaand South Korea were almost identical whenmeasured in terms of purchasing power. Theeconomic prospects of the latter did not seemas promising as those of Ghana. On the con-trary, suffering from a highly corrupt and inef-ficient regime and facing the threat of thecommunist North, South Korea seemed des-tined for stagnation. That fate, however, befellGhana instead. Forty years later, having expe-rienced no growth at all, it is still a low-incomecountry. South Korea, one the other hand, hasbecome both a high-income country and amember of the OECD.

The cases of Ghana and South Korea areactually fairly representative of the contrast-ing experiences of African and East Asian


Table 3.Growth rates of per capita GDP 1960-98

Slowest growth Fastest growth

Congo, Democratic Republic of -2.9 Botswana 6.4Niger -1.7 Singapore 6.4Sierra Leone -1.3 Korea, Republic of 5.9Madagascar -1.2 Hong Kong 5.3Zambia -1.2 China 5.1Haiti -1.0 Thailand 4.6Nicaragua -1.0 Japan 4.4Central African Republic -0.8 St. Kitts and Nevis 4.2Chad -0.6 Ireland 4.1Rwanda -0.5 Portugal 4.0

Note: GDP is measured in constant local currency units.Source: Author’s calculations based on data from World Bank (2000).

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countries over the last decades. If one assem-bles lists of the top and bottom ten countriesin terms of per capita GDP growth since the1960s, the first list is invariably dominated bythe so-called miracle countries of South-Eastern and Eastern Asia while the secondcontains mostly African countries (c.f. table3). However, the only real economic successof post-independence Sub-Saharan Africa,Botswana, is among the fastest growingeconomies in the world over the last thirty toforty years.23 Thus Botswana provides one ofthe few bright spots in the gloomy overallpicture as seen from an African angle. I shallreturn to the case of Botswana from time totime, since the relevance of the experience ofa neighbour is more easily accepted, and thelikelihood of successful emulation muchgreater.24

These individual country examples ofsuccess and failure teach us two importantlessons. Firstly, the power of compoundgrowth rates is strong. I have noted thatGhana could have been South Korea if it hadbeen able to replicate the performance of thelatter. Botswana’s phenomenal growth rate hastransformed it from a very poor country atindependence to a middle-income country by1992, a time span of only twenty-seven years.Thus, if one can unlock the secrets of gene-rating growth, rapid improvements are possi-ble, particularly if one starts from a low base.

Secondly, part of the secret of Botswana’ssuccess is luck. It has discovered the world’slargest deposits of diamonds. However, to me(as well as to Rodrik 1998) this is less inter-esting than the fact that it has managed itsnewfound wealth well. Being richly endowed

with natural resources is not a necessary con-dition for becoming a high-income country.If it were, Japan would never have achievedsuch a status. It is not sufficient either, becausethen Nigeria would be one of the richest coun-tries in the world and not one of the poorest,which is in fact the case. Indeed, Nigeria, withits rampant corruption and countless “whiteelephants”, demonstrates that resource wealthmight in some cases actually be more of a cursethan a blessing. In my opinion, the case ofBotswana shows that through the judiciousapplication of economic policies it is possibleto realise the beneficial potential of windfallsand to minimise the consequences of adverseshocks. This is vital since we have noted thatAfrican economies clearly are more exposed toexogenous shocks than most other economiesin the world.

Capital accumulation in AfricaAccumulation necessitates abstaining fromconsuming resources today so as to be able tohave greater consumption tomorrow. Thereturns to postponing consumption are there-fore crucial for private savings and investmentand, by implication, for economic growth. Ofcourse, being poor countries with little capi-tal will not be able to save much in absoluteterms. Hence, if they have to rely on their ownresources, the level of accumulation will below too. African average savings rates areindeed the lowest in the world. In the 1960sand early 1970s, gross domestic savings wereremarkably stable at 16–18% of GDP. Thebooms in commodity prices in the middle ofthe 1970s seem to have resulted in an increasein the savings rate by four to five percentage


23. Mauritius and Lesotho are the second and third fastest growing countries in Sub-Saharan Africa over 1960–98.However, at 3.4% and 3.2% respectively, their performances, though respectable, pale next to Botswana’s.

24. It should be noted that Botswana might only lead by example. It is too small and lacks the manufacturing basenecessary to be a “leading goose” such as for instance Taiwan has been in East Asia, transferring its unskilledlabour intensive industries to neighbouring countries as it has moved up the technology ladder.

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points, but after peaking in 1980 the savingsrate dropped precipitously to 15–17%. Thetime-series on average national savings rates,although somewhat shorter, follow a similartrajectory.25

Elbadawi and Mwega (2000) find that inAfrica a rise in the savings rate Granger-causesan increase in fixed investment. Thus, it is nosurprise to find both that investment rates inSub-Saharan Africa have fallen over time andthat they are low compared to other regions.The discrepancy is particularly marked withrespect to rates of private investment; accord-ing to some estimates, the African median wasonly half of the median rate in East Asiabetween 1970–90 and 50% below the LatinAmerican one (Serven 1997). The gap is notquite as big when one looks at total invest-ment, but, as we shall see, one should perhapsnot expect government investment to havecontributed very much to growth in theAfrican context.

Of course, a country need not necessarilyfinance all of its investments on its own: thepotential growth differential between capital-rich and capital-poor countries might berealised through capital flows from the formerto the latter. Such flows might be public orprivate and might come in the form of invest-ments, loans, and grants. While the condi-tions attached to the transfer will vary with thesources and types of funds, if investedefficiently all forms of international capitalflows can potentially raise the growth rate ofa recipient. Furthermore, if the returns tocapital are decreasing in the capital stock, as isconventionally assumed, the returns to invest-

ing in poor countries should be very high.One reason why there might be decreasingreturns at the economy-wide level is that itseems reasonable to expect that the bestinvestment opportunities are exploited first.Subsequent investment will therefore be inprojects with lower returns. If the set of possi-ble projects is the same in all countries, poorcountries, which have less capital than richcountries, should therefore have higherreturns to and rates of investment. It followsthat one should expect them to grow fastertoo.26

Africa definitely has a low capital stock.Recent estimates constructed by researchers atthe World Bank indicate that of all the regionsin what used to be called the Third World,Sub-Saharan Africa has the lowest amount ofprivate capital per worker (Collier, Hoeffler,and Pattillo 2001). It has actually less than halfof the capital/labour ratio of the region withthe second lowest ratio, South Asia, and lessthan a third of that of the Middle East andNorth Africa, which ranks third from bottom.Moreover, according to these estimates Africais the region with the highest proportion offlight capital, that is, investments abroad thatare not registered in public statistics, in privatereal wealth (40%). This is so even thoughthese researchers find that other things beingequal flight capital is attracted to countrieswith low capital/worker ratios. Hence thereseems to be something to the notion ofdecreasing returns to capital, but apparentlythis effect is mitigated by other factors in theAfrican context.

These results on capital flight are strength-


25. These numbers are from the World Bank (2000).26. Another reason why poor countries could be able to grow faster than rich ones is that they can achieve techno-

logical progress through innovation instead of invention. The latter is presumably more costly. However, inpractice it is likely that innovation requires a certain level of development, at least with respect to human capital.Hence, the low level of education in Africa (see below) is likely to constitute a barrier to exploiting opportuni-ties for innovation through copying and imitation.

04 NOPEC 28 (2) Hagen 11.12.02 12:11 Side 161

ened by official data on private capital flows.They indicate that Sub-Saharan Africareceives a minuscule share of the flows goinginto developing countries. Worse, theabsolute size of these flows is small even com-pared to the size of African economies. Dur-ing 1990–93, for example, the combinedlevels of private long-term net debt and equityflows were only equal to 2.6% of exports and0.8% of GNP (Fernandez-Arias and Montiel1996). The impression given by figure 2 is thatthere are some encouraging signs in recentyears. However, these are all due to the re-integration of South Africa in the worldeconomy. For example, more than half of the

FDI in the peak year of 1997 flowed to SouthAfrica (much of it due to privatisation), andmost of the portfolio flows over 1994–98 weredestined for Johannesburg.27 The only seriesthat does not look worse without South Africaincluded, is bank and trade-related lending,because this country was borrowing morethan 2.5 billion USD over 1996–98. Still, itis clear that the rest of Sub-Saharan Africa hasbeen effectively excluded from internationalborrowing since the onset of the debt crisis.Thus, neither international lenders nor inter-national investors seem to find the economiesof Africa attractive in spite of the high returnsto capital indicated by their low capital/labour


-2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

8000

1970 1975 1980 1985 1990 1995

Bank and trade-related lending Net foreign direct investment

Portfolio investment, bonds Portfolio investment, equity

Figure 2.Private capital flows to Sub-Saharan Africa

Source: World Bank (2000).

Mill

ions

US

D

27. The World Development Indicators database does not include observations on financial flows to South Africabefore 1994. However, it seems safe to assume that these were negligible due to the sanctions against the apartheidregime. This presumption is supported by the data on FDI presented by Pigato (2000) and UNCTAD (1999c),which show that foreigners disinvested in South Africa in the 1980s.

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ratios. To paraphrase Nobel laureate RobertLucas (Lucas 1990) the million-dollar ques-tion is this: why hasn’t private capital flownfrom rich to African countries?

To answer this question, recall our previ-ous reasoning around why poor countriesmight grow faster than rich ones. In additionto the assumption of decreasing returns tocapital, there were two other assumptions;namely, that investment opportunities areidentical across countries and that capital isinvested in an efficient manner. In practice,both of these assumptions are untenable. Firstof all, the set of possible investment projectsis not the same in all countries. To some extentthe natural resource base of Africa places it ina relatively favourable position when it comesto for example investment in resource inten-sive industries. In fact, most of the FDI thathas been coming in outside South Africa has been going to resource rich countries inthe region.28 In the 1990s, this has mainlybenefited the oil producers Angola, Congo,Nigeria, and Equatorial Guinea.

Moreover, in general the region is at a dis-advantage with respect to foreign investment.The lack of complementary inputs such asinfrastructure is surely one reason why this isso. As already noted, public infrastructure isboth undersupplied and of poor quality inAfrica. Historically, the provision of infra-structure has been seen as one of the majortasks of governments. Available evidence

tends to confirm the importance of publicinfrastructure investment. In a well-knownstudy, Easterly and Rebelo (1993) find thatpublic investment in transport and commu-nication is robustly related to the growth rateof GDP per capita. Moreover, the combina-tion of the poor quality of the existing stockof infrastructure and the particular impor-tance of improving communications in Africa– as noted above its countries are generallysparsely populated and many of them arelandlocked too – strengthens the need forpublic investment in this sector. In this per-spective, the spending of African governmentsdoes not seem overly impressive.29

Another input that is complementary toprivate investment in physical capital ishuman capital. Of course, human capitalaccumulation might also be an independentsource of economic growth. Here too, Africangovernments have played a major role throughtheir involvement in the provision of educa-tion and health services. At the outset, thenewly independent states faced daunting tasksin these sectors. For example, in many Africancountries life expectancy at birth was wellbelow forty years in the early 1960s. Accord-ing to the most recent version of the Barro-Lee data set on educational attainment (Barroand Lee 2001), in 1960 average years of totalschooling in African countries were only 1.39for the population aged twenty-five andabove.


28. It could be argued, as do UNCTAD (1999c), that the inflows should be seen in relation to the size of the econ-omy, which is small in many African countries. If one does, there are a number of countries without large miningor petroleum sectors that have received sizeable amounts of FDI in recent years (also see Pigato 2000, whosenumbers differ quite a lot for some countries, probably due to different sources).

29. Mlambo and Oshikoya (2001) find that in their sample of forty developing countries, of which fifteen are fromSub-Saharan Africa, public investment has a non-significant impact on private investment in most of their econo-metric specifications. It is encouraging, though, that the coefficient becomes significantly positive when thesample period is shortened from 1970-96 to 1982-96. While the authors do not discuss why, the improvementcould be due to a combination of a less volatile external environment and the implementation of economicreforms in the latter part of the 1980s and the 1990s. Hadjimichael et al. (1995) provide some indication thatthe improvement also applies to African countries: over 1986-93, government investment in this region wasfound to contribute positively and significantly to both private investment and economic growth.

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While Africa has made some impressingstrides with respect to health and educationsince the 1960s, its countries still lag behindcompared to other developing countries (c.f.table 4). In terms of spending levels, Africangovernments compare favourably withgovernments in other regions of the develop-ing world. However, rapid populationgrowth, which results in high dependencyratios, and the HIV/AIDS-epidemic, magnifythe scale of the task they are facing.30

Furthermore, it is not difficult to find Africanevidence that hints at the inputs into and out-puts of the social sectors being misallocated.Let me present three examples from theeducation sector.

First of all, it is conventionally held that inlow-income countries the social returns toprimary education are much higher than thereturns to secondary and tertiary education.

While African countries do allocate a greatershare of public recurrent expenditure toprimary education than to higher education,in 1990 public spending per student in thelatter was forty-four times spending perstudent in the former (World Bank 1995a:57-59). Thus, African governments seem tohave got their priorities wrong.

Secondly, weak governance systems in thepublic sectors in many cases result in recordedspending levels being highly misleading forjudging actual spending levels. A particularegregious example of this is non-wage expen-ditures in Uganda’s primary schools: during1991–95, on average only 13% of what thecentral government contributed was in factreceived by the schools (Reinikka and Svens-son 2001). The median amount was evenzero! The extent to which corruption, whileobviously important, is the major culprit is


Table 4.Social indicators by region

Age Life Infant Population Averagedependency expectancy mortality growth years of

ratio at birth rate (annual %) schooling

East Asia & Pacific 0.5 68.9 35.3 1.1 6.0Europe & Central Asia 0.5 68.9 21.6 0.1 9.7Latin America & Caribbean 0.6 69.7 30.8 1.6 5.4Middle East & North Africa 0.7 67.6 45.4 2.1 4.5South Asia 0.7 62.3 75.1 1.9 3.7Sub-Saharan Africa 0.9 50.4 91.8 2.6 3.6World 0.6 66.8 54.5 1.4 6.5

Note: Data are for 1998 except for average years of schooling which pertain to population aged 25 and above in1995. As the latter variable is from a different source, the composition of the regional groups might differ some-what from those of the other variables.Sources: Age dependency ratio, life expectance, infant mortality rate, and population growth are from World Bank(2000). Average years of schooling are from Barro and Lee (2001).

30. The much faster growth of the total population relative to the working-age population is one of the most impor-tant variables in explaining the differential in economic growth between Africa and other regions (Bloom andSachs 1998).

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not the main point here, but the example,while perhaps extreme, illustrates the diversityof the problems facing African governmentsthat would like to improve service delivery inthe social sectors.

Thirdly, in Benin, Mali, Rwanda andmany other African countries the governmenthas provided university graduates with jobguarantees. Rodrik (1997) argues that thereare good reasons for this in countries charac-terised by a great deal of undiversifiable risk.That is, in such environments, which includemost African countries, public employment isa form of social insurance. Rodrik (1997)claims that his regression analysis based on aworldwide sample supports this assertionagainst the alternative hypothesis that thegrowth of public pay rolls is due to calcula-tions of political gain. However, these twohypotheses are not mutually incompatible; ifhiring people are to benefit politicians, publicsector jobs must be attractive relative to avail-able alternatives and this could for example bedue to security of tenure. Moreover, it is difficult to see only considerations of socialwelfare behind the 7.6% annual increase inpublic sector employment in Zambia over1966–1980, the expansion of 15% per year inGhana during 1975–82, or the 15.8% yearlygrowth rate in Nigeria from 1977 to 1983.31

In any case, if all individuals with a higherdegree become bureaucrats, it is questionablewhether their education contributes much toeconomic growth. It is, though, clear that inthese circumstances the private sector will notbenefit from the expansion of higher educa-tion.

Macroeconomic policy volatilityWe have seen that the level and quality of pub-

licly provided inputs which are important forprivate investors might explain why theseactors have been reluctant to commit theircapital to African projects. We shall see that itis also easy to find examples of other economicpolicies that might have contributed nega-tively in this respect. It is obvious thatgovernment policies on issues like profit tax-ation and exchange rates matter to investorssince these will have a substantial impact onthe after-tax returns to investment. In addi-tion to the level effects of such variables, theirvariability matters because most investmentdecisions are irreversible to some extent. Thatis, once the decision is made the full value ofthe investment cannot be recaptured. There-fore, changes in government policies affectingthe profitability of the venture cannot changethe investment decision once it is made. How-ever, the possibility of such changes mightaffect the original decision on whether tocommit funds.

The perceived riskiness of investing inAfrica is high. It is actually higher than war-ranted by economic fundamentals: Haque,Mark, and Mathieson (2000) show that theevaluations of major risk rating agencies are toa large extent determined by economicfactors, and that Africa’s rating is below whatone would predict based on its economic char-acteristics. One possible explanation for a sig-nificantly negative African dummy is that theregion is paying for its past misdemeanours.Haque, Mark, and Mathieson (2000) findthat the ratings are highly persistent even aftercontrolling for various economic and politicaldeterminants, so the poor standing of Africamight be due to its uninspiring performancein the past. Some support for this interpreta-tion is provided by Jasperson, Aylward, and


31. The first number is from Gelb, Knight, and Sabot (1991) and the latter two from Lindauer, Meesook, and Sueb-saeng (1988).

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Knox (2000), who discover a negative andsignificant African dummy in regressions forthe ratio of FDI to GDP. They also show thatrisk ratings have a negative effect on privateinvestment.

A second possibility is that the un-explained residual riskiness of Africa is due tothe variability of the conditions facinginvestors more than the average. Measures ofe.g. policy uncertainty are not included in theregressions of Haque, Mark, and Mathieson(2000). In judging the contribution of un-certainty about macroeconomic policy to thelacklustre private willingness to invest, wemight benefit from going back to our discus-sion about the various shocks to whichAfrican economies are subjected. A usefulstarting point when looking for the linksbetween exogenous shocks and policy volatil-ity is an observation made by Deaton andMiller (1996: 123) about the terms of trade:“[a]lthough there is still dispute about long-term trends, the trend, if present, is not largerelative to variability, so that the importantthing is not to be misled by booms and slumpsinto predicting any major change in long-runvalues.” African governments, however, donot seem to have thought along these lines.There are many examples of pro-cyclical poli-cies and of failures to adjust policies to takeaccount of the fact that prices have usuallyreturned to previous levels after relativelyshort periods of time.32

Hence, it may be argued that the post-independence governments of Africa have notbeen sufficiently prudent.33 The permanentincome theory tells us that it is optimal to adjust consumption instantaneously to

shocks that alter the long-run level of incomewhile consumption should be approximatelyconstant when shocks are transitory. Theevidence illustrates that it can hardly beclaimed that in general African governmentshave followed the prescriptions of this theory.In some cases it is only a slight exaggerationto say that the government has treated allpositive shocks as permanent and all negativeshocks as transitory. This is one of the reasonswhy thirty-four of forty-two so-called highlyindebted countries are African and why in1995 the average external debt to GNP ratiowas a whopping 72.3%, almost twice the aver-age of the second most indebted region, LatinAmerica.

This sort of behaviour has been all themore serious insofar as terms-of-trade in-stability, or more generally, instability inexport earnings usually has a major impact ongovernment budgets in Africa. First of all, incountries with large mining industries, thegovernments have appropriated a large shareof the resource rents either directly, by nation-alising the industries, or indirectly throughprofit taxation or royalties. Consequently,they have borne the brunt of the burden fromfluctuations in the prices of minerals andmetals in world markets. Secondly, govern-ment controlled marketing boards have beenwidespread in countries where agriculturalexports have been important. These weremonopolies. The farmers had to sell theirproducts to the boards, which fixed the prices.These were often kept constant for long peri-ods of time. This practice stabilised theincomes of the farmers, usually at a level thatimplied a handsome monopoly profit, while


32. See e.g. the case studies in Collier, Gunning, and associates (1999).33. Nevertheless, the story is not complete without stressing the difficulties involved in forecasting commodity

prices. Deaton and Miller (1996) show how remarkably far off the World Bank has been in some of its estimates.Given the low level of human capital in Africa, forecast errors are thus to be expected.

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it had a destabilising effect on governmentrevenues, which as a consequence fluctuatedwith the world prices of the commodities con-trolled by the boards. Thirdly, export taxes hasbeen another major source of governmentrevenues. Shocks to the value of exports havethus been transformed into shocks to govern-ment revenues. In turn, this has often engen-dered expenditure instability (Bleaney, Gem-mell, and Greenaway 1995). With limitedaccess to external funds and lacking domesticbond markets, inflationary finance has beenthe only other way of adapting to revenuefluctuations. Where this route has beenchosen, both fiscal and monetary policy havebecome destabilised.

These “examples” should suffice todemonstrate that policy volatility has beenhigh in Africa. That such instabilities have hada negative impact on investment and growthin Africa has also been confirmed empiri-cally.34 Here most African governments couldprofit by taking a leaf out of the book of thegovernment of Botswana, whose macroeco-nomic management has been exemplary over-all. Notably, Botswana has been politicallystable too, thus avoiding another of the risksthat restrict private investment in Africa.35

Public financeThe volatility of macroeconomic and fiscalpolicy have probably been more important to

the disappointing African performance inrecent decades than the levels of these policies.The average rate of inflation has been quitelow in Sub-Saharan Africa, for example. Itcould even be argued that tax rates could havebeen higher if more rational tax systems wereput in place. In any case, there is certainly aneed for higher public revenues if the debtoverhang accumulated in African countries isto be repaid. Most of the external debt ofAfrica is public. Therefore, debt reductioncould have a positive impact on growth byreducing the risk of higher future taxation ifone is able to resolve the paradox noted by BillEasterly (1999: 6), namely, that “a large groupof countries came to be defined as highlyindebted at the end of two decades of debtrelief and increased concessional financing”(emphasis in original).36

Of course, in order to explain deficits onecannot look solely at the revenue side of thebudget. Indeed, African governments seem tohave overspent relative to their capacity forgenerating revenues. Public consumption inAfrica has consistently been above the averagefor all developing countries from the 1960s on(Commander, Davoodi, and Lee 1997). Ingrowth regressions, government consumptionnet of expenditures on education, health, andthe military is consistently found to have anegative impact on growth. This is usuallytaken to imply that these expenditures, which


34. See e.g. Hadjimichael et al. (1995), Serven (1997), and Mlambo and Oshikoya (2001). The macroeconomicstudies are supported by the microlevel investigations of Bigsten et al. (1999, 2000b), who find that in themanufacturing sectors of Cameroon, Ghana, Kenya, Zambia, and Zimbabwe high levels of profits and grossrates of return to capital coexist with low levels of investment, suggesting that the cost of capital is very high.Their interpretation is that macroeconomic instability implies that the option of “waiting to see what happens”is very valuable, thus driving up the rates of return at which it becomes optimal to invest.

35. Consult, for instance, Serven (1997). Gyimah-Brempong and Traynor (1999) arrive at similar results with respectto total investment. Both the latter study as well as that of Guillaumont, Jeanneney, and Brun (1999) suggeststhat political instability also has a direct impact on growth in Africa, most likely through investment misallo-cation.

36. Alternatively, a greater part of aid flows to Africa might be spent in recipient countries; Devarajan, Rajkumar,and Swaroop (1999) show that in their sample of eighteen African countries 31% of the marginal aid dollar hasbeen diverted to repaying principal on external concessionary debt.

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consist mostly of wages, are “unproductive”.As many African bureaucracies are overstaffedthis presumption does not seem out of place,and there is probably scope for reducing suchexpenditures. However, it might be equallyimportant to reallocate expenditure fromwages to spending on operations and mainte-nance to avoid the all-too familiar phenom-ena of dilapidated schools without school-books or roads littered with potholes.

The second broad category of publicspending is on capital. The data of Easterlyand Rebelo (1993) show that in the 1980s, themedian average rate of total consolidatedpublic sector investment in GDP in Africancountries compared quite favourably withthose of other regions in the Third World. Infact, it was only surpassed by that of theMiddle East and North Africa. But there ismore to public investment than just theabsolute amount of money spent. These tworegions have put huge sums into public sectorenterprises. The World Bank has estimatedthat the average share of state-owned enter-prises in GDP in a group of Sub-Saharan andNorth African countries was 14% in theperiod 1978–91 (World Bank 1995b). Thiswas much higher than in the Asian and LatinAmerican countries investigated. The share ofthese enterprises in gross domestic investmentwas also higher than that of their counterpartsin these other regions, and their share ofemployment was almost ten times as high.

The public enterprises of Sub-SaharanAfrica are notoriously inefficient. There are avariety of reasons for this, including the choiceof technologies unsuited to local conditions.These industries were often capital-intensive,and thus hardly appropriate targets for invest-

ment in countries were capital has beenextremely scarce. Given the limited size oflocal markets and the lack of internationalcompetitiveness, capacity utilisation has oftenbeen very low. For example, “[i]n Tanzania,the state-owned Morogoro shoe-factory, builtin the 1970s with a World Bank loan, nevermanufactured more than 4 percent of itssupposed annual capacity” (World Bank1995b: 35). In order to survive, such firmshad to be shielded from international compe-tition, which only served to turn them intomonopolies. While capital-intensive, theywere often overstaffed due to politicaldemands. Over time their accumulated losseshave constituted a major drain on publicresources, as huge subsidies were required tokeep them afloat. Thus, they have contributedto the debt problems of Africa, which in turnhave depressed private investment in theregion (Serven 1997, Mlambo and Oshikoya2001).37

Industrial and trade policiesAfrican governments have established publicenterprises in what was deemed strategicsectors, for example mining. However, theyhave also established such enterprises in arange of other industries that are usually dom-inated by private firms. This is a reflection ofthe strategy of import-substitution. Thisstrategy, which was followed by most devel-oping countries from the 1950s on, was basedon the idea that one had to industrialise inorder to become rich. Since industrialisedcountries are indeed rich, the assumption didnot seem farfetched at the time, and moreover,both western academics and multilateral insti-tutions provided support for this strategy


37. The superficially surprising result derived by Hadjimichael et al. (1995) – that in Sub-Saharan Africa, govern-ment investment has an impact on growth that is five to six times the effect of private investment – can probablyto a large extent be explained by the fact that in their study the latter includes investment by public enterprises.

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because it was felt that primary products couldnot be “engines of growth”. Since it wassupposed, quite reasonably, that newlyestablished industries in developing countrieswould not be internationally competitive,trade barriers were erected to protect them. Inmany countries, private industries did growbehind such tariff walls. However, in a lot ofAfrican countries the public sector assumed acommanding role out of ideology or becausethe private sector was seen as too weak to takeon this task.

Whether private or public these industrieshave rarely become competitive internation-ally. One major reason for this is that the tariffwall was not lowered. Hence, these industriesnever had to compete and so felt little inclina-tion to become competitive. Moreover,domestic markets were and are small in mostAfrican countries. Thus the scale economiesthat are important in many manufacturingindustries could not be achieved.38 As a conse-quence, much of the investment that has takenplace in Africa has been inefficient. The aston-ishing conclusion of Devarajan, Easterly, andPack (2001), that in Africa, neither private norpublic capital has been productive between1970 and 1997, supports this contention.39 Areallocation of capital to other sectors shouldtherefore increase income levels.

The gains from trade have been one of themain tenets of economic theory for over twohundred years. Still the optimality of freetrade remains controversial. While it is debat-able whether moderate and temporary infantindustry protection is damaging to economicprosperity, in Africa protection has until quiterecently seemed permanent. Moreover, it hasnot been moderate. Most observers argue thatit is likely that restrictive trade policies havecontributed to the poverty of Africa.40 Themarginalisation of Africa in world trade is inany case striking: Ng and Yeats (1997), forexample, cite an UNCTAD study whichreport that Africa’s share of global exports havefallen from 3.1% in 1955 to 1.2% in 1990.Ng and Yeats’ (1997) own investigations showthat Africa has been losing ground bothbecause of declining market shares for theirmajor exports in the OECD and because tradein these products have been growing moreslowly than the average level of trade. The firsteffect alone amounts to annual trade losses of$11 billion according to their calculations, afigure that is equal to the aid flows the regionreceived from the OECD countries in 1991!These authors argue that it is the restrictivetrade policies of African countries that explainthe marginalisation process.41

In addition, the industrial and trade poli-


38. There is currently a debate over whether African can export manufactures, which pits Wood and Mayer (1998),who argue that the region’s comparative advantage is in resource-intensive industries, against Collier (1998).The latter claim that African manufacturing is currently not internationally competitive because of high trans-actions costs, many of which are related to unfavourable policies and policy risk. However, while this argumentis clearly correct, the difficulties created by small domestic markets for building competitiveness in industrieswith high fixed costs of production cannot be easily dismissed.

39. Equally amazing is the fact that private investment does have a positive impact on growth if Botswana, with0.2% of the continent’s population, is included.

40. The static gains from trade seem indisputable. Both theoretically and empirically, controversy remains overwhether policies that restrict the openness of the economy damage long-term growth. In the African context,Sachs and Warner (1997) argue that they have while Rodrik (1998b) claims that they have not. Block (2001),who finds that openness does in general contribute to growth in his set of developing countries, uncovers astatistically significantly stronger effect in Africa. This result fits well with the severely limited size of theseeconomies.

41. Overvaluation and variability of the real exchange rate are clearly major contributing factors too (see e.g.Elbadawi 1998).

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cies that have been pursued have been highlyinequitable. Agriculture, the main exportsector, has been subjected to high explicit orimplicit taxes. In Ghana, for instance, by 1981the real producer price of cocoa was down to13% of its 1963 level (Leith and Lofchie1993: 232-233). While producers respondedby cutting production or smuggling it out ofthe country, they could not prevent a hugedrop in living standards. This is an example ofthe urban bias that has characterised eco-nomic policies in Africa in the last decades.The rural population, which is poorer thanthe urban population, has had to shoulder theburden of import-substituting industrialisa-tion. This is one of the reasons why incomeinequality is high in Africa.

The Political Economy of EconomicPolicies in AfricaIn light of our discussion of various economicpolicies that have affected economic develop-ment in Africa adversely, the natural question toask is why African governments have hung onto policies long after it must have become appar-ent that they were not working. One answer isthat over time those who benefited from thesepolicies became strong enough to protect theirpositions. Another is that African regimes havefound their control over public sector enter-prises and their influence over the profitabilityof local industries through trade and industrialpolicies useful for political purposes.42

This in turn reflects the nature of Africanpolitical regimes since independence and thecharacter of African societies. In order to

bolster their positions political leaders ofmany African regimes have made extensiveuse of the public pay roll. These leaders havegoverned poor societies characterised bypotentially explosive cleavages along the linesof region, ethnicity, or religion. Indeed, thisdestructive potential has been unleashed in anumber of cases, of which the civil wars rav-aging countries such as Angola, Sierra Leone,and the former Zaire are but the starkestexamples.43 It is easy to understand the attrac-tion of public sector employment expansionin such cases, particularly when coupled withthe restricted possibilities for generatingpolitical patronage in an efficient manner incountries with highly rudimentary tax andtransfer systems. In some cases African auto-crats have succeeded in staying in power fordecades through a combination of skilfullyapplying public largesse and judiciously hand-picking people for high-ranking public office.

The attractions of supreme power havebeen increased by the possibilities for usingpublic office for personal gain. Many Africanleaders have neither been averse to puttingtheir hands in the public purse nor to mani-pulating public policy in exchange for bribes.The temptation to engage in these practiceshas probably been strengthened by the highlikelihood of losing office to potential com-petitors for the rents from political monopolypower or representatives of other ethnicgroups, and facilitated by lack of accounta-bility characteristic of post-independenceAfrican regimes.

As discussed above, the social structures ofmost African societies are characterised by a


42. See the classic on the politics of urban bias in Africa: Bates (1981). 43. This is not to say that such cleavages necessarily caused these conflicts (though it is likely that in some cases they

have at least constituted ready-made coalitional fault lines). Collier and Hoeffler (1998, 2000) argue that theevidence suggest that Africa’s extreme fragmentation in terms of ethnicity has reduced the probability of civilwar there, its average incidence of such conflicts instead being due to its economic characteristics (in particular,its low level of income, but also to some extent its dependence upon the rents from primary commodity exports).

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multitude of informal networks based on forinstance family ties or ethnicity. Members ofa network have obligations towards othermembers. They are expected to cater to theinterests of fellow tribesmen or kin. Thus, if amember of a particular network is a publicemployee, he will, if possible, use his positionto the advantage of other members. This con-tributes to the privatisation of the state thatAfrican leaders have initiated. The enormousdrop in real civil service wages over the lasttwenty years has accentuated the tendency forbureaucrats to look after themselves and theirown instead of serving the public. The conse-quences for the public sector have been dis-turbing, if unsurprising. The quality ofAfrican public administrations is low. Absen-teeism, moonlighting and corruption arecommonplace.44 In some cases the govern-ment has become incapable of delivering evenbasic services to its citizens.

The legendary autocrat President Mobutuof Zaire, who amassed an astonishing personalfortune abroad, characterised the situation inhis country in this way (quoted in Gould1980: 49): “In a word, everything is for sale,anything can be bough in our country. And inthis flow, he who holds the slightest cover ofauthority uses it illegally to acquire money,

goods, prestige, or to avoid all kinds of obli-gations”. The self-evident proposition that insuch circumstances economic development ishighly unlikely is confirmed by a rapidlyexpanding number of empirical studies.45 Amajor part of the current African malaise mustthus be attributed to the fragmented charac-ter of African societies and to the leaders ofAfrican states over the decades.46

Here too, Botswana points the way. Itsbureaucrats are chosen on merit and corrup-tion has not been a problem. Political inter-ference has been avoided to a large extent.Thus, its civil service personnel approximatethe Weberian ideal, namely, that bureaucratsshould be competent individuals who followgeneral rules laid down by their political supe-riors. Botswana’s leaders have pursued the goalof national development instead of personalfortune. True, ethnic conflict has not been aconcern in Botswana, but the example ofMauritius demonstrates that it is possible toachieve economic progress in Africa’s ethni-cally diverse states. In my view, it is far fromcoincidental that on a continent desperatelyin need of strengthening the private sectorthese two countries have had the highestshares of private investment in GDP (table 1,Mlambo and Oshikoya 2001).47


44. On changes in salary structures and levels of remuneration in African public sectors, see e.g. Lindauer, Meesook,and Suebsaeng (1988) and Nunberg (1994). An example of the decline in both morale and control is the appear-ance of “ghost workers”, i.e., employees who are on the payroll but do not work, with their salaries being collectedeither by themselves or someone else. As many as 11,000 such ghosts were discovered in connection with thecivil service reforms in Ghana in the 1980s (Nunberg 1994).

45. The work of Phillip Keefer and Stephen Knack (e.g. Keefer and Knack 1997, Knack 1996, and Knack andKeefer 1995) is representative of the literature documenting the importance of well-functioning institutions.

46. It must be admitted, though, that exactly how ethnic diversity affects economic development is not entirelyclear. For example, Easterly and Levine (1997) find that greater fragmentation monotonically leads to poorereconomic policies. Temple (1998) also uncovers evidence of a relationship to policies, but it is non-monotonicwith a medium level of ethnic diversity yielding the worst outcomes. Finally, Collier (2000) claims that in demo-cracies ethnic fragmentation is not a problem, and in Collier (2001) argues that it is only ethnic dominationthat results in poor economic performance and violent conflicts.

47. The quality of governance is of course inherently hard to measure. The best indicators available are probablythose constructed by Kaufmann, Kraay, and Zoido-Lobaton (1999a,b), who use most other available measuresas the basis for their estimates. The result is six aggregate indicators for 1997/98: Voice and accountability, Polit-ical instability and violence, Government effectiveness, Regulatory burden, Rule of law, and Graft. On every

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The Role of External Actors During the Cold War, Africa was part of thebattleground between East and West. Theeconomic and military support that wereprovided allowed some dictators to stay inpower for longer than they would otherwisehave been able to, and conflicts such as thecivil war in Angola were fuelled by externalintervention in African politics. This hasclearly set back the pace of economic devel-opment in parts of the region. Leaving geo-politics aside, there are two main ways inwhich it is conceivable that external actorshave influenced the trajectory of Africaneconomies in the post-independence period:their policies with respect to trade and aid,respectively.

It is commonly held that the industrialisedcountries have taken a protectionist stancetowards the exports of poor countries. This iscertainly true for many developing countries,but those in Africa have in general faced quitefavourable terms. First of all, most Africancountries qualify for trade preferences underthe GSP-systems of the OECD-countries.While these preferences are provided on a dis-cretionary basis (and so to some extent havebeen uncertain) and have excluded somepotentially important exports (textiles andclothing in the US, for example), this suggeststhat Northern protectionism is not a majorfactor behind the marginalisation of Africa inworld trade. This argument is strengthened bytwo facts: 1) all former colonies of membersof the European Union have been parties tothe various Lome-conventions, and so havereceived better market access there than otherdeveloping countries; and 2) many African

countries are designated as “least developed”by the UN, and the least developed countriesgenerally receive better terms under the GSPthan the rest of the developing world. Hence,while there are obvious ways to improve themarket access of Africa in the industrialisedworld, for example, by extending quota- andtariff-free access to all African countries in allQUAD-markets, the aid policies of the richcountries have probably been of greaterimportance to Africa than their trade policies.

Sub-Saharan Africa is the region that hasreceived the largest aid flows relative to thedomestic economy, however that is measured.Table 5 illustrates that the level of aid has beensizeable in relation to income per capita,investment, and imports throughout the post-independence period. In 1990, inflows of aidamounted to more than a third of income percapita, almost 60% of investment, and a quar-ter of the region’s imports. Moreover, theimportance of aid has been increasing until itpeaked in the early 1990s. And even thoughin general aid fatigue has set in among donors,Africa has been accorded priority: its share ofeffective aid has gone up, at least until 1995.We have seen that in spite of this, Africangrowth has been poor. The World Bank arguesthat this illustrates a general result. In its majorrecent study on aid effectiveness, Assessing Aid(World Bank 1998b), it charges that onaverage aid has not contributed to growth indeveloping countries. Based on Burnside andDollar (2000), another claim is presented inthis report: that aid works in good policyenvironments. While this result is not robust,it seems intuitively reasonable that aid has agreater impact when economic policies are


one of these, the average and median values for the African countries included are worse than those for thesample as a whole. On three out of six measures, Botswana is on top in Africa (it is fourth on Voice and account-ability, second best on Political instability and violence, and third on Rule of law). Mauritius is the leadingAfrican country on the three remaining indicators.

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conducive to economic growth.48 The Africanexperience certainly does not contradict thisline of reasoning.

Both donors and recipients might befaulted. As noted, some donors have given aidfor strategic purposes. Others have let their aidflow to where their commercial interests havebeen. Most donors have meddled in the affairsof recipient countries in order to further theirgoals or to try to make sure that the moneywas spent for its intended purposes, althoughpoor policies have in general not been a majorconcern. While aid agencies are entitled tomonitor how recipients spend their grants, theproliferation of actors with which the lattermust deal has constituted a heavy burden ontheir bureaucracies. Furthermore, aid flowshave been highly volatile as well as pro-cyclical(Bulir and Hamann 2001, Pallage and Robe2001), complicating economic policy-making in the recipient countries in general

and macroeconomic management in particu-lar. For their part, recipients have not alwaysspent the funds wisely. Given that aid is tosome extent fungible, that a lot of publicspending in Africa has been inefficient, andthat corruption has been a severe problem inmany countries, it seems safe to say that thereturns to aid have been far below potential.The disappointing performance of Africaneconomies with respect to poverty and growthstrengthens this sad conclusion.

Donors have not only been profferingmoney; they have been pushing a lot of pol-icy advice too. In the early days it was eco-nomic infrastructure that was the key to devel-opment. Later on basic needs were argued tobe as important as aggregate growth, beforegetting the prices right became the rallying crythat most of the international aid communityunited behind. These days good governance isperhaps the most popular word in the donors’


48. The conclusions of Assessing Aid have not gone unchallenged. Hansen and Tarp (2000, 2001) demonstrate thefragility of the main result of Burnside and Dollar (2000), and assert that they find an unconditional positiveeffect of aid on growth, but with decreasing returns. The latter result, however, only begs the question of whythere are decreasing returns to aid. Moreover, the policy measure used by Burnside and Dollar (2000) couldsurely be improved upon, so that showing that the interaction of the measure with aid is not statisticallysignificant cannot be said to prove that the effect of aid does not strengthen with policies.

Table 5.Aid in Africa

1960 1970 1975 1980 1985 1990 Latest

Effective aid (share of total) n.a. n.a. 21.0 25.7 34.7 37.0 41.7Aid/GNP n.a. 2.5 3.5 3.9 6.0 9.9 4.1Aid per capita (current $) 1.5 3.9 10.6 21.0 20.8 36.2 20.6Aid (% of gross domestic investment) n.a. 15.0 14.4 19.1 40.5 58.3 22.3Aid (% of imports) n.a. n.a. 9.1 11.4 17.9 25.3 10.6

Notes: Effective aid is grants plus the grant component of concessional loans. The latest figure for effective aid is for1995. For the other indicators, the latest observation is from 1998.Sources: Africa’s share of total effective aid (official development assistance and official aid) is calculated by the authorfrom the data in Chang, Fernandez-Arias, and Serven (1998). The other indicators are from World Bank (2000).

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vocabulary. In short, fads and fashions on thedonor side have implied that their advice hasbeen almost as unstable as the policies ofAfrican governments. While the World Banknow advocates using dialogue to persuade thegovernments of recipient countries that havenot yet started to adopt the policies belongingto the “Washington Consensus”, this briefreview should remind us that remedies forconditions as severe as those of Africaneconomies are not readily available. Thedonors are in the business of selling hope, butperhaps we have been aiming too high. Afterall, the industrialised countries spent morethan a few decades on getting where they aretoday. So maybe Abernethy (1988: 208-209)is right:

“The African case may be thus be one inwhich, tragically, neither the public or theprivate sector is well-positioned to initiateand maintain the economic development theregion’s people desperately seek. The under-developed economy may indeed be kept inplace by the overdeveloped – or at leastoverextended – state. At the same time theoverdeveloped state may be kept in its placeby the underdeveloped economy.”

To put this in a slightly different way: if onebelieves, as I do, that Africa’s institutions playa large role in explaining the lack of economicprogress, for all the reasons explored in thisessay, then perhaps one should not expectrevolutionary changes.49 Institutions onlychange slowly, inertia being part of the defin-

ition of an institution. Hence the forces thathave lead to the adoption of growth-retardingpolicies, to the “privatisation” of publicadministrations, and to warlords playingmajor roles in the politics of the region willnot yield easily. This does not mean that thestatus quo is inevitable, only that enduringprogress might be better secured by adaptingour efforts at aiding Africa to the pace ofchange that its peoples choose.

Concluding RemarksWhat have we learned? I would argue thatthere are four major lessons. First of all,Africa’s location on the map of the world, itsphysical geography, and its colonial past con-stitute real impediments to economic devel-opment. Secondly, in many of the region’sstates the pursuit of ill-conceived and poorlyexecuted policies has made the negotiation ofthese formidable obstacles even more diffi-cult. Thirdly, there are intimate links betweenthe region’s structural characteristics and itspolicy regimes. Some of these links are eco-nomic (terms of trade volatility complicatingmacroeconomic management in countrieswith poorly developed financial systems, forexample); others, like the impact of primor-dial affiliations and personal relationships ongovernance, are social and political. Stateddifferently, economic policies, political in-stability, and bureaucratic corruption areendogenous variables, and what I have calledstructural characteristics are exogenous, or atleast predetermined, with respect to the


49. Chabal and Daloz (1999: 137) espouse a similar point of view: “It is … entirely possible that the continent’seconomic outlook will remain unconventional: an economy of exchange (barter, even) rather than the moreorthodox economy of accumulation, investment, transformation and production predicted by Western theoriesof economic development. Similarly, Africans may well stay resolutely inimical to the growth of an atomized,individualistic, mass society where solidarity counts for little. Consequently, it is conceivable that the continu-ation of such communal links will prevent the emergence of individual citizenship, as it will the constructionof an institutionalized state. This, in any case, is what has happened to date on the continent.”

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process of economic development. For a lot ofAfrican countries the equilibrium outcome isapparently to be stuck in a poverty trap.

How, then, are we to account for the fewcases of material progress and political stabil-ity? Initial conditions vary, of course, andsometimes seemingly small or arbitrary eventsmight put two fairly similar countries on dif-ferent paths to the future. However, thecircumstances in which the lone star per-former of Africa, Botswana, found itself atindependence show that initial conditions arenot destiny. Its colonial heritage in terms ofphysical and social infrastructure was negli-gible. The reason for this lack of interest onthe part of Britain, so great that it actuallyruled the country from South Africa, was thatthe prospects of Botswana were not consid-ered to be bright enough to warrant large-scaleexpenditures. Indeed, its natural resourceendowment as of 1965 was more of a liabilitythan an asset, the country being small, semi-arid, drought-prone, and land-locked. Thesituation changed with the discovery of richdiamond deposits. Nevertheless, as I arguedabove, the main moral of Botswana’s rags-to-riches story is that its good fortune is man-made, through high-quality policies and gov-ernance, and not merely bestowed on it. Actu-ally, the limited involvement of the colonialpower might have been as much of a blessing(in disguise, though) as the diamonds, since itallowed the people of Botswana a free hand increating the institutions the newly indepen-dent state required.

Returning to the realities facing most otherAfrican countries, what can we make of thefact that in many corners of the region, eco-nomic and political reforms have been insti-gated over the last decade and have resulted ineconomic growth? One possibility is that attimes, crises beget policy changes. Perhaps theeconomy had deteriorated to a state whereeven those who benefited from the previouspolicy regimes in these countries would gainfrom a switch to growth-promoting policies?If that is the case, one should not be too san-guine about future prospects, as it seems likelythat these forces might reassert themselveswhen the economy picks up. An alternativeexplanation is that external pressure has forcedthese governments into adjustment mode.Even if that was true, in spite of the establishedfailure of traditional aid conditionality, theconclusion would be just as pessimistic,because the external pressure will fade ifreforms succeed and so the impetus to sustainthem will disappear. Both of these explana-tions would mean that the reforms would lackcredibility and therefore be unlikely to resultin a sustained improvement in economic per-formance. The less than impressive growthrates of “strong reformers” over the 1990s aswell as the persistence of risk ratings indicatethat this might be a problem.50

Moreover, one must not forget that it isfairly easy to achieve fast growth when onestarts from a low base. If the starting point isthe result of war a return to peace will allowdisplaced peasants to return to their land and


50. If one takes the five countries that the World Bank (1994) reckons have achieved the greatest reduction in gov-ernment intervention as of late 1992 (i. Guinea, ii. The Gambia, iii. Guinea-Bissau, iv. Mozambique, and v.Sierra Leone; calculated from tables A12 and A13) and the top five countries in terms of improvement in macro-economic policies from 1980-86 to 1987-91 (i. Ghana, ii. Tanzania, iii. The Gambia, iv. Zimbabwe, Nigeria,and Burkina Faso; taken from table B1) to create a list of “strong reformers”, their growth rates over 1990–98are neither uniformly high nor uniformly higher than those of other African countries. If GDP per capita ismeasured in constant local currency units, I find that Mozambique, in sixth place (out of forty-four) with anannualised growth rate of 3.4%, does best among the reformers. Six of the ten strong reformers had negativegrowth rates.

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reconstruction efforts will create jobs inpublic works, but these effects will subsidewithin a few years. If a severely distortedpolicy regime is reformed, even if only par-tially, growth will increase rapidly, but this willpartly be a statistical mirage. Individuals whohave retreated into the informal urban sectoror subsistence farming in order to avoid theheavy hand of the state will slowly return toactivities in the formal sector, but much of thechange will just be due to the latter beingrecorded by statisticians.51

There is no questioning the need for effi-cient public spending on infrastructure,health, and education or the potentially ben-eficial effects of foreign aid if genuine policyreform is implemented. What is questionableis whether sustained reform, efficient spend-ing, and improved governance currently con-stitute a socio-political equilibrium in mostAfrican countries. But the final, most impor-tant lesson we have learned is that it is up tothe Africans themselves to establish a newequilibrium. So we must hope that new gen-erations of Africans will work out how toensure that their countries follow the lead ofBotswana along the path to prosperity.

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