World Economic Trends

Future Position of the Future Position of the Economies in Eastern and Economies in Eastern and Southern Africa, and Southern Africa, and Implications for Financial Implications for Financial Sector Development and Sector Development and ManagementManagement

Thorvaldur Gylfason

OverviewOverview

Where we are coming fromAnd where we could be goingAnd where we could be going

Why money and finance are so important from an economic and social point of view

Main point:

Public policies and institutions make a difference for economic growth.

GNP Per Capita, PPP-Adjusted, 1975-1998

0

1000

2000

3000

4000

5000

6000

7000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

Cu

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Do

llars

Angola Botswana

Lesotho Malawi

Namibia Swaziland

Tanzania Uganda

Zambia Zimbabwe

Eastern and Southern Africa: A Quick Glance

Growth of GNP Per Capita, PPP-Adjusted, 1975-1998

-2 0 2 4 6 8 10 12

Per Cent Per Year

Angola

Zambia

Tanzania

Zimbabwe

Namibia

Malawi

Uganda

Lesotho

Swaziland

Botswana

Botswana: Star Performer!

World record in growth 1965-90

Investment, 1960-1998

0 5 10 15 20 25 30 35 40 45

Per Cent of GDP

Uganda

Angola

Zimbabwe

Malawi

Zambia

Namibia

Tanzania

Swaziland

Botswana

Lesotho

OECD countries invest about 20% of their GDP.

Quality is key.

Investment: Quantity and Quality

Compare Botswana and Tanzania:In Botswana, the share of State-

Owned Enterprises in total investment fell from 16% in 1980-95 to 12% in 1990-97.

In Tanzania, the SOE share of investment fell from 46% in 1985-90 to 23% in 1990-97.

Privatization helps improve investment.

Growth and Investment, 1975-1998

Botswana

Uganda

Swaziland

Lesotho

ZambiaTanzania

Angola

ZimbabweNamibia

Malawi

-4

-2

0

2

4

6

8

10

12

0 10 20 30 40 50

Investment (Per Cent of GDP)

Gro

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Pe

r C

ap

ita

(P

er

Ce

nt

Pe

r Y

ea

r)

Each ten percentage point increase in the investment ratio is associated with an increase in per capita growth by 1½% per year.

Trade Ratio, PPP-Adjusted, 1980-1998

0 10 20 30 40 50 60

Per Cent of GDP

Uganda

Tanzania

Zimbabwe

Malawi

Angola

Namibia

Zambia

Lesotho

Botswana

Swaziland

From 1988 to 1998, the average trade ratio rose from 21% to 28% in the world as a whole.

Trade is ImportantTrade is Important

From 1988 to 1998, the average trade ratio rose around the world:Low-income countries: From 7% to 8%.Middle-income countries: From 13% to

22%.Low & middle-income countries: From

11% to 16%.High-income countries: From 28% to 38%.

This is good news:More trade means more efficiency

and more growth.

Growth and Trade, 1975-1998

Botswana

Swaziland

Lesotho

Zambia

Angola

Tanzania

Uganda

Zimbabwe

Malawi

Namibia

-4

-2

0

2

4

6

8

10

12

0 10 20 30 40 50 60

Trade (Per Cent of GDP)

Gro

wth

Pe

r C

ap

ita

(P

er

Ce

nt

Pe

r Y

ea

r)

Each ten percentage point increase in the trade ratio is associated with an increase in per capita growth by almost 1% per year.

Gross Foreign Direct Investment, PPP-Adjusted, 1975-1998

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Per Cent of GDP

Zimbabwe

Malawi

Uganda

Tanzania

Zambia

Namibia

Angola

Lesotho

Swaziland

Botswana

From 1988 to 1998, the average FDI ratio rose from 2% to 4% in the world as a whole.

Trade In Trade In CapitalCapital is is Important, TooImportant, TooFrom 1988 to 1998, the average FDI ratio

rose around the world:Low-income countries: From 0.2% to 0.9%.Middle-income countries: From 0.4% to 1.6%.Low & middle-income countries: From 0.3% to

1.3%.High-income countries: From 2.6% to 5.7%.

More trade in capital — more FDI! — means more efficiency and more growth.

Growth and FDI, 1975-1998

Botswana

Swaziland

LesothoUganda

Namibia

ZambiaTanzania

Zimbabwe

Malawi

Angola

-4

-2

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8

Foreign Direct Investment (Per Cent of GDP)

Gro

wth

Per

Cap

ita

(Per

Cen

t P

er Y

ear)

Each ten percentage point increase in the FDI ratio is associated with an increase in per capita growth by 1% per year.

Public Expenditure on Education, 1960-1997

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Per Cent of GNP

Uganda

Tanzania

Malawi

Zambia

Lesotho

Swaziland

Angola

Zimbabwe

Botswana

Namibia

From 1980 to 1997, the same ratio rose from 4% to 5% in the world as a whole.

Education is Education is VeryVery ImportantImportant

From 1980 to 1997, public expenditure on education rose around the world:Low-income countries: From 3.2% to 3.2%.Middle-income countries: From 4.2% to

4.9%.Low & middle-income countries: From 3.5%

to 4.1%.High-income countries: From 5.6% to 5.4%.

More and better education is good for growth.

Growth and Education, 1975-1998

Botswana

Swaziland

NamibiaZimbabwe

Angola

ZambiaTanzania

MalawiUganda

Lesotho

-4

-2

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8

Public Expenditure on Education (Per Cent of GNP)

Gro

wth

Per

Cap

ita

(Per

Cen

t P

er Y

ear)

Each two percentage point increase in the education expenditure ratio is associated with an increase in per capita growth by almost 1% per year.

Agriculture, 1998

0 10 20 30 40 50

Per Cent of GDP

Botswana

Namibia

Lesotho

Angola

Swaziland

Zambia

Zimbabwe

Malawi

Uganda

Tanzania

From 1970 to 1998, the share of agriculture in GDP decreased from 9% to 4% in the world as a whole.

Agriculture is ContractingAgriculture is Contracting

From 1970 to 1998, the share of agriculture in GDP decreased around the world:Low-income countriesLow-income countries: From 39% to 23%.Middle-income countries: From 17% to 9%.From 17% to 9%.Low & middle-income countries: From 24%

to 13%.High-income countries: From 5% to 2%.

Less agriculture means more industry, trade, and services, and almost surely more growth.

Why Agriculture ContractsWhy Agriculture Contracts

It takes fewer and fewer farmers to feed the rest of the population.

This is because farm technology steadily improves while food demand per person remains the same.

Remember how Europe became rich:By letting agriculture gradually give way to

industry, trade, and services where productivity — and pay! — is higher.

Growth and Agriculture, 1975-1998

Tanzania

Uganda

Botswana

Swaziland

Lesotho

Namibia Zimbabwe

Zambia

Angola

Malawi

-4

-2

0

2

4

6

8

10

12

0 10 20 30 40 50

Agriculture (Per Cent of GDP)

Gro

wth

Pe

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ap

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(P

er

Ce

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Pe

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ea

r)

A 25 percentage point decrease in the share of agriculture in GDP is associated with a increase in per capita growth by 1% per year.

What is the Upshot?What is the Upshot?

Economic growth responds to Economic growth responds to public policypublic policy..

In particular, by encouragingIn particular, by encouragingsaving and saving and investmentinvestment of high of high

qualityqualityforeign foreign tradetrade and investment and investmenteducationeducation

... the government can help foster ... the government can help foster rapid rapid economic growtheconomic growth. .

Sir Arthur Lewis Got It Sir Arthur Lewis Got It RightRight

Since the second Since the second world war it has world war it has become quite clear become quite clear that rapid economic that rapid economic growth is available growth is available to those countries to those countries with adequate with adequate natural resources natural resources which make the which make the effort to achieve it.effort to achieve it.

W. W. ARTHUR LEWISARTHUR LEWIS(1968)(1968)

What Else?What Else?

These lessons are borne out by These lessons are borne out by experience from around the world.experience from around the world.

Additional lessons:Additional lessons:Too much Too much inflationinflation hurts saving, investment, hurts saving, investment,

and trade and trade — and thereby also growth. and thereby also growth.Too much Too much SOESOE activity hurts the quality of activity hurts the quality of

investment and education investment and education — and growth. and growth.Too much Too much agricultureagriculture and, more generally, and, more generally,

natural resource dependencenatural resource dependence, if not well , if not well managed, hurts education and trade managed, hurts education and trade — and and thereby also growth. thereby also growth.

Too rapid Too rapid population growthpopulation growth also impedes also impedes economic growth.economic growth.

ReservationsReservations

Even so, the question of rapid growth is, Even so, the question of rapid growth is, of course, a bit more complicated.of course, a bit more complicated.

We need to address a host of We need to address a host of politicalpolitical, , socialsocial,, and and culturalcultural questions as well questions as well as questions of as questions of naturalnatural conditions, conditions, climate, and public health climate, and public health — which would take us too far afield..

But the main point remains:But the main point remains:To grow or not to growTo grow or not to grow is in large is in large

measure a measure a matter of choicematter of choice..

Future ScenariosFuture Scenarios

Therefore, looking into the future, 10-20 years hence, we should not extrapolate past trends like blind men.

Rather, we should perhaps ask ourselves:How fast can our economies grow?How fast can our economies grow? — if we

do all the right things in the field of investment, trade, education, and so on.

My answer is: Pretty fast!Per capita growth of 3%-6% per year is a

reasonable target.This would double, or perhaps even quadruple,

income per head every 25 years.

And Why Not?And Why Not?

After all, in low-income countries, GNP After all, in low-income countries, GNP per capita grew by per capita grew by 3.7%3.7% per year on per year on average from 1965 to 1998 ...average from 1965 to 1998 ...... and by 1.7% if China and India are not ... and by 1.7% if China and India are not

included.included.

In middle-income countries, GNP per In middle-income countries, GNP per capita grew by capita grew by 1.9%1.9% per year. per year.

In high-income countries, GNP per In high-income countries, GNP per capita grew by capita grew by 2.3%2.3% per year. per year.

But in Sub-Saharan Africa, GNP per But in Sub-Saharan Africa, GNP per capita capita contractedcontracted by by 0.3%0.3% per year. per year.

This year, however, according to the IMF, economic growth in Africa is second only to that of Asia.

Turning Africa Turning Africa Around: Around: What Does It Take?What Does It Take?

But, as Arthur Lewis pointed out a But, as Arthur Lewis pointed out a generation ago, generation ago, and as I think and as I think Adam SmithAdam Smith understood, understood,

there is good reason to believe that, there is good reason to believe that, withwith good policies good policies andand appropriate appropriate institutionsinstitutions, , Africa Africa cancan grow rapidly grow rapidly. .

This would revolutionize the standard This would revolutionize the standard of life among its peoples, like of life among its peoples, like happened in Asia. happened in Asia.

Why Does This Why Does This Concern Concern Central Central BankersBankers? ?

The reason is simple:The reason is simple:Recent economic theory and Recent economic theory and

experience indicate that experience indicate that high high inflationinflation is harmful to economic is harmful to economic growthgrowth..

How high is “high”?How high is “high”?My answer is: My answer is: 15-20%15-20% per year, per year,

maybe less.maybe less.

Therefore, it is essential to reduce Therefore, it is essential to reduce inflation below this range, and inflation below this range, and keep it there.keep it there.

Inflation in Eastern and Inflation in Eastern and Southern Africa, 1980-98Southern Africa, 1980-98

0

20

40

60

80

100

120P

er C

ent

Per

Yea

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Angola

Botswana

Lesotho

Malawi

Namibia

Swaziland

Tanzania

Uganda

Zambia

Zimbabwe

1980-90

1990-98

Inflation Matters Because Inflation Matters Because Money MattersMoney Matters

Money greases the wheels of Money greases the wheels of production and exchange.production and exchange.

High inflation discourages money High inflation discourages money holdings, and thereby impedes holdings, and thereby impedes economic growth.economic growth.

Therefore, high inflation deprives Therefore, high inflation deprives the economic system of the economic system of necessary necessary lubricationlubrication. .

Money and Quasi-Money in Money and Quasi-Money in Eastern and Southern Eastern and Southern Africa, 1970-98Africa, 1970-98

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30

35

40

Per

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f G

DP

Angola

Botswana

Lesotho

Malawi

Namibia

Swaziland

Tanzania

Uganda

Zambia

Zimbabwe

1970s

1998

In OECD countries, the same ratio is generally 50-70%.

The The ParadoxParadox of Money of Money

Monetary restraint is the best Monetary restraint is the best way way — the only way! — to make make money grow relative to income money grow relative to income in the long run. in the long run.

Attempts to print money to make Attempts to print money to make it grow and grease the wheels it grow and grease the wheels are counterproductive in the are counterproductive in the long run because printing too long run because printing too much money causes much money causes inflationinflation. .

Money and Inflation, Money and Inflation, 1990-98 1990-98

Namibia

Lesotho

Swaziland

BotswanaZimbabwe

Tanzania

UgandaMalawi

Zambia

0

5

10

15

20

25

30

35

40

45

0 10 20 30 40 50 60 70

Inflation 1990-98 (Per Cent Per Year)

Mo

ney

an

d Q

uas

i-M

on

ey 1

998

(Per

Cen

t o

f G

DP

)A 10 percentage point increase in annual inflation is associated with a decrease in money and quasi-money by 3% of GDP.

How To Keep Inflation How To Keep Inflation under Controlunder Control

This is not only a matter of sound This is not only a matter of sound monetary monetary policiespolicies, but also of , but also of appropriate monetary and appropriate monetary and financial financial institutionsinstitutions. .

Therein lies the importance of Therein lies the importance of recent institutional reforms in recent institutional reforms in several countries, centered on several countries, centered on increased increased independenceindependence, , accountabilityaccountability, and , and transparencytransparency..

What’s the Story?What’s the Story?

Increased Increased independenceindependence makes it easier makes it easier for central banks to withstand political for central banks to withstand political pressure to print money.pressure to print money.This may be accompanied by laws or This may be accompanied by laws or

regulations that restrict the government’s regulations that restrict the government’s ability to borrow from the central bank.ability to borrow from the central bank.

But increased independence, in a But increased independence, in a democracy, must go hand in hand with democracy, must go hand in hand with accountabilityaccountability vis- vis-àà-vis elected -vis elected representatives of the people as well as representatives of the people as well as transparencytransparency of central bank operations. of central bank operations.

What’s the Story?What’s the Story?

Empirical evidence indicates that countries Empirical evidence indicates that countries with with independent central banksindependent central banks tend to tend to have have less inflationless inflation than others. than others.

Moreover, Moreover, accountabilityaccountability and and transparencytransparency may help improve policy making by may help improve policy making by reducing the likelihood of mistakes and reducing the likelihood of mistakes and miscalculations, inside and outside miscalculations, inside and outside government. government.

This is why the IMF now tries to be as This is why the IMF now tries to be as transparent in its operations as the transparent in its operations as the member countries will allow. member countries will allow.

In Conclusion: It Can Be In Conclusion: It Can Be Done Done

The world economy is growing rapidly ...The world economy is growing rapidly ...... and will probably continue to do so.... and will probably continue to do so.

There is good reason to expect Africa There is good reason to expect Africa — Eastern and Southern Africa, in particular Eastern and Southern Africa, in particular — to participate in the growth revolution. to participate in the growth revolution.

This is because we now think we know This is because we now think we know how how to influence economic growth through to influence economic growth through policypolicy — more about which in Malta. more about which in Malta.

The scope for policy improvements is The scope for policy improvements is particularly large in countries that have particularly large in countries that have not followed good policies in the past.not followed good policies in the past.

Therefore, the legacy of inadequate policies Therefore, the legacy of inadequate policies that tends to be regarded as a sign of that tends to be regarded as a sign of weakness may be turned into strength.weakness may be turned into strength.

There is, thus, a sense in which we can say:There is, thus, a sense in which we can say:The worse, the better! The worse, the better!

Remember the main point of Gunnar Remember the main point of Gunnar Myrdal’s Myrdal’s Asian DramaAsian Drama (1968)? (1968)? It was that the Asian economies were incapable It was that the Asian economies were incapable

of rapid economic growth!of rapid economic growth!

I believe that those who make similar claims I believe that those who make similar claims about Africa will also be proven wrong.about Africa will also be proven wrong.

In Conclusion: In Conclusion: It Can Be It Can Be DoneDone