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You can’t eat GDP growth

By Nicholas Norbrook in Washington DC, Crystal Orderson in Cape Town, Elissa Jobson in Addis Ababa and Gemma Ware
Posted on Thursday, 16 January 2014 14:43

About 40km from Cape Town’s main tourist attractions, down a winding and windswept road, is the Cape Flats township of Mitchell’s Plain, designed in the 1970s as a model dormitory suburb by the apartheid government. Home to a million people, it has one of the highest unemployment rates in Cape Town.

If you just take a look at straightforward increases in national pie, you have economic growth without development

It is Saturday morning in early November, and thousands of people have been queuing since the early hours of the morning at the main shopping hub. It is busy, chaotic and people struggle to walk on the streets.

The reason for the bustle is ‘all-pay’ day: the moment in the month when the social grants that are keeping millions of South Africans out of poverty are doled out.

The happy, too few

No one can deny the extraordinary boom Africa has experienced over the past decade.

Collectively, African gross domestic product (GDP) has averaged about 5% per year from 2003 to 2013. But much of this has been on the back of Asian demand for African commodities.

Capital-intensive resource extraction has not delivered a promised ‘trickle-down’ effect.

“If you just take a look at straightforward increases in national pie, you have economic growth without development,” says Ghanaian economist George Ayittey.

“In 2008, the rate of economic growth in Angola was almost 20.8%, but more people fell into poverty – 60% of Angolans are living under extreme poverty, making under $1 a day. You can say the same thing about Nigeria.”

Boniface Dulani, co-author of an October 2013 Afrobarometer report that examines ‘lived poverty,’ which remains stubborn, agrees: “The majority are not seeing the benefits of the growth,” despite clarion calls of Africa rising, new middle classes and consumer-rich cities.

On top of that, the continent’s population growth quickly eats into headline economic growth.

The World Bank and other international financial institutions also point out the cost of liv- ing has risen in African countries, especially those where the price of transportation, electricity and food are high due to weak supplies.

Unequal = Unstable

This is not an academic question, nor even necessarily a moral one – the uprisings that spread like brushfire through North Africa, upending regimes in its wake, were stoked by immense disparities of wealth.

Beyond the political tremors to be avoided, there is now a widespread understanding that shared development – pulling people out of poverty – boosts economic growth, as Brazil and China have spectacularly demonstrated.

In October, the World Bank’s acting chief Africa economist Francisco Ferreira said: “At this rate, even if countries in Africa continue to grow at the same rates as in the 2000s – a period when the external environment was particularly benign, with rising commodity prices and abundant liquidity – poverty in 2030 would be in the 26%-30% range (assuming constant inequality). Somewhere between 60% and 80% of the world’s poor would live in Africa.”

So what to do? The head of the United Nations Development Programme, New Zealand’s former Prime Minister Helen Clark, says: “Are the poor going to get some of the growth or a fair share of the growth? The latter will take some effort.”

How Africa ranks up

If you look at how African countries compare against global peers with the same sovereign rating from Standard & Poor’s, those in Latin America and Asia tend to have higher GDP per capita than their African peers, says the rating agency’s Christian Esters. While there has been huge growth over the past decade in countries like Ghana and Mozambique, it has come from a very low base.

Some countries, like South Africa, have opted for a direct welfare model through transferring money to citizens.

According to a South African Institute of Race Relations survey, in 2001, 8% of the population benefited from social grants. It now stands at 31%, some 16.1 million people.

For more than 22% of households, social grants are the main source of income.

In Mitchell’s Plain, thousands of single mothers, pensioners and disabled people receive grants to bring food to the table. It does not go far. “Things are more expensive, and it is a struggle to survive. People are struggling and going to bedhungry,” says Florida Martin, one of the only female taxi drivers in the area.

Business might be booming today because of ‘all-pay’ day.

Despite having a job, she says: “Even if you work, you still struggle. You go ask for loans to pay your debt. Electricity and petrol are the biggest budget killers.”

But there are arguments against these sorts of direct transfers. South America has seen great success in levelling inequality through what are known as conditional cash transfers, like the Bolsa Família in Brazil.

For Santiago Levy Algazi, vice-president of the Inter-American Development Bank, there is a danger that a country can get addicted to them, locking families into dependency.

“There has been a stalling of growth in Latin America as a result. We started these programmes just as a temporary measure to buy time while the labour market reforms,” he explains.

Keep the cash at home

But because of a commodity price boom in the 2000s, politicians in many South American countries opted not to implement these difficult reforms.

Instead, they relied on commodity revenue to take the fiscal and social strain rather than helping to train workers.

“And now these transfers have gone far beyond a safety net and have become unsustainable,” warns Levy. The South African government sees lessons to learn in this story.

Other countries, where the tax take is far smaller than in South Africa, are finding it even harder to help the poorest.

There are several related problems. The first is keeping money in the country.

A report by the African Development Bank (AfDB) and Global Financial Integrity published in May 2013 suggests that up to $1.4trn was taken out of the continent via illicit financial flows between 1980 and 2009.

“The majority of this is companies avoiding tax, not corrupt Africans,” says Donald Kaberuka, president of the AfDB.

Another route – legal this time – by which money leaves is Africa’s huge im- port bills. Nigeria spent N630bn ($4bn) on food imports in 2012.

Elite avarice

The second is keeping the ‘national cake’ away from predatory elites.

Anti-corruption efforts underway in many African countries have a chequered history. South Africa’s African National Congress government disbanded the Scorpions, a high-profile white-collar crime fighting unit in 2009.

Prime Minister Hailemariam Desalegn’s government in Ethiopia has stepped up the fight against graft, arresting spy boss Woldeselassie Woldemichael on graft charges in August.

Sovereign wealth funds might be a way to keep some of Africa’s resource boom for future generations. They could also help to keep Nigeria’s oil wealth out of the hands of voracious state governors.

Uche Orji, chief executive of the Nigeria Sovereign Investment Authority, diplomatically says: “The sovereign wealth fund is a tool of financial discipline.”

Finally, once governments have stemmed capital flight and fought off corrupt elites, what decisions can be taken to help spread the wealth?

The governments in Mozambique and Zambia have focused on giving cash directly to families, following the South American and South African routes.

Mozambique spent $13m in 2008 on social safety nets, increasing that to $57m in the 2013 budget, some 0.4% of GDP.

The Maputo government will raise that to 0.8% of GDP in the medium term, targeting around a million citizens.

Zambia has been piloting a cash grant for poor families with children.

Since 2010, the authorities have been giving the equivalent of $12 per month with no conditions attached to households with at least one child under five.

The latest results show that families have spent 75% of the money on food and that the provision of basic materials such as shoes and clothes has gone up by one-third.

There has also been a 20% spike in the amount of livestock owned by recipients and a 50% jump in the value of agricultural commodities harvested.

Could it be that this is a sound investment by governments, stimulating economic growth at the grassroots level?

“This echoes what we have seen elsewhere”, says the World Bank’s Ferreira. “People who get cash grants invest it in their own microbusinesses – in Mexico, for example, where recipients of cash grants would buy chickens, improving their nutrition and also selling eggs.”

Glass Ceiling Effect

But there are other tracks to pursue. Investment from abroad brings in technology and financial muscle, but there are perhaps ways to harness it more constructively.

“Foreign capital is managed by foreign managers, largely, with indigenous labour. It’s racial profiling that happens, and there’s a glass ceiling and labour is seen as a disposable commodity,” says James Brice, managing director of Environmental Business Strategies, a consultancy that advises on sustainable investment.

“There’s an absence of mechanisation, there is an absence of up-skilling. I remember coming across an operation in Malawi where the most highly skilled, longest- serving indigenous staff member was the HR [human resources] manager, who’d been in the same position for 30 years. Nobody had gone beyond him. That’s a common scenario, whether it’s Portuguese talent out to Mozambique or Angola, or Indian talent going to East Africa, or British or European talent going elsewhere, it’s the same scenario,” says Brice.

Nigeria has been more successful in using foreign direct investment to drive development in its oil sector, but only after five decades of marginal local input.

Investment in basic infrastructure is another option. A World Bank report celebrates Rwanda and Ethiopia for their high and inclusive growth rates, in part due to their infrastructure out- lay.

“The location of the infrastructure is important here. So, for example, roads out in the rural areas are very important,” explains Punam Chuhan-Pole, lead economist for the Africa region at the World Bank.

She says that investing in infrastructure that links the agribusiness chain in small and medium-sized towns is just as important as the flagship projects that governments like to favour.

Nigeria is starting to move in this direction. The Kano River irrigation project is boosting tomato production, but the lack of packaging facilities and roads retards growth.

Road to Industrialisation

Ethiopia has also been successful at investing in people as well as hardware.

In 1990, an estimated 204 Ethiopian children in every 1,000 died before their fifth birthdays – just six countries had a higher rate. The rate dropped to 68 in 2012.

Peter Salama, the United Nations Children’s Fund country representative in Ethiopia, salutes the ambitious targets that the government set: “It has then backed them up with real resources and real commitment sustained over the past 10 years. The best example [of this] is the health extension programme. The programme put on the government payroll more than 36,000 health workers and deployed them to 15,000 health posts across Ethiopia.”

Investment in education can be a key to unlocking shared growth.

There is some way to go here: in Kenya, out of 100 teachers, just 55 are in class teaching, according to a July 2013 World Bank service delivery indicator report.

Investment in education could also help African countries to train for the next big challenge, industrialisation.

That involves going from a continent dominated by countries whose primary exports and economic activity depend on raw commodities to one where the manufacturing sector can absorb many of the young Africans joining the workforce.

Botswana, long held up by donors as a leader in governance in Africa, nevertheless has had structural unemployment of nearly 20% despite decades of strong growth.

It is also very dependent on diamond exports.

There are divergent opinions about industrialisation in Africa today.

South Africa’s finance minister Pravin Gordhan says: “It is actually quite refreshing to hear talk of industrial policy on the international circuit today – we need to be asking what are the labour-absorbing sectors we should be in.”

On the other hand, Ayittey fears the return of the state: “If you look across Africa in the post-colonial period, the problem was that we had heavy state interventionism in African economies. It got to a point where they created this giant state behemoth that was literally suffocating the economy.”

In Botswana, at least, the government has chosen the first path, incentivising companies to move diamond processing and sales to Gaborone.

And here too the debate is evolving, partly in response to the success that China and South Korea have had in tackling poverty with a developmental state approach.

Even the World Bank’s vice-president for Africa, Makhtar Diop, is taking a fresh view.

“Look at infrastructure companies for example, they are mostly dominated by non-African actors. We have been accused of favouring foreign investment. This is a taboo subject, I know, but I would like to look at how to take the trader in Cocody [in Abidjan] and help him move towards manufacturing, investing in the productive sector. How can we help him transition?” ●

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