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Africa's Fastest Growing Low Income Economies: Will They Finally Catch Up?

Sub Saharan Africa is a home to 47 of the 53 countries in the continent. In 2009, based on GNI per capita, the World Bank classified countries into four categories: (a) low income, with GNI per capita of $995 or less; (b) lower middle income $996 - $3,945; (c) upper middle income, $3,946 - $12,195; and (d) high income, $12,196 or more. During the same year, 31 of the 47 countries in Sub Saharan Africa were low income economies. These countries include: Benin, Burkina Faso, Burundi, Central African Republic, Chad, Comoros, Democratic Republic of the Congo (DRC), Djibouti, Eritrea, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Rwanda, Senegal, Sierra Leone, Somalia, Togo, Tanzania, Uganda, Zambia, and Zimbabwe.

The rest of the sub Saharan African economies belong to middle income and higher income groups. About 10 countries have been classified as lower middle income economies. These include: Angola, Cameron, Cape Verde, Congo Republic, Cote D´Ivoire, Lesotho, Nigeria, Sao Tome and Principe, Sudan, and Swaziland. These are predominantly oil rich economies which recorded fastest economic growth during the past decade. Among the remaining six countries: Gabon, Mauritius, Namibia, Seychelles, and South Africa are upper middle income economies while Equatorial Guinea is the only non OECD high income economy from the African continent and is the richest country in Africa owing to the discovery of vast oil and gas reserves in early 1990s. With the third largest oil reserve discovered in the African continent, Equatorial Guinea is regarded as the "African Kuwait."

Clearly, the sub Saharan African economies are heterogeneous and hence the old "Least Developed Country" (LDCs) classification does not reflect the reality on the ground anymore and must be abandoned with immediate effect. According to this outdated classification, many lower middle income countries are still classified as LDCs, while they have already surpassed the GNI per capita threshold. It is absurd to keep Equatorial Guinea in the least of LDCs due to the economic vulnerability and human development index while it has already achieved the high income status. Apart from this, many of the current low income economies have recorded remarkable economic growth since 2001 and hopes are high that they will catch up soon. The LDC classification holds connotations of backwardness and hopelessness for a continent which already suffers from huge image problems. Presenting a positive image about Africa is as important as the inflow of the development funds. Therefore, UNCTAD and other organizations that repeatedly emphasize about the LDC characteristics of sub Saharan Africa must adopt the more positive approach. At present , most sub Saharan African countries are either emerging middle income or developing low income economies, and as such must be classified accordingly.

The remaining parts of the article is organized as follows: section 2 scrutinizes the trends in real GDP growth in low income and lower middle income sub Saharan economies for the past decade. Section three reviews the challenges of commodity driven economic growth in these countries while the last section concludes the article.

2. The real GDP growth in low income and lower middle income sub Saharan economies

Many low income and lower middle income sub Saharan African economies recorded remarkably higher economic growth between 2001 and 2009. Based on the size of the annual average percentage change in GDP at constant prices between 2001 and 2009 (calculated based on the IMF World Economic Outlook Database, April 2010) the Sub Saharan African economies can be categorized into six groups: (a) those with real GDP growth above 10%, (b) those with 7.0-9.9%, (c) those with 5.0-7.0%, (d) those with 3.0-5.0 % , (e) those with ! 3%, and (f) those with !1% of GDP growth rates during the stated period.

The fastest growing low income and lower middle income economies between 2001 and 2009 were Angola and Sierra Leone with annual average GDP growth rate in excess of 10%. Equatorial Guinea, Africa´s only high income economy, was also the economy that recorded the highest growth rate during this period. These three countries were the top performers in economic growth in Sub Saharan Africa during the past decade and belong to our group (a) above. We may regard these economies as the "African Tigers" although the growth in Sierra Leone must be taken with caution as it has shown persistent decline during the past few years following volatility in its mineral exports.

The second group that closely follows the "African Tigers" is group (b) with annual average growth rates ranging between 7% and 9.9%. These countries include: (a) Chad, (b) Ethiopia, (c) Mozambique, (d) Rwanda, (e) Nigeria, and (f) Uganda. The growth in Chad and Nigeria is driven by oil exports while the growth in Mozambique is anchored by mineral exports. Rwanda and Ethiopia´s growth is propelled by a fast growing service export, while Uganda´s growth is based on export of agricultural commodities. Most of these six economies are on track to achieve the Millennium Development Goals of halving poverty in 2015 and if they sustain the current level of growth, they may graduate from the low income group in two decades or less.

The third group of medium growth low income economies include Burkina Faso, The Gambia, Ghana, Mali, Niger, and also Cape Verde and Sao Tome and Principe from lower middle income group. These economies grew between 5.0% and 7.0% for the period 2001-2009. The growth performance of many countries in this group was dampened by the recent global financial and economic crisis that led to sharp contractions in GDP in 2009. Within this group, Ghana´s growth is expected to improve faster following the recent discovery of oil reserves.

Many sub Saharan Africa countries, however, recorded real GDP growth rates of less than 5% on average for the period 2001-2009. These countries belong to the groups (d) with average growth of 3.0-5.0% including Benin, Botswana, Burundi, Cameron, DRC, Congo, Kenya, Lesotho, Malawi, Mauritius, Namibia, Senegal and South Africa; group (e) with average annual growth of Less than 3% including Comoros, Gabon, Guinea, Guinea-Bissau, Liberia, Madagascar, Swaziland and Togo; and group (f) with average annual growth of less than 1% including Central African Republic, Cote D´Ivoire, Eritrea, Seychelles and Zimbabwe.

Most of the lower and upper middle income sub Saharan African economies recorded growth rates of less than 5% per annum during this period. Some middle income countries experience similar challenges to those of low income economies such as high level of unemployment, low savings and investment and lower integration to the global economy among other things.

The worst performers in economic growth during the past decade, however, are: Central African Republic, Cote D´Ivoire, Eritrea, Seychelles and Zimbabwe. Although Seychelles is one of the upper middle income economies, its growth performance during the past decade was dismal owing to tight monetary policy, currency devaluation and large current account deficit, and declining private sector investment among others. Poor economic growth performance in Central African Republic, Cote D´Ivoire and Zimbabwe was linked to the continued political instability in the three countries during the past decade. In fact, Zimbabwe recorded decline in real GDP for the period 2001-2009 on average as a result of which the country has now been downgraded to low income country status. However, the recent positive developments in political climate are expected to improve growth performance in Zimbabwe going forward. Eritrea, which became independent from Ethiopia in 1993, did not live up to its promises with dismal growth performance of less than 1 % for the past decade unlike its bigger neighbor, Ethiopia, which recorded over 8% GDP growth during this period on average. The five worst performers have been characterized by macroeconomic and political instability and have to work hard to turn their economies around during the second decade of the century.

Economic growth in fast growing low income and lower middle income economies was largely driven by commodity price boom. Many analysts worry that heavy dependence on commodity may expose these economies to external shocks and may severely limit the sustainability of such growth. The next section highlights the challenges of relying on commodity driven growth in sub Saharan Africa.

3 The sustainability of commodity driven growth in sub Saharan Africa

Most of the low and lower middle income African economies that recorded higher growth during the past decade were either oil or mineral exporters. Economic growth driven by the commodity price boom exposes the economies to the external trade shock where growth prospects will be dependent on exogenous, foreign demand. However, the good news is that most of the commodity exports from these countries are going to China and India and other fast growing economies with insatiable appetite for raw materials. This is unlikely to change in the immediate future. Even then the African economies should not be complacent. The fundamental structural weaknesses of these economies must be addressed as a matter of urgency. Countries must revisit their industrialization strategy not only to raise the share of manufactures in total output but also to reduce the current high and unsustainable level of unemployment in these economies. This also requires transformation of the traditional subsistence agriculture that currently supports over 70% of the population in most of the low income and some of the middle income sub Saharan economies.

Another challenge is the low level of domestic savings. In most low and middle income economies in Africa the level of domestic savings is less than 15% of GDP as opposed to 40% in China. This implies that these countries rely on foreign capital to finance domestic expenditure and investment. Given the current low level of FDI attractions, this means that most funds come either in the form of aid or loans which may complicate development efforts by leading to dependency and debt traps. Related to this is the underdevelopment of financial institutions required to mobilize domestic resources for development.

Widening current account deficits particularly for non-oil exporting low income economies is another development bottleneck. While higher oil prices will spur growth in oil rich economies, it widens the trade deficits of non-oil and mineral exporting countries forcing them to borrow or depend on aid inflows to finance investment and other expenditure. In this regard, the challenge faced by non resource rich countries is formidable.

High level skills and technological gap constitute another critical challenge to sustainable development in sub Saharan economies. At present most of the sub Saharan economies face critical shortage of high level skills required to lead technological transformation. As a result, there is a growing technological gap between Africa and the rest of the world. To sustain the current growth moment African economies must spend an increasing higher resources on high level skills generation.

Last but not least, sub Saharan Africa faces massive infrastructure gaps. Roads, railways, airports, ports, energy, water and sewerage, and telecommunication are underdeveloped. Investment in economic infrastructure not only directly alleviates poverty by improving access to the services by the poor, but also fosters investment by the private sector, which is regarded as an engine of growth and development in market economies.

4 Concluding Remarks

After decades of stagnation, many sub Saharan African economies have recorded impressive economic growth for almost a decade. The continued discovery of oil and gas and other mineral resources in several of the low income economies coupled with the sustained rise in the prices of these commodities afforded great opportunity for growth and revival. The discovery of vast oil and gas reserves in the coast of Equatorial Guinea in early 1990s, ensured sustained and fast economic growth for over a decade as a result of which the country emerged as the only African and non-OECD high income economy. The discovery of oil reserves in Angola, Sudan, Chad, Ghana, in addition to the traditional oil exporters, Nigeria and Gabon buoyed the growth performance in these economies. This also implied improved accountability by resource rich countries compared to earlier years where revenues from oil have been vastly squandered.

The recently discovered coal reserves in Mozambique are considered to be one of the largest in the world. Sierra Leone and the Democratic Republic of the Congo are endowed with vast diamond resources while South Africa has over 40% of the World´s gold reserves. Zambia is the second largest producer of copper in the world, although its growth performance is far lower than many resource rich countries in the continent. Due to lack of political stability, the DRC has still remained one of the poorest countries in the continent with per capita income of less than US$140 in 2009 in spite of its vast mineral resources. The recent discovery of diamond in Zimbabwe provides a great shot in the arm for the economy if the rival politicians come to their senses and reintegrate the economy into the global market. Africa also has one third of the world´s cobalt, significant deposits of uranium and other strategic minerals, all of which will anchor the current growth momentum.

The expansion of service exports in place of traditional commodities by countries such as Ethiopia and Rwanda must also be encouraged as should Uganda´s innovative agriculture export led growth.

However, there still remains a lot to be done to ensure that the current impressive growth in sub Saharan economies are to be sustained and become catch-up growth. One of the most important strategic measures is an urgent diversification of the domestic output and export. Improved revenues generated through commodity exports must be wisely used to improve agricultural productivity, increase the size of manufactured output and create jobs.

Apart from this, governments must create conducive climate of doing business for the private sector, both domestic and foreign, through significant reductions in bureaucratic red tapes and improved investment in economic infrastructure as sustained economic development cannot be achieved without a strong and viable private sector.

Finally, the current macroeconomic and in particular monetary and fiscal policy resilience in many low and middle income economies must be maintained in the future. In particular, lower inflation rates, exchange rate stability, lower interest rates and improved tax revenues together with improvements in the performances of financial intermediation and capital markets will ensure that this time sub Saharan Africa will take off into self sustained development.
American Chronicle
Tags:Africa's Fastest Growing Low Income Economies: Will they finally catch up?, Africa's Fastest Growing Low Income Economies: Will They Finally Catch Up?
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