In my many travels to sub-Saharan Africa, a frequent question on the lips of policymakers is the following: “Sure, we know that growth has not been inclusive enough and poverty remains high in most of our countries, but what exactly can we do to make growth more inclusive?” This is an important question that the latest edition of the Regional Economic Outlook for sub-Saharan Africa takes a stab at.
It is well known by now that growth in sub-Saharan Africa for the past 15 years or so has on average been quite strong. What is less well known perhaps is that a number of human development indicators such as infant and maternal mortality, primary school enrollment and completion rates, have also improved (see Chart 1).
Although one can quibble as to whether the strong growth performance is the main driving force for this favorable outcome, it is fairly evident to me, as a former finance minister, that if you don’t have strong growth, you cannot have the necessary revenue to fund clinics and schools, and pay qualified nurses and teachers.
I am not saying that progress in these areas is great; it’s not. Many countries will not be able to meet the United Nations Millennium Development Goals, especially that of halving poverty. Thus the fruits of the strong growth have not been shared in a large number of countries.
In other words, growth has not been as inclusive as it can be in many cases. Countries can do more to help lift more people out of poverty. Targeted policies can make a difference.
To illustrate what I am saying, take the examples of Mozambique and Vietnam. Both countries are star performers that delivered remarkably similar growth in GDP per capita over extended periods. Both countries emerged from prolonged, devastating wars and transitioned from centrally planned economies. There the similarities stop.
As Chart 2 shows, Vietnam managed to more than halve its poverty between 1992 and 2004. Sure, Mozambique made considerable progress, but fell well short of what Vietnam achieved.
So what explains this stark difference? In two words: “structural transformation.” Our analysis underscores two ways in which the transformation was achieved in Vietnam.
- First, there were sustained increases in agricultural productivity in both staple crops such as rice and cash crops such as coffee. As shown in Chart 3, total factor productivity in the agricultural sector in Vietnam improved by 50 percent compared with less than 15 percent in Mozambique over period of 15 years.
- And second, there was significant generation of employment outside the agricultural sector, especially in low-skill manufacturing and services (see Chart 4).
The slower progress in poverty reduction in Mozambique is due to the fact that the country’s high economic growth to a large extent emanates from the so-called “mega-projects”—aluminum smelters, coal mines, and such. But these projects typically don’t employ that many people as they are capital intensive.
Although such projects clearly add to the welfare of the population by contributing to fiscal revenues that help fund public services, including in health and education, they need to be complemented with policies that support an increase in the labor productivity of as many persons as possible.
Bang for buck
Going back to my starting point, which policies then have the biggest bang for the buck in terms of making growth more successful in increasing overall labor productivity, especially at the lowest skill levels, to help reduce poverty?
First, it is necessary to maintain macroeconomic, financial, and social stability without which sustained improvements in income and social indicators are simply not possible.
Second, governments should create the physical infrastructure and incentive structure that can allow the economy to create more productive jobs.
By 2020 more than a third of the working-age population in sub-Saharan Africa will be below the age of 25. Absorbing all these people into productive activities is crucial to avoiding social tensions and political instability. This may require supporting household enterprises, which currently operate largely in agriculture and services, so that they can increase their productivity. For better or worse, this is where most of the people in sub-Saharan Africa are—around 60–70 percent of the population.
Finally, financial inclusion can play a crucial role in fostering more inclusive growth, and allowing more people to escape poverty, notably by promoting savings and removing financing obstacles to entrepreneurial activities. Recent empirical evidence suggests that lowering transaction costs for the poor, such as mobile money transfers, facilitates financial inclusion more rapidly than creating specialized financial institutions.
To sum up, I do believe that much more can be done to reduce poverty and make growth more inclusive in sub-Saharan Africa. It’s not only a moral imperative; it’s a savvy political move, and, above all, a necessary economic one: shared growth is more likely to be stronger and more durable.
This piece is cross-posted from iMFdirect with permission.