1. Introduction

At the time of decolonisation in the 1950s and 1960s, the level of economic development in most of Asia was comparable with that of Africa. For instance, four decades ago, the per capita income of South Korea was comparable with that of the Sudan in Africa. However, since the 1960s, South Korea has achieved an incredible record of growth to become one of the 26 richest countries in the world and was able to join the trillion dollar club of world economies in 2004 while the Sudan is still one of the 33 Least Developed Countries (LDCs) in sub Saharan Africa (SSA).

The Asian miracle and the failure of SSA in the late 20th century puzzles many development thinkers primarily because unlike the Asian countries, the African countries had relatively large endowments of natural resources and hence were expected to achieve higher economic growth in the post independence period.

Although most African countries which gained independence in the 1960s showed rapid economic growth, their growth could not sustain beyond the first oil shock in 1973. By the early 1980s, African countries already began to show sings of economic stagnation and their external deficits had become so severe that donors and other financers were no longer willing to continue to provide support. Thereafter and following the 1980 Washington Consensus, most African countries were forced to adopt the neoliberal Structural Adjustment Programmes prescribed by the World Bank and IMF. However, the outcomes of these programmes were often controversial and sometimes counterproductive.

Meanwhile the divergence in economic performance between Africa and Asia continued. Average annual GDP growth rates for SSA were 1.7% over 1980-90 and 2.1% over 1990-97 while that for East Asia was 7.8% and 9.9% respectively (World Bank, 1999) (in Masware, 2006). While much of the SSA growth was in agriculture, most East Asian growth was in industry. In SSA, real GDP growth has seen a general decline from about 3% in the late 1970s to about 1% in the following decade recovering only slightly in the 1990s ( Lawrence and Thirtle, 2001). On the other hand, for the rapidly growing Asian economies also known as the high performing Asian economies (HPAEs) per capita income growth has been positive since the 1960s. Thus East Asia became an undisputed development success while SSA became a development tragedy of the late 20th century.

The rest of the paper is organised as follows: section 2 provides a comparative development perspectives for the two regions. Section 3 presents Africa’s opportunities and challenges in the 21st century while section 4 concludes.

2. Africa and Asia’s Economic Performance Compared

As stated earlier, after a relatively higher growth during the first decade of independence, the economies of SSA stagnated while countries in East Asia which were at similar level of development with SSA in early 1960s showed rapid and sustainable economic growth. Over the period 1965-89, real per capita annual growth of SSA averaged less than 0.5% compared to 5% for the high performing Asian economies which included Hong Kong, Indonesia, Malaysia, South Korea, Singapore, Taiwan and Thailand (Maswana, 2006). As a result in 1997, SSA GDP per capita was US$560 as compared to per capita income of US$4,230 for Latin America, $750 for China and $24,710 for the industrial world (Maswana, 2006).

In its 1993, The East Asia Miracle Report the World Bank (in Maswana, 2006) offered number explanations for rapid growth in this sub region. Among these high savings and investment rates, a relatively high degree of equality, high growth rates of human and physical capital, high productivity growth, (including agriculture), and high growth rates of manufactured exports were considered to be key drivers.

Development theory and practice indicates that economic development generally consists of nations undergoing a series of structural transformations from tradition bound, less productive and less profitable activities to modern technology bound, more profitable and value-added activities. According to Clark and Roy (1997) (in Maswana, 2006), this transformation include the change from less sophisticated to more sophisticated agricultural techniques, from an agricultural to a manufacturing, to perhaps service economy, from light to heavy to high tech industries in post agriculture economies.

While structural tranformation was sustianed and rapid in Asia whose manufacturing export jumped from 22% of merchandise exports in 1963 to 87% in 2000, SSA experienced only a slight change from 7% to 20% in the same period (Maswana, 2006). The main reason for such failure in SSA worng governement developeemnt strategy that neglected the agrciutlture sector. Since the 1960s, the level of the public resources allocated to agriculture in SSA has been consistently low relative to the sectros’s size and contirbution to the GDP. Accoridsng to the World Bank (2000) (in Maswana, 2006), in most African countries, the sector recieves less than 10% of the public investment spending while the sector accounts for about 30-80% of the the GDP.

Another reason for the divergence in growth performances between East Asia and SSA was disparities in savings and investment rates. Saving rates nearly doubled in some countries in East Asia, where they averaged 30% of disposable income between 1984 and 1993 , while SSA’s already modest savings rates fell to 10 to 15% (World Bank , 1999) (in Maswana, 2006). During the period 1980-2004, the savings rates in Africa was 16% of GDP, but it was erratic and remained lower than investment rates of 19% for the same period while savings and investment rates in Asia averaged 30% in the same period and the saving rates in Asia have surpassed investment rates in Asia since the 1990s (Maswana, 2006).

In addition, Asia received an increasing capital flows while capital flows to Africa were limited. In 2007, Asia received over 62% of the FDI destined to the developing countries and the region is regarded as the most preferred destination for foreign investment in developing countries while Africa received only about 10% of the FDI flows to the developing countries.

Moreover, Africa’s trade and industrialisation strategy lacked the dynamism observed in Asia and elsewhere. During the first decades of independence both SSA and East Asia followed Import Substitution Industrialisation strategy that was meant to create domestic industrial base that would be able to compete with the rest of the world at a later stage. However, while Import Substitution Industrialisation strategy in Asia created a foundation for a transition to export-led industrialisation which later served as an engine of growth in the region, in Africa the import substitution strategy led to currency overvaluation, development of parallel currency markets and shortage of foreign exchange required to purchase intermediate inputs used to produce both tradable and non tradable goods and hence transition to the export led industrialisation strategy never materialised.

However, there is no general agreement regarding the causes of rapid development in East Asia. As stated earlier, the causes of rapid development in East Asia are considered to be high rates of saving and investment, appropriate politics, policies, and bureaucracy, investment in human and physical capital, and technology, and promotion of agriculture, export orientation, entrepreneurship, the cultural dimension, and the state with active intervention.

Although there seems to be no general agreement regarding the causes of the East Asian economic miracle of the late 20th century, there is a general consensus on the importance of the following factors: high rates of savings and investment, investment in education, capital accumulation, sound macroeconomic management, relatively open trade policy, dynamic agricultural sector, maintenance of relatively equitable income distribution, and political credibility.

However, still there is no single East Asian development model that can be replicated in Africa. Instead, there are different experiences, policies and outcomes. Booth (2001) (in Lawrence and Thirtle, 2001) argues that there are at least three models of east Asian development: These are (a) a manufactured export led, state interventionist model based on the experience of Japan, Taiwan, and South Korea, (b) the freeport commerce and service dominated model of Hong Kong and Singapore, and (c) the natural resource model of Indonesia, Malaysia and Thailand.

The SSA’s success could depend on more noneconomic lessons from Asia, such as the existence of national identity and political commitment to growth with equity. In contrast to the developmentalist and distributive role of the state, especially in Korea and Taiwan, where relatively authoritarian states identified their maintenance of power with a successful economy, the SSA authoritarian states have become kleptocracies (Lawrence and Thirtle, 2001).

Lawrence and Thirtle (2001) highlight further three essential policy options: First, policies to support agriculture are important, but should be based on price incentives and market opportunities. Second, industrial policy may be ill advised because of the difficulty of identifying target manufacturing industries. Finally, trade liberalization based on the removal of domestic distortions would be the best option for SSA.

3. Africa’s Development Opportunities and Challenges in the 21st Century

After a period of falling per capita incomes that started in the 1970s, African economies began finally to turn around from about 1995, with initially modest increase in per capita incomes (Bigsten and Durevall, 2008). Since 2001 the African economic turn around has become real and sustainable with average growth rates of over 6% per annum partly due to the resources price boom but also due to improved economic policies.

The progress has been largely due to improved policy performance, particularly the adoption of less-distorted macroeconomic frameworks, increased reliance on private sector as a driving force for economic growth, and the improvement in governance in many countries. Although the political news is largely mixed, the emergence of more participatory government regimes has improved confidence and modestly increased investment in more sub regions of the continent (UNECA, 1999).

However, SSA is still one of the least developed sub region with massive poverty and underdevelopment. Thus while there are opportunities for SSA to claim the 21st century there are numerous challenges.

Studies have shown that to reduce poverty in Africa by half during 1999?2015, balanced policies to enhance economic growth and reduce inequality and an average annual rate of growth of at least 7 per cent are minimum requirements. Policies and programmes that promote broad-based, labor-absorbing patterns of growth are critical to ensuring that the poor participate and benefit from income growth. Poverty has a root in the interlinked population, environment, and development dimensions and must be tackled accordingly (UNECA, 1999).

Another change is Africa’s ability to join the information revolution. Africa is the most subdivided continent?with 165 borders demarcating the region into 52 countries, 22 of which have a population of 5 million or less, and 11 of which have a population of under 1 million. The limitations of size are very real from demand and supply points of view, and this makes regional cooperation a sine qua non for competitive entry by any individual African country into world markets. There is also a need to broaden the concept of regionalism and accordingly rethink Africa’s regional integration strategy (UNECA, 1999).

Industrialization is the key to increasing Africa’s participation in world commerce and finance, is crucial to the structural transformation of Africa’s economy, and provides the platform for enhancing Africa’s competitiveness in an increasingly globalized economy. Yet the level of Africa’s industrialization remains low, as illustrated by three key facts: first, there are only a handful of countries where manufacturing as a share of GDP exceeds 25 per cent?the benchmark for considering a country as having achieved the threshold of industrial take-off; second, the export composition of African countries continues to be dominated by primary rather than by processed or semifinished products; third, the ratio of public expenditure and private investment in scientific research and development remains minuscule as a percentage of GDP in all African countries (UNECA, 1999).

The continent has to devise polices to attract FDIs, has to rapidly expand human and physical infrastructure and fully participate in the global information revolution.

Africa has to build its capacities to accelerate growth to 8 per cent per annum and sustain it at that level well into the second and third decades of the 21st century. Only addressing these issues will prevent countries which are recovering at present from slipping back into stagnation. Thus, in spite of the recent good news, the challenges ahead for Africa to deepen economic and social progress and to sustain it over the next two decades are formidable.

Africa is a region with a very high economic risk. This means that both domestic and intentional investors demand a very high risk premium on their investment in the continent. Therefore the quality and stability of the economic environment within which economic agents operate depends on the institutional structure and the quality of government. Although the recent process of democratisation and some improvements in the process of governance are encouraging, the low quality of governance is still the most severe development problem in Africa (Bigsten and Durevall, 2008). Africa has to address the governance challenge as a matter of urgency to sustain and improve the current growth opportunities.

4. Concluding remarks

Although SSA and East Asia were at comparable level of economic development during the decades of decolonisation, East Asia quickly outperformed Africa in economic advancement. There is now a general consensus on the importance of the following factors in ensuring rapid development in East Asia : high rates of savings and investment, investment in education, capital accumulation, sound macroeconomic management, relatively open trade policy, dynamic agricultural sector, maintenance of relatively equitable income distribution, and political credibility.

Due to these factors East Asia achieved rapid transformation from non sophisticated, low-valued added economic activities to highly sophisticated high-tech led and highly profitable modern economies. On the other hand, Africa remained the poorest and the most marginalised continent in the world.

However, after more than two decades of decline, the African economies saw a turnaround beginning in mid 1990s. The turn around has accelerated since 2001 with sustained annual average growth in excess of 6%. However, to meaningfully reduce the rampant poverty in the continent in the foreseeable future, the continent needs to accelerate its growth to over 8% per annum.

There is no single East Asia development model that can be replicated in Africa. To achieve and sustain higher growth levels, Africa needs to devise balanced economic polices that put the private sector at the centre of economic growth and job creation, rapidly expand human and physical infrastructure and fully participate in the global information revolution, industrialise rapidly, devise polices to attract FDIs, and address the current severe problems of governance.

References

• Bigsten , A. and Durevall, D. 2008. The african economy and its role in the world economy. Current African Issues 40. The Nordic Africa Institute.

• Maswana, JC, (2006). Economic Development Patterns and Outcomes in Africa and Asia. Congo Economic Review. Working Paper WP04/06-2006.

• Lawrence, P. and Thirtle, C. (eds) (2001) Africa and Asia in Comparative Economic Perspective. New York: Palgrave.

• UNECA, 1999. The ECA and Africa: Accelerating a Continent’s Development Chapter1. United Nations, ECA. http://www.uneca.org/publications/books/eca_and_africa/chapter1.pdf.

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By Sam Vaknin — Author of “Malignant Self Love – Narcissism Revisited“

The fate of modern economies is determined by four types of demand: the demand for consumer goods; the demand for investment goods; the demand for money; and the demand for assets, which represent the expected utility of money (deferred money).

Periods of economic boom are characterized by a heightened demand for goods, both consumer and investment; a rising demand for assets; and low demand for actual money (low savings, low capitalization, high leverage).

Investment booms foster excesses (for instance: excess capacity) that, invariably lead to investment busts. But, economy-wide recessions are not triggered exclusively and merely by investment busts. They are the outcomes of a shift in sentiment: a rising demand for money at the expense of the demand for goods and assets.

In other words, a recession is brought about when people start to rid themselves of assets (and, in the process, deleverage); when they consume and lend less and save more; and when they invest less and hire fewer workers. A newfound predilection for cash and cash-equivalents is a surefire sign of impending and imminent economic collapse.

This etiology indicates the cure: reflation. Printing money and increasing the money supply are bound to have inflationary effects. Inflation ought to reduce the public’s appetite for a depreciating currency and push individuals, firms, and banks to invest in goods and assets and reboot the economy. Government funds can also be used directly to consume and invest, although the impact of such interventions is far from certain.

GOVERNMENTS

It is a maxim of current economic orthodoxy that governments compete with the private sector on a limited pool of savings. It is considered equally self-evident that the private sector is better, more competent, and more efficient at allocating scarce economic resources and thus at preventing waste. It is therefore thought economically sound to reduce the size of government – i.e., minimize its tax intake and its public borrowing – in order to free resources for the private sector to allocate productively and efficiently.

Yet, both dogmas are far from being universally applicable.

The assumption underlying the first conjecture is that government obligations and corporate lending are perfect substitutes. In other words, once deprived of treasury notes, bills, and bonds – a rational investor is expected to divert her savings to buying stocks or corporate bonds.

It is further anticipated that financial intermediaries – pension funds, banks, mutual funds – will tread similarly. If unable to invest the savings of their depositors in scarce risk-free – i.e., government – securities – they will likely alter their investment preferences and buy equity and debt issued by firms.

Yet, this is expressly untrue. Bond buyers and stock investors are two distinct crowds. Their risk aversion is different. Their investment preferences are disparate. Some of them – e.g., pension funds – are constrained by law as to the composition of their investment portfolios. Once government debt has turned scarce or expensive, bond investors tend to resort to cash. That cash – not equity or corporate debt – is the veritable substitute for risk-free securities is a basic tenet of modern investment portfolio theory.

Moreover, the “perfect substitute” hypothesis assumes the existence of efficient markets and frictionless transmission mechanisms. But this is a conveniently idealized picture which has little to do with grubby reality. Switching from one kind of investment to another incurs – often prohibitive – transaction costs. In many countries, financial intermediaries are dysfunctional or corrupt or both. They are unable to efficiently convert savings to investments – or are wary of doing so.

Furthermore, very few capital and financial markets are closed, self-contained, or self-sufficient units. Governments can and do borrow from foreigners. Most rich world countries – with the exception of Japan – tap “foreign people’s money” for their public borrowing needs. When the US government borrows more, it crowds out the private sector in Japan – not in the USA.

It is universally agreed that governments have at least two critical economic roles. The first is to provide a “level playing field” for all economic players. It is supposed to foster competition, enforce the rule of law and, in particular, property rights, encourage free trade, avoid distorting fiscal incentives and disincentives, and so on. Its second role is to cope with market failures and the provision of public goods. It is expected to step in when markets fail to deliver goods and services, when asset bubbles inflate, or when economic resources are blatantly misallocated.

Yet, there is a third role. In our post-Keynesian world, it is a heresy. It flies in the face of the “Washington Consensus” propagated by the Bretton-Woods institutions and by development banks the world over. It is the government’s obligation to foster growth.

In most countries of the world – definitely in Africa, the Middle East, the bulk of Latin America, central and eastern Europe, and central and east Asia – savings do not translate to investments, either in the form of corporate debt or in the form of corporate equity.

In most countries of the world, institutions do not function, the rule of law and properly rights are not upheld, the banking system is dysfunctional and clogged by bad debts. Rusty monetary transmission mechanisms render monetary policy impotent.

In most countries of the world, there is no entrepreneurial and thriving private sector and the economy is at the mercy of external shocks and fickle business cycles. Only the state can counter these economically detrimental vicissitudes. Often, the sole engine of growth and the exclusive automatic stabilizer is public spending. Not all types of public expenditures have the desired effect. Witness Japan’s pork barrel spending on “infrastructure projects”. But development-related and consumption-enhancing spending is usually beneficial.

To say, in most countries of the world, that “public borrowing is crowding out the private sector” is wrong. It assumes the existence of a formal private sector which can tap the credit and capital markets through functioning financial intermediaries, notably banks and stock exchanges.

Yet, this mental picture is a figment of economic imagination. The bulk of the private sector in these countries is informal. In many of them, there are no credit or capital markets to speak of. The government doesn’t borrow from savers through the marketplace – but internationally, often from multilaterals.

Outlandish default rates result in vertiginously high real interest rates. Inter-corporate lending, barter, and cash transactions substitute for bank credit, corporate bonds, or equity flotations. As a result, the private sector’s financial leverage is minuscule. In the rich West $1 in equity generates $3-5 in debt for a total investment of $4-6. In the developing world, $1 of tax-evaded equity generates nothing. The state has to pick up the slack.

Growth and employment are public goods and developing countries are in a perpetual state of systemic and multiple market failures. Rather than lend to businesses or households – banks thrive on arbitrage. Investment horizons are limited. Should the state refrain from stepping in to fill up the gap – these countries are doomed to inexorable decline.

A Note on GDP (Gross Domestic Product)

The formula to calculate GDP is this:

GDP (Gross Domestic Product) = Consumption + investment + government expenditure + net exports (exports minus imports) =
Wages + rents + interest + profits + non-income charges + net foreign factor income earned

But the GDP figure is vulnerable to “creative accounting”:

1. The weight of certain items, sectors, or activities is reduced or increased in order to influence GDP components, such as industrial production. Developing countries often alter the way critical components of GDP like industrial production are tallied.

2. Goods in inventory are included in GDP although not yet sold. Thus, rising inventories, a telltale sign of economic ill-health, actually increases the GDP!

3. If goods produced are financed with credits and loans, GDP will be artificially HIGH (inflated).

4. In some countries, PLANS and INTENTIONS to invest are counted, recorded, and booked as actual investments. This practice is frowned upon (and landed quite a few corporate managers in the gaol), but is still widespread in the shoddier and shadier corners of the globe.

5. GDP figures should be adjusted for inflation (real GDP as opposed to nominal GDP). To achieve that, the calculation of the GDP deflator is critical. But the GDP deflator is a highly subjective figure, prone, in developing countries, to reflecting the government’s political needs and predilections.

6. What currency exchange rates were used? By selecting the right “points in time,” GDP figures can go up and down by up to 2%!

7. Healthcare expenditures, agricultural subsidies, government aid to catastrophe-stricken areas form a part of the GDP. Thus, for instance, by increasing healthcare costs, the government can manipulate GDP figures.

8. Net exports in many developing countries are negative (in other words, they maintain a trade deficit). How can the GDP grow at all in these places? Even if consumption and investment are strongly up – government expenditures are usually down (at the behest of multilateral financial institutions) and net exports are down. It is not possible for GDP to grow vigorously in a country with a sizable and ballooning trade deficit.

9. The projections of most international, objective analysts and international economic organizations usually tend to converge on a GDP growth figure that is often lower than the government’s but in line with the long-term trend. These figures are far better indicators of the true state of the economy. Statistics Bureaus in developing countries are often under the government’s thumb and run by political appointees.

EXPECTATIONS

Economies revolve around and are determined by “anchors”: stores of value that assume pivotal roles and lend character to transactions and economic players alike. Well into the 19 century, tangible assets such as real estate and commodities constituted the bulk of the exchanges that occurred in marketplaces, both national and global. People bought and sold land, buildings, minerals, edibles, and capital goods. These were regarded not merely as means of production but also as forms of wealth.

Inevitably, human society organized itself to facilitate such exchanges. The legal and political systems sought to support, encourage, and catalyze transactions by enhancing and enforcing property rights, by providing public goods, and by rectifying market failures.

Later on and well into the 1980s, symbolic representations of ownership of real goods and property (e.g, shares, commercial paper, collateralized bonds, forward contracts) were all the rage. By the end of this period, these surpassed the size of markets in underlying assets. Thus, the daily turnover in stocks, bonds, and currencies dwarfed the annual value added in all industries combined.

Again, Mankind adapted to this new environment. Technology catered to the needs of traders and speculators, businessmen and middlemen. Advances in telecommunications and transportation followed inexorably. The concept of intellectual property rights was introduced. A financial infrastructure emerged, replete with highly specialized institutions (e.g., central banks) and businesses (for instance, investment banks, jobbers, and private equity funds).

We are in the throes of a third wave. Instead of buying and selling assets one way (as tangibles) or the other (as symbols) – we increasingly trade in expectations (in other words, we transfer risks). The markets in derivatives (options, futures, indices, swaps, collateralized instruments, and so on) are flourishing.

Society is never far behind. Even the most conservative economic structures and institutions now strive to manage expectations. Thus, for example, rather than tackle inflation directly, central banks currently seek to subdue it by issuing inflation targets (in other words, they aim to influence public expectations regarding future inflation).

The more abstract the item traded, the less cumbersome it is and the more frictionless the exchanges in which it is swapped. The smooth transmission of information gives rise to both positive and negative outcomes: more efficient markets, on the one hand – and contagion on the other hand; less volatility on the one hand – and swifter reactions to bad news on the other hand (hence the need for market breakers); the immediate incorporation of new data in prices on the one hand – and asset bubbles on the other hand.

Hitherto, even the most arcane and abstract contract traded was somehow attached to and derived from an underlying tangible asset, no matter how remotely. But this linkage may soon be dispensed with. The future may witness the bartering of agreements that have nothing to do with real world objects or values.

In days to come, traders and speculators will be able to generate on the fly their own, custom-made, one-time, investment vehicles for each and every specific transaction. They will do so by combining “off-the-shelf,” publicly traded components. Gains and losses will be determined by arbitrary rules or by reference to extraneous events. Real estate, commodities, and capital goods will revert to their original forms and functions: bare necessities to be utilized and consumed, not speculated on.

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Also Read:

• Governments and Growth

• Trading in Sovereign Promises

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Kenyans are outraged by a proposal to pay hefty salaries to the wives of the prime minister and vice-president.

A leaked document says the head of civil service Francis Muthaura has directed that they each be paid $6,000 (£3,000) every month.

But MPs have vowed to shoot down the proposal in parliament, saying it is too expensive for the economy.

Kenyan tax-payers are already paying heavily for the cabinet – the largest ever – with more than 40 ministers.

A government memo leaked to the local media directs that Ida Odinga and Pauline Musyoka, wives of the prime minister and vice-president respectively, will be rewarded for their roles as hostesses.

   Ida Odinga                                                                     Pauline and Kalonzo Musyoka [Enlarge]

The pay is also supposed to recognise their role for upholding national family values.

‘Over-burdened’

But Eugene Wamalwa, an MP and brother for former Vice-President Micheal Kijana Wamalwa, says the tax-payer is already over-burdened and the allowances are uncalled for.

“The prime minister and vice-president attract one of the highest salaries in the world and that will be sufficient for couples,” Mr Wamalwa said.

And former head of the Kenyan chapter of Transparency International Gladwell Otieno said the move is a confirmation that Kenyan politicians are just a greedy caste, looking after themselves at the expense of poor Kenyans recovering from the effects of post-election violence.

The two women will join First Lady Lucy Kibaki, whose allowances increased last year to nearly $8,000 a month.

President Mwai Kibaki and Prime Minister Raila Odinga agreed to share power in February after negotiations led by former UN head Kofi Annan to end weeks of violent clashes.

Some 1,500 people died and 600,000 left homeless around the country after last December’s disputed elections.

Taken From: How rich is Kenya, really?