Dr. Wolassa Kumo
Introduction

Fixed capital has long been considered as an engine of growth both as a factor of production and as an embodiment of technological progress. Countries that had made sustained accumulation of fixed capital were able to achieve higher and sustained economic growth and development while those who had not lagged behind. For instance, economic development in Sub-Saharan Africa has been severely constrained by inadequate saving and investment, among other things. The average annual gross domestic saving rate by 41 sub Saharan African countries during the period 1980-2010 was as little as 14.3% of GDP while the average fixed investment was 20% of GDP for the same period. Therefore, sub-Saharan Africa’s burgeoning debt was not primarily meant to finance investment as the saving- investment gap was only about 6% of GDP during the past three decades.

Sub Saharan Africa’s dismal average economic growth of about 3.8% during the past three decades was therefore a direct consequence of low saving and low investment. The Sub Saharan Africa average saving and investment rates pale in comparison to the saving and investment rates of the newly industrialized and emerging Asian economies, such as China, whose saving and investment rates of over 40% of GDP ensured real economic growth rates of over 10% during the same period, i.e. 1980-2010.

Average annual growth in Africa reached above 5% during the past decade following the commodity price boom since the early 2000s but was dampened by the global economic and financial crises during 2008-2009. Growth rebounded in 2010 and is projected to reach 5.5% in 2011 making sub Saharan Africa the second fastest growing region in the world following Asia.

However, heavy dependence on growth driven by improved commodity terms of trade subjects the sub continent to vagaries of global demand uncertainty. Unless improved commodity terms of trade translates into higher saving and investment, the sustainability of the current improved growth performance will be at stake. Equally important is the continuation of economic and political reforms that are required to enhance the participation of the private sector in economic development, and also improve productivity and investment efficiency.

This brief paper presents an overview of investment efficiency, savings and economic growth in 41 sub Saharan African countries for the past three decades using data from the IMF, World Economic Outlook Data Base, April 2011. Six countries have been excluded from the analysis for lack of consistent time series data. These are Djibouti, Liberia, Mauritania, Sao Tome and Principe, Sudan and Zimbabwe.

Investment Efficiency in Sub Saharan Africa

There are two broad concepts of efficiency: allocative efficiency and technical or production efficiency usually measured by total factor productivity. Some empirical analysts use these broad concepts of efficiency to assess inefficiency in aggregate investment in terms of excess investment demand that captures the deviations of actual investment from the desired investment. These approaches usually use nonparametric methods, such as Data Envelopment Analysis (DEA), as well as, parametric methods including multiple linear or non- linear regression models.

In this brief article, we use a simple approach based on marginal productivity of capital, known commonly as the Incremental Capital Output Ratio (ICOR) to measure investment efficiency in 41 sub Saharan African countries for the period 1980-2010. ICOR is the ratio of investments in some previous period or periods and growth in output in subsequent period or periods measured at constant prices.

Growth in output is not attributed only to investment in fixed capital. It could be due to growth in productivity (partial or total factor productivity), increased use of labour input or improvement in the level of education of the labour force (growth in human capital), and/or improvements in productive capacity utilization. However, changes in fixed investment still explain a significant portion of growth in output particularly in developing countries with limited fixed capital stock and therefore the efficiency with which this input is utilized provides a useful clue about the correlation between the later and economic growth.

The higher the ICOR, the lower is the implied investment efficiency. That is fixed investment is more efficient if fewer dollars are required to generate a unit growth in output. The average ICOR for sub Saharan Africa for the period 1980-2010 was 5.23 and was comparable with the ICOR for of about 5 during the 1980-2003 period. This implies that fixed investment in sub Saharan Africa is pretty efficient and the level of investment efficiency in the sub region is comparable with that of China during the early two decades of its rapid industrialization. This is not only because the sub region is capital scarce but also because there have been marked improvements in business climate and political environment during the past two decades. Therefore, no wonder that foreign direct investment surged in Africa from less than US$15 billion in early 2000s to over US$80 billion in 2007 before the inflow was hit by the global financial and economic crises of 2008-2009.

While average investment efficiency in sub Saharan Africa is high, performance varies from country to country. The 41 countries in sub Saharan Africa can be classified into three groups based on their ICOR performance for the period 1980-2010: (a) those with ICOR value of 1-5, (b) those with 6-9, and (c)) those with ICOR values of above 10.

The majority of the 41 counties (i.e. 25 countries) in the sub region recorded higher investment efficiency during the past three decades. These countries include both the least developed countries with very low fixed capital stock base, as well as, some middle income economies with higher level of capital stock. These best performing countries with ICOR value of 1-5 are: Botswana, Cameroon, Central African Republic, Comoros, DRC, Republic of Congo, Equatorial Guinea, Ethiopia, Gabon, The Gambia, Ghana, Guinea, Guinean Bissau, Kenya, Malawi, Mali, Mozambique, Namibia, Niger, Nigeria, Rwanda, Seychelles, Togo, Uganda, and Zambia. Most of these countries are not only face extreme capital scarcity but have also shown some progress in opening up their economies during the past 3 decades.

The countries with medium investment efficiency level of ICOR 6-9 include: Benin, Burundi, Cape Verde, Eritrea, Mauritius, Sierra Leone, and Swaziland. Mauritius is among the Upper Middle income countries and top reformers in the sub region. Lower investment efficiency may imply an over investment in the economy where marginal investment needed to generate a unit output was greater during the past three decades than during the earlier years of its economic expansion.

Investment efficiency was the lowest in the following countries during the past three decades: Angola, Chad, Cote d’Ivoire, South Africa and Tanzania. All of these four countries have experienced some form of economic and political upheavals during the past three decades. Preliminary data analyses showed that South Africa’s ICOR was comparable with that of China for the post-Apartheid period, but the number was very high for the pre 1994 period, i.e. 1980-1994 pulling the country’s overall performance significantly down. Investment efficiency was very low during the Apartheid rule in South Africa, due to global isolation and heavy state control over the economy. Thus if we exclude the pre 1994 period South Africa’s investment efficiency will fall within the first group of best performers. Poor performance by Angola, Cote d’Ivoire and Tanzania reflects the continued impacts of civil war and socialist mode of production in the case of the later which contributed to wasteful investment.

Investment required to achieve a minimum growth threshold of 7 percent

While Africa’s growth performance is the second best in the world at present, the continent still lags behind other regions in terms of socioeconomic development. Over 380 million people in Africa today live below poverty line, while youth unemployment is as high as 70% in some countries. Most economies are still heavily dependent on rain fed subsistence agriculture with extremely limited investment on irrigation. Weak economic structure reinforces poverty and poses a major risk to the sustainability of the current growth fuelled by commodity price boom.

African countries will not be able to address this fundamental economic challenge with current growth rates of 5% or less. They should achieve a minimum of 7% annual growth rate individually or collectively for the coming two decades to make a dent on poverty and unemployment. With an average ICOR of 5.23, the sub Saharan Africa region therefore requires a minimum fixed investment of 35% of GDP over the coming two decades collectively or by each country. Given the current actual average regional fixed investment rate of 20% of GDP, the desired investment rate of 35% over the coming two decades seems insurmountable, but not unrealistic. China’s economic growth during the past three decades was fuelled by fixed investment of over 40% of GDP. China’s massive investment was financed by extraordinarily high household and public savings which at times reached 50% of GDP. The major challenge for Africa, in this respect, is a culture of low savings, which we expound in the following section.

Saving-investment gap in Sub Saharan Africa

When domestic household and public savings fall short of the fixed investment needs of a country, this leads to a saving-investment gap. This gap is exacerbated when export earnings of a country fall short of import demand leading to a second, foreign exchange gap. Most developing countries in Sub Saharan Africa are often characterized by both gaps. Except five countries, i.e. Botswana, DRC, Gabon, The Gambia, Namibia, and South Africa, the rest of 41 sub Saharan African countries had an average saving -investment gap ranging from 1% to nearly 30% of GDP during the past three decades.

The saving-investment gap, however, significantly varies across the countries in the sub region. Countries that faced relatively lower saving-investment gaps ranging between 1-5% in the sub region during the period under review include Angola, Cameroon, Central African Republic, Comoros, Republic of Congo, Cote d’Ivoire, Eritrea, Ghana, Kenya, Mali, Nigeria, Swaziland and Uganda. The lower gap by some countries reflects increased savings from oil revenues, while lower gap by others simply mean lower level of investment.

Countries in the sub region with the average saving investment-gap of 6-10% during the stated period include Benin, Burkina Faso, Burundi, Central African republic, Ethiopia, Guinea, Guinea Bissau, Madagascar, Malawi, Mauritius. Niger, Rwanda, Senegal, Sierra Leone, Tanzania and Zambia, while those with average saving-investment gap of above 11% include Cape Verde, Chad, Equatorial Guinea, Lesotho, Mozambique, Seychelles and Togo.

The poor performance of the sub region in terms of the saving-investment gap reflects two major challenges: First, most countries are characterized by low saving and low investment and hence are at the risk of being trapped in vicious circle of poverty if the they do not raise their saving and investment rates immediately; and second if they raise their investment levels without a concomitant increase in domestic savings they may be trapped in vicious cycle of debt which could undermine the value of their investments, provided money borrowed is invested in economic development. Since the recent economic crisis proved that most of the aid pledged by non-African donors is unlikely to be delivered, the only sustainable solution to Africa’s development challenge is aggressive domestic resource mobilization for development. This could be supplemented by foreign direct investments, if the countries in the sub region speed up the current economic and political reforms.

Concluding remarks

Africa is rising. After 5 decades of civil strife and economic stagnation, the first decade of the 21st century shone a new light on the continent. Africa is no more a hopeless dark continent. Like its diamonds in the West, South and at the center, the continent is shining.

It is also shining as a second fastest growing continent in the world. However, there is no time for complacence as Africa is still the least developed continent in the world plagued with high level of poverty, unemployment, political instability and corruption. To sustainably address these fundamental socio economic challenges the region should at least grow by 7% per annum for the coming two decades. However, this is unlikely to be achieved with the current investment rate of 20% and the saving rate of 14% of GDP.

While the return to investment in Africa is high, it is such low levels of investment and saving that are holding the continent back. Given higher returns to investment, Africa’s economic transformation will depend on radical shift in the saving culture of its people, further economic and political reforms, and accelerated fixed investment.

   Dr. Wolassa Kumo
Introduction

A Report by the United Nations Development Programme released in May 2011 revealed that the world’s 48 Least Developed Countries (LDCs) of which 33 are in sub Saharan Africa, 14 in Asia and 1 in Latin America and the Caribbean, illegally transferred a net capital of about US$197 billion mainly to the developed world between 1990-2008. During this period, all the 48 LDCs received about US$118 in remittances and about US$94 billion in new loans, Foreign Direct Investments (FDIs) and other related capital inflows while they paid back US$162 billion in debt services leaving them with net capital inflows of US$50 billion. However, this was sharply offset by a gross massive illicit capital flight estimated to be about US$246 billion for the period stated. This could have wiped out the entire LDC debt of about US$155 billion in 2009 with over US$91 billion being saved for investment in economic development.

These illicit financial flows involve the cross boarder transfer of the proceeds of corruption mainly by local kleptocracies; trade in contraband goods and criminal activities by local households and businesses; and tax evasion mainly by multinational corporations.

The Report identifies three major drivers of illicit capital flows from LDCs. Macroeconomic drivers, structural challenges and overall governance. Macroeconomic factors such as high fiscal deficit, high and volatile inflation rates, overvalued real effective exchange rates, negative real interest rates, low real GDP growth and high indebtedness are believed to positively contribute to higher illicit capital flows. So do structural weaknesses such as growing income inequality, increasing trade openness without adequate regulatory oversight, as well as, poor overall governance including corruption, inimical business climate, prevalence of the shadow economy and political instability.

The Report emphasizes further that the illicit capital flows from the LDCs vary both by region and structural characteristics. The following section describes the regional pattern of such flows.

The Regional Pattern of Illicit Capital Flows

Regionally, about 69% of the total illicit capital flows originates from the 33 LDCs in sub Saharan Africa while about 29% originates from the 14 Asian LDCs. Latin America and the Caribbean contribute the remaining 2%. Among the top ten exporters of illicit capital, 6 countries belong to Africa while 4 belong to Asia. One of the poorest countries in Asia, Bangladesh is the world’s top exporter of the illicit capital with the cumulative outflow of US$ 34.8 billion followed closely by Angola, Africa’s second largest oil reducer, with a cumulative outflow of US$34 billion during 1990-2008. This accounted for about 11% and 3.4% of Angola’s and Bangladesh’s GDP during the period respectively.

The Report indicates that trade mispricing accounts for about 65-70% of the illicit capital flows from all LDCs while unrecorded leakages from the balance of payment accounts for the remainder. The Report stresses further that in countries with weak overall governance, i.e. high corruption, and low transparency and accountability, trade mispricing increases with increasing trade volume exacerbating further the illicit capital outflows.

Structural characteristics such as being landlocked or small island nation LDC does not necessary imply higher illicit capital outflows.

Illicit Capital outflows from sub Saharan Africa

The 33 LDCs from the world’s least developed continent, Africa, exported a net illicit capital of US$135 billion to the developed world during 1990-2008 alone. And previous estimates suggest that the African continent as a whole had exported roughly about US$1.8 trillion in illicit capital outflows during the past 50 years while it received roughly about US$ 1 trillion in all forms of international capital inflows. Africa therefore was a net exporter of roughly US$ 0.8 trillion during the past half century. This massive loss of capital to the rest of the world explains why the continent remained the poorest and the least developed region in the world. After over 50 years of decolonization Africa’s resources continue to fuel development in advanced economies, while the owners of the resources on the continent, the broad masses, continue to languish under perpetual poverty.

The six countries in Africa which are among the top ten exporters of illicit capital include: Angola (US$34 billion), Lesotho (US$16.8 billion), Chad (US$15.4 billion), Uganda (US$8.8 billion), Ethiopia (US$8.4 billion), Zambia (US$6.8 billion) and Sudan (US$6.7 billion). It is saddening to observe that a small, land locked country of Lesotho with a total population of about 2 million lost a staggering amount of capital totaling US$16.8 billion in illicit capital outflows during the past 19 years. Equally astonishing is the size of the illegal capital flight from Ethiopia, the country often regarded as one of the poorest countries in the world in terms of per capita income, although the size of its GDP ranks it as the 86th biggest economy in the word.

Ethiopia cannot afford to export US$8.4 billion illegally aboard while the country is unable to feed close to 5 million of its citizens every year bad weather befalls on it.

Angola, Chad, Zambia and Sudan’s size of illicit capital flight is a symptomatic of the natural resource curse and reflect the need for the governments to take urgent actions to improve transparency in their extractive industries.

Other net exporters of illicit capital from sub Saharan Africa include Equatorial Guinea (US$6.5 billion), Liberia (US$5.8 billion), Guinea (US$4.9 billion), Malawi (US$4.2 billion), Djibouti (US$3.9 billion), Mozambique (US$3.8 billion), Madagascar (US$3.7 billion), Congo Democratic Republic (US$3.5 billion), Burkina Faso (US$ 2.9 billion), Tanzania (US$2.3 billion), Sierra Leone (US$2.1 billion), Mali (US$1.7 billion), Gambia (US$1.6 billion), Rwanda (US$1.6 billion), Central African Republic (US$ 1 billion), Niger (US$1 billion), Burundi (US$ 969 million), Guinea Bissau (US$847 million), Togo (US$ 678 million), Mauritania (US$ 428 million), Senegal (US$ 334 million), Benin (US$264 million), Comoros (US$ 154 million), Sao Tome and Principe (US$142 million), and Eritrea (US$118 million).

Equatorial Guinea, one of the largest oil producers in Africa, is in fact not a least developed country in terms of the size of its GDP per capita. With GDP per capita of over US$ 16000, it is the only non-OECD high income country in Africa. However, due to weak overall governance that resulted in illicit capital outflows of over US$6.5 billion over the past 19 years, among other things, nearly 77% of its citizens live under abject poverty. Equatorial Guinea is not even a member of Extractive Industries Transparency Initiative while other countries such as Liberia and Mozambique are making necessary efforts to improve transparency and accountability in the use of revenues from natural resources.

The preceding figures of net illicit capital outflows from the world’s least developed countries partly explain why these countries remained poor. The constant rhetoric of aid and FDI to Africa is nothing more than a cheap political propaganda. Poor countries like Ethiopia and Lesotho have been subsidizing economies of the developed nations for the past 50 years at the expense of millions of their own citizens who go to bed every day without a single meal.

It is now abundantly clear that the west not only cannot save Africa, to use the wise words of Professor William Easterly, but in fact is helping the kleptocraceis to kill the continent’s people by facilitating the robbery of its meager resources.

Concluding remarks

In spite of continued inflows of aid, foreign direct investments and remittances, the least developed countries of the world continue to be the net exporters of capital to the developed world which denies them crucial resources needed to provide jobs, alleviate poverty and enhance economic development. Cross border illicit outflows of proceeds of corruption by African kleptocracies, contraband trade and criminal economic activities by households and businesses and tax evasion by multinational corporations fueled by structural weaknesses, macroeconomic instability and poor overall governance by the least developed countries led to loss of nearly US$ 200 billion in net capital during the past 19 years. This could have wiped out the entire LDC debt stock of about US$155 billion estimated in 2009 leaving billions of net resources for further investment.

Africa is the hardest hit with nearly 70% of the stated net capital loss originating from the LDCs in sub Saharan Africa.

The UNDP report on illicit capital flows shed new light on challenges of underdevelopment in LDCS and particularly in Africa. The fundamental challenge for the LDCs in Africa and elsewhere is to put effective measures in place to improve overall governance including democratization, fighting corruption and improving transparency and accountability in the generation and use of revenues from natural and other resources, promoting inclusive economic growth, ensuring macroeconomic stability and implementing effective mechanism for trade regulation.

The proliferation of free trade areas with neighbors or the west will not bring sustainable development if the bulk of locally mobilized resources continue to be lost in illicit outflows due to unregulated open trade.

Neither will tax holidays for few FDIs. Continued provisions of tax holidays for multinationals would result in double loss of capital if there is no effective mechanism to control tax evasion by those who have already graduated from the incentives.

The developed world would help the LDCs escape from the vicious circle of poverty not by promising more aid, and technical assistance but by closing down the offshore capital safe havens most notably the Swiss Banks which have continued to gladly receive stolen funds from the Africa’s hungry people.

And it is only when Africans stop stealing from their own poor and the west stops aiding and abating the kleptocracies and be part of the process that the least developed countries will ever develop.

References

UNDP: Illicit Financial Flows from the Least Developed Countries: 1990-2008. Discussion paper: May 2011

   Sam Vaknin, Ph.D.
Sam Vaknin is the author of “Malignant Self Love – Narcissism Revisited“

The agent-principal problem is rife in politics. In the narrative that is the modern state, politicians are supposed to generate higher returns to citizens by increasing the value of the state’s assets and, therefore, of the state. In the context of politics, assets are both of the economic and of the geopolitical varieties. Politicians who fail to do so, goes the morality play, are booted out mercilessly.

The misconduct of politicians is one manifestation of the “Principal-Agent Problem“. It is defined thus by the Oxford Dictionary of Economics:

“The problem of how a person A can motivate person B to act for A’s benefit rather than following (his) self-interest.”

The obvious answer is that A can never motivate B not to follow B’s self-interest – never mind what the incentives are. That economists pretend otherwise – in “optimal contracting theory” – just serves to demonstrate how divorced economics is from human psychology and, thus, from reality.

   [ ENLARGE ]

The same goes for politics and political science, respectively.

Politicians will always rob blind the state. They will always manipulate electorates, political parties, legislatures, and the judiciary to induce them to collude in their shenanigans. They will always bribe constituents and legislators to bend the rules. In other words, they will always act in their self-interest. In their defense they can say that the damage from such actions to each citizen is minuscule while the benefits to the politician are enormous. In other words: such misbehaviour is the rational, self-interested, thing to do.

But why do citizens cooperate with such political brigandage? In an important Chicago Law Review article titled “Managerial Power and Rent Extraction in the Design of Executive Compensation” the authors demonstrate how the typical stock option granted to managers as part of their remuneration rewards mediocrity rather than encourages excellence.

But everything falls into place if we realize that citizens and politicians are allied against the state – not pitted against each other. The paramount interest of both citizens and politicians is to increase the value of their benefits (stake) regardless of the true value of the state. Both are concerned with the performance of their individual assets rather than with the performance of the state. Both are preoccupied with boosting the “share’s price” rather than the “company’s business”.

Hence the inflationary perks and pay packages enjoyed by politicians, directly (via campaign contributions, personal favours, an enhanced quality of lifestyle) and indirectly (via the revolving door between politics and business). Citizens hire “stock manipulators” – euphemistically known as “politicians” – to generate expectations regarding the future prices of their stakes in the state.

These snake oil salesmen and snake charmers – politicians – are allowed by the citizenry to loot the state providing they generate consistent “capital gains” to their masters. This they do by provoking persistent interest and excitement around the country and the nation and their prospects, both economic and geopolitical. Citizens, in other words, do not behave as owners of a firm – they behave as free-riders.

The Principal-Agent Problem arises in other social interactions and is equally misunderstood there. Consider taxpayers and their government. Contrary to conservative lore, the former want the government to tax them on condition that they share in the spoils. They tolerate corruption in high places, cronyism, nepotism, inaptitude and worse providing that the government and the legislature redistribute the wealth they confiscate. Such redistribution often comes in the form of pork barrel projects and benefits to the middle-class and the affluent.

This is why the tax burden and the government’s share of GDP have been soaring inexorably with the consent of the citizenry. People adore government spending precisely because it is inefficient and distorts the proper allocation of economic resources. The vast majority of people are rent-seekers. Witness the mass demonstrations that erupt whenever governments try to slash expenditures, privatize, and eliminate their gaping deficits. This is one reason the IMF with its austerity measures is universally unpopular.

Employers and employees, producers and consumers, voters and elected officials all reify the Principal-Agent Problem. Economists would do well to discard their models and go back to basics. They could start by asking:

•   Why do shareholders acquiesce with executive malfeasance as long as share prices are rising?

•   Why do citizens protest against a smaller government even though it means lower taxes?

Could it mean that the interests of shareholders and managers are identical? Does it imply that people prefer tax-and-spend governments and pork barrel politics to the Thatcherite alternative?

Nothing happens by accident or by coercion. Electorates the world over aided and abetted the current crop of venal politicians enthusiastically. They knew well what was happening. They may not have been aware of the exact nature and extent of the rot, but they witnessed approvingly the public relations antics, unnecessary wars, rampant malfeasance, media manipulation, opaque transactions, and outlandish pay packets. People remained mum as they witnessed the mounting corruption of the political-corporate nexus.

Still, there is an even narrower and more worrisome interpretation of the politician’s comportment, in which he is answerable not to his constituents, but to party hacks.

It is a common error to assume that the politician’s role is to create jobs, encourage economic activity, enhance the welfare and well-being of his subjects, preserve the territorial integrity of his country, and fulfil a host of other functions.

In truth, the politician has a single and exclusive role: to get re-elected. His primary responsibility is to his party and its members. He owes them patronage: jobs, sinecures, guaranteed income or cash flow, access to the public purse, and the intoxicating wielding of power. His relationship is with his real constituency – the party’s rank and file – and he is accountable to them the same way a CEO (Chief Executive Officer) answers to the corporation’s major shareholders.

To make sure that they get re-elected, politicians are sometimes required to implement reforms and policy measures that contribute to the general welfare of the populace and promote it. At other times, they have to refrain from action to preserve their electoral assets and extend their political life expectancy.

   Dr. Wolassa Kumo
Introduction

As many economists had expected, China overtook Japan as the world’s second largest economy during the second quarter of 2010. The Chinese nominal Q2 GDP was $1.335 trillion surpassing that of Japan, $1.286, by $0.049 trillion for the same quarter. Japan had retained this position since it overtook West Germany as the world’s second largest economy at the end of 1960s.

However, the Japanese economy began to stagnate since the early 1990s following the asset price bubbles of the late 1980s and had grown well below trend for the past 20 years. The Japanese economic growth was further dampened by the 2008-2009 global financial and economic crises. On the other hand, since a landmark economic reform in 1978, the Chinese economy recorded double digit annual average economic growth.

For instance, while Japanese economy grew only by 1.1 per cent during the fourth quarter of 2009, the Chinese economy grew 10.7 percent during the same quarter and 8.7 percent during the year. In 1980 the Chinese GDP of $188 billion was less than 20% of Japanese GDP of $1.05 trillion. However, due to rapid economic growth in China compared to sluggish, below trend growth during the same period in Japan, the GDP of both countries converged at the end of 2009 as the Chinese GDP of $4.91 trillion was only slightly below Japanese GDP of $5.1 trillion in 2009. China and Japan offer a typical proof of the economic convergence hypothesis.

As a result of accelerated and sustained economic growth, poverty in China fell by 80% during the past 30 years. China’s economic success is miraculous not only because of the pace at which it was able to catch up the advanced economies but also because it was based on a unique development model of Socialist Market Economy. The Chinese leadership ingenuously applied market principles in socialist state owned enterprises while it also allowed the private enterprise to gradually develop and contribute to the economic progress of the nation.

China is the only country in the world to achieve rapid and sustained economic progress based on a mixed socialist and market economic model of development that defied the basic principles of free market that was regarded as the foundation of economic prosperity since Adam Smith’s 1776 famous phrase of the “invisible hand”. Wen Jiabao, the current Chinese premier, was once quoted as saying: ” Both visible and invisible hands should regulate market forces.” And that is what worked for China. China is now undisputed world economic superpower surpassed only by the United States of America although it overtook USA as the largest auto market.

Key determinants of the accelerated growth of socialist market economy

Different authors emphasize different factors as key determinants of Chinese fast economic growth. Some argue that the three most important factors in Chinese fast economic growth are: private enterprise, investment on education and openness while others emphasize export, investment and domestic consumption as the three key components that propelled China’s economy.

Between the late 1940s and 1978, China followed a repressive and closed policy of communist economic development with tight state control of production, exchange and distribution. However, beginning in 1978 the Chinese leadership embarked in a landmark policy shift that not only opened up the economy to international trade and foreign direct investment, but also encouraged private sector development and gradual privatization of the state owned enterprises. These reforms and opening up the economy coupled with ingenious use of market forces led to unprecedented economic growth for the past three decades.

The adoption of market principles in state owned enterprises were made possible through series of reforms that separated the functions of government from those of state enterprises and those aimed at revitalizing the private sector. In addition to this, China carefully adjusted its economic structural imbalances by developing massive labour intensive industries with comparative advantage, focusing primarily on export markets.

The Chinese economic success therefore is primarily driven by state entrepreneurship. The Chinese leadership had a clear vision about their country and they delivered on their promises. The Chinese leadership was not only committed to the development of their nation but was also highly capable and no- nonsense leadership. They always prove their words with actions; a critical leadership quality that many leaders of the developing world and especially those in Africa lack. The critics of the Chinese leadership may disagree with me. But let us be realistic; transforming a country from poor agrarian society into the world economic superpower in 30 years cannot come without costs. I request the critics of the Chinese leadership to do a Cost-Benefit analysis of the Chinese economic miracle and show us the evidence.

The socialist market economy ensured high investment and saving

Immediately after opening up the economy, investment in China accelerated reaching 43.5% of GDP in 1993. The other critical components of GDP, domestic consumption and export were also increasing at the same time. China’s domestic market of 1.3 billion people is undoubtedly one of the major drivers of economic success. Although investment slowed down since mid 1990s due to surging inflation, it rose sharply again beginning in 2000 through a combination of massive government infrastructure spending and both foreign and domestic investment in manufacturing. As investment in factories and other construction as well as roads and other infrastructure reached unprecedented levels, gross capital formation rose from 36% in 2000 to 43% in 2003 ensuring GDP growth of over 9% per year from 1995[1]. During the 2008-2009 global economic and financial crises, China’s economic growth was spurred by a $586 billion stimulus package mostly directed towards massive infrastructure investment projects.

The extraordinary investment growth in China was supported by two central government policy instruments [1]. First, key input prices such as land, electricity, and other utilities, including water, were kept low through subsidies and controlled pricing. Land was mostly allocated for development for free and electricity for foreign direct investment was sold at half price. Second, cheap finance was channeled into industry, particularly to SOEs and other large companies, often effectively at zero cost which was made possible by the high savings rate, which averaged 40% of GDP for most of the 1990s and has recently grown to close to 50%[1]. In addition to the above China offered large tax incentives to foreign direct investors. What would African countries which charge more than 50% of the total investment cost for urban land lease learn from China?

Since China opened up its economy and implemented reform programmes to revitalize the private sector, the share of the state sector in GDP declined to only one-third. Foreign direct investment was important but only about 5% of the total investment.

China also maintained export competitiveness through currency depreciation. The yuan gradually depreciated from 3 yuan per US dollar in 1985 to 5.76 in 1994 and approximately 8.28 between the late 1990s to 2005. Currently, the yuan trades at about 7.8 per US dollar.

The socialist market economy improved efficiency of investment

In China an investment of 3.7% of GDP generates 1% of GDP growth and this efficiency of investment, from the point of view of GDP growth, is almost twice that of the US[2]. Another indicator of improved efficiency is growth in total factor productivity (TFP) which reflects a country’s ability to use a broad range of skills, including its public policies and infrastructural development. TFP grew by about 1.98 percent per year on average in China, and 0.87 percent in India for the period 1982- 2008 and by over 4 percent in Russia for the period 1995 ? 2008 as compared to 0.35 percent and 0.18 percent for United States and Japan for the period 1982-2008 respectively. The growth in TFP represents the effect of technological change, efficiency improvements, and our inability to measure the contribution of all other inputs and is a key determinant of long term economic growth.

Enormous investment on education

Improved productive efficiency in China is a result of enormous investment on education. High school and college enrollments are rising sharply in China. In 1998 just 3.4 million students were enrolled in China’s colleges and universities; but over the next four years enrollment in higher education increased 165 percent and the number of Chinese studying abroad rose 152 percent while between 2000 and 2004, university enrollment continued to rise steeply, by about 50 percent [3]. Studies indicate that skilled workers with college education are more than three times more productive than those with less than high school education.

China’s innovative Township ?Village enterprises

The communally owned township-village enterprises which were initially set up during the pre-1978 period to serve the rural areas and which were restricted to the production of non agricultural output such as iron, steel, cement, chemical fertilizer, hydroelectric power, and farm tools were later revitalized and became an engine of rural transformation and economic growth. The development of town and village enterprises transferred more than 120 million people (the total population of Ethiopian and Tanzania combined) out of agriculture by early 1990s.

The township and village enterprises are found to be much more efficient than comparable state-owned enterprises and are competitive in the international markets. Their management, which responds to market forces and their outward-orientation have contributed to their productive efficiency. It is argued that efficient management, which successfully exploits the endowments and resources of the country rather than the nature of ownership of production entities, is crucial to the success of manufacturing firms [4]. It is often argued that openness, not ownership, is the key in economic development. This offers critical lessons to most African countries where over 80 percent of the population survives on subsistence rural agriculture with massive redundant labour, and dismal labour productivity.

The rural sector will continue to play a significant role in China’s economic growth. It is estimated that in 2009,about 55 percent of China’s population, or 700 million people, still lived in the countryside. That large rural sector is responsible for about a third of Chinese economic growth today and will continue to anchor the future growth [3].

Concluding remarks

China’s economic success is a miracle. A country transformed itself from poor agrarian economy in as recently as 1970s to a world economic superpower within 30 years. China is not particularly endowed with vast natural resources as in Africa. But it is endowed with committed, capable and visionary political leaders that put the interest of their people and their country before anything else.

The unique socialist market model of economic development pursued by these leaders defied the main stream economic thinking of laissez faire capitalism as the only way for sustained prosperity. China provides a unique model of economic development to the developing world where it is not the nature of ownership of the means of production that really matters in economic development but it is the degree of openness, management and productive efficiencies that are the key to success. This is not to undermine the importance of a vibrant private sector, both domestic and foreign, in economic development; but rather to emphasize the fact that open, efficient and competitive state and communally owned enterprises complemented by equally vibrant private sector can do economic wonders as in China.

References

[1] Zheng, J, Bigsten, A. and Hu, A. Can China’s Growth be sustained? A Productivity Perspective. Special Issue on Law, Finance, and Economic Growth in China,World Development, 2007

[2] John Ross, Key Determinants Of The Different GDP Growth Rates In India And China, Sunday, May 02, 2010

[3] Robert Fogel, January /February 2010. $123,000,000,000,000. China’s estimated economy by 2010. Be warned.

[4] Fu X. , and Balasubramanyam, V.N. 2003. The Township and Village enterprise in China, Journal of Development Studies, Vol. 39, No.4, 2003.

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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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