Why Are Some African Economies Growing and Others Not? | African Economy | Econ

In the early 1990s, economists had almost given up on the developing world because they were not growing as expected. Although some individual countries, like Singapore or South Korea, occasionally scaled the income ladder, the overall picture was that there was a big difference between advanced economies and the rest. Then the scene changed.

In the late 1990s, global trade experienced explosive growth, and the gap between the rich and the rest closed fast. Poverty tumbled. The share of people living on no more than $1.

90 a day (at purchasing-power parity) fell from 36% in 1990 to less than 10% in 2022. The proportion of Africans living in extreme poverty also decreased, from 53% to 35%. But, due to rapid population growth, the number of poor Africans has increased.

Despite this, the African economy has been among the fastest-growing in the world in recent decades. Moreover, the growth in Africa is becoming increasingly hard to ignore, as rapid economic and social changes position the continent for a more significant role in global affairs. So, how are African economies doing?

To answer this question, this matrix separates countries into two groups: strong growth (5% or higher) and weak growth (less than 5%). Within each category of growth, the countries' economies are further divided into three subgroups: non-resource-intensive countries, oil exporters, and other resource-intensive countries. Based on growth data between 2013 and 2023, the table shows that out of the 41 countries, 18 have achieved a growth rate of 5% or higher.

These countries encompass all three types of economies. While 8 out of the 18 strong-growth economies are non-resource-intensive countries, they are the prevailing majority. So, why are these African countries improving while others are not?

For decades, commodities have shaped Africa’s economic growth. When commodity prices were high, growth was good; when prices dipped, the continent's economy suffered as well. Even though Africa is home to a third of the planet’s mineral reserves, a tenth of the oil, and two-thirds of the diamonds, it is still the poorest continent on Earth.

Many left-wingers argue that Africa is poor because its former colonial powers want to keep it that way, not because of the choices its leaders are making. Many conservatives, on the other hand, sweepingly say that corruption or bad governance are to blame, without taking account of the obstacles many African countries face. However, according to McKinsey & Company research, Africa is outperforming many expectations and transforming its diversity into opportunities.

So, let's delve into the details of how similar countries have taken diverse paths, offering valuable lessons to be learned. The first lesson, about the importance of simply having a state that works, comes from Rwanda and Burundi. Both countries are small, landlocked, and densely populated.

Since gaining independence, both nations have experienced genocides against their Tutsi minorities by their Hutu majorities. In the early 1990s, Burundi had an income almost similar to that of Rwanda. However, since then, incomes in Rwanda have more than tripled, whereas those in Burundi have fallen, resulting in it becoming the world's poorest country.

One significant difference between the two lies in their governance. Although neither country is democratic, Rwanda has a functional government and low corruption. whereas Burundi witnessed large-scale political strife and various coup attempts.

The Ibrahim Index of African Governance, which looks at a variety of indicators including the rule of law, infrastructure and sanitation, ranks Rwanda 12th, while Burundi is placed 43rd. The second is that economic policies matter. Upon gaining independence in the early 1960s, Kenya and Tanzania had similar economies, both dependent on farming, with almost identical per capita incomes.

Both initially suppressed democracy to run authoritarian one-party states. But they chose very different economic models. Tanzania nationalized big companies and forced people onto collective farms in the name of “African socialism”.

while Kenya embraced free markets, which encouraged investment and implemented several regulatory reforms to streamline foreign and local investments, including the establishment of an export processing zone. As a result, Kenyans are now 80% wealthier than Tanzanians. Zimbabwe and Botswana further reinforce this.

Both the countries are led by very different temperamental political leaders. In the early 1980s, Zimbabwe was richer than Botswana. However, Zimbabwe's second president, Robert Mugabe, destroyed its economy through careless printing of banknotes, stealing farms for his cronies and authoritarian rule.

Whereas, Botswana’s first President Seretse Khama embarked on an ambitious economic agenda aimed at reshaping the nation into an export-driven economy, centered around beef, copper, and diamonds. Khama implemented stringent measures to combat corruption. Consequently, Botswana now enjoys a wealth that is nine times greater than that of Zimbabwe.

Let's take a look at Africa's most successful economy—Mauritius. With one of the highest GDP per capita and HDI scores, it serves as a remarkable example of how countries with sound policies and robust institutions can enter a virtuous cycle of development. This small island economy has been a historical evidence against the pessimistic projections made by Nobel Laureate James Meade.

Meade regarded the Mauritian economy as a case of the Malthusian trap, predicting poor developmental prospects due to its heavy reliance on a sugar-based agricultural sector, high vulnerability to trade shocks, rapid population growth rate and rising ethical tensions. Yet, in addition to maintaining national stability and social cohesion, the island economy has sustained a high and stable economic growth rate averaging 5 percent annually between 1980 and 2000. This period, often called the "Mauritian economic miracle," has generally been attributed to the role of foreign direct investment (FDI) in transforming the country from a stagnant mono-crop economy to one with sustainable growth and development.

While having sensible economic policies is crucial, it's not enough. Several other African countries also tried to boost manufacturing by attracting foreign investors to export-processing zones. Only a few, including Ethiopia, Lesotho and South Africa, succeeded.

Trade and investment policies were just a portion of what contributed to Mauritius' success. Another critical element was the resilience of its institutions. Ever since gaining independence, Mauritius has maintained peaceful elections, adhered to the rule of law, upheld integrity within its courts, and managed to maintain a relatively low level of corruption.

When we look at Mauritius biggest neighbor Madagascar, its larger size and richer natural resources seemed to position it for potential success. However, this was not the case. In the 1970s, just as Mauritius started to attract foreign investors, Madagascar adopted a socialist approach marked by economic centralization and state control.

This decision led to the expulsion of investors and the nationalization of two American oil companies. While Mauritius worked to discover new export markets for its sugar industry, Madagascar took a different path by seizing land from its commercial farmers. Unfortunately, the Malagasy economy suffered a severe collapse.

It is one of the few countries in the world to have become poorer over the years, because of disastrous socialist policies, rural riot and generally chronic political instability. The main problem of the African economy is corruption and mismanagement. Power really corrupts.

So too does a resource-rich economy, like Nigeria’s the largest economy of Africa, where easy access to oil revenues paves the way for unethical practices. The Transparency International Corruption Perception Index ranks Nigeria 150th out of 180 countries. According to The Economist, by the year 2030, the size of Africa's largest economy should triple in real terms, and if Nigeria manages to reduce corruption to levels comparable to Malaysia, its economy could be about 37% bigger.

Nigeria has for long been regarded as the poster child for the ‘curse’ of oil wealth. Yet despite this, Nigeria achieved strong economic growth for over a decade in the 21st century, driven largely by policy reforms in non-oil sectors. Nigeria’s major development challenge is not the ‘oil curse’, but rather one of achieving economic diversification beyond oil, subsistence agriculture, informal activities, and across its subnational entities.

Its challenge of economic diversification is situated within the political setting of an unstable distribution of power among individual, group, and institutional actors. Public institutions often hire the family and friends of the boss rather than the best candidates. In turn those institutions become more inefficient and deliver less of what they are meant to, whether it is education or roads.

In addition, countries where corruption is high attract less foreign investment. They have higher prices, and lower tax bases. Nigeria’s tax-to-GDP ratio is only about 8%, compared with more than 25% in South Africa.

Although South Africa, the economic powerhouse, is not immune to corruption and mismanagement, it has successfully diversified its economy with a growing and sizable middle class. The economy of South Africa is the second largest in Africa and the most industrialized, technologically advanced, and diversified economy in Africa. For the first fifteen years of democracy, South Africa enjoyed the advantages of both effective institutions and a shared willingness of stakeholders to believe in the power of cooperation.

This enabled the country to move beyond counterproductive conflict and pursue win-win outcomes. Growth began to accelerate, which created new opportunities for expanding the middle class. Increased fiscal space made it possible to broaden access to public services and to social grants, which reduced absolute poverty.

There is no doubt Africa is growthing and its growth is already being driven by internal consumption and investment. The expansion of regional trade would reinforce that dynamic, especially in industry. Manufactured goods make up only 19% of African countries’ exports to the rest of the world, but 43% of what they sell to each other.

To access larger markets, companies must engage in global exports. As they adapt to global competition, their productivity also improves. Nigeria is gradually reducing its reliance on oil exports.

Rwanda is becoming a hub for conferences, attracting upscale tourists, and thriving business-services firms. Lesotho and Ethiopia are building factories and an Asian-style manufacturing hub. Some economists argue that automation, competition and shifting demand are limiting the prospects for countries seeking to replicate Asia's economic miracle.

Yet not everyone needs a factory job. Many Africans will move from subsistence farms to commercial ones, or from living alongside a game reserve to guiding tourists around one. Since colonial powers carved up Africa, the continent's population numbered fewer than 100 million people, which accounted for approximately one-third of Europe's population at the time.

Today, there are almost two Africans for every European. Some outsiders see this rapid population growth as a potential recipe for disaster. Although the poverty rate is falling, about a third of children are still malnourished.

Every month about one million Africans enter the job market. Many of them do not have the education or skills they need. More than a third of African children do not finish secondary school.

In Mozambique and Madagascar that rate jumps to more than half. Over the longer term, the major trends taking hold—rapid urbanization; increasing migration and remittances; a rising share of children in school; the hundreds of thousands of students at universities abroad—are reasons for hope. These trends provide reasons for optimism.

The most crucial lesson—and one that holds the most promise —is that many of these trends reinforce one another. Countries with more capable bureaucracies and open democratic systems tend to fare better economically and invest more in education. Strengthened economies and improved education, in turn, contribute to decelerating population growth and enhancing dependency ratios.

While not all nations are part of this virtuous cycle, the differences are stark for those that are.