Macroeconomic Developments and Structural Change
This chapter reviews Africa’s economic performance in 2017 and presents forecasts of GDP growth for 2018–19. It analyzes growth outcomes and discusses some of the macroeconomic shocks and vulnerabilities African countries face and how they have affected development financing.
Several key findings and recommendations emerge from the analysis:
– Growth in real output recovered in 2017. Many African economies are better placed to cope with harsh external conditions than they were in the past two decades. Global conditions have eased slightly since mid-2016, improving the outlook for Africa, but countries in the region still face major macroeconomic challenges. Commodity prices have recovered but not to precrisis levels, and demand for traditional and nontraditional exports from Africa remains modest. Although current account positions have improved, they are not sufficiently robust; dollar interest rates are expected to edge up, bidding up the cost of capital; and external debt ratios have begun to rise across the region.
– The infrastructure investment drive in the region, financed largely by external borrowing, needs careful monitoring to ensure that revenue streams (generated in local currencies) are strong enough to meet the debt obligations when they fall due. Fiscal policy should not undercut the growth-promoting effects of the recent surge in public investment and reverse the inroads made in poverty reduction, health, and education across the continent.
– In the short term, macroeconomic policy must blend real exchange rate flexibility and judicious demand management. Real exchange rate depreciations will be important, but given the strengthening of the U.S. dollar, competitive currency depreciations may not necessarily translate into a strong price advantage in export markets. Domestic demand management may have to bear a larger share of the burden in restoring external balance. Ongoing infrastructure projects will need to be completed and maintained, and projects in the pipeline balanced against other needs.
Recurrent expenditures, including the public sector wage bill, should be watched carefully.
– In the medium to long term, the most important area of fiscal policy is tax reform. Domestic revenue mobilization improved substantially in recent decades, but tax-to-GDP ratios are still below the 25 percent threshold deemed sufficient to scale up infrastructure spending. There is an urgent need for better revenue regimes—including progressive elimination of the vast array of exemptions and leakages that pepper tax systems—to capture the gains from growth and rapid structural change that some countries are experiencing.
– None of these fiscal choices is straightforward. Intensely political, all have difficult distributional and welfare consequences. Adopting and implementing a coherent and equitable fiscal policy holds out the best prospects for sustained growth when external conditions improve.
Regional and global shocks in 2016 slowed the pace of growth in Africa, but signs of recovery were already manifest in 2017. Real output growth is estimated to have increased 3.6 percent in 2017, up from 2.2 percent in 2016, and to accelerate to 4.1 percent in 2018 and 2019.
There is significant heterogeneity across African countries. Some are performing remarkably well while others experience tepid growth. Structural transformation and productivity improvements are evident in some non-resource-dependent countries. Expanding this process across the continent is critical to sustain growth, create employment, and accelerate poverty reduction.
The recovery in growth could mark a turning point in net commodity-exporting countries, among which the protracted decline in export prices shrunk export revenues and exacerbated macroeconomic imbalances. Although revenues declined and expenditures rose in these economies, inflation and current account positions for the continent as a whole improved in 2017, thanks to better exchange rate policies. Overall, the recovery in growth has been faster than envisaged, especially among non-resource-intensive economies, underscoring Africa’s resilience.
Structural reforms, sound macroeconomic conditions, and buoyant domestic demand are sustaining the growth momentum in resource-intensive economies. African countries should strengthen this economic dynamism to lift their economies to a new growth equilibrium driven by innovation and productivity rather than by natural resources.
Economic fundamentals and resilience to shocks improved in a number of African countries.
In some, domestic resource mobilization now exceeds that of some Asian and Latin American countries at similar levels of development. But it is still insufficient to meet the high level of financing to scale up infrastructure and human capital.
With external official development assistance per capita sharply lower and an increased appetite for debt to fiancé infrastructure and social sectors, many African governments have turned to international capital markets to meet their financing needs. The result has been a build-up of debt, much of it on commercial terms. Despite the increase, levels for most countries have not yet breached the traditional threshold indicators. Debt levels have actually declined in nine African countries, and they have remained stable in others. Africa needs more development financing. But the build-up of debt should be consistent with countries’ development needs and capacities to service the loans without compromising fundamentals for future growth. Debt must be deployed in productive investments that yield income streams for self-financing and grow the economy, in order to build capacity for increased domestic resource mobilization that helps wean countries from foreign debt and prevents potential debt distress.
The chapter is organized as follows. The next section looks at the performance of African economies. Section 2 discusses external shocks and macroeconomic imbalances. Section 3 examines domestic savings, tax revenues, and debt dynamics. The last section summarizes the chapter’s policy implications.
African Economies have been Resilient to Negative Shocks
After tepid annual growth of 2.2 percent in 2016, average real GDP rebounded, reaching 3.6 percent in 2017. It is projected to grow 4.1 percent a year in 2018 and 2019. No single factor accounts for this improvement.
It reflects better global economic conditions; the recovery in commodity prices (mainly oil and metals); sustained domestic demand, partly met by import substitution; and improvements in agricultural production.
Country-level variation is significant. Indeed, much of the downturn is linked to the recession in Nigeria, where output shrunk 1.5 percent in 2016, a result of low oil prices and policy challenges, including delays in exchange rate adjustments.
The recovery in oil prices bolstered production in 2017. Coupled with strong performance in agriculture, it lifted the economy out of last year’s recession, but growth was still tepid, at 0.8 percent.
Nigeria is set for a rebound, but is projected to be weaker than the average for the continent. Among the continent’s other large economies, South Africa was a drag on growth in 2016 (0.3 percent), while Egypt enjoyed above-average growth (4.3 percent).
Africa as a whole saw growth fall behind the global average in 2016; in 2017 it grew at about the same rate as the global economy. But because population growth is greater than in most other regions, per capita growth was below the world average. In North Africa excluding Libya, it rose by just 1.8 percent in 2017 and is projected to increase by just 2.3 percent and 2.9 percent in 2018 and 2019, respectively. In Sub-Saharan Africa excluding Nigeria, per capita income rose by just 1.1 percent in 2017 and is projected to increase by just 1.5 percent in 2018 and a further 1.8 percent in 2019. In Nigeria per capita income fell 1.7 percent in 2017 but the contraction is projected to reduce to 0.6 percent in 2018 and narrow further to just 0.1 percent the following year.
Global economic growth is estimated to rise from 3.1 percent in 2016 to 3.6 percent in 2017 and 3.7 percent in 2018. 1 This growth may lead to higher commodity prices, which would benefit some African countries.
Africa’s economic performance has been resilient against the background of a difficult external environment in recent years. The continent’s main exports are commodities. Commodity prices
enjoyed a long boom, both before the 2008 crash and for many years after it. That boom has ended.
The prices of many commodities fell to local lows at the start of 2016, and the value of many of Africa’s exports, including oil, gold, and coffee, declined between 2014 and 2016. The prices of oil and metals recovered significantly in 2016 and 2017, if well below the highs of 2010–14. The rise in prices boosts demand for (and in many cases production of) African commodity exports.
GDP and all of its components rose.
GDP in Africa has grown in real terms every year since 2009—despite the hit to export earnings by the decline in commodity prices in 2013–15. Public and private investment grew every year between 2012 and 2016. Private investment slowed in 2015 but recovered in 2016.
The real value of exports fell in 2013–15, recovering slightly in 2016. Weaker export earnings reduced the demand for imports as a share of GDP. Imports grew only 1.5 percent a year between 2012 and 2015, actually falling in some years.
Consumption growth was strong, especially in 2013 and 2015. It grew faster than imports, leading to import substitution—a healthy adjustment to weaker export earnings and a major reason why GDP did not fall between 2013 and 2015. Structural change has been slow Structural transformation involves large, permanent changes in the structure of production. This process may take decades.
There is little evidence of structural change for the continent as a whole (although the aggregate data may conceal structural change in individual countries). The sectoral make-up of GDP remained roughly constant between 2000 and 2016. The share of extractives in GDP increased between 2000 and 2008, declining in 2009 and then again in 2012–15. But most of this movement reflected changes in international demand and international prices rather than structural shifts. Excluding extractives reveals just how little structural transformation occurred over this period for the continent as a whole.
Agriculture represented 18.9 percent of nonextractive output in 2000 and 19.2 percent in 2016. In 16 years, services took away just 2 percentage points from manufacturing. There was a marked decline in the share of extractives between 2012 and 2016. But it represented medium-term adjustments to commodity prices rather than a structural shift. Nigeria’s downward adjustment in the share of extractives was stronger than in other African economies. Between 2012 and 2016, the share of extractives fell from 16 percent to 6 percent of output, with manufacturing and services increasing their shares.
Labor has not moved from low- to high-productivity sectors: For the region as a whole, the distribution of labor across productive sectors has been even less dynamic than changes in output shares. This pattern is much more static in Africa than in other regions. In Asia and Latin America, labor shifted from agriculture to services between 1990 and 2005. In Europe and North America, the shift was from industry to services. In Africa as a whole, there was very little movement, although this aggregate picture conceals structural change in some countries.
After a persistent decline throughout the 1990s, labor productivity increased at the dawn of the millennium. Labor productivity can arise from within-sector gains and from shifts of workers from less productive to more productive sectors.
In 2000–13, labor productivity grew 2.2 percent a year. Within-sector growth accounted for about 73 percent of the increase, indicating that at the continental level very little labor reallocation took place.
Some structural change did take place in some countries. In Senegal, for example, all of the growth in labor productivity reflected structural changes. But in many other countries, the increase in labor productivity largely reflected within-sector productivity growth. Increasing labor productivity through a shift of workers from low to high-productivity sectors is vital to long-term growth.
Côte d’Ivoire experienced moderate structural change—but within-sector gains dwarfed between-sector shifts. Between 2000 and 2016,
about 3.5 percent of workers moved from agriculture to services. Because average productivity in services was 3.2 times the level in agriculture, even this small shift generated significant between-sector productivity gains. Output per worker in agriculture and services rose 50 percent over the period. In industry, which employed just 5.2 percent of the workforce but accounted for 23.4 percent of output in 2000, productivity gains were even faster. As a result, by 2016 it contributed 31.7 percent of GDP.