Africa’s Spacial hurdles to Takeoff

In my previous post, I commented on the influence mobile technology is having on economic growth in Africa through its ability to facilitate more formal transactions and tap into traditionally un-accessed capital. Growth in Africa has traditionally been met with pessimism as countries are seen to be plagued by corruption, dysfunctional public sectors, nepotism, poor infrastructure, and problems with capital flight. Jim O’Neill, of Goldman Sachs,  has argued that “Africa could be the next BRIC country by 2050.

A recent analysis, prepared for Swedfund International AB by Peter Stein, came out this spring analyzing economic growth in Africa more broadly. The report, “Can Africa’s Economic Momentum Be A Platform For Takeoff?” looked at the growth rate in sub-Sahara Africa since 2002 and asked the question of whether “strong economic growth in some parts of Africa [could] be a driving force to lift the entire continent?”

Stein found that economic growth in Africa has been averaging 5% annually since 2002 (with the exception of a well weathered slow down of 2.6% in 2008-9). Stein sees the almost decade long period of growth on the continent as positive. He noted that a “dynamic transformation,” accompanying long periods of growth, typically result in higher purchasing power, increased entrepreneurship, and increased attraction of foreign direct investment (FDI).

The report examines Africa’s economic past and present and tries to understand the role of economic growth in poverty reduction.  Stein scrutinizes the continent in terms of its political, economic, environmental, and social diversity. He explains that the most important factor contributing in Africa’s economic growth has been “the surge in global commodity prices over the past decade.”  With a large dependence on commodity exports though, as the source of growth, Stein worries about the problem of a “Dutch Disease“.  This is when a country relies on an abundance of natural resources for economic growth; the export of those resources drives up the value of the countries currency and subsequently reduces competitiveness in the countries other outputs.

Regional agglomerations in Stein’s analysis show specific areas of economic growth.  The East African Community (EAC: Burundi, Kenya, Rwanda, Tanzania, and Uganda), which has had the highest growth rates on the continent since 2005 and is projected to grow at 5.7% in 2010, is a regionally-integrated-community that promotes the free flow of goods, labor, services, and capital.  Stein found that 65% of African GNI comes from ten African countries within these types of regional configurations. South Africa, Egypt, Nigeria, Algeria, Morocco, and Angola also help to make up the top-ten GNI countries in Africa.

This type of regional growth has been explained in terms of spacial-economies.  Jacques-François Thisse explains that “space-econom[ies] may be viewed as the outcome of a trade-off between different types of scale economies in production and the mobility costs of goods, people and information.” The location of economic activities is influenced by the “push and pull” of consumer and producer forces.  Thisse says that if one region has a greater share of capital activities though, then greater “regional disparities arise.”

Stein argues that “Africa has a way to go before it can become a BRIC region or translate its current economic momentum into a continent-wide takeoff.”  It currently only has a 2.4% share of global GDP but is home to 11.4% of the world population; “a lot of people are surviving on less than $1.25 a day”. He further argues that “countries that have made the most progress in cutting poverty have largely done so not by spending public money but by encouraging faster growth.”

FDI and remittance flows play a huge role in helping to reduce poverty and assist.  To this end they help appropriately allocate funds to activities and ventures that can achieve growth.

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