Rodrik’s Triple Trap and Growth Prospects in Africa

Many factors lead people to write about heterodox economics in development. This has obviously been greatly informed by the Eurozone debt crisis and political fiasco of the past 4 years where the good old criticism of ‘the system, man’ has gone beyond simply blaming the excesses and transgressions of the financial sector and the superwealthy, to reach at issues of basic wealth distribution and equality and discrimination in society.

The attraction of the schools of thought which reject neoclassical economic models of growth and convergence to me is that they come with concrete policy tools and prescriptions, which are drawn in many cases not from an ideological contre-posture to the Washington Consensus or the like, but tied to concrete cases of economic success. The policies that East Asian countries like Korea, Japan and Taiwan used to develop since the 1950s have been used to highlight and guide policy advice for current developing countries. In short, my appreciation for heterodox development economics has been rooted in the suggestion that it can actually achieve economic development.

So when my favorite thinker in this line, Harvard’s Dani Rodrick, starts getting pessimistic, I get worried. Rodrick has given talks and put out papers in the past year or so looking at the shifts in labor among different sectors of an economy, the productivity of those sectors, and the rate of growth of the countries. The diagnosis, apparently, is bleak.

Developing economies, Rodrik argues, are facing a triple trap of economic structural change. Convergence in productivity certain sectors of manufacturing has slowed down compared to previous decades, meaning that transitioning an agrarian labor force to manufacturing will be less effective than before at increasing productivity. However, the service sector has its own pitfalls (a leitmotif of many development economists), mainly in the high barrier to entry that it has, presented by the higher skills needed to enter this labor market and the lower number of workers that it can absorb. And the third trap is that of primary-resource-led development. The argument here is also a classic- agriculture and mining are too dependent on demand + investment in commodities, or they are simply not sustainable. Besides which, the more high productivity sectors such as mining are invariable much less labor-intensive. Much of African growth over the past decade (stellar by the way) has been led by high primary commodity prices.

The outlook is somewhat grim. African countries’s real issue according to Rodrik seems to be a mix of their high urban informal sectors, which are apparently very unproductive, and the can’t go here, can’t go there conundrum.

I wonder though. Countries like China and Korea achieved high growth in part because they first saw huge increases in factor accumulation- they brought more labor into their manufacturing sectors, and they bought and used more machines- before productivity went up much (this is Krugman’s famous ‘perspiration not inspiration‘ argument (pdf) regarding East Asia’s development). African countries haven’t seen this sort of shift (at least not into the formal sector manufacturing jobs), so it is perhaps too early to say that manufacturing cannot lead to very solid growth. We simply haven’t seen much sustained manufacturing growth- not even in inputs, forget productivity- in African countries to be able to tell what factors would push it forward. The optimists on Africa will not stop talking about the rise of an African consumer. Imagine a growing manufacturing industry which benefits from rising costs of production in China on one hand and rising demand on the continent on the other.

To achieve this, it’s clear that the large informal urban economy (think Nairobi) would have to be addressed by policymakers. Finding way to drive labor into the most productive sectors of the economy (Rodrik’s opinion on the best way forward)? This isn’t the fight-the-comparative-advantage Rodrik I know. Imagine if you raise the productivity of these informal urban micro-firms and production centres, just a little, and the effect that might have. Imagine subsidy programmes which encourage larger scale production, social protection which drives people to larger firms, and skills and business education which makes individuals more productive.Let’s see if Dani Rodrik can start proning more solutions as well.

While I am by no means an optimist of the “Africa Rising’ type, the continent has not yet had its final word.

Advertisements

The Problem with Global Income Categories

With so many countries experiencing rapid rates of growth, with so much income disparity and with so many countries whose particular demographic/economic situations are of a complexity which belies the simplicity of mere income-based rankings, how come the World Bank’s famous global income categories, measured in Gross National Income per capita are still used with such authority?

Several possible reasons stand out: 1-because GNI per capita and global income categories are widely understood and used categories, useful for communicating and coordinating with a multitude of international actors; 2-because these categories can be indicative of countries’ capacities to produce goods and services; 3-because many developing countries have embraced the terminology derived from these categories, with attaining the middle income category being seen as a significant achievement.

The Middle Income Angle
Much of the debate within international financial institutions, development agencies and global fora is focused on identifying the position and role of middle income countries in global development assistance architecture. Key considerations include whether to continue to allocate resources to middle income countries, whether or not to prioritize certain middle income countries in global aid and lending strategies, identifying the role of middle income countries as emerging donors and sources of development experience and expertise, as well as specifying the type of engagement that the international development world needs to take in middle income countries.

The conventional view espoused by the main development and lending organizations as well as some OECD donor countries is that rapidly narrowing poverty gaps and growing GDP in middle income countries, along with increased capacity to formulate and actuate viable development solutions means that a higher priority should be given to lower income countries in development assistance, and at the least that support to MICs should not come at the expense of support to other categories of countries, such as LDCs.

Middle income countries have better access than their lower income counterparts to funds through their tax bases or their ability to enter sovereign bond markets, mobilize more competent bureaucracies and provide additional support for expanded social safety nets, and therefore less in need of development assistance.

The critique to the conventional view suggests that while specific country needs and responses by the international community may change with a ‘graduation’ to middle income status, this does not necessarily mean that serious problems do not exist within MICs, or that less priority should be placed on all middle income countries.

Recent studies have noted that with 74 per cent of the world’s poor (living on under 1.25$ per day) now living in middle income countries, the only way to make significant gains in the struggle against global poverty is for international development cooperation to give special attention to poor people, not just poor countries.

livingthemiddleincomedream

Living the middle income dream at $ 2.25 a day

Moreover the growth in GNI that can push countries across the imaginary line to another income category is not necessarily a reflection of commensurate increases in the wellbeing of all of their population. Many countries have persisting inequality and ‘pockets of poverty’, often in underserved regions or among marginalized populations, which national governments are often unable or unwilling to address. In short GNI growth by itself is misleading, and efforts must be made to better represent the relative quality of growth in global-level discussions.

While the conventional view generally acknowledges a broad diversity in countries which cuts across income categories, it still makes reference to and accepts these categories as approximate indications of the overall wellbeing of a country. However the link between income and other areas of development is not always very clear, and discussions on a variety of development-related topics, including food security, run the risk of becoming misleading if they take their cue from income categorizations.

Dissonance in Development Discourse: ‘Africa Rising’

I recently wrote my frustration with the conception of risk and vulnerability in the African continent as dealt with by a Davos World Economic Forum debate. There is a similar line in the ‘Africa Rising ’ discourse, which as the Davos debate, centered almost exclusively on growth, investment and interest in the continent’s economic future. What is missing from these conversations is a serious consideration of how growth is benefiting the citizens of each country, and how international development efforts and international capital should approach this evolution.

Part of the problem is a dissonance between aid/development actors and business and investment actors when it comes to developing economies on the continent. The discourse of shared growth, welfare, investment in local economies and the like are pillars of the broader aid/development discourse, and are put into practice through different programs and policy advising.

The business and investment end does not have the same angle of attack. To be sure there are differences between foreign direct investment and financial speculation, bank driven investment and the like. The nature of the investment and the timeframe considered for the investment are such that in the latter case, there is a smaller incentive to care about second-degree causes of success, such as a country’s education level. There is a tendency across the board to look at indicators such as the World Bank’s Ease of Doing Business, ‘hard’ infrastructure such as roads, electricity, internet, but also the ‘soft’ infrastructure indicators that are laws, regulations, corruption indices and the like.

This is why debates like Davos can come up, and this is why McKinsey and Co. keeps coming out with reports (relevant and useful though they may be) on how Africa’s rise is being driven by privatization, low inflation rates and other ‘strong fundamentals’. So, that the question of ‘whose benefit’ has not been featured as prominently as it should be in a certain (nebulous) sector’s articulation of ‘Africa Rising’ is certainly one glaring obstacle.

Nairobi Marketplace

Nairobi Marketplace

African Consumption

There is another very interesting line, running parallel to the previous one, but with a more African-centered focus: it’s the way in which Africa’s rise is equated with the rise of an African middle class and of an African consumer. (This is a real leit motif of whoever is in charge of African markets research over at McKinsey, because they are all over this one- and here, and here). The actual numbers are very interesting. Consumer product industries slated to grow by 400 billion dollars by 2020. Private consumption on the continent rose by 568 billion dollars from 2000 to 2010. All very exciting stuff.

It’s exciting because an African consumer of enough significance could really change the way foreign capital looks at African countries, in addition to deepening markets for African businesses. In pointing this out, these reports, op-eds and books play an important role in getting the message out- that is, we are long past the days when ‘development’ in African countries meant simple aid money. Okay, all well and good.

Upon Further Inspection…

But this discourse and these studies are still very detached from that of shared growth and social welfare. The business community, the investors who have African countries, companies, and projects in their portfolios aren’t as eager to talk social protection, insurance and welfare.

And yet there is a real need to do so. Not simply because there is a large vulnerable population on the continent, but because sometimes the very growth that is touted in all these statistics comes at the expense of the more vulnerable population. So yes, there is a rising African consumer. But when you look closer, you learn that 81% of African private consumption is concentrated in 10 countries- only 5 of which are in sub-Saharan Africa (and they are all pretty much the usual suspects). One more step and you learn that a vast majority of labor on the continent is informalized. Another step and you see that while Diaspora communities returning ‘home’ can bring some economic advantages, it also perpetuates existing social inequalities.

You can be satisfied with the quotation here below for only so long…

In the 1990s African economies embraced the World Bank and the International Monetary Fund’s (IMF) structural adjustment programmes, which advocated free market policies.“The introduction of liberalisation, which focused on private sector-led growth, is key to the growing middle class on the continent,” said Bategeka. “Countries introduced sound economic policies which controlled inflation, benefiting investments in their economies.” Source

…before you remember what structural adjustment also did to the African state’s ability to protect the most vulnerable in the 1980s and 1990s.

In the end…

There is nothing wrong with growth. But when you keep listening to Davos and to McKinsey and the others, it is easy to forget that growth and wealth in and of itself is not the end goal. Equatorial Guinea is classified by the World Bank as a High-Income country since 2007, even while 77% of the population lives on less than 2 dollars a day.

How can more of the population be involved in and see benefits from growth? How can growth serve to protect the most vulnerable from the risks of a globalizing domestic economy, from environmental changes, from health concerns? These are all questions of importance to the continent, and yes, to its overseas investors as well. This is the type of debate I would like to see grace center stage at forums like Davos.

Chris Blattman

International development, economics, politics, and policy

The GOVERNANCE blog

Governance: An international journal of policy, administration and institutions

Unused Entity

เซื่อในสิ่งที่เฮ็ด เฮ็ดในสิ่งที่เซื่อ

The Charnel-House

From Bauhaus to Beinhaus

Konakry Express

L'Histoire est patiente, la Vérité têtue!

AfricLaw

Advancing the rule and role of law in Africa

Thirdeyemom

A Travel Blog - Traveling the World and Doing Good

AID LEAP

A motley group of international aid bloggers, practitioners, and critics. Interested in impact, poverty, evidence, and throwing things off planes.

choforche

A site on limited government, development and free markets

The5thWorld

Exploring Unbeaten Paths of Culture

Joe Studwell's blog

On the theme of development in East Asia, Britain, Italy, and the United States

The More Things Change

Translating French foreign policy ... and other musings

Monitoring & Evaluation & Learning

Weitzenegger's Knowledge Network

Sustainability in Crisis

Faith in sustainability

Bedside Readings

Humorous, thought provoking, brain teasing, factual and developmental

Lesley on Africa

African politics, security, and occasional travel tales

Africa is a Country

a site of media criticism, analysis and new writing

Bridges from Bamako

life in a budding West African metropolis