Back to Index

How Euphoria Turned into Tragedy
Hippolyte Fofack, African Business
June 2007

In the final part of his three-part series on the history of Africa's economy from the ending of the slave-trade to the present day, Dr. Hippolyte Fofack retraces the steps that turned initial euphoria in the 1960s into an economic tragedy by the late 1990s.

Although the slave trade was abolished two centuries ago, it took most African nations more than 150 years to assume full responsibility of the management of their economic affairs because of the subsequent rise of colonialism. The following assessment of African economic achievements focuses on a truncated series restricted to the post-independence era, the period following the glorious 1960s when most countries became independent.

Prior to independence, African economies assumed peripheral roles and were locked in a gravitational model whereby production processes were primarily dictated by demands from the gravity centre, with primary commodities and natural resources driving output growth and exports.

Though the persistent macroeconomic disequilibria of the structural adjustment era might have overshadowed initial positive developments of the post-independence aftermath, the 1960s remain the most vibrant era in the process of Africa-s development.

Carried by a post-independence exuberance, African governments undertook massive investments in support of economic growth. Aggregate investments reached record highs, exceeding 25% of GDP in the early 1970s.

As a result of these impressive rates of capital accumulation, most countries enjoyed virtuous cycles of growth and employment creation. Growth rates averaged 5% over the period. Despite massive brain drain reversals, demand for labour remained strong, as rural-to-urban migrations were used to compensate for the labour supply shortfalls in urban areas.

However, under the prevailing gravitational model, economies inherited from the colonial era are grossly undiversified and therefore highly vulnerable to negative shocks.

The first wave of these negative shocks occurred in the early 1970s, when primary commodity prices - the main sources of government revenues and foreign reserves - fell by 50% below their 1960s levels thus undermining the sustainability of investments.

The disconnect between culture and economic development - whereby production processes are not embedded in local cultures - further magnified the costs of these negative shocks, particularly as emerging African economies largely relied on imports for the majority of capital goods and advanced technology.

The sustainability of post-independence investment booms was further compromised by the proliferation of 'agency- problems as officials used their authority to advance their own interests at the expense of the people they should have been representing.

This new culture of poor governance imposed tremendous costs on African economies. While the emphasis has primarily been placed on capital flight - which crowded out the limited resources that could have been used to spur growth and mitigate recurrent balance of payments crises - one of the most insidious ramifications of this phenomenon is the declining level of public trust and waning social capital.

However, this new culture of 'personal agency rents- is at odds with the immediate post-independence era when transparency and accountability were the leitmotif of relatively young African governments. Then leaders were primarily concerned with the integration of their respective countries into the world economy as respectable and sovereign nations.

Abysmal economic outcomes

The absence of strong institutions with checks and balances enabled 'agency- to continuously draw personal rents for decades. This led to the elimination of the immediate post-independence patriotic spirit and ultimately undermined initial attempts to establish respectable and sovereign African states. Within a few decades of independence, African countries topped the hit-parade of aid-dependency and capital flight. It is estimated that over 40% of Africa-s private wealth is held outside the continent; yet, Africa is the most capital-poor region of the world.

The conjunction of negative shocks and sustained capital outflows transformed what could have been a small bump on a transitory long-run growth path into a protracted recession, resulting in abysmal economic outcomes. Indicators of these economic outcomes include a long cycle depreciation of the capital stock, the debt-poverty trap and falling aggregate GDP per capita.

In fact, after a positive start at independence, the ratio of gross domestic investment to GDP fell dramatically in most countries, averaging less than 10% of GDP in the mid-1990s.

Similarly, the rising trend of GDP per capita, which reached the peak of $590 (in constant 2000 US$ terms) in the mid-1970s, embraced a long, sliding path in a dismal growth reversal, falling below the 1970 level in 1995.

At the same time, sustained per capita income growth was recorded in other regions, including in North Africa where it exceeded the threshold of $3,500 in 2005.

Such instances of appalling economic outcomes are pervasive across the region. Except in a few cases, high growth volatility is the norm, with spasms of negative growth rates largely exceeding positive ones.

The annual average economic growth rate between 1975 and 1995 is estimated at -1%. When the subset of high performing countries (Botswana, Mauritius, South Africa and Seychelles, which grew to achieve middle-income country status) is excluded from the sample, this estimated growth rate is even lower at -1.72%.

However, breaking with these protracted recessions, a number of countries resumed positive growth in the second half of the 1990s. This resumption of growth largely reflects improved macroeconomic stability following the implementation of stabilisation programmes in the 1980s onward.

To a certain extent, these programs were successful - not least because they brought inflation under control and almost eliminated the existence of dual exchange rate regimes pervasive across the region. However, the bottom line is disappointing, notwithstanding these stabilisation programmes. Income levels remain extremely low, partly owing to the stunted nature of recent growth episodes and excess growth volatility.

Africa-s biggest paradox

The magnitude and rising scale of poverty in a resource-rich continent is certainly the biggest paradox and disappointment of the post-independence era. A number of scholars have called
these abysmal outcomes the 'Africa-s Growth Tragedy,- particularly referring to unfulfilled potential and disastrous consequences. The failure to meet expectations and fulfil potential has come with tremendous costs. The growing number of Africans risking their lives as aspiring international migrants, attempting to escape poverty in search of employment and welfare opportunities elsewhere, has heightened the magnitude of this economic tragedy in recent years. It is also to be found in the declining life expectancy and persistently widespread poverty.

At a time of general improvement in living standards in the rest of the world, Africa-s poverty rates increased dramatically and are among the highest in the world. The contribution of the region to global poverty reached the critical threshold of 30% in the late 1990s ; and it is expected that by 2015 more than 87% of Africans will live on less than $2 a day. Poverty is further aggravated by structurally high unemployment rates. Even South Africa, which has been the prime destination of continental migration over the last decade, has one of the highest unemployment rates - especially among blacks - at 45%.

In the absence of job creation in the formal economy, informal sector employment has become the norm in the region, accounting for over 72% of non-agricultural employment.

The rising trend of poverty in Africa, in the face of a rapid decline in other regions of the developing world, suggest that Africa may alone miss the first UN Millennium Development Goals. This would be a serious embarrassment for the international community who, over the past few years, has been drumming up support to halve poverty by 2015! Other indicators of abysmal economic outcomes include falling exports and increasing dependency on external financing. Since the mid-1970s, the contribution of the region to global trade has declined consistently and is the lowest in the world. The declining rate of exports in the region contrasts with the global surge in trade which saw aggregate export revenues growing to $12 trillion in 2005. It also corroborates the sliding economic position of Africa in the post-independence era of globalisation.

Possible explanations

While globalisation, which has contributed to an exports boom, might also have accelerated global income inequality, as implied by the famous quote of Professor Edmund Phelps, the 2006 Nobel Laureate in Economics, "We must act to share the gains with globalisation-s losers."

Though empirical analysis corroborates the rising trend of global income inequality, it does not particularly point to an excessively skewed distribution of income within Africa. In fact, Latin American countries have continued to exhibit substantially higher Gini (the Gini co-efficient is a measure of inequality of income distribution) coefficients. Moreover, income inequality can be high both in developed and developing countries.

Over the years, the classic explanation of Africa-s growth tragedy has been the deterioration of terms of trade and growth volatility. More recently another strand of literature has emphasised the recurrence of conflicts; wars entail huge fiscal and human costs, and sustained political risks increase uncertainty about the macroeconomic environment and place a high premium on investment decisions.

Nevertheless, abysmal economic outcomes are also prevalent in numerous countries which enjoyed relative political stability in the region. Moreover, terms of trade deterioration and growth volatility may be the consequences, rather than the causes, of the growth tragedy.

World economies are all subject to the constraints of wild price gyrations and unfavourable terms of trade following positive shocks. Nonetheless, the cost of negative shocks tend to be significant for undiversified economies which cannot draw on the simultaneity of asymmetric shocks to weather the costs of unpredictable negatives ones.

In this context, a more plausible explanation of the dismal economic outcome confronting the region may be found in the deficit of economic diversification and inability to expand industrial output and manufacturing production.

This is especially important because the patterns of global trade changed drastically with the intensification of globalisation. Traditional primary agricultural commodities, declined in value steadily, and increasingly account for a smaller share of global trade. According to the latest statistics, manufactured goods account for over 80% of merchandise exports from developing countries.

In the absence of economic diversification, African countries heavily relied on imports for most essential consumables and manufactured goods. However, this alternative choice exacerbated external disequilibria, leading most countries to embrace the costly path of external indebtedness to finance galloping balance of payments deficits. And as the balance of payments deficit widened, external debt grew even more to reach unsustainable levels in the late 1990s.

While the financing of growing balance of payments deficits might have fuelled the debt cycle, it is believed that failed development strategies and Cold War-driven geopolitical loans also played a part.

Under the new binomial classification taking into account the emergence of the debt-poverty trap, the poor nations of Africa became the 'Highly Indebted Poor Countries,- a label that is probably more demeaning as it emphasises welfare under the developed-developing countries dichotomy.

Thus, even by developing country standards, Africa grew poorer in the post-independence era. And its continued excessive reliance on imports is a source of concern for the persistence of widespread poverty. Indeed as President Nkrumah put it, "We have become poor because we are not producing what we consume."

Positive Outlook

Africa-s dismal economic record was neither expected nor predicted. In the 1970s, Gunnar Myrdal, the 1974 Nobel Laureate in Economics, predicted: "Africa-s growth and development prospects will exceed those of the overpopulated Asia." This positive outlook reflected the tremendous potential of the region: abundant arable lands and also endowed with natural resources. With growing international demand for oil, Africa could have become the 'golden angel- carrying the only light in a dark cavern.

Over the past decades, this potential has been further enhanced by an increasingly healthier world economy starving for natural resources to sustain output expansion.

Please credit www.kubatana.net if you make use of material from this website. This work is licensed under a Creative Commons License unless stated otherwise.

TOP