Thursday, June 12, 2008

Growth Acceleration and Deceleration in Africa

This one is from an article titled “Good and Bad Times: Volatility and Growth in Africa” by Jorge Saba Arbache and John Page. They look at long term growth episodes and reach interesting conclusions (well, at least to me!). See WIDER Angle newsletter 2008 for the article.

We find evidence that economic, social, governance, and institutional variables are significantly different during acceleration and deceleration episodes. The major changes in national accounts during growth episodes take place in investments and savings, rather than in consumption. Savings and investments are higher during accelerations as compared with normal times and substantially lower during deceleration episodes. Foreign direct investment during accelerations is six-times the figure for deceleration episodes. Trade is substantially lower during decelerations.

Surprisingly, the authors find that growth accelerations do not produce a significant improvement in education and health outcomes. Meanwhile, deceleration has a significant impact on these two development indicators. This means that preventing African states from failing is important. Nations with growth accelerations should devise other techniques to improve the development indicators as acceleration itself do not improve them substantially. For instance, Botswana is growing at an average of 7% but HIV/AIDS transmission and infection rate is pretty high.

We also find an important asymmetry between how growth accelerations and decelerations affect human development outcomes. While growth accelerations result in relatively small improvements in human development, decelerations have important negative impacts on education and health outcomes. Under 5 mortality and infant mortality, for example, are substantially higher during growth decelerations than in normal times, but they do not improve during growth accelerations. These results suggest that preventing growth collapses is essential should Africa want to attain the Millennium Development Goals.

The authors argue that it is easier to predict deceleration than acceleration by looking at key indicators, chiefly low savings and investment rates.

Countries that have low savings and investment have greater probability of a deceleration. Poor macroeconomic management appears to be an important factor in precipitating bad times. Decelerations are accompanied by high inflation and significant exchange rate misalignment; and countries that trade less are more exposed to growth decelerations. Governance indicators deteriorate during bad times. Avoiding conflict appears to be a major part of avoiding growth decelerations.