The countries of Sub-Saharan Africa present a diversified landscape of economic growth, according to the new Africa’s Pulse, the World Bank’s twice-yearly analysis of economic trends and data for the region.

After slowing to 3 percent in 2015, economic growth in Sub-Saharan Africa is expected to fall further to 1.6 percent in 2016, the lowest level in over two decades. The sharp decline in aggregate growth reflects challenging economic conditions in the region’s largest economies and commodity exporters. Many of these countries continue to face headwinds from low commodity prices, tight financial conditions, and domestic policy uncertainties. Economic activity has been notably weak across oil exporters. At the same time, economic growth in about a quarter of the region’s countries is showing signs of resilience.

Growth is far from homogeneous, suggesting that countries are growing at divergent speeds. While many countries are registering a sharp slippage in economic growth, some others – Ethiopia, Rwanda, and Tanzania – have continued to post annual average growth rates of over 6 percent. Several countries – including Côte d’Ivoire and Senegal – have become top performers.

A deeper analysis of economic growth patterns in the region shows that countries’ economies have performed differently in the years before and after the global financial crisis of 2008. Some countries, those categorized as “established”, have sustained strong performance in both periods. Several other countries are seeing strong performance in recent years, and are categorized as “improved”. Overall, these resilient groups of countries show more diversified export structures and have made more progress on structural reforms, business regulation, rule of law, and government effectiveness.

The weak aggregate economic performance is mainly a reflection of deteriorating economic performance in the continent’s largest economies: Nigeria and South Africa, which together account for half the region’s output. In Nigeria, GDP contracted during the first two quarters of the year due to low oil revenues and a fall in manufacturing, among other things. In South Africa, the economy contracted slightly in the first quarter, before rebounding in the second quarter, thanks to an increase in mining and manufacturing output.

Generally, oil exporters in Sub-Saharan Africa continue to experience slippages in economic growth due to shocks from the collapse of commodity prices. This underlines once more the limited diversification of their economies.

“Our analysis shows that the more resilient growth performers tend to have stronger macroeconomic policy frameworks, better business regulatory environment, more diverse structure of exports, and more effective institutions,” says Albert Zeufack, World Bank Chief Economist for Africa.

Despite a recent pickup, commodity prices are expected to remain largely below their 2011-14 peaks, reflecting the weak global recovery. Faced with growing financing needs, commodity exporters have begun to adjust, but efforts have been uneven and remain insufficient. Against this backdrop, a modest recovery is expected with real GDP in Sub-Saharan Africa forecasted to grow 2.9 percent in 2017, then rising moderately to 3.6 percent in 2018.

“Adjustment to low commodities has been limited in several commodity exporters, even as vulnerabilities have mounted,” says Punam Chuhan-Pole, World Bank Lead Economist for Africa and the report’s author. “Adjustment efforts should include measures to strengthen domestic resource mobilization, so as to reduce overdependence on resource-based revenues.”

Outlook

With the external environment expected to remain difficult, deeper adjustment would be needed in some countries to contain fiscal and current account deficits and rebuild policy buffers. The Pulse further argues that along with adjustments to macroeconomic policies, countries will need to accelerate structural reforms to bolster medium-term growth prospects.

Against this backdrop, a modest rebound is forecast for Sub-Saharan Africa in 2017. Economic activity is expected to rise to 2.9 percent. Africa’s Pulse notes that the region’s economic performance in 2017 will continue to be marked by variation across countries. While the larger economies and other commodity exporters are expected to see a modest increase in GDP growth as commodity prices continue to stabilize, economic activity is expected to keep expanding at a robust pace elsewhere in the region, supported in part by infrastructure investments.

Looking ahead, increasing agricultural productivity on the continent is central to transforming Sub-Saharan Africa. Analysis shows that addressing the quality of spending and the efficiency of resource use is even more critical than addressing the level of agriculture spending. Rebalancing the composition of public agricultural spending could reap massive payoffs.

Enhanced agricultural productivity for poverty reduction

The decline in oil and commodity prices has hurt resource-rich countries and signals an urgent need for economic diversification in the region, including through improvements in agriculture. Agricultural productivity growth in Africa has lagged that in other regions. While production increases elsewhere were driven by better use of inputs and improvements in production technologies, in Africa they resulted mainly from expanding the area under cultivation.

Public agricultural spending in Africa has also lagged other developing regions yet agriculture accounts for a third of region-wide GDP and employs two-thirds of the labor force, with the poorest countries most heavily reliant on it. Investments and smart policy choices are needed to foster growth in the rural economy, accelerate poverty reduction, and foster inclusive growth. Improving agricultural productivity is key to fostering structural transformation and managing the urban transition, by increasing incomes and enabling more people to move out of agriculture.

“Improving the productivity of smallholder farms is central to lifting rural incomes and reducing poverty in Sub-Saharan Africa,” says Chuhan-Pole. “But unleashing this productivity requires investing in rural public goods such as rural infrastructure, agricultural research, and use of improved technologies, as well as in availability of good data and evidence.”

As African regional markets develop rapidly – to reach an expected trillion dollars by 2030 – the potential is enormous for increasing agricultural production and productivity. The Pulse finds that Sub-Saharan African countries underfund high-return investments, and that increasing the efficiency of current public spending in agriculture while rebalancing its composition could reap massive benefits.

In order to move forward, Africa’s Pulse recommends that countries take urgent steps to adjust to low commodity prices, address economic vulnerabilities, and develop new sources of sustainable, inclusive growth. By boosting agricultural productivity, countries will not only raise the incomes of farm households, but will also lower food costs and promote development of agro-industry.

The Report’s Key Messages

• After slowing to 3% in 2015, economic growth in Sub-Saharan Africa is projected to fall to 1.6% in 2016, the lowest level in over two decades.

• The sharp decline in aggregate growth reflects the challenging economic conditions in the region’s largest economies and commodity exporters as they continue to face headwinds from low commodity prices, tight financing conditions, and domestic policy uncertainties.

• At the same time, in about a quarter of countries, economic growth is showing signs of resilience. Some countries – Ethiopia, Rwanda, and Tanzania – have continued to post annual average growth rates of over 6%, exceeding the top tercile of the regional distribution; and several other countries – including Côte d’Ivoire and Senegal – have moved into the top tercile of performers.

• Risks to the outlook remain tilted to the downside. On the external front, old risks remain salient and include slower improvements in commodity prices, tighter global financial conditions, and security concerns.

• Post-global financial crisis performance in the region as a whole has not been as stellar as it was pre-crisis. However, there are some diverging growth experiences across countries.

• Increasing agricultural productivity is central to transforming Sub-Saharan African economies. Addressing the quality of public spending and the efficiency of resource use is even more critical than addressing the level of spending.

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Drivers of growth: Moving beyond luck to policy

The previous section showed that the higher growth rate of established and improved performers has been supported by better macroeconomic policy frameworks – although these countries appear to have greater space on the monetary rather than the fiscal front. However, it is warranted to ask whether having sound macroeconomic policy frameworks guarantees sustained growth. Do good macroeconomic policies influence the sustainability of growth among countries in Sub-Saharan Africa?

A strand of the literature has questioned the role of macroeconomic policies as a force influencing growth over the long term. In this context, Fatas and Mihov (2013) summarize the main three pitfalls: (a) macroeconomic policy variables become insignificant when a large number of long-term growth determinants are included in the analysis; (b) the degree of persistence of macroeconomic policies is unambiguously higher than that of growth rates over time; and (c) the positive co-movement between good macroeconomic policies and growth is attributed to the fact that both are the outcome of robust institutions; hence, this relationship dissipates once we control for the quality of institutions.

This section looks beyond (exogenous) external factors affecting growth across countries in Sub-Saharan Africa, to domestic factors – and, notably, domestic policies – that help sustain growth over the long term. The section examines the role of policy-driven, long-term growth fundamentals in the economic performance of established, improved, slipping, and falling behind countries. These policy-driven, longterm growth drivers are classified into four groups:

1. Structural policies. This focuses on the degree to which the legal, regulatory, and policy environment fosters private sector development by creating jobs, boosting investment, and unleashing productivity. Specifically, it looks at the business regulatory environment, depth of the financial sector, and trade diversification.

2. Governance. This comprises policies to boost the effectiveness of the legal system and rule-based governance structure to enforce property rights and ensure the quality of the public administration in policy implementation and regulatory management. It also includes the extent to which the executive, legislators, and other high-level officials are held accountable for their use of public resources, administrative decisions, and obtained outcomes.

3. Infrastructure. This evaluates the quality of and access to the different infrastructure sectors (rail network, air transport, and access to water, among others). In addition to the indicator of overall quality of infrastructure, this group focuses on the quality of the road network, and the quality and reliability of electricity supply.

4. Rural sector. This focuses on public policies for the development of the agriculture and rural sectors, securing access to land and equitable user-rights over water resources for agriculture among the rural poor, and policies supporting the development of private rural businesses and commercially-based agricultural and rural finance markets.

In sum, this section aims at examining whether government policies provided an enabling environment for the private sector to develop and boost growth.

Structural policies

To assess the evolution of structural policies among established, improved, slipping, and falling behind countries, this section focuses on three dimensions: (a) the quality of the regulatory framework, (b) the depth of domestic banks, and (c) the diversification of exports. This categorization may also involve policies that boost human capital accumulation, open trade, and capital accounts, among others.

Quality of the regulatory framework

Private sector development can influence long-term growth to the extent that governments are capable of implementing policies and regulations that foster the contestability of output and factor markets. The quality of the regulatory framework across countries in Sub-Saharan Africa is proxied by two indicators: (a) the CPIA score on business regulatory environment, and (b) the index of regulatory quality from the World Bank’s World Governance Indicators (WGI).

On the quality of the business regulatory environment of the four groups of performers, the evolution of the CPIA scores over 2005-15 shows that: (a) the established and improved performers have the highest level of business regulatory environment, and (b) the gap between established and slipping performers has increased since 2009, given that the quality of regulation has declined in the latter group.

Among the established performers, Rwanda is the only country in the group with notable improvement in this area. For improved performers, this is the case of the Democratic Republic of Congo – although coming from low levels.

The WGI index of regulatory quality shows two opposite trends since 2007: (a) an increase in the quality of regulations among established and improved performers, although the former group at a faster pace, and (b) a decline in regulatory quality among slipping countries. By the end of the period, established and improved performers exhibited the highest quality of regulations (namely, those governing market contestability). The average of established and improved groups of economies in Sub-Saharan Africa is still below the average of developing countries (excluding Sub-Saharan Africa).

The biggest reformer, among established performers, is Rwanda, whose WGI index of regulatory quality is higher than that of other developing countries. Cote d’Ivoire and Senegal experienced some increase in regulatory quality among improved countries. However, the group of improved performers shows greater cross-country variability in regulatory quality than the established performers.

Export diversification

A strand of the literature shows that trade openness is conducive to long-term growth under certain circumstances. However, greater trade integration can lead to greater volatility, as countries become more exposed to external shocks – and this is the case of commodity-exporting nations or countries with concentrated structures of production. Haddad et al. (2013) find that product diversification – rather than market diversification – protects an economy against the deleterious impact of idiosyncratic global shocks on volatility.

Figure 2.8 depicts the inverse of the Theil index using disaggregated exports at the four-digit level following the Harmonized System, rev. 2. These scores were standardized into a 0-100 scale, with greater scores implying more diversified export structures. The first feature that emerges from the figure is the low degree of diversification among groups in Sub-Saharan Africa – notably, slipping and falling behind performers. Second, improved performers have the most diverse export structure among the four country groups, with an index that is about 50 percent greater than that of established countries. Third, Tanzania and Senegal are the best performers in export diversification among established and improved countries, respectively.