tralac’s Daily News Selection

tralac’s Daily News Selection
Photo credit: Dominic Chavez | IFC

30 Jan 2020

African Economic Outlook 2020: Developing Africa’s workforce for the future (AfDB)

Decomposing Africa’s GDP growth shows that the shift from consumption toward investment and net exports observed in previous years has continued and strengthened. In 2019, for the first time in a decade, investment expenditure explains more of GDP growth than consumption expenditure (54 versus 31%). And growth in net exports has contributed more to aggregate growth than in previous years, rising from % in 2018 to 6% in 2019. Similarly, the production and value-added approach shows that improvements in services are the primary driver, explaining more than 50% of growth in the region.

Profiled policy recommendation from Chapter 1: Africa’s growth – performance, outlook, and inclusiveness. Improve productivity by alleviating constraints in the business environment. The results from the growth accounting show that growth in the region has been driven mainly by factor accumulation, while the contribution of total factor productivity has been limited and in some cases declining. The large and persistent gaps in output per worker between Africa and other world regions can be explained by inefficiencies in the allocation of factors by firms. Improving productivity to revive growth will require cultivating a dynamic and competitive private sector by alleviating the most binding constraints to business operations. Recent analysis by the African Development Bank shows that Africa loses close to 3 million jobs due to the low entry, early exit, and stagnation of existing firms. Particularly worrisome is the “missing middle” of medium size firms. In most economies, small and large firms predominate. The main constraints limiting firm survival and growth in Africa tend to be symptoms of poor governance - poor contract enforcement, delayed court hearings, unreliable property rights, and poor infrastructure - and an inadequately educated labor force. Alleviating these constraints can help to boost productivity and revive growth.

Trade integration, export patterns, and growth in Sub-Saharan Africa (World Bank)

This paper examines systematically the growth effects of trade integration in Sub-Saharan Africa. It complements and improves upon the empirical literature in two aspects: first, it jointly estimates the impact of different dimensions of trade integration, namely, trade volumes, export/trade patterns by product (primary and manufacturing goods), and by destination (inter- and intra-regional). Second, it estimates the impact of trade integration on economic growth and its sources, that is, capital accumulation and total factor productivity growth. The analysis finds causal evidence that trade integration fosters growth. Additionally, manufacturing trade boosts growth and trade in primary goods hampers growth. Doubling the manufacturing trade share in Sub-Saharan Africa’s gross domestic product would increase growth by 1.9 percentage points per year, while increases in primary trade reduce growth by 1 percentage point. This impact is mainly transmitted through lower capital accumulation. Finally, inter- and intra-regional trade have a positive impact on growth in Sub-Saharan Africa. Doubling inter-regional trade will increase growth by 1.9 percentage points, and the same increase for intra-regional trade enhances growth by 0.6 percentage points. The effects of inter-regional trade are transmitted primarily through capital accumulation, while those of intra-regional trade are channeled through enhanced total factor productivity growth. Extracts (pdf):

Intra-regional trade in Africa grew by 8 percentage points of GDP since 1990 (see Figure 2). However, the actual volume of trade across borders might be underestimated as it does not account for informal (or unrecorded) trade in the region. The share (and size) of intra-regional trade in Sub-Saharan Africa is significantly lower compared with other regions — especially with East Asia (See Figure 3). In 2017, intra-regional trade in Africa represented only 17% of total exports, an amount that is considerably lower than that of Asia (59%) or Europe (69%). Additionally, one of the main drivers of the gap in Africa’s intra-regional trade vis-à-vis Asia and Europe is the large share of intraregional trade of manufactured goods in the latter regions.

The evolution of the patterns of intra- vs. inter-regional exports and imports in Sub-Saharan Africa over the last decade is presented in Figure 4. Shifts in the extent of Sub-Saharan Africa’s trade openness in the region are mainly driven by fluctuations in exports and imports outside the region. In turn, interregional trade is vastly influenced by fluctuations in international commodity prices —where exports still heavily rely on extractive industries (say, mineral ores, metals, and energy commodities). Intra-regional exports and imports represent a small and fairly stable share of total exports and imports over time. The low levels of intra-regional trade suggest significant barriers to trade across borders as well as the lack of depth in regional value chains.

Overall, intra-regional trade in Sub-Saharan Africa has been driven by an expansion of “intra-REC” rather than “inter-REC” trade. The lower tariffs implemented after the creation of the REC increased significantly trade flows within sub-regions in the continent — although the effects were uneven across RECs (see Figure 6). For instance, tariff reductions were not accompanied by substantial increases in subregional trade flows in CEMAC. This suggests that the inability to boost trade within the community could be attributed to important non-tariff barriers and relatively undiversified exports. On the other hand, the limited trade between countries from different RECs may, for instance, result from high tariffs imposed by countries from different RECs. [The authors: César Calderón, Catalina Cantú, Albert G. Zeufack]

South Africa and the IMF:

  1. 2019 Article IV Consultation. South Africa’s undeniable economic potential remains largely untapped and the recent economic performance points to rising risks. Impediments to growth have to be removed, vulnerabilities addressed, and policy buffers rebuilt. The economy faces three immediate challenges: (i) persistently weak economic growth attributable to stagnant private investment, exports, and productivity, worsening already high unemployment; (ii) deteriorating fiscal and debt positions, and weak quality of spending; and (iii) major difficulties in the operations of SOEs, which inflate the cost of doing business and financial support from the fiscus. [ pdf Staff report (4.28 MB)

    Against this background, a more decisive approach to reform implementation is urgently needed. Beyond the initial steps undertaken, expediting structural reform implementation is the only way to sustainably boost private investment and inclusion. Improving the cost effectiveness of network industries will be crucial. In particular, determined and coordinated action will be needed to deliver an electricity sector that can provide reliable services at predictable and reasonable prices without government support. To this end, the financial and technical capacity of the private sector in renewables must be actively pursued. Dominant market players in sectors lacking contestation should be subject to healthy competition. Regulatory requirements that unduly inflate production costs should be streamlined. Labor market rigidities should be tackled to help align wages more closely with productivity and facilitate employment, including in SMEs. [IMF: Six charts explain South Africa’s inequality]

  2. Selected issues report: Growth in South Africa – issues and reform options. Export performance was lackluster compared to other EMs. South Africa’s exports have remained broadly stagnant as a share of world goods exports, in clear contrast to the increasing trend in exports of the median EM and the fastest growing EMs in the sample. The composition of exports shows that the importance of minerals and manufacturing sectors has remained broadly unchanged. The lack of export dynamism is also confirmed by the export complexity index of the Growth Lab at Harvard University, which presents South Africa with one of the least complex export structures among EMs. [ pdf Selected Issues paper (1.66 MB) ]

    The behavior of foreign direct investment points to low returns to investment. The five-year moving average of FDI has been consistently below the median level of other EMs. Moreover, the decline in FDI that followed 2009 was slightly above 50% compared to 20% in the median EM despite already low levels. At the same time, South African corporates increasingly started to seek investment opportunities abroad. These developments suggest that a low rate of return to private investment has been a long-standing problem, worsening after 2009. 

  3. National Treasury’s response to the IMF’s Article IV Report. National Treasury is mindful of the fiscal risks that SOEs, particularly electricity utility Eskom, present to the fiscal framework. Furthermore, there is commitment to resolve the challenges facing South African Airways (SAA). The airline has been placed under voluntary business rescue to improve its financial position. Externally, the performance of the global economy has an impact on South Africa, as an open, small economy. Government has progressed in implementing many of the reforms to revive the economy, however, more urgency is required in the speed of implementation. Finally, National Treasury remains committed to implementing prudent fiscal policy to achieve a low primary balance, excluding Eskom provisions, by 2022/23 in order to ensure a stabilisation of debt by 2025/26.

Mozambique Economic Update: Mind the rural investment gap (World Bank)

Having put much of the past economic volatility behind, the challenge for Mozambique remains to be slow growth. According to the Mozambique Economic Update, growth is expected to have fallen to 2.3% in 2019, from 3.3% in 2018, as lower coal production and the impact of the cyclones, particularly on agriculture, affected overall output. With economic output growing at a slower pace than the population (2.8%), this translates into a decline in the standards of living in a context where poverty has been further aggravated by the cyclones. The report also warns that Mozambique is entering a period of widening current account deficits as it heads towards the early stages of the Liquefied Natural Gas (LNG) investment cycle. It enters this cycle with an improved external reserve position. But lackluster non-extractive export performance, lower growth in key trading partners and commodity price movements continue to be important sources of external risk. The MEU presents a positive growth outlook provided a post-cyclone recovery in agriculture, easing in credit conditions and progress in LNG developments are materialized. But the report highlights the need for a renewed focus on structural reforms for more sustainable and inclusive growth, including progress in strengthening the business environment, increasing the supply of skilled labor to the economy, reducing corruption and improving connectivity. Building resilience to climate shocks is also increasingly critical given Mozambique’s heightened exposure to such events. Extract (pdf):

The special focus section of this edition of the Mozambique Economic Update places a spotlight on public investment in basic infrastructure, a topic of significant importance if Mozambique is to raise equality in opportunity and pursue more inclusive growth. First, it asks whether disparities in access to basic infrastructure are growing or declining. The analysis finds that overall, disparities have been growing between rural and urban areas, especially in the rural parts of Mozambique’s central and northern provinces. Beneath the regional trends is mixed performance at the sectoral level, with mild improvements in access to water, electricity and health facilities. However, access to transport deteriorated significantly, along with a moderate deterioration in access to primary schools, on average. The deterioration in access to transport is particularly notable, indicating a significant deterioration in rural connectivity and contributing heavily to the overall decline in the measure of access to basic infrastructure. With this context in mind, the report asks if the large increases in public expenditure during Mozambique’s 2009 to 2015 investment boom years boosted funding to the underserved areas: did the public investment program seek to address the growing disparities?

Toward successful development policies: Insights from research in development economics (World Bank)

  1. Bob Rijkers, Erhan Artuc: Trade, poverty, and inequality. Despite the compelling associations between international integration and growth, empirical evidence on the causal relationship is more limited. This is because separating the impact of trade from other developments that overlap with episodes of increasing globalization, such as technological progress, is challenging. To accurately quantify the gains from trade it is also necessary to account for the structure of global value chains, input‐output linkages, knowledge spillovers, pro‐competitive effects, and other mechanisms that may amplify them. In addition, trade may create dynamic gains which can be sizable.

    Although globalization has been a force for development for the last three decades, protectionism is now on the rise. One reason is the frustration of those whom trade may have left permanently behind. International trade is not a zero‐sum game, as it increases the size of the pie. However, it also changes how the pie is divided, creating winners and losers. The losses often are highly visibly concentrated among specific people in specific areas. The gains, by contrast, are often widely spread and therefore less salient. This undermines political support for global integration. In the past 10 years, the increased availability of microdata and computing power have spawned a burgeoning literature measuring these distributional impacts of trade, yielding several novel insights (pdf):

    The negative distributional impacts of international trade are large, localized, and long‐lived

    Trade liberalization can favor the poor because low‐income households often consume traded goods more than services and non‐traded goods

    Lower prices due to trade liberalization are often not fully passed on to consumers. [Note: An extract Briefing Note 13 in the short volume]

  2. Roberto Fattal, Hiau Looi Kee, Sergio Schmukler: To design good policies, macro outcomes need to be understood “from the ground up”

    Traditionally, macroeconomic outcomes such as growth, economic fluctuations, and reactions to policies and shocks have been studied using aggregate data at the country level. A flurry of new research over the past decade has centered on using micro data at the product, firm, and sector level to shed new light on aggregate outcomes. The bottom‐up approach yields insights on how trade affects workers, firms, and localities differently. For example, low‐cost imports from China increase unemployment, lower labor force participation, and reduce wages in some local labor markets in the United States, contributing to one‐quarter of the contemporaneous aggregate decline in U.S. manufacturing employment, even though the aggregate welfare gains from trade with China are positive. The firm‐level approach also reveals that there are significant downward biases in aggregate measures of domestic value added embodied in exports. This is because aggregate statistics are mainly constructed based on data from large firms, which tend to use more imported material inputs and therefore produce less domestic value added. The new firm‐level approach aggregates firms’ domestic value added from the ground up based on customs transaction data for all firms, not just large ones. Based on this firm‐level evidence, new research shows that the domestic value added of China’s exports is higher than previously thought, and rising over time due to trade and FDI liberalization.