African Development Successes
July 18-20, 2010
Forty research projects have been commissioned. This second full research conference of the Africa Project included fifteen final presentations, described below.
Cellular technologies have become increasingly important in the developing world; infrastructure for mobile networks has expanded dramatically over the past two decades giving access to remote areas without previous phone service. Despite this expansion, relatively little is known about the correlates of the rollout of cellular phone networks or the performance of these networks. Because the rollout of cellular networks has been spearheaded largely by an active private sector in telecommunications, the way that demand-side and cost-side factors affect the timing of rollout and the quality of network service is of particular interest. Batzilis and his co-authors use new data to estimate the correlates of cellular phone access and network performance across rural areas of Malawi. They compile a dataset combining administrative data for the entire cellular network of Malawi with geographic and Census data to describe the rollout and the performance of the cellular network as measured by the dropped call rate. They find that both demand-side and cost-side factors are important in determining the timing of network access, while demand-side factors appear most relevant for the dropped call rate, which is one metric of network quality.
Nyarko looks at the decision of the government or "central planner" in the allocation of scarce governmental resources for both tertiary education and for individuals He estimates the net present values, or cost and benefits, which include the costs of tertiary education; the benefits of improved skills among those who remain in the country; the flows of the skilled out of the country (the brain drain); and the remittances the skilled bring into the country. The net benefits appear to outweigh the costs. This study suggests that: 1) creative thinking about the brain drain could provide mechanisms for dramatic increases in education levels within African nations; and 2) by at least one metric, one of the big successes of African nations in this period has been their spending on education and the consequent "brain power" which many have argued is so critical for economic development. The results on the individual decision problem resolve a paradox in the returns to education literature, which finds low returns to tertiary education.
With its recent history of civil war, chronic poverty, and corrupt governance, many would dismiss Sierra Leone as a hopeless case. But the country's economic and political performance over the last decade has defied expectations. Casey and her co-authors examine how several factors-including the legacy of war, ethnic diversity, decentralization, and community-driven development (CDD)-have shaped local institutions and national political dynamics. The story that emerges is a nuanced one: war does not necessarily destroy the capacity for local collective action; ethnicity affects residential choice, but does not impede the provision of local public goods; while politics remain heavily ethnic, voters are willing to cross ethnic boundaries when they have better information about candidates; decentralization can work even where capacity is limited, although the results are mixed; and, for all of its promise, CDD does not transform local institutions nor social norms. All of these findings are somewhat "unexpected," but they are quite positive in signaling that even one of the world's poorest, most violent, and ethnically diverse societies can overcome major challenges and progress towards meaningful economic and political development.
This paper uses national household survey data to examine changes in real per capita incomes in South Africa between 1993 and 2008; the start and the end of the first fifteen years of post-apartheid South Africa. These data show an increase in average per capita real incomes across the distribution. Over this period growth has been shared, albeit unequally, across almost the entire spectrum of incomes. However, kernel density estimations make clear that these real income changes are not dramatic and inequality has increased. Leibbrandt and Levinsohn conduct a series of semi-parametric decompositions in order to understand the role of endowments and changes in the returns to these endowments in driving these observed changes in the income distribution. This analysis highlights the positive role played by changes in endowments such as access to education and social services over the period. If these endowment changes were all that changed in South Africa over the post-apartheid period, the authors would have seen a pervasive rightward shift of the distribution of per capita real incomes. In the rest of the paper they explore why this did not happen.
Nunn and Qian examine the supply-side and demand-side determinants of global bilateral food aid shipments between 1971 and 2008. They find that domestic food production in developing countries is negatively correlated with subsequent receipt of food aid, suggesting that the receipt of food aid is driven partly by local food shortages. Interestingly, food aid from some of the largest donors is the least responsive to production shocks in recipient countries. The researchers further show that U.S. food aid is driven partly by domestic production surpluses, whereas former colonial ties are an important determinant for European countries. Third, among food aid recipients, former colonial ties are especially important for African countries. Finally, aid flows to countries with former colonial ties are less responsive to recipient production, especially for African countries.
Nkurunziza and his co-authors investigate the performance of the financial system in Burundi in mobilizing and allocating resources. Although this study does not presume that finance is the most binding constraint to growth in Burundi, it is motivated by the critical role of finance in stimulating investment and growth, which are needed to reduce the country's high level of poverty. Hence, unlocking the financing constraint might alleviate other impediments to growth and the reduction of poverty. This paper takes a number of approaches to methodology, notably: 1) industrial organization, in examining the structure of the banking sector and the behavior and profitability of financial intermediaries; 2) macroeconomic analysis, focusing on the effect of economic performance and the policy framework on the performance of the financial sector; and 3) political economy analysis, highlighting the role of political governance, ethnicity, and political instability, as well as ownership of financial institutions on allocative and distributional inefficiencies. The authors find that the banking sector is highly profitable and its core has survived the worst of economic and political crises of the last decade surprisingly well. However, this performance hides several weaknesses of the financial sector, including: a high level of fragmentation; a narrow credit market that favors "insiders" who are mostly affiliated with the traditional political elites, at the expense of "outsiders"; a severe shortage of long-term stable resources; inefficient allocation of resources relative to social returns and risk; and a weak supervision and regulation system that underlies the failure of several financial institutions in the past and the fragility of the banking sector. Furthermore, access to finance remains an important challenge, especially for the rural sector as well as the "stranded middle" (middle- income households and medium-size firms), because of the "missing middle credit market" which is not filled by the banking sector or microfinance institutions. In the medium term, recent developments in that sector, particularly the increasing penetration of foreign banks, could be a potential boost to competition and financial innovation, thus increasing access to finance with positive effects on growth and poverty reduction.
Lesotho and other least developed African countries responded impressively to the preferences they were granted under the African Growth and Opportunities Act (AGOA) with a rapid increase in their clothing exports to the United States. But this performance was not accompanied by some of the more dynamic growth benefits that might have been hoped for. Edwards and Lawrence develop the theory and present empirical evidence to demonstrate that these outcomes are the predictable consequences of the manner in which the specific preferences should be expected to work. The MFA (Multi-fiber Arrangement) quotas on U.S. imports of textiles created a favorable environment for low value-added, fabric-intensive clothing production in countries with unused quotas by inducing these constrained countries to move into higher quality products. By allowing the least developed African countries to use third country fabrics in their clothing exports to the United States, AGOA provided additional implicit effective subsidies to clothing that were multiples of the U.S. tariffs on clothing imports. Taken together, these policies help to explain the program's success and to demonstrate the importance of other rules of origin in preventing poor countries from taking advantage of other preference programs. But the disappointments also can be attributed to the preferences, because they discouraged additional value-addition in assembly and stimulated the use of expensive fabrics that were unlikely to be produced locally. When the MFA was removed, constrained countries such as China moved strongly into precisely the markets in which AGOA countries had specialized. Although AGOA helped the least developed countries withstand this shock, they were nonetheless adversely affected. Preference erosion attributable to MFN reductions in U.S. clothing tariffs could similarly have particularly severe adverse effects on these countries.
M-Pesa is a mobile phone-based money transfer system in Kenya which grew at a blistering pace following its inception in 2007. Mbiti and Weil analyze how M-Pesa is used, as well as its economic impacts. Analyzing two waves of individual data on financial access in Kenya, the authors find that increased use of M-Pesa lowers the propensity of people to use informal savings mechanisms, such as ROSCAS, but raises the probability of their being banked. Using aggregate data, the researchers calculate the velocity of M-Pesa at between 11.0 and 14.6 person-to-person transfers per month. In addition, they find that M-Pesa causes decreases in the prices of competing money transfer services, such as Western Union. While they find little evidence that people use their M-Pesa accounts as a place to store wealth, their results suggest that M-Pesa improves individual outcomes by promoting banking and increasing transfers.
Mauritius is a top performer among African countries: it developed a manufacturing sector soon after independence and has managed to respond well to new external shocks. What explains this success? Frankel draws on the history of the island, the writings of foreign economists, the ideas of locals, and the results of econometric tests to answer that question. Mauritius has mostly followed growth-enhancing policies including: creating a well-managed Export Processing Zone; conducting diplomacy regarding trade preferences; spending on education; avoiding currency overvaluation; and facilitating business. The growth-enhancing policies in turn can be traced back to sound institutions. These include: forswearing an army; protecting property rights (particularly non-expropriation of sugar plantations); and creating a parliamentary structure with comprehensive participation (in the form of representation for rural districts and ethnic minorities, the "best loser system," ever-changing coalition governments, and cabinet power-sharing). But from where did the sound institutions come? They were chosen around the time of independence in 1968. Why in Mauritius and not elsewhere? Was it simply luck? Some fundamental geographic and historical determinants of trade and the rule-of-law help to explain why average income is lower in Africa than elsewhere, and trade and the rule-of-law help to explain performance within Africa, as they do worldwide. Despite these two econometric findings, the more fundamental determinants are not much help in explaining relative performance within Africa. The fundamental determinants that work worldwide but not within Africa are: remoteness, tropics, size, and fragmentation. (Access to the sea is the one fundamental geographic determinant of trade and income that is always important.) A case in point is the high level of ethnic diversity in Mauritius, which in many places would make for dysfunctional politics. Here, however, it brings cosmopolitan benefits. The institutions manage to balance the ethnic groups; none is excluded from the system. It is intriguing that the three African countries with the highest governance rankings (Mauritius, Seychelles and Cape Verde) are all islands that had no indigenous population. It helps that everyone came from somewhere else.
The empowerment of women within households remains a major issue around the world, including in Africa. Iyengar and Ferrari conducted a study in Burundi coupling discussion sessions with micro-financing to determine if together they enhance the role of women in decisions regarding household purchases and in the reduction of domestic violence. They compare their findings to the results of a published study in South Africa that combined discussion sessions on life skills and health as a means of reducing domestic violence and influencing decisions on economic issues. Both of these studies used randomized controlled experiments, and both show a trend towards increases in household authority, but the Burundi study results are also statistically significant. In South Africa there was a large, albeit short lived decrease in domestic violence. In Burundi, there was a small reduction but the trend suggests a longer duration. The effects on overall empowerment are small, however. These studies together suggest that a more sustained use of discussion sessions could be beneficial. Future research could focus on the longer-term effects of the use of discussion sessions and investigate how the observed impacts can be sustained in magnitude and duration.
La Porta and Shleifer examine the productivity of informal firms (those that are not registered with the government) in 24 African countries using field work and World Bank firm level data. They find that productivity jumps sharply if they compare small formal firms to informal firms, and rises rapidly with the size of formal firms. Critically, informal firms appear to be qualitatively different than formal firms: they are smaller in size, produce to order, are run by managers with low human capital, do not have access to external finance, do not advertise their products, and sell to largely informal clients for cash. Informal firms thus occupy a very different market niche than formal firms do, and rarely become formal because there is very little demand for their products from the formal sector.
Adolescent girls are seen by many as the key demographic target group for successfully breaking the cycle of poverty in developing countries. Policies that enable these girls to reach their full potential can have a strong impact not only on their own well-being, but also on that of future generations. Baird and her co-authors investigate the impact of a conditional cash transfer program for schooling on the empowerment of adolescent girls in Malawi. They find that the program, which transferred cash directly to school-age girls as well as their parents, empowered these girls in a number of important respects. First, it increased their resources and improved their self-perceived standing within the household. Moreover, it resulted in changed life choices, such as increased school attendance and delays in childbearing and marriage. Finally, the program beneficiaries saw increases in the investments made in their human capital, such as in nutrition and health. Overall, the results point to the potential role that conditional cash transfer programs can play in improving the lives of adolescent girls in Sub-Saharan Africa.
The Nigerian banking system was in crisis for much of the 1990s and early 2000s. The reforms of 2005 were ambitious in simultaneously attempting to address safety, soundness, and accessibility. Cook uses published and new survey data through 2008 to investigate whether bank consolidation and other measures achieved their stated goals and whether they also enhanced development, efficiency, and profitability. She finds that following the reforms, banks are better capitalized, more efficient, and less involved in the public sector, but they are not more profitable or accessible to the poor. While there is greater supervision and less fragility after reform, the recorded distress was artificially low. The improved macroeconomic environment can explain some of the variation in observed outcomes, and it likely enhanced the efficacy of reforms.
Agricultural productivity growth in sub-Saharan Africa has been a qualified success. Total factor productivity (TFP) growth has increased rapidly since the early 1980s. By the early 2000s, average annual TFP growth was roughly four times faster than it had been 25 years earlier. However, this period of accelerated growth followed nearly twenty years of declining rates of TFP growth subsequent to independence in the early 1960s. Average agricultural TFP growth for sub-Saharan Africa was 0.14 percent per year during 1960-84, and increased to 1.24 percent per year from 1985-2002. The average over this period was approximately 0.6 percent per year, which accounts for 36 percent of the increase in total crop output over this period. These highly aggregated results conceal substantial regional and country-level variation. Expenditures on agricultural R and D, along with the reform of macroeconomic and sectoral policies shaping agricultural incentives, have played a substantial role in explaining both the decline and the rise in agricultural productivity. The case study of Ghana clearly reflects these broader findings.
Easterly and Reshef establish the following stylized facts: 1) Exports are characterized by Big Hits; 2) the Big Hits change from one period to the next; and 3) these changes are not explained by global factors including global commodity prices. These conclusions are robust to excluding extractable products (oil and minerals) and other commodities. Moreover, African Big Hits exhibit similar patterns to Big Hits in non-African countries. The researchers also discuss some concerns about data quality. These stylized facts are inconsistent with the traditional view that African exports are a passive commodity endowment, whereby changes are driven mostly by global commodity prices. In order to better understand the determinants of export success in Africa, the authors interviewed several exporting entrepreneurs, government officials, and NGOs. Some of the determinants that they document are conventional: moving up the quality ladder; using strong comparative advantage; trade liberalization; investment in technological upgrades; foreign ownership; ethnic networks; and personal foreign experience of the entrepreneur. Other successes are triggered by idiosyncratic factors including entrepreneurial persistence, luck, and cost shocks, and some of the successes occur in areas that usually fail.