So this is only a short post today because I have been working the last 8 days in a row. The graph above, taken from the Economist, shows the recent forecasts by the IMF on African economic growth in the next 5 years. What is surprising from this graph is that 7 of the 10 fastest growing economies in the world are forecast to be African over the years 2011-2015. Could this be further evidence of the Solow growth model’s prediction of convergence? This model predicts that poor countries will tend to catch up or converge to the income levels of rich countries in the long run. Put simply, this is because in capital scarce countries an extra unit of capital increases productivity by a larger amount in comparison to a capital rich country. To visualize this, imagine a company with many workers but no machines, the addition of one machine will increase productivity more relative to the addition of that same machine to a workforce which already has many machines – this is known as the law of diminishing returns.
Transfer this to a global scale and in theory the greatest returns to capital investments should be in those countries abundant in labor but with low levels of capital. Africa seems to be fulfilling this prediction, the graph predicts that Africa will soon overtake Asia as the fastest growing continent, whilst the western industrialized economies struggle. Whilst much of this growth has been attributed mainly to commodity price increases others have argued that the general macroeconomic climate in Africa is improving . An article by the McKinsey Global Institute suggests that investment is now increasing due to the fact that governments have undertaken macro and micro economic reforms to increase investment. Additionally it argues the ending of many hostilities has enabled political stability and a safer environment for investment both internally and from overseas.
However Africa’s continued growth and eventual convergence is dependent on a number of conditions. Firstly many African economies are highly geared to natural resource production. Recovering commodity prices since the 2008 global crisis have been a leading driver of growth in many African economies, however such prices are vulnerable to collapse and exhibit high levels of volatility.
Secondly many African countries are still lacking the institutional frameworks to sustain long term growth. Corruption, anti-competitive practices and state capture are still rife over the continent and this needs to be addressed. However this is improving with 36 out of 46 governments making it easier to conduct business in their respective countries according to the World Bank.
Lastly climate change may pose a significant challenge to this continuing growth. It is believed that such change is making farmland more arid and wet areas wetter. The world bank forecasts that 9-20% of Africa’s arable land will become less farmable by 2080. Furthermore increased incidences of flooding may cause substantial economic damage. For example in the year 2000 flooding in Mozambique cost the country an estimated $550 million and lowered the national GDP by 1.5 percent.