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World Economic Trends

World Economic Trends. Future Position of the Economies in Eastern and Southern Africa, and Implications for Financial Sector Development and Management. Thorvaldur Gylfason. Overview. Where we are coming from … … and where we could be going

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World Economic Trends

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  1. World Economic Trends Future Position of the Economies in Eastern and Southern Africa, and Implications for Financial Sector Development and Management Thorvaldur Gylfason

  2. Overview • Where we are coming from … • … and where we could be going • Why money and finance are so important from an economic and social point of view Public policies and institutions do make a difference for economic growth in the long run. Main point:

  3. Eastern & Southern Africa: A Quick Glance* GNP Per Capita, PPP-Adjusted, 1975-1998 * MEFMI members only.

  4. Growth of GNP Per Capita, PPP-Adjusted, 1975-1998 World record in growth 1965-90 Botswana: Star Performer!

  5. Investment, 1960-1998 OECD countries invest about 20% of their GDP. Quality is key.

  6. Investment: Quantity and Quality • Compare Botswana and Tanzania: • In Botswana, the share of State-Owned Enterprises in total investment fell from 16% in 1985-90 to 12% in 1990-97. • In Tanzania, the SOE share of investment fell from 46% in 1985-90 to 23% in 1990-97. • Privatization helps improve investment.

  7. Investment: Quantity and Quality • Investment quality, however, is not only a question of public vs. private enterprise. • Sound banking is also important. • It takes sound commercial banks, usually privately owned banks motivated by profit rather than by political concerns, to channel household savings into high-quality investment.

  8. Growth and Investment, 1975-1998 Each ten percentage point increase in the investment ratio is associated with an increase in per capita growth by 1½% per year.

  9. Trade Ratio, PPP-Adjusted, 1980-1998 From 1988 to 1998, the average trade ratio rose from 21% to 28% in the world as a whole.

  10. Trade is Important • From 1988 to 1998, the average trade ratio rose around the world: • Low-income countries: From 7% to 8%. • Middle-income countries: From 13% to 22%. • Low & middle-income countries: From 11% to 16%. • High-income countries: From 28% to 38%. • This is good news: • More trade means more efficiency and more growth.

  11. Growth and Trade, 1975-1998 Each ten percentage point increase in the trade ratio is associated with an increase in per capita growth by almost 1% per year.

  12. Gross Foreign Direct Investment, PPP-Adjusted, 1975-1998 From 1988 to 1998, the average FDI ratio rose from 2% to 4% in the world as a whole.

  13. Trade In Capital is Important, Too • From 1988 to 1998, the average FDI ratio rose around the world: • Low-income countries: From 0.2% to 0.9%. • Middle-income countries: From 0.4% to 1.6%. • Low & middle-income countries: From 0.3% to 1.3%. • High-income countries: From 2.6% to 5.7%. • More trade in capital — more FDI! — means more efficiency and more growth.

  14. Growth and FDI, 1975-1998 Each ten percentage point increase in the FDI ratio is associated with an increase in per capita growth by 1% per year.

  15. Public Expenditure on Education, 1960-1997 From 1980 to 1997, the same ratio rose from 4% to 5% in the world as a whole.

  16. Education is Very Important • From 1980 to 1997, public expenditure on education rose around the world: • Low-income countries: From 3.2% to 3.2%. • Middle-income countries: From 4.2% to 4.9%. • Low & middle-income countries: From 3.5% to 4.1%. • High-income countries: From 5.6% to 5.4%. • More and better education is good forgrowth.

  17. Growth and Education, 1975-1998 Each two percentage point increase in the education expenditure ratio is associated with an increase in per capita growth by almost 1% per year.

  18. More on Education, 1970-1995 Primary Enrolment Secondary Enrolment

  19. ... and on Health, 1970-1997 Life Expectancy Infant Mortality

  20. Agriculture, 1998 From 1970 to 1998, the share of agriculture in GDP decreased from 9% to 4% in the world as a whole.

  21. Agriculture is Contracting • From 1970 to 1998, the share of agriculture in GDP decreased around the world: • Low-income countries: From 39% to 23%. • Middle-income countries: From 17% to 9%. • Low & middle-income countries: From 24% to 13%. • High-income countries: From 5% to 2%. • Less agriculture means more industry, trade, and services, and almost surely more growth.

  22. Why Agriculture Contracts • It takes fewer and fewer farmers to feed the rest of the population. • This is because farm technology steadily improves while, for biological reasons, food demand per person remains the same. • Remember how Europe became rich: • By letting agriculture gradually give way to industry, trade, and services where productivity — and pay! — is higher.

  23. Growth and Agriculture, 1975-1998 A 25 percentage point decrease in the share of agriculture in GDP is associated with a increase in per capita growth by 1% per year.

  24. What is the Upshot? • Economic growth responds to public policy. • In particular, by encouraging • saving and investment of high quality • foreign trade and investment • education • ... the government can help foster rapid economic growth.

  25. Sir Arthur Lewis Got It Right Since the second world war it has become quite clear that rapid economic growth is available to those countries with adequate natural resources which make the effort to achieve it. W. ARTHUR LEWIS (1968)

  26. What Else? • These lessons are borne out by experience from around the world. • Additional lessons: • Too much inflation hurts saving, investment, and trade — and thereby also growth. • Too much SOE activity hurts the quality of investment and education — and growth. • Too much agriculture and, more generally, natural resource dependence, if not well managed, hurts education and trade — and thereby also growth. • Too rapid population growth also impedes economic growth.

  27. Reservations • Even so, the question of rapid growth is, of course, a bit more complicated. • We also need to address a host of political, social,and cultural questions as well as questions of natural conditions, climate, and public health — which would take us too far afield. • But the main point remains: • To grow or not to grow is in large measure a matter of choice. • Many of the constraints on growth are man-made, and can be removed.

  28. Future Scenarios • Therefore, looking into the future, 10-20 years hence, we should not extrapolate past trends like blind men. • Rather, we should perhaps ask ourselves: • How fast can our economies grow?— if we do all the right things in the field of investment, trade, education, and so on. • My answer is: Pretty fast! • Per capita growth of 3%-6% per year is a reasonable target. • This would double, or perhaps even quadruple, income per head every 25 years.

  29. And Why Not? This year, however, and last, 1999-2000, according to the IMF, economic growth in Africa is second only to that of Asia. • After all, in low-income countries, GNP per capita grew by 3.7% per year on average from 1965 to 1998 ... • ... and by 1.7% if China and India are not included. • In middle-income countries, GNP per capita grew by 1.9% per year. • In high-income countries, GNP per capita grew by 2.3% per year. • But in Sub-Saharan Africa, GNP per capita contracted by 0.3% per year.

  30. Turning Africa Around: What Does It Take? • But, as Arthur Lewis pointed out a generation ago, • and as I think Adam Smith understood, • there is good reason to believe that, with good policies and appropriate institutions, Africa can grow rapidly. • This would revolutionize the standard of life among its peoples, like happened in Asia ... • ... where Taiwan, for example, knowingly or not, took its cue from Smith, Lewis, et al.

  31. Why Does This Concern Central Bankers? • The reason is simple: • Recent economic theory and experience indicate that high inflationis harmful to economic growth. • How high is “high”? • My answer is: 15-20% per year, maybe less. • Therefore, it is essential to reduce inflation below this range, and keep it there.

  32. Inflation in Eastern and Southern Africa, 1980-1998

  33. Inflation Matters Because Money Matters • Money greases the wheels of production and exchange. • High inflation discourages money holdings, and thereby impedes economic growth. • Therefore, high inflation deprives the economic system of necessary lubrication.

  34. Money and Quasi-Money in Eastern and Southern Africa, 1970-1998 In OECD countries, the same ratio is generally 50-70%.

  35. The Paradox of Money • Monetary restraint is the best way — the only way! — to make money grow relative to income in the long run. • Attempts to print money to make it grow and grease the wheels are counterproductive in the long run because printing too much money causes inflation.

  36. Money and Inflation, 1990-1998 A 10 percentage point increase in annual inflation is associated with a decrease in money and quasi-money by 3% of GDP.

  37. How To Keep Inflation under Control • This is not only a matter of sound monetary policies, but also of appropriate monetary and financial institutions. • Therein lies the importance of recent institutional reforms in several countries, centered on increased independence, accountability, and transparency.

  38. What’s the Story? • Increased independence makes it easier for central banks to withstand political pressure to print money. • This may be accompanied by laws or regulations that restrict the government’s ability to borrow from the central bank. • But increased independence, in a democracy, must go hand in hand with accountability vis-à-vis elected representatives of the people as well as transparency of central bank operations.

  39. What’s the Story? Need to find a healthy balance between transparence and confidentiality. • Empirical evidence indicates that countries with independent central banks tend to have less inflation than others. • Moreover, accountability and transparency may help improve policy making by reducing the likelihood of mistakes and miscalculations, inside and outside government. • This is why the IMF now tries to be as transparent in its operations as the member countries will allow.

  40. In Conclusion: It Can Be Done • The world economy is growing rapidly ... • ... and will probably continue to do so. • There is good reason to expect Africa — Eastern and Southern Africa, in particular — to participate in the growth revolution. • This is because we now think we know how to influence economic growth through policy— more about which in Malta. • The scope for policy improvements is particularly large in countries that have not followed good policies in the past.

  41. In Conclusion: It Can Be Done These slides can be viewed on my website: www.hi.is/~gylfason/mefmi.ppt Therefore, the legacy of inadequate policies that tends to be regarded as a sign of weakness may be turned into strength. There is, thus, a sense in which we can say: • The worse, the better! Remember the main point of Gunnar Myrdal’s Asian Drama (1968)? • It was that the Asian economies were incapable of rapid economic growth! I believe that those who make similar claims about Africa will also be proven wrong. The End

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