Price distortions slow economic growth in sub-Saharan Africa

Kym Anderson, Markus Brückner 07 October 2011

a

A

Economic growth in sub-Saharan Africa has been slow for decades (Easterly and Levine 1997, Ndulu and O'Connell 2007).

  • Sub-Saharan African real income per capita grew at less than 1% over the past half century (Heston et al 2009).
  • Some countries have enjoyed faster growth in recent years, but the reasons for that acceleration, and the extent of its sustainability, are still uncertain (Page 2009, Arbache and Page 2010).

Among the candidates, though, are reductions in distortions to producer incentives, particularly to farmers who over that time period accounted for more than half of African labour and between one quarter and one third of the region’s GDP.

A database recently compiled as part of a World Bank study on policy distortions to agricultural incentives since 1955 reveals that there have been numerous price and trade policy reforms in Africa since the 1980s, although they have not been as extensive as reforms in Asia or even Latin America (Anderson and Valenzuela 2008, Anderson 2009, Anderson and Masters 2010). That raises the question: How much can differences in reforms explain differences in national economic growth rates within Africa? To address that question, we have made use of the World Bank’s distortions database plus other variables to examine econometrically sub-Saharan Africa's patchy growth performance.

Figure 1 plots the time-series evolution of our measure of relative agricultural price distortions for each of the 14 sub-Saharan African countries for which a full set of data is available. It is clear from this Figure that, for the majority of those sub-Saharan African countries, there was a strong policy bias against agriculture over the past half century (a negative relative rate of assistance). The relative rate of assistance is the ratio of the nominal rates of assistance to agricultural and the non-agricultural tradables, where the nominal rate of assistance is defined as the percentage by which government policies directly raise the gross return to producers of a product above what it would be without the government’s intervention (or lowered it, if NRA<0). Another stylised fact that emerges from Figure 1 is that there is also substantial RRA variation across time and countries. For example, in Ethiopia, Madagascar, and Tanzania there was a continuous reduction in policy biases against agriculture, while in countries such as Zambia and Zimbabwe the strong bias against agriculture has persisted.

Figure 1. Time-series plots of the relative rate of assistance to agriculturea

Notes: aThe relative rate of assistance (RRA) is defined as RRA = [(100+NRAagt)/(100+NRAnonagt)] - 1

where NRAagt and NRAnonagt are the percentage NRAs for the tradables parts of the agricultural and non-agricultural sectors, respectively, and NRA is the percentage by which gross returns to producers of a product have been raised directly by government policies above what they would be without the government’s intervention (or lowered it, if NRA<0)Source: Anderson and Brueckner (2011).

Casual empiricism supports the expectation of economists that reductions in distortions are associated with faster economic growth. Tanzania, for example, halved its distortion to the relative price of farm products over the 1985-2005 period, during which time its income per capita increased by over 30%. By contrast, over the same period Zimbabwe increased its distortions to relative agricultural prices by over 50% and experienced a drop in income per capita of more than 25%. Other less-extreme examples during the 1960-80 period include Madagascar, which experienced an increase in relative agricultural price distortions of more than 50% when its real income per capita fell by more than 10%, and Uganda, which experienced a fourfold increase in relative agricultural price distortions and a decrease in real income per capita of over 25%.

The econometric challenges

But such country examples do not prove that those price distortions slowed economic growth. There could be country-specific factors, for example ethnic divisions, that affect economic growth beyond their effect on the political economy of price distortions. Empirical analysis requires rigorous panel-data regressions that control for country as well as year fixed effects. Our estimation strategy hence takes into account that there are deep and sometimes difficult-to-measure differences across sub-Saharan African countries in terms of history, geography, and ethnicity.

Another empirical challenge is to allow for the possibility of reverse causality, with impact going from income (say, due to political economy mechanisms) to price distortions. We address this issue by building on the by now well-established literature showing that rainfall and international commodity price shocks have a significant effect on income in sub-Saharan African countries. Using rainfall and international commodity price shocks as instruments for growth, we examine and quantify the size of the reverse causal effect that income growth has on price distortions. By doing so, we obtain an estimate of the response of price distortions to growth. With this estimate in hand, we adjust for endogeneity of price distortions when estimating the effects that these distortions have on economic growth.

What our study found

Our key finding is that policy-induced price distortions had a quantitatively large negative effect on economic growth. In other words, reductions in those distortions in recent decades have contributed significantly to economic growth in sub-Saharan Africa. More specifically, a one standard-deviation decrease in distortions to relative agricultural prices raised real GDP per capita growth in the region by about half a percentage point per annum on average (Anderson and Bruckner 2011).

Why this matters

Our finding of a statistically significant and quantitatively large negative effect of distortions to relative agricultural prices on sub-Saharan African economic growth is important for several reasons.

  • First, it implies that reducing distortions to incentives faced by even the world’s poorest farmers can be growth-enhancing. Thus this result does not support the view that there are significant growth benefits associated with supporting manufacturing and other sectors at the expense of agriculture.

  • Second, our finding suggests that the returns from investments in agricultural development will be greater in countries with less-distorted relative prices. Since funding for agricultural development in sub-Saharan Africa is expanding rapidly at present, particularly via development assistance programmes1, our findings provide additional empirical support to those arguing that aid flows would be more effective in those African countries that have reduced, or are willing to reduce, their anti-agricultural policy bias.

  • Third, our empirical analysis shows that there is a significant within-country effect of policy distortions on economic growth. This is an important result. It implies that the relationship between price distortions and economic growth is unlikely to be a consequence of the strong ethnic divisions that characterise many sub-Saharan African countries. The reason is that ethnic divisions, as measured by countries' ethnic fractionalisation or polarisation, are mostly time-invariant variables. Hence, these variables cannot be a cause of within-country variations in price distortions. From an economic policy viewpoint, this is important because it suggests that in African countries there are significant factors that influence economic growth other than ethnic divisions.

References

Anderson, K (ed.) (2009), Distortions to Agricultural Incentives: A Global Perspective, 1955–2007, Palgrave Macmillan and World Bank.

Anderson, K and E Valenzuela (2008), Global Estimates of Distortions to Agricultural Incentives, 1955 to 2007.

Anderson, K and M Brueckner (2011), “Price Distortions and Economic Growth in sub-Saharan Africa”, CEPR Discussion Paper No. 8530.

Anderson, K and W Masters (eds.) (2009), Distortions to Agricultural Incentives in Africa, World Bank.

Arbache, JS and J Page (2010), “How Fragile is Africa's Recent Growth?”, Journal of African Economies, 19(1):1-24.

Easterly, W and R Levine (1997), “Africa's Growth Tragedy: Policies and Ethnic Divisions”, Quarterly Journal of Economics, 112(4):1203-1250.

Heston, A, R Summers, and B Aten (2009), Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices, University of Pennsylvania.

Ndulu, BJ and SA O'Connell (2007), “Policy Plus: African Growth Performance 1960-2000”, Ch1 (pp. 3-75) in BJ Ndulu, P Collier, RH Bates and S O'Connell (eds.), The Political Economy of Economic Growth in Africa, 1960-2000, Cambridge University Press.

Page, J (2009), “Africa’s Growth Turnaround: From Fewer Mistakes to Sustained Growth”, Commission on Growth and Development Working Paper No. 54, World Bank.


1 See, for example, the wide range of major donor partners that have joined with the Alliance for a Green Revolution for Africa, at www.agra-alliance.org/section/links and the Partnership to Cut Hunger and Poverty in Africa, at www.partnership-africa.org, as well as the contribution from the Bill and Melinda Gates foundation at www.gatesfoundation.org/agriculturaldevelopment/Pages/default.aspx

a

A

Topics:  Development

Tags:  sub-Saharan Africa, regulation, ethnic divisions

George Gollin Professor of Economics and Foundation Executive Director of the Centre for International Economic Studies (CIES) at the University of Adelaide and CEPR Research Fellow

Markus Brückner

Associate Professor in Economics, National University of Singapore