Aid, Trade, Investment and Governance in Sub-Saharan Africa: By the Numbers

7/31/2019 Aid, Trade, Investment and Governance in Sub-Saharan Africa: By the Numbers

1/8

Summary: Low corruption,

political stability, rule of

law, good regulations,

and transparency all help

foster an enabling business

environment. The lack of these

features has been found to

distort investment, at times

hinder trade, and inducethe misallocation of public

resources. These facts are well-

known, but certain underlying

mechanisms deserve further

exploration in order for African

leaders and their transatlantic

partners to fully maximize

private investments and ODA

on the continent.

The views expressed here are

the views of the authors alone

and do not necessarily reectthe stance of the German

Marshall Fund of the United

States.

Analysis

Connections

Aid, Trade, Investment and Governance

in Sub-Saharan Africa: By the Numbers

By Veronika Penciakova

1744 R Street NWWashington, DC 20009 1 202 683 2650F 1 202 265 1662E [email protected]

July 2012 Number 8

Paper series on transatlantic trade and development policy issues

Since 1980, countries in sub-SaharanArica (SSA) have received over $555billion in ocial development assis-tance (ODA).1 Yet, nearly 69 percento the population remains withoutaccess to improved sanitation acili-ties, compared to 39 percent in therest o the developing world. At 563maternal deaths per 100,000 births,sub-Saharan Aricas average maternalmortality ratio is ve times higher

than that o other emerging econo-mies.2 Te persistence o these andother development challenges haveled many analysts and advocates toquestion the eectiveness o oreignassistance to the region. Many nowargue that the answer to Aricasdevelopment decit is not more aid,but more trade.

rade and investment are seen as anessential driver o long-run sustain-

able development by many. Teexperiences o Latin America andEast Asia are oen cited as exampleso how trade and investment, ratherthan aid, promote growth and povertyreduction. Over the past 30 years,emerging East Asia, spurred in part

1 This gure accounts for ODA disbursed by traditional

Organisation for Economic Co-operation and Develop-

ment (OECD) bilateral and multilateral donors.

2 World Bank, World Development Indicators, 2012 and

authors own calculations.

by its impressive trade and investmenperormance, has experienced theastest growth rates in GDP per capitain the world. Moreover, in just over25 years (between 1981 and 2008),the region was able to reduce abso-lute poverty by nearly 63 percentagepoints, rom 77 percent to 14 percent.During the same period, poverty insub-Saharan Arica declined by just 4percentage points, rom 52 percent to

48 percent.3

One o the crucial questions acingsub-Saharan Arica today is how theregion can attain and maximize thegains rom trade and investment asother regions have done in the past.Te policy options available to coun-tries in SSA and their developmentpartners are many, and this reportcannot attempt to do justice to themall. Rather, it will ocus on one strand

o the literature good governanceand institutional development. Lowcorruption, political stability, rule olaw, good regulations, and transpar-ency all help oster an enabling busi-ness environment. Te lack o theseeatures has been ound to distortinvestment, at times hinder trade, andinduce the misallocation o public

3 World Bank, An update to the World Banks estimates

of consumption poverty in the developing world, March

2012.
http://siteresources.worldbank.org/INTPOVCALNET/Resources/Global_Poverty_Update_2012_02-29-12.pdfhttp://siteresources.worldbank.org/INTPOVCALNET/Resources/Global_Poverty_Update_2012_02-29-12.pdfhttp://siteresources.worldbank.org/INTPOVCALNET/Resources/Global_Poverty_Update_2012_02-29-12.pdfhttp://siteresources.worldbank.org/INTPOVCALNET/Resources/Global_Poverty_Update_2012_02-29-12.pdf


2/8

Analysis

Connections

2

resources.4 Tese acts are well-

known, but certain underlyingmechanisms deserve urtherexploration.

In trying to understand whysub-Saharan Arica may not beully capturing potential gainsrom global trade and invest-ment, this report looks at threeinterrelated topics: 1) the evolu-tion o aid, trade, and investmentin sub-Saharan Arica; 2) the

distribution and composition othese fows; and 3) the prevailinggovernance environment inwhich businesses in the regionoperate. Te numbers indicatenot that SSA is receiving insu-cient private sector fows, but rather that the distributionand composition o these fows is not ideal or long-runsustainable development. Further, these challenges may bedirectly related to, and exacerbated by, poor governance.As transatlantic donors and businesses interested in Aricaattempt to oster development in the region, this analysis

implies that promotion o good governance may help ostera better composition and distribution o private sectorfows.

Aid, Trade, and Investment Trends

in Sub-Saharan Africa

Te discussion surrounding nancial fows in and out osub-Saharan Arica tends to pit public sector fows (in theorm o ODA rom bilateral donors and multilateral insti-tutions) against private sector ones (including exports andoreign direct investment FDI). It is true that aid fows

have risen substantially since the early 2000s, refectingdonors renewed commitment under the MonterreyConsensus to strive toward a target o 0.7 percent o gross

4 Dutt, Pushan and Daniel Traca, Corruption and Bilateral Trade Flows: Extortion or

Evasion?, The Review of Economics and Statistics, Vol.92, No.4, November 2010; Fosu,

Augustin Kwasi, Political Instability and Export Performance in Sub-Saharan Africa,

Journal of Development Studies, Vol.39, Issue 4, 2003; Kimenyi, Mwangi and John Mu-

kum Mbaku, Africas War on Corruption, in Foresight Africa: The Continents Greatest

Challenges and Opportunities for 2011 Africa growth Initiative at the Brookings Institu-

tion, January 2011; Mauro, Paolo, The Effects of Corruption on Growth, Investment,

and Government Expenditure, IMF Working Paper, September 1996; Ng, Francis and

Alexander Yeats, Good Governance and Trade Policy: Are they the Keys to Africas Global

Integration and Growth?, World Bank Policy Research Working Paper, November 1998;

Wei, Shang-Jin, How Taxing is Corruption on International Investors?, The Review of

Economics and Statistics, Vol.82 No.1, February 2000.

national income (GNI) as ODA to developing countries by2015.5 Between 2000 and 2010, net ODA rose by about 123percent.6 Yet the rise in aid did not translate to signicantlyhigher aid dependence in sub-Saharan Arica, and moreimportantly, it did not come at the expense o private sectorfows.

By 2010, aid accounted or only 4 percent o regionalGNI, down rom its peak o nearly 7 percent in the mid-1990s. At the same time, private sector fows (in the ormo exports and FDI) accounted or about 32 percent oregional GNI by 2010, compared to just 16 percent duringthe mid-1990s. As Figure 1 indicates, the importance oexports and FDI to sub-Saharan Arica has risen substan-tially since 1980, and that o ODA has allen. o put thisinto context, consider that while over the past 30 years SSAhas received $555 billion in ODA, in just the past 5 yearsthe region has exported more than double that ($1.3 tril-lion) and received nearly hal that ($203 million) in FDI.7

Te importance o private sector compared to public sectorfows persists i we consider the bilateral fows betweensub-Saharan Arica and the United States and Europe.In 2010, total exports to the United States accounted or6.1 percent o sub-Saharan Aricas regional GNI, whileaid disbursed by the United States accounted or only 0.7

5United Nations Millennium Project, The 0.7% target an in-depth look, 2006.

6 OECD Development Assistance Committee, ODA Statistics: DAC2a Table.

7 International Monetary Fund, Direction of Trade Statistics, 2012; OECD Development

Assistance Committee, ODA Statistics: DAC2a Table, 2012; United Nations Conference

on Trade and Development, Foreign Direct Investment Statistics, 2012.

0%

10%

20%

30%

40%

50%

1980 1985 1990 1995 2000 2005 2010

S

hareofGrossNatonalIncome

Figure 1. Trade, Investment, and Aid Flows as Share of GNI:

Sub-Saharan Africa, 1980-2010

Exports

Net Official

Development

Assistance

Inward Foreign

Direct Investment

Sources: Internatonal Monetary Fund, Directon of Trade Statstcs, 2012; OECD, Development Assistance Commiee Aid Statstcs, 2012;
http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00034http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00034http://www.tandfonline.com/doi/abs/10.1080/713869426http://www.brookings.edu/research/reports/2011/01/africa-economy-agihttp://www.brookings.edu/research/reports/2011/01/africa-economy-agihttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=882994http://papers.ssrn.com/sol3/papers.cfm?abstract_id=882994http://papers.ssrn.com/sol3/papers.cfm?abstract_id=620659http://papers.ssrn.com/sol3/papers.cfm?abstract_id=620659http://www.nber.org/~wei/data/wei2000a/wei2000a.pdfhttp://www.unmillenniumproject.org/press/07.htmhttp://www.unmillenniumproject.org/press/07.htmhttp://www.nber.org/~wei/data/wei2000a/wei2000a.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=620659http://papers.ssrn.com/sol3/papers.cfm?abstract_id=620659http://papers.ssrn.com/sol3/papers.cfm?abstract_id=882994http://papers.ssrn.com/sol3/papers.cfm?abstract_id=882994http://www.brookings.edu/research/reports/2011/01/africa-economy-agihttp://www.brookings.edu/research/reports/2011/01/africa-economy-agihttp://www.tandfonline.com/doi/abs/10.1080/713869426http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00034http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00034


3/8

Analysis

Connections

3

percent. Similarly, total exports to Europe accounted or 7.0

percent o regional GNI, while aid accounted or only 1.2percent. Tese patterns suggest that SSA is ar more depen-dent on exports and investment than it is on aid.

Sub-Saharan Aricas export and investment sectors havebeen steadily growing in importance over the past 30 years.And while the region continues to struggle with manydevelopment challenges and lag behind other developingregions, its growing global export and investment sectorshave helped the region exceed its past economic peror-mance. Sub-Saharan Aricas average GDP per capitagrowth rate over the past ve years has been a pretty

healthy 2.6 percent, which is a signicant improvementover the regions average o -0.2 percent or the previous 25years (1980-2004). Similarly, although SSAs average GDPper capita in PPP terms o US$2,285 remains below theaverage o any other developing region, it has risen by 14.5percent since 1980.

It is no longer the case that sub-Saharan Arica can bepainted as an isolated, aid-dependent region. Rather, orthe most part, countries in SSA today are active partici-pants in the global economy. And the regions persistentdevelopment challenges cannot be blamed solely on the

ineectiveness o aid.Given the importance o these private sector fows or long-run sustainable development, the remainder o this reportocuses on these fows. Tough several gains rom tradeand investment have materialized in SSA, these gains havenot been as marked as those experienced by other devel-oping regions. A contributing actor to the lack o progresson some development indicators and slow progress onothers may be that the region has been unable to eectivelycapture and maximize the gains rom existing and poten-tial private trade and investment fows, despite increased

involvement with the global economy. In particular, boththe distribution and composition o these fows matter.

Distribution and Composition of Trade

and Investment in the Region

Sub-Saharan Arica is made up o 49 individual countriesthat vary substantially across economic and developmentindicators.8 Among other things, these countries attract

8 Kaufmann, Daniel and Veronika Penciakova, On Africas New Dawn: from Premature

Exuberance to Tempered Optimism, Brookings Institution, June 2011; Radelet, Steven,

Emerging Africa: How 17 Countries are Leading the Way, Center for Global Development,

September 2010.

dierent levels and dierent kinds o trade and investment

fows. It may then be that unequal distribution and subop-timal composition o private sector fows are among thereasons that, as a whole, the region has been unable to ullyharness the development gains rom trade and investment.

Investment and trade fows in sub-Saharan Arica areunevenly distributed: Te uneven distribution o privatefows in sub-Saharan Arica can contribute to the regionseconomic and development challenges. I export and FDIfows are concentrated in a ew countries, it is likely thatthe benets o these fows are likewise concentrated.

Between 2008 and 2010, the 10 largest exporters anddestinations or FDI in SSA accounted or 81 percent o allprivate fows. Tese 10 countries have just 39 percent o theregions population, suggesting that the concentration oprivate fows ar exceeded what was warranted by the sizeo these countries.9

In order to get a sense o how the trend in distributiono export fows has evolved, Figure 2 compares the fowrom the largest 10 exporters to the remaining 38.10 Herethe ocus is on export fows since these ar exceed FDIthroughout the period. Te distribution o exports hasbecome more uneven over the past 15 years. Te share oexports rom the majority o SSA economies (the 38 coun-tries not included in the top 10) has allen rom 27 percento the top 10 in 1995 to under 23 percent in 2010. Duringthis same period, these 38 countries share o the popula-tion rose rom 52 percent to 61 percent. 11

Figure 2 also demonstrates that the pattern o risingconcentration persists in bilateral trade relations. Inparticular, over the past 15 years, the exports rom themajority o SSA countries to Europe as a share o the top10 exporters ell by nearly 13 percentage points. Notably,exports to the United States are ar more concentrated than

exports to the world or Europe. Between 1995 and 2010,exports rom the majority o SSA economies as a share othe top 10 exporters did not exceed 10 percent. And romthe already low share o 6.3 percent in 1995, the export

9 Population was chosen to represent country size rather than GDP because exports are

endogenous to trade and investment.

10 In these calculations, the top 10 countries were allowed to vary over time. Further,

the total number of countries analyzed is 48 rather than 49 because of the lack of data

available for South Sudan.

11 Authors calculations based on UNCTAD, International Trade Statistics, 2012 and

World Bank, World Development Indicators, 2012.
http://www.brookings.edu/research/opinions/2011/06/07-africa-new-dawn-kaufmannhttp://www.brookings.edu/research/opinions/2011/06/07-africa-new-dawn-kaufmannhttp://www.cgdev.org/content/publications/detail/1424378/http://www.cgdev.org/content/publications/detail/1424378/http://www.brookings.edu/research/opinions/2011/06/07-africa-new-dawn-kaufmannhttp://www.brookings.edu/research/opinions/2011/06/07-africa-new-dawn-kaufmann


4/8

Analysis

Connections

4

share o these countries ell urther to just 4.5 percent by2010.12

Unsurprisingly, the uneven distribution o private fowsaects outcomes. Te economic perormance o the top tenexporters and FDI destinations between 2008 and 2010 Angola, Congo, Cote dIvoire, Equatorial Guinea, Gabon,

Ghana, Nigeria, South Arica, Sudan, and Zambia exceeds that o the remaining 38 countries. Troughout thepast 30 years, these economies outperormed others in theregion in terms o GDP per capita growth. In particular, inthe past ve years, the average GDP per capita growth othe top 10 countries neared 4 percent, while that o othercountries rested at just over 2 percent. Likewise, the averageGDP per capita o the top 10, $7,223, is nearly three timeshigher than the average o the remaining economies in sub-Saharan Arica.13

Foreign direct investment and exports are heavily

concentrated in the extractive resources sector: Evidencerom developing countries also suggests that the composi-tion o investment and exports matters or development.In particular, investment concentration in the extrac-tive sector may create disincentives to invest in capacitybuilding in other sectors, thus preventing the developmento a diversied economic base. Further, research has shownthat under certain circumstances resource dependence

12 Authors calculations based on UNCTAD, International Trade Statistics, 2012.

13 Authors calculations based on World Bank, World Development Indicators, 2012.

can be detrimental to long-run

growth.14

Similarly, concentra-tion in low-value-added primaryexports may inhibit capacitybuilding and productivity,inducing a perilous dependenceon cyclical and volatile interna-tional prices.15

Over the past ten years, econo-mies in sub-Saharan Aricahave attracted over $302 billionin oreign direct investment.16

Yet only around 1 percento these fows were into themanuacturing sector.17 Tevast majority o FDI is given toextractive industries (oil, gas,and minerals). Since investment

is critical or the development o a strong export base, thelack o investment in manuacturing has contributed toSSAs undiversied export composition.

Between 2008 and 2010, over 70 percent o all exports romsub-Saharan Arica were rom extractive industries. Other

primary commodities accounted or nearly 13 percent oexports. Overall, in 33 countries extractive resources orother primary commodities accounted or over 50 percento total exports. Only 15 percent o exports were romthe manuacturing sector. Moreover, the regions exportcomposition is almost the inverse o global export compo-sition. In recent years, extractive resources accountedor about 22 percent o global exports, other primarycommodities around 10 percent, and manuacturing 68percent.18

14 Boschini, J. Pettersson and J. Roine, Resource Curse or Not: A Question of Appropri-

ability, The Scandinavian Journal of Economics, Vol.109 Issue 3, November 2007;

Brunnschweiler and E. Bulte, The Resource Curse Revisited and Revised: A Tale of Para

doxes and Red Herrings,Journal of Environmental Economics and Management, Vol.55

Issue 3, May 2008; Isham, J., M. Woodcock, M. Pritchett, and G. Busby, The varieties of

resource experience: how natural resource export structures affect the political economy

of economic growth, World Bank Economic Review, 2005; Sala-i-Martin, X. and Subra-

manian, A., Addressing the natural resource curse: an illustration from Nigeria, NBER

Working Paper, 2003.

15 Castro, Lucio, Luciano Cohan and Eduardo Levy-Yeyati, Latin America Economic

Perspectives All Together Now: The Challenge of Regional Integration, The Brookings

Institution, April 2012.

16 United Nations Conference on Trade and Development, Foreign Direct Investment

Statistics, 2012.

17 Page, John, A New Agenda for Aid to Africa, in Foresight Africa: Top Priorities for the

Continent in 2012,Africa growth Initiative at the Brookings Institution January 2012.

18 Authors calculations based on UNCTAD, International Trade Statistics, 2012.

0%

5%

10%

15%

20%

25%

30%

35%

40%

1995 2000 2005 2010

E

xportsfrom3

8/Exportsfromt

op10

Figure 2: Share of Export from 38 SSA Countries as Share of Exports

from Top 10 Exportng SSA Countries

World

Europe

United States

Sources:UNCTAD Bilateral Trade Statstcs, 2012

Exports to:
http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9442.2007.00509.x/abstracthttp://onlinelibrary.wiley.com/doi/10.1111/j.1467-9442.2007.00509.x/abstracthttp://www.sciencedirect.com/science/article/pii/S0095069608000193http://www.sciencedirect.com/science/article/pii/S0095069608000193http://wber.oxfordjournals.org/content/19/2/141.abstracthttp://wber.oxfordjournals.org/content/19/2/141.abstracthttp://wber.oxfordjournals.org/content/19/2/141.abstracthttp://www.brookings.edu/research/reports/2012/04/latin-america-perspectiveshttp://www.brookings.edu/research/reports/2012/04/latin-america-perspectiveshttp://www.brookings.edu/reports/2012/01_priorities_foresight_africa.aspxhttp://www.brookings.edu/reports/2012/01_priorities_foresight_africa.aspxhttp://www.brookings.edu/reports/2012/01_priorities_foresight_africa.aspxhttp://www.brookings.edu/reports/2012/01_priorities_foresight_africa.aspxhttp://www.brookings.edu/research/reports/2012/04/latin-america-perspectiveshttp://www.brookings.edu/research/reports/2012/04/latin-america-perspectiveshttp://wber.oxfordjournals.org/content/19/2/141.abstracthttp://wber.oxfordjournals.org/content/19/2/141.abstracthttp://wber.oxfordjournals.org/content/19/2/141.abstracthttp://www.sciencedirect.com/science/article/pii/S0095069608000193http://www.sciencedirect.com/science/article/pii/S0095069608000193http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9442.2007.00509.x/abstracthttp://onlinelibrary.wiley.com/doi/10.1111/j.1467-9442.2007.00509.x/abstract


5/8

Analysis

Connections

5

Te process o moving towards a more diversied exportbase does take time. o see whether the region is in theprocess o transitioning away rom the extractive sector,Figure 3 explores the trend in the composition o exportsbetween 1995 and 2010. But rather than becoming morediversied, it appears that over the past 15 years, sub-Saharan Arica has become less so. In act, at the same time

that extractive industry exports rose rom 45.3 percentto 69.0 percent o exports, manuacturing ell rom 27.4percent to 16.1 percent.

Tese patterns persist or exports to the United States andEurope. Bilateral exports to the United States have beendominated by extractive resources over the past 15 years.Te share o extractive sector exports rarely ell below 80percent throughout the period. Even rom already highlevels, there has been a slight rise in concentration since1995 (rom 84 percent to 86 percent). Tis came at theexpense o both manuacturing and primary commodity

exports. By 2010, manuacturing exports accounted ornearly 10 percent o total exports, down slightly rom 11percent in 1995. In the case o Europe, extractive exportsrose rom 45.5 percent in 1995 to 58.0 percent in 2010.But the rise was more at the expense o exports in otherprimary commodities than manuacturing. Te primarycommodity sector share o exports ell rom 38 percent to23 percent, while manuacturing saw a slight rise rom 16percent to nearly 18 percent.

Tese prevailing trends in the distribution and composi-tion o private fows in sub-Saharan Arica contribute to

the regions mixed perormance

on economic and developmentindicators. Te causes o unevendistribution and skewed compo-sition o fows are numerous,and as such, the policy implica-tions are many. Businesses oencite poor inrastructure, lack oaccess to capital, bureaucratic redtape, and corruption as amongthe key hindrances to doing business.19 Rather than attempting todo justice to all o these actors,

here the sole ocus will be onsub-Saharan Aricas institu-tional/governance setting. Inparticular, the ollowing sectionswill analyze the regions peror-mance on several key governance

variables with the aim o providing some guidance on areasin which improvements could perhaps help spur more andhigher quality private sector fows.

Institutional Development and Investment

and Trade in Sub-Saharan AfricaGood governance has been ound to promote privatesector development, spur investment, improve resourceallocation, and acilitate long-run sustainable growth. Inparticular, research has shown that high levels o corrup-tion increase bureaucratic red tape, decrease the quality oregulations, reduce FDI, and even impede trade.20 Further,weak regulatory quality and rule o law can discourageprivate investment by introducing uncertainties in areassuch as property and intellectual rights protection.21 And agrowing body o literature has demonstrated that speci-

19 Mutenyo, John and Nelipher Moyo, Addressing Uncertainty to Spur Investment in

Africa, in AGOA at 10: Challenges and Prospects for U.S.-Africa Trade and Investment

Relations,Africa Growth Initiative at the Brookings Institution, July 2010.

20 Dutt, Pushan and Daniel Traca, Corruption and Bilateral Trade Flows: Extortion or

Evasion?, The Review of Economics and Statistics, Vol.92, No.4, November 2010;

Kurer, Oskar, Clientelism, corruption and the allocation of resources, Public Choice,

Vol.77 No.2, 1993; Mauro, Paolo, The Effects of Corruption on Growth, Investment

and Government Expenditure, IMF Working Paper, September 1996; Teravaninthorn,

Supee and Gael Raballand, Transport Prices and the Costs in Africa: A Review of the

Main International Corridors,Africa Infrastructure Country Diagnostics Working Paper,

July 2008; Wei, Shang-Jin, How Taxing is Corruption on International Investors?, The

Review of Economics and Statistics, Vol.82 No.1, February 2000.

21 Cass, Ronald, Property Rights Systems and the Rule of Law, The Elgar Companion to

Property Rights Economics, 2003.

0%

10%

20%

30%

40%

50%

60%

70%

80%

1995 2000 2005 2010

Share

ofTotalExports

Figure 3: Share of Exports from Sub-Saharan Africa by Sector,

1995-2010

Extractve

Resources

Manufacturing

Other Primary

Commodites

Sources:UNCTAD Bilateral Trade Statstcs, 2012
http://www.brookings.edu/research/reports/2010/07/agoa-africahttp://www.brookings.edu/research/reports/2010/07/agoa-africahttp://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00034http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00034http://papers.ssrn.com/sol3/papers.cfm?abstract_id=882994http://papers.ssrn.com/sol3/papers.cfm?abstract_id=882994http://www.infrastructureafrica.org/system/files/WP14_Transportprices.pdfhttp://www.infrastructureafrica.org/system/files/WP14_Transportprices.pdfhttp://www.nber.org/~wei/data/wei2000a/wei2000a.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=392783http://papers.ssrn.com/sol3/papers.cfm?abstract_id=392783http://www.nber.org/~wei/data/wei2000a/wei2000a.pdfhttp://www.infrastructureafrica.org/system/files/WP14_Transportprices.pdfhttp://www.infrastructureafrica.org/system/files/WP14_Transportprices.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=882994http://papers.ssrn.com/sol3/papers.cfm?abstract_id=882994http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00034http://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00034http://www.brookings.edu/research/reports/2010/07/agoa-africahttp://www.brookings.edu/research/reports/2010/07/agoa-africa


6/8

Analysis

Connections

6

cally in countries with poor governance, resource depen-dence will hinder long-run sustainable development.22

Figure 4 highlights the strong positive relationship between

competitiveness and governance. It also demonstrates thatthe majority o countries in sub-Saharan Arica (identiedin Figure 4) are relatively uncompetitive and ace gover-nance challenges. In act, only three countries in the region(Rwanda, Mauritius, and South Arica) rate among theworlds top hal on competiveness and only eight (Lesotho,Ghana, Seychelles, South Arica, Namibia, Cape Verde,Botswana, and Mauritius) rate among the top hal ongovernance.23

As suggested above, there are aspects o good governancethat are more closely related to private sector development

than others. A simple correlation analysis indicates that othe six components o the Worldwide Governance Indica-tors (WGI), government eectiveness (GE), regulatoryquality (RQ), rule o law (RL), and control o corruption

22 Boschini, J. Pettersson and J. Roine, Resource Curse or Not: A Question of Appropri-

ability, December 2005; Brunnschweiler and E. Bulte, The Resource Curse Revisited

and Revised: A Tale of Paradoxes and Red Herrings,2006; Sachs, Jeffrey and Andrew

Warner, Natural Resource Abundance and Economic Growth, NBER Working Paper,

December 1995.

23 The total number of countries covered by the Worldwide Governance Indicators is 213.

(CC) are the our most highly

correlated with the GlobalCompetitiveness and DoingBusiness Indexes.24

On all our governance indica-tors o interest, sub-SaharanArica rates among the bottomthird o countries worldwide(Figure 5). SSA perormance isthe weakest in government eec-tiveness (27th percentile) and thestrongest in control o corrup-

tion (33rd

percentile). Gover-nance in the region also remainsbelow the average or all otheremerging economies, which ratenear the top hal o all countries.

It should o course be notedthat regional averages such asthose presented in Figure 5 maskcross-country variation. On

average across the our WGI components analyzed here(government eectiveness, regulatory quality, rule o law,

and control o corruption), perormance ranges rom thosecountries with governance below the 10th percentile (suchas Somalia, Zimbabwe, Democratic Republic o Congo, andEquatorial Guinea) to those rating above the 60th percentile(including Namibia, Cape Verde, South Arica, Botswana,and Mauritius).

As has been suggested above, these dierences in thequality o governance may help shed some light on thevariations in competitiveness, trade composition, andeconomic and development outcomes seen across theregion. o veriy whether this is borne out in the data,

countries in SSA were divided into terciles based on theiraverage perormance on WGI government eectiveness,regulatory quality, rule o law, and control o corruption in2010.

Countries in the best-governed tercile rate the highest inthe region on the Global Competitiveness and Doing Busi-ness Indexes, while countries in the weakest tercile rate the

24 The six components covered by the WGI are: voice and accountability, political stability

government effectiveness, regulatory quality, rule of law, and control of corruption.

AGO

BEN

BWA

BFA

BDI

CMR

CPV

TCDCIV

ETH

GMB

GHA

KEN

LSO

MDG

MWI

MLI

MRT

MUS

MOZ

NAM

NGA

RWA

SEN

ZAF

SWZ

TZA

UGA

ZMB

ZWE

0

20

40

60

80

100

0 20 40 60 80 100WGIOverallGovernance(percentlerank),2010

WEF Global Compettveness Index (percentle rank), 2011

Figure 4: Global Compettveness & Overall Governance

Sources:World Economic Forum, Global Compettveness Report, 2011; D. Kaufmann, A. Kraay and M. Mastruzzi, "Worldwide Governance

Indicators: Methodology and Analytcal Issues," October 2011.

r = 0.80
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CCQQFjAA&url=http%3A%2F%2Funixware.mscc.huji.ac.il%2F~melchior%2FDEGIT%2F69_Boschini_et_al_Resource_Curse.pdf&ei=c8ORT_DHFo7k6QHt58mxBA&usg=AFQjCNFq4OKBqwsEebLMZpgyCFC16JKo4Qhttp://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CCQQFjAA&url=http%3A%2F%2Funixware.mscc.huji.ac.il%2F~melchior%2FDEGIT%2F69_Boschini_et_al_Resource_Curse.pdf&ei=c8ORT_DHFo7k6QHt58mxBA&usg=AFQjCNFq4OKBqwsEebLMZpgyCFC16JKo4Qhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=959149http://papers.ssrn.com/sol3/papers.cfm?abstract_id=959149http://www.nber.org/papers/w5398http://www.nber.org/papers/w5398http://papers.ssrn.com/sol3/papers.cfm?abstract_id=959149http://papers.ssrn.com/sol3/papers.cfm?abstract_id=959149http://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CCQQFjAA&url=http%3A%2F%2Funixware.mscc.huji.ac.il%2F~melchior%2FDEGIT%2F69_Boschini_et_al_Resource_Curse.pdf&ei=c8ORT_DHFo7k6QHt58mxBA&usg=AFQjCNFq4OKBqwsEebLMZpgyCFC16JKo4Qhttp://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CCQQFjAA&url=http%3A%2F%2Funixware.mscc.huji.ac.il%2F~melchior%2FDEGIT%2F69_Boschini_et_al_Resource_Curse.pdf&ei=c8ORT_DHFo7k6QHt58mxBA&usg=AFQjCNFq4OKBqwsEebLMZpgyCFC16JKo4Q


7/8

Analysis

Connections

7

lowest.25 Dierences in the composition o exports acrossthe three terciles are also quite telling. On average, coun-tries with the weakest governance are more dependent onextractive sector exports than countries with better gover-nance (Figure 6). Moreover, countries with the highestquality o governance in the region tend to rely more on

primary commodity and manuacturing exports than

25 Specically: On the Global Competitiveness Index, the highest tercile was in the 27th

percentile, middle tercile in the 20 th percentile, and lowest tercile in the 6 th percentile.

Similarly, on Doing Business the highest tercile rated in the 45th percentile, the middle

tercile in the 20th percentile, and the lowest tercile in the 9th percentile.

countries with weaker gover-

nance.

And nally, the dividend to goodgovernance and higher qualityprivate fows seems to extendto economic and developmentoutcomes. As able 1 indicates,the countries with the highest-quality governance in sub-Saharan Arica have the highestgrowth rates and GDP per capitaTese countries also have the

lowest maternal mortality ratesand highest access to sanita-tion. At a broader level, thesecountries rate higher on theHuman Development Index thanthe remaining countries in theregion.

Good governance matters or private sector development,and more broadly or economic and social development.Variation in the quality o governance across countries insub-Saharan Arica appears to contribute to dierences in

private fows and economic and development outcomes.Given the positive developmentdividend o good governance,governments in the region (andtheir development partnersin both the public and privatesectors) may nd it benecialin the long run, alongside otherpolicies, to continue to identiyand address governance chal-lenges.

Policy Implications

rade and investment will likelybe the drivers o sub-SaharanAricas growth and developmentin the long run. Already the callsor more trade have been heard.Inward FDI into the region rosenearly eight-old and exportsgrew over six-old over the past

15 years. Most countries in the region are ar more depen-dent on private sector fows than aid. Even with this infux

0

20

40

60

80

100

Government

Effectveness

Regulatory Quality Rule of Law Control of

Corrupton

Percentle

Rnak

Figure 5: Governance in Sub-Saharan Africa and Other Emerging

Economies, 2010

Sub-Saharan Africa Emerging Economies (excluding SSA)

Sources: D. Kaufmann, A. Kraay and M. Mastruzzi, "Worldwide Governance Indicators: Methodology and Analytcal Issues," October 2011.

0%

10%

20%

30%

40%

50%

60%

Extractve Resources Other Primary Commodites Manufacturing

Shar

e

ofTotalExports

Figure 6: Compositon of Exports by WGI Government Effectveness,

Regulatory Quality, Rule of Law, and Control of Corrupton Terciles,

2010 Adequate MiddlingQuality of Governance:

Sources: D. Kaufmann, A. Kraay and M. Mastruzzi, "Worldwide Governance Indicators: Methodology and Analytcal Issues," October 2011.


8/8

Analysis

Connections

8

o investment to the region and the expansion o exportsout o it, the economic and development perormance osub-Saharan Arica continues to lag behind that o otherdeveloping regions.

Tis report has argued that a contributing actor to thisuneven perormance may be the regions inability to ullycapture and maximize the potential gains rom trade. Tecentral problem is not that the region is receiving insu-cient private sector fows (though there is certainly roomor growth), but that the distribution and composition othese fows is not ideal or long-run sustainable develop-ment. Private sector fows are highly concentrated in ewcountries and sectors. Te uneven distribution o thesefows inhibits many countries in the region rom benetingrom trade and investment, and their skewed compositiontoward the extractive sector may also hinder broad-baseddevelopment.

Although the underlying causes o these challenges arenumerous, the evidence suggests that one contributingactor is sub-par governance. Countries with high corrup-tion and weak regulations and rule o law have troubleattracting investment and promoting private sector devel-opment. More broadly, good governance also contributesto growth, poverty reduction, and better development

outcomes. It may thereore be benecial or countriesthroughout SSA to learn rom some o the regions goodperormers and put (or maintain) governance reorms onthe policy agenda. Tis also has important implications orSSAs development partners, who are seeking to improvepublic-private partnerships and increase the eectivenesso trade and FDI as tools or development. In their eortsto improve development outcomes, experts may consider

About the Author

Veronika Penciakova received her BA in economics and interna-

tional aairs rom the George Washington University and her MSc

in Development Studies rom the London School o Economics. She

currently works as a research analyst.

About GMF

Te German Marshall Fund o the United States (GMF) is a non-

partisan American public policy and grantmaking institution dedi-

cated to promoting better understanding and cooperation between

North America and Europe on transatlantic and global issues. GMF

does this by supporting individuals and institutions working in the

transatlantic sphere, by convening leaders and members o the policy

and business communities, by contributing research and analysis

on transatlantic topics, and by providing exchange opportunities to

oster renewed commitment to the transatlantic relationship. In addi-

tion, GMF supports a number o initiatives to strengthen democra-

cies. Founded in 1972 through a gi rom Germany as a permanent

memorial to Marshall Plan assistance, GMF maintains a strong

presence on both sides o the Atlantic. In addition to its headquarters

in Washington, DC, GMF has seven oces in Europe: Berlin, Paris,

Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has

smaller representations in Bratislava, urin, and Stockholm.

ways in which ODA

can be used to mosteectively bolsterArican businessenvironments,alongside, o course,existing investmentsin poverty reduction,health, education,and other criticalareas. Combined withother private sector-

promoting and competitiveness-enhancing policies, good

governance reorms could contribute to long-run sustain-able growth by promoting better development outcomesand attracting not just more private sector fows, but betterquality ones.

Table 1: Economic and Development Performance by Governance Tercile

Quality of

Governance

GDP per

capita

growth,

2005-2010

GDP per

capita

(PPP), 2010

Human

Development

Index, 2011

Maternal

Mortality Ratio

(per 100,000

live births), 2005

Access to

Sanitation,

2010

Adequate 3.3% 5,606 0.52 462 43.8%

Middling 2.2% 2,264 0.43 619 28.5%

Weak 1.8% 4,184 0.40 773 29.4%

Sources: World Bank, World Development Indicators, 2012; United Nations Development Program, Human Development Report, 2011
http://www.gmfus.org/http://www.gmfus.org/

Aid, Trade, Investment and Governance in Sub-Saharan Africa: By the Numbers

Documents

Transcript of Aid, Trade, Investment and Governance in Sub-Saharan Africa: By the Numbers