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...recovered ground lost during 1980s. Moreover, Africa's health conditions are by far the worst on the planet. The AIDS pandemic is wreaking havoc, as is the resurgence of malaria due to rising drug resistance and the lack of effective public health systems. Africa's population continues to soar, adding ecological stresses to the economic strains. Policy-based development lending to Africa over the past twenty years, known as structural adjustment lending, did not solve the problem. A heavy debt burden is evidenced by the 155 Paris Club restructurings of African countries' debt between 1980 and 2001, much more than for any other region. In general, Africa remains mired in poverty and debt.
This paper focuses on the tropical sub-Saharan African countries with populations of at least 2 million people in 2001. We leave out North Africa (Algeria, Egypt, Libya, Morocco, and Tunisia,), southernmost Africa (Botswana, Lesotho, Namibia, South Africa, and Swaziland), and a number of very small economies (Cape Verde, Comoros, Djibouti, Equatorial Guinea, Gabon, The Gambia, Guinea-Bissau, Mauritius, Sao Tome and Principe, and Seychelles). Both nontropical ends of Africa are much richer than tropical Africa. They grow temperate crops, escape the worst of malaria, enjoy (in the south) vast deposits per capita of gold and diamonds, and (in the north) benefit from proximity to EU markets. The smallest economies present idiosyncrasies that would distract more than inform the analysis.
The thirty-three sub-Saharan African countries on which we focus (and which are listed in table 2) had a combined population of 617 million in 2001, with a population-weighted average annual income of $271 per person, or a mere 74 cents a day. Every country on the list is a low-income country according to World Bank country classifications, and twenty-six are among the forty-nine Least Developed Countries in the world by the United Nations classification. Of the four countries with income per capita of $500 or more, three (Angola, Cameroon, and Congo) are oil exporters, and only Cote d'Ivoire, which is currently in a vertiginous political and economic collapse, is a non-oil exporter. Every country on the list has a life expectancy at birth below sixty years, and in all but Ghana, Madagascar, and Sudan life expectancy at birth is below fifty-five years. Child mortality rates (deaths before the age of five per 1,000 live births) are above 100 in every country.
The standard diagnosis is that Africa is suffering from a governance crisis. With highly visible examples of profoundly poor governance, for example in Zimbabwe, and widespread war and violence, as in Angola, the Democratic Republic of the Congo, Liberia, Sierra Leone, and Sudan, the impression of a continent-wide governance crisis is understandable. Yet it is wrong. Many parts of Africa are well governed even though stuck in poverty. Governance is a problem, but Africa's development challenges run much deeper.
Using our thirty-three-country sample, table 2 reports some common governance indicators that make this point. The first column presents a ranking of African governance compiled by Steven Radelet, (1) who regresses a set of widely used World Bank governance indicators due to Daniel Kaufmann, Aart Kraay, and Massimo Mastruzzi on GDP per capita, (2) and ranks countries according to the residuals from that regression, thereby standardizing the measurement of governance by level of income. This procedure recognizes that poorer countries have systematically poorer governance measures than richer countries, since good governance itself requires real resources. Well-governed African countries are defined as those with residuals at least 1 standard error above, and poorly governed countries as those with residuals at least 1 standard error below, the regression line. "Average" countries are those with residuals within 1 standard error on either side of the regression line. The table shows that, by this ranking, many countries are well governed. Nor is there evidence that Africa's governance, on average, is worse than elsewhere once we control for income levels: a regression (not reported in this paper) of several different governance indicators on the logarithm of GDP per capita (measured at purchasing power parity) and a dummy for tropical sub-Saharan Africa results in a statistically insignificant coefficient for the dummy variable.
The second column of table 2 repeats the same procedure using the Corruption Perceptions Index of Transparency International. (3) All but one of the African countries in our sample for which scores are available receive scores of "good" (that is, low corruption) or "average" after we control for income. The third column reminds us as well that many African countries have become democracies in recent years, and thus are scored as "free" or "partly free" by the well-known Freedom House ranking. (4) The final column, however, shows real consumption expenditure per capita in 2000, as a percentage of its 1980 level, to point out that many of the relatively well governed African countries have been unable to increase the material well-being of their populations. Table 3 makes this point more systematically in a cross-country regression, which shows that, after we control for initial income in 1980 and the quality of governance (according to several alternative measures), sub-Saharan African countries grew more slowly than other developing countries, by around 3 percentage points a year. Africa's crisis requires a better explanation than governance alone.
Our explanation is that tropical Africa, even the well-governed parts, is stuck in a poverty trap, too poor to achieve robust, high levels of economic growth and, in many places, simply too poor to grow at all. (5) More policy or governance reform, by itself, will not be sufficient to overcome this trap. Specifically, Africa's extreme poverty leads to low national saving rates, which in turn lead to low or negative economic growth rates. Low domestic saving is not offset by large inflows of private foreign capital, for example foreign direct investment, because Africa's poor infrastructure and weak human capital discourage such inflows. With very low domestic saving and low rates of market-based foreign capital inflows, there is little in Africa's current dynamics that promotes an escape from poverty. Something new is needed.
We argue that what is needed is a "big push" in public investments to produce a rapid "step" increase in Africa's underlying productivity, both rural and urban. The intervention of foreign donors will be critical to achieving this step increase. In particular, we argue that well-governed African countries should be offered a substantial increase in official development assistance (ODA) to enable them to achieve the Millennium Development Goals (MDGs), the internationally agreed targets for poverty reduction, by 2015. (6) The goals are useful intermediate targets for breaking Africa's poverty trap, because they address the key sectors in which major productivity improvements are both needed and achievable, and because the rich countries have repeatedly committed themselves to helping Africa achieve these goals, with more funding if necessary. (7) However, the rich countries have not yet delivered on that promise.
We begin by outlining our theory of Africa's poverty trap. This is followed by a discussion of the structural conditions and history that have led the continent into such a trap. Following that, we identify how a big push in key investments could enable Africa to meet the MDGs, and how that, in turn, would help to extricate Africa from its current development trap. We then estimate the financial costs required to meet the MDGs, and we suggest how those costs could be allocated between domestic resources in Africa (both public and private) and increased ODA. Finally, we propose a new framework for donor-African relations to underpin a big push designed to meet the MDGs.
The Theory of Africa's Poverty Trap
Consider a standard neoclassical growth model in which output per capita q is produced by a production function Af(k), where A is total factor productivity and k is the capital-labor ratio. For the moment we take A to be constant. The national saving rate is s, and d is the rate of capital depreciation, with n denoting the rate of population growth. The rate of capital accumulation dk/dt is given by
(1) dk/dt = sAf(k) - (n + d)k.
A change in the capital-labor ratio is called capital deepening. The term (n + d)k is called capital widening and is equal to the amount of saving per capita that is needed to hold the capital-labor ratio constant in the face of population growth and depreciation. Equation 1 says that capital deepening equals saving per capita minus capital widening.
The economy grows in per capita terms as long as saving per capita exceeds capital widening. If saving is lower than capital widening, the economy experiences a decline in output per capita. The standard neoclassical model is typically presented as if the economy necessarily grows when k is very low, in the famous diagram reproduced in figure 1. In the figure, sAf(k) is assumed to be very steep at the origin and, in particular, steeper than the (n + d)k ray from the origin. In that case, when k is low, dk/dt is positive, since it is equal to the vertical distance between the sAf(k) curve and the (n + d)k ray. Indeed, starting at a very low capital-labor ratio, k and q rise asymptotically to a unique, positive steady-state equilibrium at [k.sup.E] and [q.sup.E] = Af([k.sup.E]).
[FIGURE 1 OMITTED]
Actually, figure 1 is a special case, and a not very plausible one at that. When k is very low, two other things tend to be true. First, the marginal productivity of capital also tends to be very low (instead of nearly infinite, as the standard theory assumes), because a minimum threshold of capital is needed before modern production processes can be started. Factory production requires, for example, a basic infrastructure of electricity, roads, and a functioning port, as well as a literate and numerate labor force. When these basic conditions are not present, small increments of k may have little effect. However, once the basic infrastructure and human capital are in place, the marginal productivity of capital may indeed become very high in a low-income country. The capital threshold can be seen in figure 2: small increments of k below a threshold [k.sup.r] might do little to raise production, and the sAf(k) curve might be very flat near the origin. It then becomes steep in a middle range before flattening out once again at high levels of k. In short, there is an early period of increasing returns to scale in capital before the more traditional constant or decreasing returns to scale set in.
[FIGURE 2 OMITTED]
Second, the saving rate can become very low or even negative when k is very low, because impoverished households do not save, but rather must use all (or more than all) of their current income in the struggle just to stay alive. Once basic needs are met, poor households may save quite a lot of income, but not before. The saving trap leads to a picture like figure 3, in which sAf(k) is less steep than (n + d)k when k is very low, and then turns steeper in an intermediate range. Note that sAf(k) looks as it does in figure 2 even without assuming a threshold level of capital. The key implication of figures 2 and 3 is that dk/dt is negative when k < [k.sup.T]. When an economy begins with very low capital, both the capital-labor ratio and output per capita tend to decline over time. The very poor indeed get poorer, pushed into more extreme poverty by the lack of capital accumulation coupled with population growth. Only when an economy has a capital-labor ratio above a minimum threshold [k.sup.T] does it tend to achieve economic growth and converge to the steady-state [k.sup.e] and [q.sup.E].
[FIGURE 3 OMITTED]
To formalize these ideas using the simplest version of the neoclassical model, we can use the Harrod-Domar or AK model, in which q = Ak. In this case, equation 1 becomes
(2) dk/dt = sAk - (n + d)k.
The proportionate growth rate of the economy is given by
(3) [gamma] = (l/q)dq/dt = sA - (n + d).
The economy grows if sA > (n + d) and declines if sA < (n + d). As is well known, the AK model does not have a steady-state equilibrium. The economy either grows or declines at a constant rate.
Let us now see how a poverty trap arises in the AK model, beginning with a capital threshold. Suppose that A is low ([A.sup.L]) until a threshold level of infrastructure capital [k.sup.T] (the minimum capital needed for roads, ports, electric power, and human capital) is reached, and then becomes high ([A.sup.H] > [A.sup.L]). If it is the case that s[A.sup.L] < n + d while s[A.sup.H] > n + d, the economy can get stuck in a poverty trap. Specifically, if the capital stock starts below [k.sup.T], the economy shrinks at the rate s[A.sup.L] - (n + d) < 0, whereas if k starts above [k.sup.T], the economy grows at the rate s[A.sup.H] - (n + d) > 0. The picture is similar to figure 2, with a relatively flat sAf(k) curve near the origin, but with a vertical segment at k = [k.sup.T] as the economy transits from [A.sup.L] to [A.sup.H], and then a relatively steep segment for k > [k.sup.T].
Consider alternatively the case of the saving trap, in which the saving rate is very low or negative when k is very low. As an illustration, suppose that households save a constant fraction G not of total income but of discretionary income, which we define as income after deducting the costs of meeting basic needs. Poor countries calculate basic needs according to an estimate of the minimum caloric intake necessary for a healthy and productive life, plus ancillary essential needs of clothing, shelter, cooking fuel, and a few other basic amenities. Let these minimum needs be represented by the poverty line [q.sup.P] = A[k.sup.P]. Discretionary income is then [q.sup.d] = q - [q.sup.P] if q > [p.sup.p] and [q.sup.d] = otherwise. We assume that saving per capita sq is equal to [sigma][q.sup.d]. The saving function is therefore
(4) s = for...
NOTE: All illustrations and photos
have been removed from this article.
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