Price distortions slow economic growth in sub-Saharan Africa (updated)

Real income in sub-Saharan Africa has grown by less than 1% per year over the past half century. Yet within this dismal statistic, there is wide variation. A new column at VoxEU.org explores the policy reforms that may have caused growth to flourish or stagnate.

In their column Kym Anderson and Markus Bruckner note that,

Economic growth in sub-Saharan Africa has been slow for decades

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

(References removed)

Anderson and Bruckner then point out that the in the majority of sub-Saharan African countries, there was a strong policy bias against agriculture over the past half century. By which they mean 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). They also note that there is substantial RRA [RRA is the relative rate of assistance, which 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)] 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.

When discussing their study, Anderson and Bruckner (2011), Anderson and Bruckner say,

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

Why does this matter?

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 programmes, 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.

Yes people, market prices really do matter.

Reference:

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

Update: Tim Worstall also notes The Importance of Market Prices