Blog
Good and Bad Times

by Jorge Saba Arbache and John Page

During the last three decades growth in Sub-Saharan Africa has been both low and highly volatile. Between 1975 and 2005 per capita income PPP grew by 0.7 per cent per year, by far the lowest among developing regions. At the same time growth rates were more volatile than in any other part of the world. Interestingly, however, there is no evidence of a direct correlation between growth volatility and Africa’s long term economic performance. This result is unexpected and turns out to be misleading. Africa’s poor long run growth was in fact a product of good and bad times for its economies that featured surprisingly high rates of growth and decline that occurred with almost equal frequency.

To explore the relationship between volatility and growth in Africa we extend the work of Hausmann, Pritchett and Rodrik (2005) to identify growth accelerations and decelerations—medium term deviations from African economies’ long run trends (see our working papers under further reading below). Our method features two main novelties. First, it identifies both growth accelerations and decelerations, and second, it defines growth accelerations and decelerations relative to each country’s economic performance. We believe that this method is well suited to understanding the underlying dynamics of Africa’s slowly growing but volatile economies.

Using the most recent data on GDP growth per capita in PPP, we find that African countries have experienced numerous growth acceleration episodes in the last 30 years, but also a comparable number of growth collapses. Table 1 shows the frequency of accelerations and decelerations and their associated growth rates during selected periods.

Between 1975 and 2005 there was a slightly higher probability of the representative African country experiencing a growth acceleration than a deceleration: 25 per cent of the country-year observations are growth accelerations, while 22 per cent are growth decelerations. Between 1975 and 2005, countries in Africa that experienced growth accelerations managed to grow on average by 3.6 per cent during those episodes, compared with the region-wide average of 0.7 per cent. The rapid medium term growth experienced by the typical African country during a growth acceleration is good news; African economies are indeed capable of growing in tandem with the better performers world-wide. But their equally rapid declines are cause for concern. During decelerations countries contracted on average by -2.7 per cent.​

Given the almost equal probabilities of growth accelerations and decelerations, most of the benefi ts of growth accelerations in the continent were offset by growth collapses. Had Africa avoided its growth collapses it would have grown at 1.7 per cent a year in per capita terms instead of 0.7 per cent, and the income per capita would have been at least 30 per cent higher in 2005 from avoiding bad times.

The relative frequency of good and bad times is also refl ected in changes in Africa’s long run pattern of growth. Accelerations were more frequent in 1995-2005; decelerations were more common in the two preceding decades. Forty two per cent of the country-year observations during 1995-2005 occurred in countries experiencing growth accelerations, and only 12 per cent in countries undergoing growth decelerations. In contrast during 1975-1984, growth decelerations were 350 per cent more frequent than accelerations. By 1985-1994 this ratio had dropped to 71 per cent, mainly due to a sharp rise of accelerations to 21 per cent from 4 per cent.

In 1995-2005, the average growth rate for countries during acceleration episodes was 3.8 per cent, surprisingly, lower than in 1975-1984, a period of very modest regional economic growth. This reflects a compositional effect at work. In the last decade even long stagnant economies experienced some sustained growth, pushing down the average during acceleration episodes, whereas in 1975-1984 the high average growth rate during accelerations was mainly due to rapid growth in the small number of countries experiencing growth accelerations. The average (negative) growth rate for countries experiencing growth decelerations in 1995-2005 was less than half that in previous decades, contributing to the more positive overall economic performance of the period. Economic declines had both the highest frequency—double that of the next highest decade—and the greatest impact on countries during the period 1985-1995.

Do growth accelerations and decelerations matter? 

We find evidence that economic, social, governance, and institutional variables are signifi cantly different during acceleration and deceleration episodes. The major changes in national accounts during growth episodes take place in investments and savings, rather than in consumption. Savings and investments are higher during accelerations as compared with normal times and substantially lower during deceleration episodes. Foreign direct investment during accelerations is six-times the figure for deceleration episodes. Trade is substantially lower during decelerations. 

We also fi nd an important asymmetry between how growth accelerations and decelerations affect human development outcomes. While growth accelerations result in relatively small improvements in human development, decelerations have important negative impacts on education and health outcomes. Under 5 mortality and infant mortality, for example, are substantially higher during growth decelerations than in normal times, but they do not improve during growth accelerations. These results suggest that preventing growth collapses is essential should Africa want to attain the Millennium Development Goals.

Avoiding bad times and extending good times

We find that growth decelerations are more predictable than growth accelerations. Doing the wrong things—poor macroeconomic management, poor structural policies and institutions, and poor governance—appears to be a relatively broadly based predictor of a descent into bad times. Countries that have low savings and investment have greater probability of a deceleration. Poor macroeconomic management appears to be an important factor in precipitating bad times. Decelerations are accompanied by high inflation and significant exchange rate misalignment; and countries that trade less are more exposed to growth decelerations. Governance indicators deteriorate during bad times. Avoiding conflict appears to be a major part of avoiding growth decelerations.

There are fewer correlates with growth accelerations. Increases in foreign direct investment increase the odds of a growth acceleration, while government consumption and major confl icts reduce the odds.

In the African context it may be easier to understand what policy makers should not do to avoid bad times rather than what they should do to achieve sustained growth.

One possible explanation is that there may be fewer commonalities among success stories. Opportunities for growth vary with sound policies and good governance, but also with timing, initial conditions, inherited institutions, geography, and availability of natural resources. Leadership, and other less observable factors, may also have a role in achieving sustainable growth. ​

Jorge Saba Arbache is Senior Economist in the World Bank’s Office of the Chief Economist (AFRCE) of the Africa Region. Before joining the Bank he was Professor of Economics at the University of Brasilia (1991-2005). He also served as an economist at the International Labour Organization in Brasilia (1989-1991).​

John Page is currently Senior Associate Member, St Anthony’s College and Visiting Scholar, Centre for the Study of African Economies at the University of Oxford on leave from the World Bank. At the time this article was written he was the Chief Economist for the Africa Region, World Bank. He has also been the World Bank’s Director of Economic Policy and Director of Poverty Reduction.