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5 Findings: Drivers of Growth in West Africa

Table 2 shows the output results from our models for different groupings. The results are presented along the two broad divides for this study—regional and product, in addition to the aggregate West Africa result. As can be seen from the result, a few variables seem to be pervasive, with potent effects across all (or nearly all) classifications. Those that are significant in as much as four of the six groups include lending interest rate, domestic credit, electric power transmission and distribution, the real effective exchange rate and import value index. Of these, two (interest rate and domestic credit) can be regarded as monetary variables while the rest (electric power transmission, real exchange rate and import value index) are prices reflecting deeper (and relative) macroeconomic fundamentals of the economies. Other variables which equally were consistently significant for at least two of the estimations include foreign direct investment (for aggregate West Africa and the aid dependent), remittances (for the aggregate and non-UEMOA group, probably affected by Nigeria), export value index (for the non-UEMOA group), debt service (for the UEMOA and non-UEMOA groups, though more significant for the latter and tax revenue (for aggregate and non-UEMOA estimations).

In understanding the interest rate effect on growth, it is important to situate the discussion within the development of the broad set of monetary variables in the region. Figure 4 graphs average inflation and money supply growth across West Africa. The figure shows that West Africa's inflation has drastically fallen since 1998. Average inflation rates in the region in the 1970s were relatively low. But the collapse of global oil and commodity prices later in the 1970s led to immediate reduction in reserves, rise in country debt profile leading to abandonment of projects, adoption of austerity measures and later structural adjustment policies among others. One area where the impact of the policy changes that followed showed up the most was in broad domestic prices, such that by the mid-1990s, most countries had inflation rates that ranged between 10 and 20 %; with the rates in several countries far exceeding that. But beginning late 1990s, the rate of inflation fell from

Table 2 West African country export products and ranking


Africa rank

World rank

Amount or value of items exported

Major export commodity

Proportion of exports







Cote D'Ivoire






















Iron (metal)
























Phosphates (other mineral)








Burkina Faso










Uranium (other mineral)








Cape Verde






Sierra Leone






Guinea Bissau






an average of 26 % to single digits in about 5 years, and has remained so ever since. But interestingly, West Africa's broad money growth has not fallen the same way, as shown in the figure.

As at the 1970s, growth in M2 averaged less than 20 %. But this figure gradually increased as countries either got more confident about the macroeconomic environment or persuasions about the overall effects of money supply changed, leading up to an average of 27 % in 1994. The growth, like most other macro variables, has continued to gyrate falling to as low as 6 % in 1998 before rebounding to the 1920s. Thus, while inflation has gone quite down, growth of money supply remains up. The implications of this for the sort of growth the region has experienced and even for growth going forward are not miniscule. It therefore is important to understand the driving force behind this unique 'coincidence' of low inflation and rising money supply and its impact in the determination of which sectors can contribute to growth and how.

First, it is difficult to dissociate the rise of the concept and practice of Central Bank independence in many countries from the phenomenon described above. Having acquired independence, many central banks in West Africa set themselves singular goals of inflation management, with targets regularly put at single digit, for

Fig. 4 Trends in West Africa's inflation and broad money. Source: Authors' calculations (from WDI and IFS)

good cause of achieving macroeconomic stability. Given the recurrent theme of high volatility and the need to engender macroeconomic stabilization (often proxied most by inflation) for most of the 1980s and 1990s, the very narrow focus among “liberated” Central Banks on inflation management, seemed reasonable. Some countries went full-scale and explicit on inflation targeting while others adopted implicit targeting regimes. This was not helped by the fact that inflation is among closely monitored indices in IMF Article 4 consultation and since most low income countries were struggling to regain relevance and access to global capital markets, inflation had to be forced down.

But there was also a misreading of the macroeconomic environment under which most of these Central Banks operated. Two factors complicate the issues—first is the monetization of foreign exchange earnings and the second are the operations of fiscal authorities. Both remain very huge sources of money supply. Thus, inflation control for many of the central banks turned to no more than monotonous mopping up excess liquidity, a fire-fighting process aimed at curtailing the negative toxins injected into the broader economy by these two agents. This the Central Bank does by continually getting on the money market and selling instruments in order to control the liquidity of the banking system. In effect, most of West Africa has had no more than reactionary central banking, imposed upon it by its unique characteristics of producing and dealing in natural resources. Only few countries that have managed to coordinate the receipts and use of resources or had banking reforms that minimize the overall impact of such 'toxification' of the macro economy. For the UEMOA group of countries, with unified monetary rules and activities, this effect is even stronger.

The result of the above configuration of events showed up in the costs and pricing of money market instruments and affected capacity of national governments to manage structural factors that help growth. One such is interest rate, which matters for growth, and very negatively too! High rates of lending rates have coexisted with very low returns to saving, forcing down savings while at the same time serving as critical disincentive to investment. Thus, most African countries have traded off savings and investment for low inflation within a macroeconomic system where fiscal authorities are improperly reined in and foreign inflows are not tied to levels of activities and investments in the productive sectors of agriculture and manufacturing but to natural resources, and where the Central Banks have been trained to trade off productivity for stability, and the latter is almost exclusively defined in terms of low inflation. In effect, funds are flowing within the individual economies, but the flow merely supports a rent-sustaining growth that creates artificial financial barriers which ultimately do not add to improvements in the real sector. Unfortunately, without a robust capital market, real sector investment funding is stalled, leaving growth in sectors that can match both the risk and returns available in the money market or are so short term in outlook as to make do with resources from banks at the very high rate of interest.

The above is further complicated by the real exchange rate channel, which as the results also indicate, is equally important and pervasive. This has been much discussed in the literature [1] (referred to as the Dutch disease) for resource dependent countries. For the purpose of the current work, it suffices to tie that bit of the discussion to the capital formation challenge, in part made difficult by the negative role played by credit to the domestic private sector, both of which are shown in the regression results. That is not in any way to downplay the vexed issue of price distortions that alter incentives in favour of high-and-fast-return resource-based investments, but to draw attention to another link that has often been ignored in mainstream literature. As is widely acknowledged, domestic capital formation is a function of credit availability or capital imports. In many African countries, it is taken as given that investments in the real sector (particularly agriculture and manufacturing) are fraught with risks. Such risks often mean that beyond considerations of capacity to take on the very high cost of finance on the part of the investor, the financial intermediary has very low incentive to lend to an agent with high risk of default. The tweaking of incentives towards short-gestation, quick return trade and services (particularly in importation and natural resource exploi-tation and distribution) means less funds (and attention) to long-gestation, high risk investments in agriculture and manufacturing. Thus, while the economy may record significant capital formation, the sectoral distribution of such capital is regularly skewed against the real sector.

Since gaps between aggregate demand and supply would always be met from the external sector, the effect of weak domestic production has been a rise in import for nearly all countries in the region. It is important to note at this stage that the structure of imports has changed in two ways. First, there is the change in volume and value which has been persistent across Africa. But even more fundamental is that the composition of such imports is not the same in the current boom as it was in the boom of the 1970s. The boom of the 1970s was followed by an import substitution industrialization that placed emphasis and therefore import demand on capital goods, raw materials and industrial production components for the newly established domestic firms. The current boom neither has an import substitution industrialization nor indeed any form of industrialization programme following. The result is that imports have mainly gone to fill the gap in demand for final goods across all sectors. Consequently, West Africa's current growth is driven by a rising urbanization (or more specifically, the growing middle income group within these urban centres). Interestingly, these middle income groups are basically a class of consumers, mostly employed in the services sub sector. They are not only highly import-dependent, but quite vocal. In addition to fiscal authorities, activities of this group are the next second most important pressure point on relative prices. Therefore, rise in import value index hurts economic growth through activities of these middle income group whose consumption basket comprise mostly of imported products. Neither middle income-induced nor public sector-induced imports have supported production; instead, they help final consumption.

And this brings us to the import-export dilemma. Despite the gains in growth, West Africa remains a very marginal (and fragile) player in the global economy. Neither the sterling growth performances nor the quadrupled commodity prices seem to have affected the region's share of world export. Africa's export deflator has been largely stagnant. In effect, while the region has seen a rise in the value of its exports, when this is indexed and related back to the history of the value of the exports in previous decades, such value diminishes or altogether disappears. By implication, export gains were, in reality, not as significant as the nominal values of its performances would project. By contrast, the region's import basket has not only consistently become more diversified; the overall value of items in the basket has risen significantly over the period under consideration. It is difficult to dissociate this weak performance in export value index from the structure and concentration in Africa's export basket. There has been increase in volume of West Africa's exports, especially with the ascendancy of alternative markets (especially India and China). However, as the facts seem to indicate, this has neither meant Africa is better off in terms of the returns to its products, nor has it increased the overall value of the items it is offering in the market over the years.

That this concentration of exports emanates from concentration of production is equally difficult to deny. The rise in imports value deflator may not be unconnected to a subtle pressure that emanates from a change in partnership and the need for continued 'bilateral' reciprocation of trade relations. While the new trading partners have managed not to either support increase in the value of items exported by the region, they have also strongly (and steadily) pressured a rise in imports, increasing not only the value, but also the diversity, of imported items. It might be difficult to prove that this is merely the outcome of voluntary bilateral relations as much as it might be the outcome of a rising new trend in global geopolitics. It seems there is a demonization of the old masters that has managed to silently keep eyes off a new trend of unilateral (or unreciprocated) value addition from Africa to its new trading partners. While the export basket can, and indeed, does give a broad indication of the weak and deteriorating diversification in most of Africa, the more profound story lies in the composition of domestic value added. For an export-oriented economy, there could be huge gaps between domestic composition of output and export concentration. But this presupposes differences in incentives facing the production of tradables and non-tradables (Zietz 1996). Where such differences are not pronounced, export concentration would mirror domestic concentration. Evidence seems to suggest this to be the case.

Earlier in Sect. 2, we showed trends in manufacturing and agricultural value added. At the risk of retelling an old story, attention has to again be drawn to the divergence in trends between industry and manufacturing value added. Africa's import substitution industrialization (ISI) strategy has received much knock in both the literature and policy circles over the years. But evidence seems to indicate that the impact of the ISI persisted all the way through the late 1980s. The broad growth implosion of the early 1980s may have emanated from natural resources, leading to the downward spiral of industry value added, but the longer term effects were on manufacturing. Whatever name could be given to the alternative adopted by Africa following the failure of the ISI, it has hardly produced as good a result as the discredited policy. Africa's unique growth fragility—in particular the simultaneous existence of large (commodity price and export volume) booms and sterling domestic growth on the one hand and stagnant export unit value index as well as non-diversification on the other—could find easy explanations in the divergence between industry and manufacturing. In particular, the continent has managed to sustain investment in natural resource extraction without translating any of the proceeds to higher value products in other sectors. For some, this is a sure ratification of the already quite celebrated literature on Dutch disease and the consequent weak (or lack of) inter-industry and sectoral spillovers, exchange rate overvaluation and (to use the words of Lederman and Maloney 2012) 'toxic political economy effects'. Interestingly, adoption of import substitution industrialization was part of a bid to restructure and prevent such toxic political economy effects. When therefore the ISI was declared null and void, recourse to natural resources, the known devil, was preferred to any unknown angel, an uncertain search for a new industrial anchor. Add this to the availability of trading partners ever more willing to sign for the Africa's raw materials and the cycle is complete for the concentration on industry that has plagued the continent.

The above is part of the reason why real exchange rate (relative prices) reflecting relative differences between domestic fundamentals and the rest of the world, has seemed to be against the region. Real exchange rate depreciation is good for growth. But the reliance on raw materials and the monetization of proceeds have also meant that obtaining depreciated real exchange rate among West African countries is difficult. Domestic real production is therefore hurt and importation becomes much more attractive. But it is not only imports that benefit, the services sector, which has capacity for quicker returns than manufacturing and agriculture, easily benefit from this. Thus, the region has become increasingly 'servicified'. But the 'servicification' is not as much the challenge as the quality of products from the service industry. Given that the services sector is a derived industry, its overall quality and the quality of its products draw from the quality of the real sector it supports. Consequently, the quality or advancement of the real sector ahead of or concurrent with the development of the services sector matters for the quality of the service sector. Where the real sector is advanced, services, even when non-tradable, will produce equally advanced products that could either feed into this advanced real sector and produce quality exports or increase intra-industry linkages that will enhance overall performance of the economy. Over time and in many climes, it has evolved into an exporting industry on its own, serving not only as an enhancer of real exports, but also producing 'advanced services' exported to the rest of the world. However, its origin would always be the real sector. So where the mother real sector is underdeveloped or weak, the emanating services sector is equally weak—at least during initial stages of development. In saying this, we are yet to refer to the fact that a significant proportion of products from the services subsector is non-tradable.

That the support of the services subsector for an extractive industry has been part of the complications of growth without diversification is best demonstrated by the trends in the export unit values. If growth in export unit values can act as proxy for the accumulation of underlying factors of production that yield high quality goods, then the stagnancy of Africa's export unit values imply that the continent has failed to accumulate high-value factors of production. Interestingly, because it derives from an industry that is neither efficient nor productive, it cannot produce value that is superior to the agriculture which it has managed to displace. Thus for many commodity dependent African countries, the transition has merely been from low value added agriculture to low value services, with little or no change in its linkages to the global value chain. This is not mere rhetoric; its implications for sectoral linkages and overall dynamism of the production structure are not minuscule.

The foregoing leads up to the second point namely, the rise of a set of interest groups that feed upon the sectoral inefficiencies. Clearly, as such groups increasingly take root and spread, dislodging them becomes more difficult should restructuring be required at any point in the future. Whatever may be said in favour of the current production structure in Africa, it is difficult to deny that it is unsustainable—given its reliance on an uncertain global demand and other variables that are not only outside the control of the policymaker, but also inherently unstable. In effect, restructuring will become inevitable at some point. For some countries, this will be a deliberate programme (maybe by a reform minded regime); for others it will be involuntary (as in the wake of commodity price glut or the emergence of new technologies that outmodes the commodity). But therein will be challenges. History has shown that dislodging such entrenched interests regularly prove more difficult that the process that enthroned them.

The structural support that should come from domestic energy (and expectedly other critical infrastructure) seems to be critical (following the results), but lacking. At the broad ECOWAS level and for the three product groups, electric power transmission and distribution remains important. The results seem to indicate that this one factor is hurting growth for the mineral exporting and aid dependent groups. Electricity supply and export and import value indices are about the most critical determinants of growth in the group of mineral exporters. For the agricultural countries, domestic credit, electric power transmission and the real effective exchange rate are the important explanatory variables. For the group of aid dependent countries, such factors as foreign direct investment flows, reserves to debt ratio interest rate, lending interest rate, electric power transmission and the real effective exchange rate are the critical determinants of growth. As can be seen, the set of determinants are similar across the different product groups except that factors that make credit and investible resources more readily available affect growth more deeply in the agricultural countries than they do in the mineral exporters. This reflects the relative lower liquidity in these economies relative to their mineral exporting counterparts (Table 3).

  • [1] See Gylfason et al. (1999), Sachs and Warner (2001) and Raghuram and Subramanian (2011) where perhaps through an appreciated exchange rate or classic Rybczinski effects, resource booms depress manufacturing activity.
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