RISE FACING THE CHALLENGES, CONTINUING TO STATE OF THE AFRICA REGION WORLD BANK IMF SPRING MEETINGS 2015

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1 FACING THE CHALLENGES, CONTINUING TO RISE STATE OF THE AFRICA REGION WORLD BANK IMF SPRING MEETINGS 2015 Francisco H. G. Ferreira Chief Economist, Africa Region The World Bank

2 OUTLINE 1. Africa s rise 2. Structural challenges a. Harnessing demography b. Boosting productivity c. Promoting inclusiveness 3. Immediate risks a. The end of the commodity super-cycle b. Fragility and violence c. Health challenges 4. Policy lessons, old and new

3 Real GDP per capita (US$ at 2005 prices) 1. Africa s rise: Twenty years of sustained economic growth have established that Africa can find its own path to successful development Source: World Development Indicators. Actual Trend

4 South Sudan Central African Republic Sudan Equatorial Guinea Madagascar Cape Verde Swaziland South Africa Guinea Comoros Mali Guinea-Bissau Senegal Botswana Mauritius The Gambia Cameroon Benin Burundi Cote d'ivoire Mauritania Seychelles Sao Tome and Principe Angola Namibia Gabon Eritrea Togo Niger Sierra Leone Lesotho Malawi Congo, Rep. Kenya Uganda Nigeria Chad Burkina Faso Congo, Dem. Rep. Tanzania Rwanda Mozambique Zambia Ghana Zimbabwe Ethiopia Liberia 1. Africa s rise: Progress has been sustained since the Great Recession, albeit heterogeneously 12 Growth in GDP, average GDP growth Source: World Development Indicators.

5 South Sudan Central African Republic Sudan Equatorial Guinea Madagascar Cape Verde Swaziland South Africa Guinea Comoros Mali Guinea-Bissau Senegal Botswana Mauritius The Gambia Cameroon Benin Burundi Cote d'ivoire Mauritania Seychelles Sao Tome and Principe Angola Namibia Gabon Eritrea Togo Niger Sierra Leone Lesotho Malawi Congo, Rep. Kenya Uganda Nigeria Chad Burkina Faso Congo, Dem. Rep. Tanzania Rwanda Mozambique Zambia Ghana Zimbabwe Ethiopia Liberia 1. Africa s rise: Progress has been sustained since the Great Recession, albeit heterogeneously Growth in GDP and GDP per capita, average GDP growth GDP per capita growth Source: World Development Indicators.

6 South Sudan Central African Republic Sudan Equatorial Guinea Source: World Development Indicators. Madagascar Cape Verde Swaziland South Africa Guinea Comoros Mali Guinea-Bissau Senegal Botswana Mauritius The Gambia Cameroon Benin Burundi Cote d'ivoire Mauritania Seychelles Seychelles Sao Tome and Principe Angola Namibia Gabon Eritrea Togo Niger Sierra Leone Lesotho Malawi Congo, Rep. Kenya Uganda Nigeria Chad Burkina Faso Congo, Dem. Rep. Tanzania Tanzania Rwanda Mozambique Zambia Ghana Zimbabwe Ethiopia Liberia 1. Africa s rise: Progress has been sustained since the Great Recession, albeit heterogeneously Growth in GDP and GDP per capita, average GDP growth GDP per capita growth

7 Cumulative growth index (1995=1) 1. Africa s rise: This growth has been investment-driven and, since 2004, increasingly financed by foreign savings Source: World Bank C I G X M

8 Output per capita index (1995=1) 1. Africa s rise: Growth has been particularly pronounced in the extractives and services sectors Growth in GDP per capita by sector Sub-Saharan Africa Agriculture Manufacturing Other industry Services Source: staff estimates based on WDI (2015). Note: Population-weighted average of 29 countries for which sectoral value added data can be decomposed into manufacturing and other industry

9 % 1. Africa s rise: In a global context 7 Average annual growth in GDP and GDP per capita, PPP (constant 2011 international $) Europe & Central Asia Latin America & Caribbean Middle East & North Africa Sub-Saharan Africa East Asia & Pacific South Asia GDP GDP per capita Source: World Development Indicators.

10 Outline 1. Africa s rise 2. Structural challenges a. Harnessing demography b. Boosting productivity c. Promoting inclusiveness 3. Immediate risks a. The end of the commodity super-cycle b. Fragility and violence c. Health challenges 4. Policy lessons, old and new

11 Structural challenges: Harnessing demography Population projections Medium fertility scenario East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa Source: adapted to World Bank regions using data from United Nations, Department of Economic and Social Affairs, Population Division (2013).

12 2. Structural challenges: Harnessing demography Dividend or Disaster? Highest fertility rates in the world are associated with: Low women s empowerment High maternal and child mortality Low investment in education High dependency ratios Youth employment challenges

13 Structural challenges: Harnessing demography Urban population (millions) 2,000 1,800 1,600 1,400 1,200 1, EAP ECA LAC MENA SAR SSA AFR Source: World Urbanization Prospects of the UN and WDI

14 Percent per year 2. Structural challenges: Boosting productivity A standard Solow growth decomposition, and TFP trends 2.0 Contribution to output per worker growth, Total Factor Productivity Sub-Saharan Africa Resource Rich Non-resource-rich Physical Capital Human Capital Total Factor Productivity Source: World Bank AFR SSA AFR SSA Resource Rich AFR SSA Resource Poor

15 2. Structural challenges: Boosting productivity Unit labor costs and GDP per capita.35 AGO.3 MLI GHA Unit labor cost.25.2 MOZ UGA SEN NGA IDN COL BRA ZAF MEX CHL ZMB UKR RUS ETH BGD TZA KEN VNM PHL ARG URU TUR Ln GDP per capita 2006 (constant 2005 US$) Sub-Saharan Africa Other Countries Source: Gelb, Meyer, and Ramachandran (2013) and WDI

16 $1.25 a day headcount (%) 2. Structural challenges: Promoting inclusiveness Poverty reduction during Africa s rise has been too slow - The rise must be for all Africans Sub-Saharan Africa South Asia Source: PovcalNet, March East Asia and Pacific 7.9 MENA 1.7 ECA LAC 4.6

17 Thailand Turkey Egypt, Arab Rep. Pakistan Colombia Russian Federation Argentina Kazakhstan Morocco Tunisia Philippines Israel Bhutan Nepal South Africa Peru Vietnam Romania Bangladesh Other developing countries India Brazil Indonesia Mexico China Tanzania Mozambique Ethiopia Sub-Saharan Africa Nigeria Iraq 2. Structural challenges: Promoting inclusiveness 4 The growth elasticity of poverty reduction is lower than in other regions Source: PovcalNet, March 2015.

18 2. Structural challenges: Promoting inclusiveness Most growth takes place in the services and extractives sectors, but most people work in agriculture Sectoral contribution to per capita value added ( ) Sectoral composition of labor ( ) Agriculture Industry Services Agriculture Industry Services Source: GDP sectoral data fom WDI, and labor force composition from International Income Distribution Database

19 Outline 1. Africa s rise 2. Structural challenges a. Harnessing demography b. Boosting productivity c. Promoting inclusiveness 3. Immediate risks a. The end of the commodity super-cycle b. Fragility and violence c. Health challenges 4. Policy lessons, old and new

20 Commodity prices (Index 2010=100) 3. Immediate risks: End of the commodity super-cycle After rising steadily in , commodity prices have fallen since Commodity prices, Source: World Bank Commodity Markets Outlook (DEC-PG) Energy Beverages Food Raw Materials Metals & Minerals

21 Commodity prices (Index 2011M1=100) 3. Immediate risks: End of the commodity super-cycle Source: World Bank Commodity Markets Outlook (DEC-PG) Iron Ore Copper Cocoa Cotton Rubber

22 Correlation of commodity j and oil price, Immediate risks: End of the commodity super-cycle Though oil price plunges of this magnitude are not unprecedented, the current episode is characterized by a higher correlation between oil and other commodity prices 0% -10% Episode of sharp decline in oil prices, (T= peak month of oil price episode) T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 Co-movement of commodities with oil prices has increased over the past 15 years Rubber Iron Ore Copper -20% -30% Cotton -40% -50% -60% -70% Nov-85 Jul-08 Jun-14 Source: World Bank Commodity Markets Outlook (DEC-PG) Cocoa Correlation of commodity j and oil price, Agriculture Metals & Minerals Energy

23 3. Immediate risks: End of the commodity super-cycle Correlation analysis among commodity prices, vs Crude Oil Natural Gas Cocoa Coffee Tea Rice Wheat Sugar Tobacco Cotton Aluminum Iron Ore Copper Gold Silver Crude Oil Natural Gas Cocoa Coffee Tea Rice Wheat Sugar Tobacco Cotton Aluminum Iron Ore Copper Gold Silver Source: World Bank. Note: The table reports the correlation among year-on-year changes in international commodity prices. The above the diagonal (shaded in light red) represent correlation coefficients for the period while those below the diagonal (shaded in light green) correspond to the period Elaboration: AFRCE Staff.

24 3. Immediate risks: End of the commodity super-cycle Correlation analysis among commodity prices, vs Crude Oil Natural Gas Cocoa Coffee Tea Rice Wheat Sugar Tobacco Cotton Aluminum Iron Ore Copper Gold Silver Crude Oil Natural Gas Cocoa Coffee Tea Rice Wheat Sugar Tobacco Cotton Aluminum Iron Ore Copper Gold Silver Source: World Bank. Note: The table reports the correlation among year-on-year changes in international commodity prices. The above the diagonal (shaded in light red) represent correlation coefficients for the period while those below the diagonal (shaded in light green) correspond to the period Elaboration: AFRCE Staff.

25 3. Immediate risks: End of the commodity super-cycle Impact on aggregate terms of trade of movements in international commodity prices in SSA forecast: 39 African countries suffer a negative ToT shock (88% of population, 92% of GDP) Overall average ToT loss is 8% per year 9 countries have a loss greater than 10% per year Source: staff estimates based on commodity prices (Commodity Markets Outlook, DEC-PG) and commodity trade (WITS)

3. Immediate risks: End of the commodity super-cycle 2014-2015 forecast: - 36 African countries suffer a negative ToT shock (80% of population, 70% of GDP) - Overall average ToT loss is 18% - 14

26 3. Immediate risks: End of the commodity super-cycle forecast: - 36 African countries suffer a negative ToT shock (80% of population, 70% of GDP) - Overall average ToT loss is 18% - 14 countries have a loss greater than 10% Impact on aggregate terms of trade of movements in international commodity prices in SSA : - Africa s oil trade surplus equals 12% of GDP - Oil among top 5 export items in 18 countries Source: staff estimates based on commodity prices (Commodity Markets Outlook, DEC-PG) and commodity trade (WITS)

27 GHA BEN TGO RWA BDI MWI BFA SWZ CAF ETH CIV CPV MLI GNB UGA TZA MUS GMB ZWE MDG SYC COM 3. Immediate risks: End of the commodity super-cycle 5 Aggregate Terms of Trade effect More vulnerable SSA countries forecast: 10 Aggregate Terms of Trade effect Less vulnerable SSA countries AGO SSD COG NGA TCD SDN GAB GNQ MRT ZAR CMR GIN LBR SLE Agriculture Metals & Minerals Energy Total Agriculture Metals & Minerals Energy Total Source: staff estimates based on commodity prices (Commodity Markets Outlook, DEC-PG) and commodity trade (WITS)

28 3. Immediate risks: Fragility and violence After decreasing throughout the mid-2000s, violent deaths due to conflict and violence against civilians in particular has steadily risen again since 2012.

29 3. Immediate risks: Fragility and violence Over the last decade, the region saw a reduction in traditional types of armed conflict and actors, including interstate violence and rebellion, and an increase in non-traditional forms of conflict and conflict actors that increasingly target civilians Agents of violence by total conflict involvement, Africa, Source: ACLED

30 3. Immediate risks: Fragility and violence Contrary to previous decades, violence is largely concentrated in a small number of subregions The Sahel Sudan & South Sudan Northern Nigeria Darfur Somalia & Kenya Eastern DRC

31 3. Immediate risks: Health challenges Ebola outbreak is slowing, but progress toward zero cases has also slowed with several reverses in Sierra Leone and Guinea Over 10,000 deaths and 25,000 cases to date Economic impacts in three core countries are devastating Forecast Growth Rates Guinea Liberia Sierra Leone Pre-Ebola forecast Figure source: Martin (2015)

32 3. Immediate risks: Health challenges Ebola has highlighted weak health systems 1,200 1, Maternal deaths per 100,000 live births Source: WHO, World Bank, et al. (2014) Sub-Saharan Africa 510 Developing Regions World South Asia LAC East Asia Maternal mortality has fallen in Africa, but remains more than double that of developing regions Healthcare workers are lowest of any region & 27% of global average Disease surveillance systems are weak across much of the continent Affects risk not only for infectious disease, but all health conditions

33 3. Immediate risks: Health challenges 400 Health expenditures remain very low in SSA Public health expenditure per capita (current US$) EAP ECA LAC MENA AFR SAR Source: aggregate level data from WBG HNP database and data for developing countries only

34 Outline 1. Africa s rise 2. Structural challenges a. Harnessing demography b. Boosting productivity c. Promoting inclusiveness 3. Immediate risks a. The end of the commodity super-cycle b. Fragility and violence c. Health challenges 4. Policy lessons, old and new

35 4. Policy lessons: old and new I. For the long run 1. Stronger institutions of governance Better able to manage both external and internal shocks 2. Human capital / skills Education: invest in quality and gender equality 3. Infrastructure Close the energy, transport and logistics deficits.

36 4. Policy lessons: old and new II. For the short run Policy making in times of scarcity 1. Treat the commodity price shock as permanent rather than temporary 2. Borrow with moderation 3. Raise domestic savings public and private 4. Diversify revenues, as well as output 5. Prioritize spending: reduce fuel subsidies, target social spending on the poor 6. Enhance public investment management capacity no room for waste 7. Policy coordination and economic integration within Africa 8. Make a deliberate effort to cushion the poor even if at the expense of others

37 Thank you

Structure. Introduction

Structure. Introduction 1 Introduction Structure Demographic Dynamics in Africa Determinants of the Demographic Transition Human Development Payoffs Jobs Payoffs Economic Growth in Africa Policies to Speed up the Demographic