Understanding growth options and challenges in African economies

Citation

Kuada, J. (2011), "Understanding growth options and challenges in African economies", African Journal of Economic and Management Studies, Vol. 2 No. 1. https://doi.org/10.1108/ajems.2011.43902aaa.002

Understanding growth options and challenges in African economies

Article Type: Editorial From: African Journal of Economic and Management Studies, Volume 2, Issue 1

Why do incomes grow faster in some countries than others? This remains a nagging question in Economics. For many neoclassical economists, the answer lies in the relative differences in the levels of savings, revenue generation, and investments in the different countries (Solow, 1956). Others seek their explanations in the theory of endogenous growth – drawing attention to the development of human capital, entrepreneurship, and innovation capacities of countries (Lucas, 1988; Romer, 1990). Some emphasise the importance of non-economic factors – civil society, politics, culture, etc. – in their explanations (Myrdal, 1957). Thus, the ability of the private sectors and public institutions of different countries to generate and manage their resources effectively appears to be at the centre of most economic growth theories.

Scholars of Africa’s economic growth have been inspired by these theories. The available understanding is that macroeconomic policies pursued in the different African countries invariably affect their growth performance through their impact on certain economic variables. For example, it has been argued that outward-oriented trade polices are conducive to faster growth in Sub-Saharan Africa (SSA) because they promote competition, encourage learning-by-doing, improve access to trade opportunities, and raise the efficiency of resource allocation. But trade liberalization also entails reduction in import duties and therefore impacts international trade tax revenue of nations that embark upon such programmes. The link between trade liberalization and aggregate national revenue, however, depends on a number of variables (including the structure of the tax system and administrative capabilities) and therefore difficult to predict (Agbeyegbe et al., 2004). Thus, liberalization programmes need to be carefully thought through for them to achieve desired economic growth and development impacts in countries pursuing them.

The wisdom contained in the existing economic theories and perspectives has also been reflected in the advice that African policy makers have received from economists within and outside the continent. Possibly, as a result of recent macro-economic policy changes, several SSA countries have recorded quite impressive economic growth since the middle of the 1990s, with average growth close to 5 per cent per year. Optimistic observers believe that by the year 2050, Africa will arrive at the threshold of economic lift-off, granting that current positive change-inducing policies are sustained. But the road forward promises to be still bumpy and uncertain, as the papers in this volume of AJEMS reveal. Issues taken up by the authors include challenges with revenue generation and investments in different African countries, foreign direct investment flows, managerial competencies, marketing practices, and microcredit systems.

The issue of liberalization and government revenue has been taken up in the article by Camara Kwasi Obeng, William Gabriel Brafu-Insaidoo, and Ferdinand Ahiakpor. The authors investigated the quantitative effect of import liberalization on tariff revenue in Ghana, using a robust decomposition analytical approach to examine how different components of the sources of change in import tax contribute to changes in import tax revenue in Ghana. Their findings show that Ghana suffered some revenue loss from trade liberalization by reducing the level of average official duty rates, but gained in revenue as a result of real currency depreciation. Their advice is that Ghana’s revenue policy should aim at determining and targeting the optimum level of the average official import duty rates, focus on the identification of the major sources of duty revenue leakage, and substitute sales taxes for tariffs. This, in their view, will improve tax revenue from trade.

With respect to foreign capital flows, the available records show that Africa has been recording some increase despite recent declines in FDI globally. Some of the preferred FDI destinations on the continent have been in the extractive industries of Angola, Equatorial Guinea, and Nigeria. FDI flows to the service sector (e.g. telecommunications, electricity, and water), have also been on the rise with countries such as South Africa benefiting immensely from these investments.

The key question confronting countries with no extractive industries is how to attract FDI into the manufacturing and service sectors of their economies. Boopen Seetanah and Sawkut Rojid’s article may be read in the light of this perspective. The authors explore the determinants of FDI in Mauritius, using a differenced vector autoregressive model to capture the short-run dynamics of the growth rate of a set of specified variables. Their study showed that trade liberalization, wage levels, and the quality of labour are important determinants of foreign investment flows into Mauritius. This study adds to the growing body of literature that supports liberalization as a viable economic policy for SSA countries.

Using a dataset covering the period 1990-2006, Abel Ebeh Ezeoha’s article examines whether industry-specific factors in Nigeria play more significant role in the financing decisions of firms than firm-specific characteristics. The results support both the pecking order theory and the trade-off theory of capital structure, i.e. the more profitable firms in the study tended to have lesser proportion of debt, and firms with higher levels of asset tangibility tended to use more long-term finances. The results have motivated the author to argue that government policies that regulate finance discriminately across industry may be sub-optimal because of the existence of inter-firm variations in the level of asset tangibility, profitability, size, age, and nationality.

On the management level, Billy Wadongo, Oscar Kambona, and Edwin Odhuno argue that several critical generic management competencies are emerging in the Kenyan hospitality industry. But, most Kenyan managers appear not to have the competencies needed to increase the sector’s contribution to the country’s economic growth. The study showed that while the industry considers such competencies as taking initiative, motivating others, goal setting, personal productivity, and stress management to be important, Kenya’s universities and training institutions do not place significant emphasis on these competencies in their curricula development. The authors therefore argue in support of an overhaul of the training programmes for hospitality employees in Kenya.

Anna V.S. John and Malcolm P. Brady report a study of consumer ethnocentrism tendencies in Mozambique and discuss their implications for export strategies of companies targeting the Mozambican market. The study found Mozambican consumers to be moderately ethnocentric. This ethnocentric tendency has been reflected in the relatively negative consumer attitudes towards fresh agricultural products exported by South African companies to Mozambique. Processed food products have, however, been found not to suffer similar ethnocentric disadvantages. The article also discusses the implications of its findings for export strategy formulation of companies exporting from countries such as South Africa into Mozambique.

I. Oluranti Ogunrinola examined the role that social capital plays in the determination and distribution of business earnings of female entrepreneurs in selected rural communities of Ogun State, Nigeria. The study is predicated on the understanding that income-generating activities of women are essential for African families to build a pathway out of poverty and for countries to generate the revenue they need to become self-sufficient. (Women usually invest 90 per cent of their earnings into the health, education, and well-being of their families, compared with 30-40 per cent for men). The results of the study indicated that social capital and neighbourhood network ties are important determinants of women’s access to finance, their investment decisions and levels of earnings.

Together, these articles contribute significant insights into the specific issues that the authors chose to investigate. They also show that the challenges of economic growth in SSA still remain important research issues. Some previous studies have shown that liberalization of African economies may contribute more to income inequalities than it contributes to overall economic growth (Adams, 2008). It has also been shown that financial liberalization affects small and large firms differently, with smaller firms likely to become more financially constrained after liberalization (Harris et al., 1994). The political dimensions of financing also require greater attention in Africa. It is possible that firms that have strong political connections may have better access to preferential credit before and after financial deregulation. Thus, financial liberalization may tend to benefit larger firms than smaller ones. Furthermore, policies aimed at raising savings are not easy to implement since, higher savings may reduce present welfare of citizens in very poor countries. The impact of trade liberalization on government revenue generation remains unsettled. Some scholars argue that since public finances of many developing and emerging market countries are still heavily dependent on trade tax revenues, the adoption of trade liberalization as an economic growth policy must be combined with the development of alternative sources of revenue (Baunsgaard and Keen, 2005). With respect to management practices in Africa, some scholars have suggested that competence development is not an issue that should be confined to changes in the educational curricula alone. Fundamental changes in the value systems and approaches to child upbringing may also be necessary (Kuada, 2006). These contentious issues remain fertile grounds for additional research and AJEMS still invites contributions in this field of study.

John Kuada