Media Briefings

Africa’s Growth Performance: Failure Even When Government Revenues Are High

  • Published Date: June 2010

International aid in support of new resource extraction projects in Africa may be counterproductive for achieving sustained economic growth. That is one of the conclusions of a study by Manuel Oechslin, published in the June 2010 Economic Journal.

His research on the explanations for Africa’s poor growth performance suggests that both very low and very high levels of government revenues induce low levels of growth-promoting public spending. Even when a government is able to raise significant tax revenues, the weak institutions of most African states lead to an ‘instability effect’, where elites struggle for power and no one has an incentive to promote growth.

Few people would deny that – for the most part – African economic performance has been disappointing during the past five decades, and many would agree that it is exactly the lack of sustained economic growth that has prevented the quality of people’s lives from improving.

There is much less agreement, however, when it comes to the major causes of the poor growth performance. Indeed, some of the leading explanations put forward by economic researchers are difficult to reconcile.

For example, one influential line of research argues that the ‘weakness’ of African states – particularly the low ability to extract resources from society – leaves governments without sufficient means to play a key developmental role.

Another major argument is that it is exactly the high level of public revenues that holds back resource-rich economies because a large public income somehow induces ‘bad’ economic policies and low public goods provision.

Oechslin’s study argues that these two different views on the role of public revenues are not as incompatible as it might seem at first glance. More specifically, using ‘political economy’ analysis, the author suggests that we should expect both ‘very low’ and ‘very high’ levels of public revenues to be detrimental to the provision of growth-promoting public goods.

The main reason is that many African states tend to be weakly institutionalised. This means that incumbent regimes have substantial leeway to divert public resources for their own benefit but – at the same time – are continuously contested by competing elites, which try to seize control of the state apparatus.

Clearly, in such an environment, the supply of growth-promoting public goods is excessively low if the state has only a minor ability to tax the economy. The intuition is that – under these circumstances – the regime can capture only a small fraction of the additional future output that would result from a higher level of growth-promoting public spending. Thus, the regime perceives a ‘low return to public investment’ and prefers to appropriate a substantial fraction of the public budget.

With a stronger ability to tax, the regime’s incentives to invest tend to strengthen because its stake in the economy rises. But this positive effect is dampened and eventually dominated by a negative political instability effect.

With more resources to be appropriated in office, the power struggle between competing elites intensifies so that the regimes are more often forced out of power. As a result, the incumbent regime faces a lower probability of benefiting from the future returns to today’s investment.

The instability effect is likely to become dominant only at high levels of public revenues, so that the relationship between public revenues and growth-promoting public spending is positive up to some point and turns negative thereafter.

Thus, in line with the two major arguments outlined above, both ‘very low’ and ‘very high’ levels of public revenues induce low levels of growth-promoting public spending. The importance of the instability effect in African politics is supported by a large body of anecdotal evidence collected by historians and political scientists.

One important policy implication is that a surge in public revenues may not only be ineffective but, under certain circumstances, can actually make matters worse. Hence, international aid in the form of support for new resource extraction projects (which generate a continuous stream of new government revenues) may even be counterproductive from a long-run growth perspective.

ENDS

Notes for editors: ‘Government Revenues and Economic Growth in Weakly Institutionalized States’ by Manuel Oechslin is published in the June 2010 issue of the Economic Journal.

Manuel Oechslin is at the University of Bern, World Trade Institute.

For further information: contact Manuel Oechslin on +41 31 631 36 73 (email: Manuel.Oechslin@wti.org); or Romesh Vaitilingam on 07768-661095 (email: romesh@vaitilingam.com).