Decoding African Poverty

I’ve lived in Africa for the first 16 years of life, and I always wondered why was Africa so poor?

Why are there people begging at every traffic light?

I never really got an answer:

Was it because of slavery?

Was it because of colonisation?

I never really knew.

So when I had to write my Economic History essay I chose to write about African Poverty because it’s a topic near and dear to my heart and I’m not going to write about “why Germany and France experienced faster growth than Britain after World War 2”.

This isn’t meant to be an economics essay so I am going to keep all the terms to a minimum and the ones I have to use I’ll be explaining them very nicely for you guys.

Obviously, I am aware that Africa is a huge place with many different countries each facing its own growth inhibitors. But for the sake of simplicity, I am going to lump them all into one category because they deal with the same problems to a certain extent.

Before I start this essay, I want to familiarise you guys to the idea of “institutions”.

So basically, institutions are the rules of the game or basically how your society works. Institutions aggregate your law system, your system of government and how people interact together into one broad category. So the better the country’s institutions are, the richer the country usually is.

To be honest, institutions are a very weird concept so don’t worry about it.

The Slave Trade: 

Because it happened such a long time ago, it’s very hard to find some tangible economic ramifications of the slave trade. So what Economic Historians, like David Nunn do is try to figure out the effect of the slave trade on a countries institutions.

So the way the slave trade worked is that your family and friends would sell you off into slavery in exchange for goods.

Because it was your close friends or family betraying you, people are much less likely to trust each other. When people don’t trust each other, society as a whole cannot function therefore West Africa in particular never adapted proper institutions because most complex institutions require trust.

Remember what we said before:

Bad institutions=low economic prosperity

How significant is this probably?

Not very, but it’s almost the only thing we have to quantify one of the darkest periods in history so I thought it would be worth taking a look.

Colonialism: 

So colonialism is a very hot button issue for most people and rightfully so. It’s one of the most disgusting moments in human history.

But, let’s imagine a world without colonialism.

Is Africa better or worse off in the long run?

Because the neo-European colonies (USA, Canada, Australia and New Zeeland) worked out so well, there was a clear track record of success.

But, for a multitude of reasons I am going to discuss bellow colonialism was a net negative on African growth.

The biggest difference between the USA and Ghana for instance regarding colonisation is the advent of germs and diseases.

Settler mortality in Africa was much higher than settler mortality in other parts of the world. Therefore, Europeans did not want to live there because they kept dying. So they established institutions designed to take as much money and resources as possible and not trying to build an actual country. One of the only African countries that colonialists decided to live in was South Africa because settlers were dying less there and it was more temperate than its sub-Saharan counterparts.

The reason that is such a big deal is because it’s very hard to change a countries institutions.

What do I mean by this?

If it was so easy why isn’t every country set up exactly like the US or Germany?

Why doesn’t everyone have democracy, property rights and freedom of speech?

This is because it’s very hard to introduce these exogenous policies on countries.

That’s why all efforts to establish democracy on the rest of the world have been a huge dud.

Some countries colonialists did a worse job than others.

For instance, most of the British colonies do far better than their Belgian counterparts because British tried to build a social structure while the Belgians did no such thing.

So the reason a lot of the social framework of Africa is so messed up is because of colonial history.

What makes this even worse is that most Economic Historians believe that this is something that Africa may never be able to fix and will always be playing with a handicap because of its colonial past.

Also, another reason Africa has experienced such slow growth is because of civil wars and conflicts. Most of these conflicts arose because westerners created countries with arbitrary borders with little insight into the conflict.

Germs and Malaria:

We already spoke about malaria on the effect it has in the past. But malaria is still running riot in today’s society.

Most of the Africa is located right next to the equator making it a far more tropical place.

Which sounds kind of cool right?

Well yeah, unless you forget the fact that the more tropical you are, the more likely you are to have a bunch of very dangerous diseases. Probably the most dangerous of all of those was and still is malaria.

The most direct effect of malaria is that it kills a lot of people naturally.

So when someone dies because of malaria, the workforce is being weakened. But, more importantly, you are reducing the returns on education. If a student who just graduated secondary school dies of malaria, all the resources dedicated to him in an economic sense (not in a social sense of course) is a waste.

Also, if someone contracts malaria and survives they still can’t work or can’t go to school which puts a strain on the economy as a whole.

The good news about this, as opposed to the institutions, is that this can be fixed more quickly.  Between 2000-2013 malaria was reduced by 34% in Africa and with better prevention methods along with better treatment, it is very likely that Africa can overcome this.

Resource curse:

Having some oil, diamonds and gold sounds dope right?

It’s pretty much easy money, and you could use the profits to lower taxes, builds nice roads and fix everything else.

But that whole Saudi Arabia and UAE model doesn’t work well most of the time. Most countries with lower resources do far better when compared to a country with a lot of resources.

Natural resources without a proper institutional background is pretty much a recipe for disaster.

So there is an economic and social reason having natural resources aren’t that great.

Economic reason: 

Before I tell you guys why being too dependent on primary commodities is as a bad thing. I need to tell you guys about Income Elasticity of Demand (YED).

If I gave you $10,000 right now but the only catch is that you have to spend it, what would you buy?

Probably a new laptop, a new phone and a new TV right?

Wouldn’t you buy 100 gallons of oil and some cocoa right?

Manufactured goods like phones and TV’s have a higher YED meaning that the more money you have, the more of these goods you are going to consume.

But, necessities like oil and gold you’re going to consume the same amount regardless of how much more money you make. Therefore, these goods have a low YED.

Why is this important?

Because the rest of the world keeps getting richer and richer every year so therefore the demand for natural resources decreases relative to manufactured goods every year.

So countries who only export natural resources and import manufactured goods like Nigeria their term of trade (average price of export/average price of imports) gets worse and worse each year.

This is one of the big reasons countries like Ghana’s currency is going to crap. If you import more than you export your currency is going to depreciate and cause a whole other problem.

Also because of the nature of primary commodities slight fluctuation in the price of the good has a huge effect on overall revenue. So in that sense as well it is not prudent for countries to be reliant on such a volatile good.

Social reasons: 

Natural resources come with a lot of baggage as well if you think about it.

They make civil wars more likely, reduce democracy and make corruption worse.

But worse of all most of the money made with these natural resources is kept within the elites who are either corrupt themselves or fund most of the corruption.

This keeps the money from going to where it needs to go.

There are 15,400 people worth at least a million in assets in Nigeria (knowing Africa the number is probably much higher) yet 24% of all kids under five years old are malnourished.

If Nigeria or other countries had better social institutions most of the proceeds of their oil exports would go to the schools or to help fund social programs.

The problem with aid: 

Aid is also one of those things that sounds nice in theory but does not necessarily translate into real life success.

Aid does a lot of good things:

Helps breaks the poverty cycle

Gives much needed humanitarian support

But the problem is that aid is not necessarily executed properly.

Take the Tom shoes (the ugliest shoes I’ve ever seen) for instance. Every time you buy one of their ghastly shoes somebody in Africa, gets’s a pair.

Which is sounds pretty cool right?

Not really.

When you give people shoes, for instance, you are destroying their local shoemaking economy.

If you get shoes for free why would you go out and spend your money on getting a shoe?

The problem with that is that you are destroying a flow of currency that would have otherwise stayed within a community while at the same time destroying someone’s livelihood.

You give money to the shoemaker, the shoemaker buys food from the market, and the cycle continues.

One study showed that aid like the one I just described has increased unemployment in Africa by 50%. So although you are giving someone shoes, you are making the situation worse.

The most effective aid is something known as programme aid. Especially when that aid goes toward infrastructure development.

Aid should be focused on building what is known as trade linkages which make the economy more efficient as a whole.

There is also this notion that the way to break the poverty cycle is to throw as much money at possible as the problem, and this “big push” would work out.

But the problem with this idea can be noticed when we look at the Solow, growth model. I’m not going to go over the entire model but in this model.

But the model shows us that the economy, in the long run, will always return to its steady state. This is when the level of investment rate in the economy is equal to the depreciation rate.

Using the Solow growth model is just a fancy way of saying that unless whatever you’re building is sustainable in the long run, you’re just basically wasting your resources.

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Now that we’ve listed some of the problems Africa has in trying to converge economically let’s go over some solutions.

Switch the manufacturing: 

As we said before the market for manufactured goods in the world is constantly growing. Therefore, it would make sense to invest in this on a purely intuitive basis.

However, there is also some economic theory behind this.

Convergence in the manufacturing sector has what is known as a high “beta coefficient” meaning that it is more likely to converge to the rest of the world.

What makes this particularly important is that Africa does not have to fix all its institutions to achieve this convergence, they could stay the hot mess (which they are), and convergence will still occur in that sector.

Also, Africa has a huge advantage due to their abundance of cheap labour as well. As China and other Asian countries continue to develop, a lot of manufacturing plants might want to relocate to Africa to keep costs low.

The added benefit of industrialization is that it would shift people from the agricultural sector into the manufacturing sector. This is good because Africa, in general, does not have very fertile soil. Therefore, it would not be wise for them to keep pursuing such an inefficient path.

But of course, this is easier said than done. Having countries with such a poor political system to make a concentrated effort to shift their primary means of production proves to be very complicated.

Increase ease of business: 

This too is easier said than done, but if Africa wants to become more affluent, it’s something they need to address to attract more investment.

This is what is known as the Lucas Paradox. Where even though returns on investment are far greater in the developing world than the developed world, capital stays in the later.

Why is that?

Because investors are scared that because of corruption among other things, they won’t be able to reap the benefits of their investment.

So the best way to fix this is through social reform, which at this point, is nearly impossible to do right away.

Africa must first build a base through which they can fix their institutions.

Their best policy would be to invest in education as Africa has a notoriously poor investment in human capital.

From then slowly making democracy more prominent and transparent should help fix the corruption and bureaucracy.

Africa has been converging regarding everything else: 

Even though Africa has gotten poorer in monetary terms, it has been catching up with the rest of the world in every other respect.

GDP per capita in Africa increased from $477 to $561 from 1960-1969, the under-five survival rate increased as well from 746 to 839 (per 1000) as well.

In addition, to this if you look at aggregated methods of measuring the quality of life such as the Human Development Index (HDI) show that Africa has been getting closer to their European counterparts.

This makes sense when you think about the nature of all these well-being statistics. It’s much harder to move the literacy rate from 98 to 99 out of 100 than it is to increase it from 10 to 30. So the more money Africans make they will increase increasing marginal returns regarding their quality of life.

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In the end, Africa still has a lot of work to do if it ever wants to catch up with everyone else. But, there is hope for the future.

 Anywho,

Hope you guys learned a thing or two

Shami out

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