OBG talks to Shanta Devarajan, Chief Economist for Africa, World Bank

Interview: Shanta Devarajan

Given the difficult global economic climate, how will African economies fare in 2012 and 2013?

SHANTA DEVARAJAN: Our base case is that Africa will grow between 5.1% and 5.2% in both 2012 and 2013. The main channel where the external environment will affect Africa is commodity prices, which have been softening. There will also be a trade channel effect, as 37% of Africa’s consumer goods exports go to the EU. Tourism is getting hit quite badly as well, but the main effect is commodity prices. There are some other possible channels, such as finance, remittances, foreign investment and aid, through which problems in Europe could affect Africa, but these remain limited.

What good governance policies could improve macroeconomic resilience on the continent?

DEVARAJAN: Good macroeconomic policies are what has given African countries the cushion with which to withstand some of these shocks. When the price of oil reached $130 per barrel in 2007, the reference price being used in Africa’s three biggest oil exporters, Angola, Nigeria and Gabon, was $65. The additional earnings were automatically saved, and this had not happen during previous oil booms. These kinds of policies will help them be more resilient. There are crises all the time in Africa, with food price shocks and droughts.

The other thing we have learnt is that traditional panic-type instruments, such as price or exchange rate controls, are counter-productive. Governments have increasingly been letting prices pass through to the consumer, and then providing safety nets in the form of direct cash transfers to the poor. These kinds of programmes are more cost-effective than subsidies and are good at keeping people from falling into poverty.

In what ways has sustained economic growth reduced poverty on the continent?

DEVARAJAN: The poverty rate was increasing in Africa through the mid-1990s, when growth per capita was negative or close to zero. Since then, growth has been around 5-6%, and the poverty rate has fallen about 1 percentage point per year. That said, with 47% of the population living on less than $1.25 per day, there is still a problem. Safety nets, for any given level of growth, can accelerate poverty reduction. There is quite a lot of evidence that growth is necessary but not sufficient. Safety net programmes and employment are also needed. The big issue is the number of people employed in the informal sector, with very low productivity.

Are infrastructure and skills deficits constraints to a labour-intensive manufacturing boom?

DEVARAJAN: Infrastructure is more of a problem than skills. The infrastructure constraint is not just a lack of hardware. A lot has to do with regulation. It is widely said Africa lacks competitiveness, as there are many land-locked countries that have to ship goods through ports and on poor-quality roads, increasing costs. However, we conducted a study of four major road transport corridors in Africa and found the pure vehicle operating costs were no higher than in France. The transport prices, however, were the highest in the world, the difference being the profit margins accruing to the trucking companies. These profit margins are over 100%, particularly in Central Africa where they are the highest. This is explained by lack of competition, with 50-year-old regulations prohibiting entry into the trucking industry. Rwanda, however, deregulated its trucking industry, and transport prices fell by 75% in real terms.

How can Gabon’s industrial policy be enhanced?

DEVARAJAN: Getting the infrastructure right, including pricing and regulation, is going to be key. Once this is done, the danger will be that the government finds this is insufficient and starts to subsidise processing. This happened before, when Africa went through a whole phase of processing natural resources. It was a colossal failure. It is not clear there is a comparative advantage for Gabon, despite a proximity of resources, because other countries have cheaper processing.