Msc Economics

<= /span>

Growth experienc= es in Sub-Saharan Africa=

<= /span>

The Case of Chad

Malik Bachar Ali= Haggar

<= /span>

Abs= tract

This paper review Chad’s growth experience since its independence from its colonial Power, France, and subsequently explore the growth strategies that= may or may not have been used in the past, what strategy should it adopt in ord= er to develop by taking account of past experiences, then, explore the differe= nt scenarios that Chad have had and what is like today’s Chad in the hea= rt of Sub-Saharan Africa. By taking the specific case of Chad’ growth strategy, characteristic of the majority of African Countries, I have been able to dr= aw some inference about the African continent. One finding is that, Africa in general and Chad’s economy in particular have experienced “growth without development”. The reasoning here is that in the late 1970s up to 1980 there was a major increase in measured GDP, but after 1980 up to 2000, per capita GDP is fluctuating up and down, consequently, the structure of the economy remained basically unchanged. Therefore, economic growth did not se= em to be lasting or to have had a significant effect in changing the structure= of the economy so that growth can be sustained.

Moreover, from the selected countries, the rate of total factor productivity growth h= as only a significant effect on per capita GDP growth of Ivory Cost. Using OLS regression I obtained the estimates of Alpha (the relati= ve share of capital in output, equivalent to the elasticity of output with res= pect to capital); all countries show a high alpha. Furthermore, the indications from this study are that Chad’s and the selected African countries’ slow growth in per capita income is not mainly attributable to slow TFP growth, = On the contrary, the results point that slow growth in output and capital per worker are also the sources of the problem.

Introduction:

<= /span>

The main focus of this study is Chad which, in the last two decades, there has been little or no progress made in alleviating poverty despite the massive effort made and the many programmes established for that purpose[1]. Indeed, as in many ot= her SSA countries, both the number of poor and the proportion of poor have been increasing in Chad.

In particular, the 2005 United Nations Human Development Report declares that = 48% of Chad’s population lives below the poverty line. According to the Report (UNDP,2005= ), The bitter reality of the Chadian situation is that the poverty level is getting worse by the day as more than 4 in 10 Chadian live in conditions of extreme poverty of less than $5 per month, which barely provides for a quar= ter of the nutritional requirements of healthy living. This is approximately US= 27 cents per day.

No wonder then that Cha= d’s Human Poverty Index (HPI), at 0.341, ranks 173 out of 177 countries for whi= ch the index is available, (UNDP 2005). According to the Human Development Report, “The HPI index measures the extent of deprivation, the proportion of people in the community who are left out of progress”

The 2005-2006 African Economic outlook report provides a perspective on the pov= erty situation in Chad. According to the Survey, Chad’s life expectancy is given as 43.6 years, infant mortality is an atrocious 112 per 1,000 live births, adult literacy rate is a miserable 49.3% and access = to clean water is a disgraceful 50%.

With a per capita income of about US$1,210 (HDI 2003) and a human development in= dex of 0.341, Chad is a poor country despite the abundance of human, material and natural resources. Recent studies show that at least 50% of the population is poor while another 30% may be regarded as moderately poor. The majority of the p= oor, over 70%, are located in the rural areas where most of the people and natio= nal resources are located.

While distributional considerations cannot be ignored, it seems apparent that the most important explanation for the persistence of slow growth in Chad is its poor economic performance as reflected in a low GDP per capita growth rate. Chad’s average growth rate of per capita GDP of 0.6% between 19= 80 and 1990 and 0.4% during the period of the 1990-2000 period compares unfavourably with that reported by other countries, and particularly those posted by China and the Asian Tigers (Hong Kong, Singapore, Taiwan, and Sou= th Korea), Note that other countries like Indonesia, real GDP per capita growth was 8.5% between 1960 and 2000; during the same period, Pakistan’s re= al income per capita was 6.3%. In sub-Saharan Africa, <= st1:country-region w:st=3D"on">Botswana reported a growth ra= te of real GDP per capita equal to 8% between 1982 and 1989. Viewed in this compa= rative perspective, Chad’s per capita income growth has been woefully low and needs to be improved upo= n.

The critical role of rapid per capita income growth in promoting poverty alleviation is now generally accepted. Indeed, cross-country studies carried out under the aegis of the World Bank have established the important role of rapid income per capita growth in bringing about poverty reduction. Accordi= ng to the numerous studies of the World Bank, for instance researchers Paul Collier and David Dollar (2001) f= ound that policy reform in developing countries would accelerate their growth and cut world poverty rates in half[2]. This, to a large exte= nt explains the phenomenal progress made in poverty alleviation in China and East and Pacific Asia during the last decade of the 20th century. High growth rate of income per capita in China (averaging over 6% per = annum between 1970 and 1988, and exceeding 5% in the 1990s) led to halving the proportion of people living in poverty, i.e., living on less than US$1 a da= y. Specifically, in 1990, the share of people living on less that $1 a day in = China was 18.6%; by 1998, this share had fallen dramatically to 9.4%, World Bank (2001). Unfortunately, in Chad, the growth rate of real GDP per capita has been very low and sometime negat= ive during the 1960-2000 periods.

Thus, given that the growth rate of per capita GDP was much less than 3% in Chad during the period being studied, it is not surprising that the number and s= hare of people living in poverty have been increasing.

Furthermore, The stubborn problem= of extreme dependence on technology and foreign exchange from the West and ind= eed extreme dependence on the exportation of a raw materials (for example petro= leum in Chad started and is expected to grow in importance) as a source of export revenue, and subsistence farming as a source of income remains so in spite = of serious attempts to solve it. Attempts at diversifying the economy and its exports have met with less than the expected level of success. And it still= not completely satisfactory as the problem of bad governance persists.

Thus, the Aim of this paper is to overview Chad’s growth experience since its independence from its colonial Power, France, and subsequently explore the growth strategies that= may or may not have been used in the past, what strategy should it adopt in ord= er to develop by taking account of past experiences, then, explore the differe= nt scenarios that Chad have had and what is like today’s Chad in the hea= rt of Sub-Saharan Africa. Note that, at the outset, by taking the specific cas= e of Chad’ growth strategy, characteristic of the majority of African Countries, where the hope of any economic development seem doomed, I would = try to explain Sub-Saharan Africa growth performance and strategies in the last five decades

Therefore, the structure of the paper would be as follow.

In the first section, I will give a brief history of economic growth theories = and review the existing literature on economic growths.

In the second section, I will review Chad and some selected African countries’ growth experience between 1960 and 2000. This can be possi= ble by taking account of the level of GDP per capita and some other indicators = of the Chadian and the other selected African economies during that period.

In the third section, I will investigate the sources of Chad= 217;s economic growth during the past four decades by bringing into play a widely accepted framework for doing this. That is growth accounting. The growth accounting methodology, also known as the sources of economic growth approa= ch provides a breakdown of observed economic growth into its main components, = that is the changes attributable to the growth in factor inputs (capital and lab= our) and the residual or unexplained component. Therefore = growth accounting exercise will let us determine whether growth is “extensive”, that is to say whether economic growth has been propelled by factor input growth, or “intensive” that is when economic growth is driven by productivity increases. The reason for this di= stinction is to determine if observed economic growth in such an economy is “sustainable”. And additionally I will review the fact and empirical evidence with regard to sub Saharan Africa by using cross countries analysis on the cause of economic growth.

And finally, make some comment and suggestions on the differ= ent policies and strategies that ought to be carried out, whether by African governments, non-governmental organisations in the summary.

A brief review of the history of Economic Growth theories

Economic growth can be described as the long term-expansion of the productive capacity of an economy. It is essentially = an increase in the real level of the national output as measured by the annual percentage change in real GDP.

Predictably, the evolution of growth theories= has a long history that can be traced back to Adam Smith; attributing economic gr= owth as an increase in the quantity and quality of the three main factors of production, namely labour, capital and land. David Ricardo enforced Adam smith’s growth theory through the comparative advantage theory by providing a fuller explanation of the ways trade increase efficiency and thereby economic growth. This line of research has led Harrod and Domar to mathematically formalised Smith’s growth theory by emphasising the distinction between flows such as savings and investment and stocks such as capital.

Robert Solow (1956) developed a growth model = that would eventually represent the central model of growth research among economists. Solow’s model (or neoclassical model) concludes that econ= omic growth is exogenous in the long-run. Therefore, economic growth is immune to economic policy. This neo-classical growth model dominated economic growth = research for many years. Yet, during the 1980s many economists became increasingly dissatisfied with what they perceived as the inability of the neo-classical model to answer many questions about economic growth. Most importantly, some economist began to doubt the wisdom of regarding technological change as exogenous from an economic point of view. In that respect, In 1986 Paul Rom= er developed a growth model in which technology is not exogenous but depends on economic factors such as savings, efficiency and depreciation. Thus, this endogenous technological factor makes growth endogenous.<= /p>

3-1 Exogenous E= conomic Growth

&nb= sp;

Exoge= nous growth models the production process using the Cobb-Douglas production function. This production function relates the amount of output (Y) produced during a particular period of time to the contemporaneous inputs of capital= (K) and labour (L) as well as the prevailing level of technology (A). Thus the Cobb-Douglas production function is given by:

()

Note = that this production function displays a constant return to scale, that increasing bo= th capital and labour by a given percentage leads to an equal percentage incre= ase in output. And diminishing return to scale, which means that a successive i= ncrease in one input factor keeping the other factor input constant leads to smaller successive increase in output.

The S= olow model attempts to explain the growth process through the accumulation of capital = in the economy. This can be obtained by transforming the production form in per capita from. Thus by dividing the production by AL (quality adjusted labour) we get th= e per capita production function.

That = is,

And are output and capital over productivity adjusted worker respectively.

Therefore, an increase in the amount of capit= al per quality adjusted worker would automatically lead to an increase in output. However, because of diminishing return to capital further increases in per capita capital will lead to a smaller increase in per capita output.

In the Solow model capital accumulation and o= utput can be obtained by making some assumptions. That the economy is closed so t= hat there are no imports or exports and the amount of private saving equals tha= t of public saving. It is also ass= umed that there is no government sector in the economy so that, investment spend= ing is solely financed by private saving. And finally it is assumed that the am= ount of saving in the economy is proportional to income (Y). Therefore, it is concluded that

()

Given= that the accumulation of capital is obtained through investment by the equation

And a= s (investment= as a share of income), thus, in order to maintain the same ratio of capital to effective workers requires an increase in the capital stock proportional to the increase in the numbers of effective workers. Given that technology and labour grow at and respectively then

Dividing both sides by (AL) we get

Then

Therefore

This last equation captures the so called ste= ady state of the economy. It is a state in which output and capital per effecti= ve worker are no longer changing. Thus, the economy reaches its steady state w= hen the level of investment is exactly equal to the level depreciation and increased productivity. Hence, the economy is now following a balanced grow= th path. The reasoning behind this assumption is that, even if an increase in = the amount of capital per adjusted labour would automatically lead to an increa= se in output, however, because of diminishing return to capital, further increase= s in capital will lead to a smaller increase in per capita output. Consequently,= the Solow model emphasises the importance of technological progress as the ulti= mate driving force behind sustained economic growth.

3-2 Endogenous = Growth Theory

As a group of economist became dissatisfied b= y the exogenous growth theory, in which it is argued that the growth of per capita output was only driven by technological factors that are exogenously determined, they have formulated a set of growth models in which the main determinant of economic growth are endogenous to the model. One can disting= uish two types of endogenous economic growth models. The first one emphasises the importance of Research and Development (R&D) and knowledge accumulation= as the main source of increase in productivity and continuous expansion in out= put. The second one highlights the effect of externalities in the accumulation of human and physical capital in fostering economic growth. Therefore, both ty= pes of models provide endogenous growth as both R&D and externalities precl= udes the emergence of diminishing return to capital accumulation. Thus, this mod= el attempts to explain growth from the micro-foundation of consumer behaviour = with the assumption that, the consumer, representative of all consumers, assumed= to live indefinitely with no borrowing constraints and with a particular budge= t, maximise its inter-temporal utility. This can be summarised in the basic eq= uation of consumption growth.

Therefore, consumption growth is basically determined by the difference between the real interest rate r and the disco= unt rate ρ between the period t and t+1. The parameter that regulates how = much consumption respond to a change in r- ρ is regulated by the inter-temp= oral profile of the representative consumer. Thus, σ is the elasticity of inter-temporal substitution.

Consider for example the Schumpeterian model = of economic growth which endogenises technology (as opposed to the exogenous growth theory) by assuming that the technological transforms the very econo= mic system that creates it. thus, this model of economic growth known as the mo= del of creative destruction (the process of creation of new innovation result in the destruction of previous innovation by making them obsolete) analyse economic growth by dividing it into three sectors, A research sector, an intermediate good sector and a final good sector.

The final good sector produces the output (y)= for final consumption in the economy where production takes place according to = the Cobb-Douglas production function.

Where X is the amount of intermediate good us= ed as input in the production of the good, A is the technological factor assumed = to grow at a constant positive rate>1 whenever a new innovation is introduced. Hence, sustained economic growth occurs through the continuous improvement in the quality and productivity of intermediate good.

Thus the economy grows according to how well resources are allocated between the research and the intermediate good sect= or.

the allocation of resources between the two s= ectors is explained by the arbitrage condition which determined how individual choose b= etween the two sectors through the mechanism which workers move from one sector to another according to the wage offer and the exp= ected payoff is given by , where, is the probability that a new invention will happen.

There= fore, the economy’s growth in the long run is given by the following expression= .

This last term shows that the economy’s growth is determined by the arrival rate of new invention, by the numbers of workers employed in the research sect= or and by the productivity of new innovations.

On the whole, this particular model of endoge= nous growth tries to explain the interplay that exist between technological know= ledge and the various structural characteristic of the economy, and how such interplay result in economic growth. that is, a research sector where R&= ;D takes place and where innovation are created; an intermediate good sector w= here the innovation is used to produce a new quality good; and the final good se= ctor where the intermediate good is used in the production of the final good for consumption. This interplay is made possible because, the final good sector maximises profits leading to an inverse demand function for intermediate go= ods. this inverse demand function is taken as given by the firms in the intermed= iate sector and the optimisation objective of the firm determines the interest r= ate in the economy; and finally, utility maximisation of the representative household yields the growth rate of aggregate consumption (given above), wh= ich is assumed to be equal to the rate of output growth in the economy.

<= /span>

A brief review of the existing lite= rature on Growth

In the line of research devoted to the empirics of growth theories, there exist many contributions made by some outstanding economists.

To name just a few:

Temple (1999) st= arted with the questions: why have some countries grown rich while others remain poor? How is the world income distribution evolving? Do countries converg= e to steady state paths and, if so, how quickly? How rapidly do returns to inputs like physical capital diminish? Are poor countries are poor because they la= ck inputs, or because of technological differences? Why do growth rates differ over long periods? What happens in the long-run?

By answering to th= ese questions, he found that poor countries are not catching with the rich, and= to some extend the international income distribution is becoming polarised. Countries do converge to their own steady states but at an uncertain rate. = One reason for this uncertainty is that countries catch up by adopting technolo= gies from abroad, as well as in investing in physical capital and education. Mor= eover, a key reason why growth rates differ across countries is that macroeconomic stability differs across countries.

He also found that the social returns to R&D are high, even if in the log-run growth rate are independent of research effort. Population grow= th does not seem to have the large negative effects that are frequently conjectured. High inequality lower growth by raising social and political tensions, and finally, the depth of financial intermediation seems importan= t to subsequent development.

Easterly and Levine (1997) produced a paper on which they argue that policies on economic growth have had varied implication in Africa and therefore, there = are differences on why the 600 million people inhabiting the 50 odds countries = in Africa are among the poorest in the world. Accordin= g to their studies, Africa’s high ethnic fragmentation explains a signific= ant part of most of the problem on why Africa is still underdeveloped. Hence, explaining cross-country differences in growth rates requires not only an understanding of the link between growth and pub= lic policies, but also an understanding on why countries choose different public policies. However, note that, the most common problem in Sub-Saharan Africa= is that they are all still underdeveloped where the hopes of any economic development seem doomed.

Thus, according to many analyst, Robert J Barrot (1991), Sala-I-Martin and E. Artadi (2003), Robert J Barrot and Sala-I-Martin (2004), in Sub-Saharan Africa, economic growth is thought to be associated = with low schooling, political instability, underdeveloped financial systems, distorted financial markets and insufficient infrastructures. Moreover, eve= n if there is no consensus on a single cause, it is believed that the continent’s slow growth is also due to its colonial legacy, its backw= ard technology, export enclavism, extremely disadvantageous geography and clima= te and most importantly, macroeconomic policies mistakes.

However, According to Rodrik (2004) African countries have overlooked one very impor= tant lesson. That is the difference between igniting economic growth and sustain= ing it. As he argues

“Igniting economic growth and sustaining it are somewhat different enterprises. The former generally requires a limited range of (often unconventional) reforms that need n= ot overly tax the institutional = capacity of the economy. The latter challenge is in many ways = ; harder, as it requi= res constructing over the longer term a sound institutional underpinning to endow the economy = with resilience to shocks and = maintain productive dynamism. Ignoring &= nbsp; the distinction between these = ; two tasks leaves reformers saddled with impossibly ambitious, undifferentiated, and impractical policy agendas.”

Graham, Bryan S. and J. Temple (2006) ask whether the income gap between rich and p= oor nations can be explained by multiple equilibria. By exploring the quantitat= ive implications of a simple two-sector general equilibrium model that gives ri= se to multiplicity, and calibrate the model for 127 countries, they found that= around a quarter of the world's economies are found to be in a low output equilibr= ium. They also found that, the model can explain between 15 and 25 percent of the variation in the logarithm of GDP per worker across countries, given that t= he output gains associated with an equilibrium switch are significant.

BY constructing a new index of the quality of macroeconomic policy and compari= ng growth rate distributions across countries with good and bad policies; using Bayesian methods to examine the partial correlation between policy and grow= th; Sirimaneetham, Vatcharin and J. Temple, (2006), found that bad macroeconomic policies can be offset by other factors, but the fastest-growing countries = in the sample all shared high-quality macroeconomic management.

Using Bayesian methods, Malik, Adeel and J. Temple (2006) examined the structural determinants of output volatility in developing countries, by emphasising t= he roles of geography and institutions. That is by investigating the volatility effects of market access, climate variability, the geographic predispositio= n to trade, and various measures of institutional quality. They found an especia= lly important role for market access as remote countries are more likely to have undiversified exports and to experience greater volatility in output growth= .

Gizashew (2006) investigated the economic performances of authoritarian and democrat= ic systems in 44 African countries during the 1990s. By employing ordinary lea= st squares (OLS) estimators and a cross-sectional research design and controll= ing for variables like economic development, domestic investment, economic openness, privatization, and education. He found that the influence of regi= me type has some but not strong impact on African economic growth. One control variable that, for the most part, has a statistically significant influence= on economic growth in Africa is domestic investment.

Yanrui Wu (2003), by applying an extended Solow approach to examine = the role of productivity in China's economic growth (this approach allows the decomposition of output growth in= to factor contributions, technological progress and efficiency change). She fo= und that total factor productivity (TFP) has on average contributed to 13.5 per= cent of China's economic growth in the past two decades. This contribution is mainly due to technological progress which tends to accelerate over time. However, during 1982–97 efficiency change due to catch–up has been very volatil= e, reflecting the uncertainties associated with economic reforms and transitio= n in China.

In the front of aid to Africa, th= ere are some studies undertaken in that field as well. David Dollar and J. Sven= sson (2000) analysed the causes of success or failure of adjustment programmes brought about by the World Bank and the IMF, using a database of 220 reform programmes. They found that the success or failure of reform depends on domestic political-economy forces. A few donor-effort variables are found t= o be highly correlated with the probability of success. However, once these donor-effort variables are taken as endogenous to the system, there is no relationship between reform and success. Thus, these results indicate the importance of policy based aid.

By investigating how a wide r= ange of types of shock arising from world prices, natural events, and political violence affect growth, Paul Collier, B. Goderis and A. Hoeffler (2006) fou= nd that the impacts from political shocks are far greater than from natural shocks. Potentially, shocks can affect growth either due to their impact, or due to the volatility that repeated shocks generate. However, they found li= ttle evidence that volatility is a problem. By investigating the efficacy of economic structure and domestic as well as external policy responses to the various shocks and what can a government do to moderate the adverse effects= of negative shocks and to make the most of favourable shocks? The answer appea= rs to be that governments can do a lot, partly through policies that alter exposure, partly through policies that encourage adaptation and flexibility, and partly by precautionary policies.

In addition, international assistance can help to mitigate the impact of shocks. Development assistanc= e as well as remittances can cushion the adverse effect of shocks.

Data

Time series data of real GDP per capita, investment and saving as a percentage of real GDP, Openness for the entire period (1960 -2000) are taken from Penn W= orld Table: Alan Heston, Robert Summers= and Bettina Aten, Penn World Table Version 6.1, Centre for International Compar= isons at the University of Pennsylvania (CICUP), (2002).

In the same way, Time-series data for output per capita and capital per capita = for the entire period were obtained from Easterly, W. and Ross Levine, “It’s not factor accumulation: stylized facts and growth models” , Mimeo, World Bank and U. of Minnesota, September 1999, www.worldbank.com.=

Note that data entry are in Purch= asing power parity (PPP) conversion, which is the number of currency units requir= ed to buy goods equivalent to what can be bought with one unit of the base country (US dollars). That is, for example for GDP per capita, the PPP is the natio= nal currency value of GDP divided by the real value of GDP in international dollars. International dollar has the same purchasing power over total U.S.= GDP as the U.S. dollar in a given base year.

<= /p>

Chad= and some selected Sub-Saharan African (SSA) countries’ growth experience between 1960 a= nd 2000.

The overriding imperative is to raise economic growth in sub-Saharan African countries so that the inhabitants of these countries can attain higher standards of living, and succeed in alleviating their pervasive poverty. In this chapter, I will review Chad and some selected African countries’ growth experience between 1960 a= nd 2000, and along the line observe the different scenarios and puzzle the Afr= ican continent has gone through.

Chad= , Africa’s fifth largest nation, is situated in the heart of the continent. Its econom= y is mainly based on Agriculture and more than half of the work force is still engaged in subsistence farming. Petroleum is the leading mineral produced i= n Chad, and by 2004 it was by far the leading earner of foreign exchange. Apart form the growing oil industry, Chad’s economy includes the processing of agriculture products (cotton) and the manufacture of textiles and tobacco products. Therefore, Chad has a Dual economy with a modern segment dependent on oil earnings, overlaid by a traditional agricul= ture and manufacturing economy.

To successfully map a strategy for understanding Chad’s growth experienc= e in the past 30 to 40 years, it is worth to take a look at the rate of per capi= ta GDP, the level of saving and investment in the economy and the other main indicators. Thus, consider Chad’s GDP per capita between 1960 and 2000 sketched in the line graph below.=

Source: Penn world table.

A puzzling and disturbing first reading of this graph is that, in the first t= wo decades between 1960 and late 70, there has been little or no progress made= in alleviating poverty. GDP per capita growth is almost negligible. Even if it= has experienced a considerable increase from the late 70s until the earlier 80s, the bitter reality of the Chadian situation is that the poverty level is getting worse as real per capita GDP in the year 2000 is less than it was in the 1990s.

Moreover, a speculative study of the graph above that presents Chad’s per capita GDP f= rom 1960 to 2000 may be analysed as, between 1960 and 1980 the graph shows that= per capita GDP rose progressively from US$284 to US$929.16 in 1980. Thus, betwe= en 1960 and 1980, income per capita has trebled and increased by more than 300= % or at an annual average rate of 6.6%. Thereafter, it fell abruptly to US$595 in 1984, as between 1980 and 2000; it increased only at an annual average rate= of 0.55%. Note that if income per capita had continued to increase beyond 1980= as it did before then (an annual average growth rate of 6.6%); Chad’s GDP per capita w= ould have trebled again. The difference between US$959.41 (per capita GDP in 2000) and US$1,226.49 that is equal US$929.16(per capita GDP in 1980) multiplied by 6= .6% (annual average growth rate before 1980) over 20 years (1980 to 2000), i.e., approximately US$297.33, is a rough measure of the cost to the average Chad= ian of domestic macroeconomic policy mistakes and adverse economic shocks[3].

The Chadian situation is typical to many African countries as represented in the line graph below. GDP per capita some time in the past is higher than in the year 2000 (growth disasters).