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Backgrounder #756 on Asia

March 2, 1990

Why Asia Grows and Africa Doesn't

By and


(Archived document, may contain errors)

756 March 2,1990 WHY ASIA GROWSANDAFRICA DOES INTRODUCTION In the 1960s, as the countries of Sub-Saharan Africa gained independence from their colonial rulers, their economic futures looked bright. Free of problems associated with imperialism, and many rich in natural resources these new countries seemed on the road to inevitable economic progress. At the same time, Asia seemed an economic backwater, holding no special promise.

Today, Sub-Saharan Africa is the economic backwater. Living standards in many African countries have declined. The misery and suffering of their people, compounded by famines (part of which are man-made), disease and political repression, continue to rise. By contrast, Asia has been setting the global pace for economic development. This is true particularly for those na tions variously called the FourTigers or the Newly Industrialized Countries NICs Hong Kong, the Republic of Korea, Singapore, and the Republic of China onTaiwan. By a n d large they have eliminated the hunger and diseases associated withThird World poverty, while Hong Kong and Singapore per capita income equal that in a number of European countries Money No Answer. American policy makers correctly are saddened and distur b ed by Africa's tragic situation and are seeking ways to reverse its plight. Usually such plans rely on more money for that continent, for food, in creased numbers of medical care personnel, or other worthy goals. The trouble is that after nearly three dec ades of pouring aid into Africa, there is little indication that more money is the answer to the continent's problems.

Tanzania, for example, has received more funds per capita over the past two decades then almost any other less developed country. Its eco nomy, however is in shambles fact, it appears in worse shape than it was a quarter-century ago Asian Lesson. The answer for Africa is not simply more foreign aid; it is economic growth. The comparison with Asia dramatically illustrates this point If betwe e n 1965 and 1985, their economies had grown at the same rate as the four Asian NICs, the countries of black Africa today would have a com bined gross domestic product of 648.3 billion rather than the actual $21 1.8 billion.This $436.5 billion in additional wealth would go very far to eliminate hunger, increase people's life expectancy, and raise living standards The hian. ikiipie offek Gother lesson for Mrica.The'four Asian "ICs pursued free market oriented policies. All had lower levels of inflation and so under banking systems than Africa. Prices generally were established by the market.Taxes were kept low. Hong Kong and Singapore have markets opened almost totally to imports.

Economic growth which results from free markets, with minimal govern ment control and maximum incentives for private entrepreneurs to be productive, is the only means by which Sub-Saharan African countries can pull themselves out of their economic quagmire. Foreign aid simply cannot provide the amounts of assistance that Africa could create for itself with the right economic policies.The U.S. and its Western allies therefore should promote economic growth as the ultimate solution to Africa's poverty.

America's Agency for International Development could help by placing a greater emphasis on policy reforms and monitoring programs in African countries toward a number of free market goals. These goals should include 4 4 Guaranteeing the right of all citiz e ns to own property, to use it as they choose, and to have these rights protected by their governments 4 4 Establishing the freedom of farmers to grow whatever crops they choose and to sell them to whomever they wish and at whatever price they can obtain. i nvestment, which creates jobs the general public, and foreign investors 4 4 Opening markets to imports, which raise living standards, and foreign 4 4 Privatizing state-owned enterprises by selling shares to the workers THE FAILURE OF AID TO AFRICA The eco n omic plight of Sub-Saharan Africa usually comes to the attention of the American public through pictures on television screens of starving children in Ethiopia or the Sudan, of AIDS-ravaged villages in Uganda or of teeming urban slums in Nigeria or Zaire. American policy makers respond in fits and starts. Famine relief is sent to help the hungry. A special African Development Foundation is created by Congress to funnel aid to that con tinent.The foundation seeks $10.2 million for fiscal 19

91. Further, Ame rica's Agency for International Development (AID) seeks $565 million for the Development Fund for Africa in its 1991 budget. A Global Poverty Reduc tion Act would require AID to set specific goals for reducing absolute levels 2 of poverty and infant morta l ity and for raising levels of female literacy in less developed countries, especially in Africa. The humanitarian instinct driving these programs is commendable. But little fundamental is accomplished be cause little fundamental is changed In addition to A merica's assistance to Africa, other democratic, industrial ized countries have supplied aid The British and French have tried to help their former colonies. The Scandinavian counties took special interest inTan za&a after ih hen-President Julius Nyeiere a eclired'hisintention in 1968 to transform his country into a model of African socialism Western Budget Problems. The U.S. has transferred almost $12.5 billion to Sub-Saharan Africa during the last three decades. Over the last four decades the US. has tran s ferred some $400 billion in foreign assistance to the less developed world, less than the amount that Africans themselves might have created with economic growth. Given the budget problems of most Western countries today, it will be difficult to sustain c urrent levels of assistance much less meet the new economic demands of Africa. Economic growth offers the only solution to Africa's difficulties.

Yet the economies of most of the Sub-Saharan African countries continue to stagnate. Foreign aid has failed to overcome the adverse effects of flawed economic policies.There is no way for the West to provide enough funds to pull Africa out of its quagmire of poverty. That must be done by the Africans themselves, through growth-oriented free market policies that w i ll allow them to create the wealth that constitutes a prosperous society THE BENEFITS OF GROWTH A lesson for Africa can be found in the four Asian NICs, Hong Kong, the Repubk of Korea, Singapore, and the Republic of China onTaiwan. Like most African count ries, Hong Kong, Singapore, South Korea, and Taiwan had colonial pasts. South Korea and Taiwan were Japanese colonies from early in this century until the end of World War

11. Singapore was ruled by London from 1819 until 19

65. Hong Kong remains a British colony until Beij ing becomes its ruler in 1997.

None of the four NICS had particularly promising economies in the 1950s Hong Kong and Singapore had suffered brutally under Japanese military oc cupation during World War 11. The Korean War left South Ko rea in shambles and in the early 1960s, the U.S. cut off development assistance to South Korea, declaring it to be in too poor condition economically to benefit from further aid. During the 1950s,Taipei was concerned foremost with defending Taiwan against a possible attack by the communist armies from the Chinese mainland; little attention was paid to the economy economic conditions appeared no worse than the Asian countries In some ways Africa was in better shape. Some African countries had large deposits ' of mineral resources like copper and oil. Others had fertile land, especially in As African countries gained their independencein the 196Os, their 3 British East Africa. In many cases the colonial powers left in frastructure neces sary for economic growth , like roads andrpower plants Comparing what happened in the subsequent Years In terms of purchasing power parity. Data from the U.S. Agency for is instructive. In International Development 1985 the total gross domestic product (GDP) of the Asian NICs was $269.9 billion in terms of purchasing power parity, which attempts to measure real buying power and adjusts for inflation.This is a 434.percent increase over the GDP of these countries in 1965 SeeTable

1. Raw data in Appendix The per capita in come of these countries stood at $3,948.7 in 1985,266 percent higher than in 1965.

In Sub-Saharan Africa, by con trast, GDP in 1985 was $211.8 billion, only 74 percent above the 1965 level. Per capita income was virtually un changed See Table 2) Some I Table 2 I Eco nomic Growth in Africa countries had par ticularly poor records. A recent International Development In terms of purchasing power parity. Data from U.S. Agency for World Bank report, for ex ample, finds that between 1965 and 1987 Zaires average per capita income shrank at an-annual rate of 2.4 percent. In contrast, per capita income in Sin gapore grew during this period at an annual rate of 7.2 percent.

This comparison confirms the importance of economic growth SeeTable 3) If, since 1965, the Sub-Saharan Af rican countries had grown at the same rate as the four Asian NICs, in 1985 they would have had a total GDP of 1 1 World Development Repti IW, issued by the World Bank, Washington, D.C., Table 1, Basic Indicators p. 164-5 4 648.3 billion, an ad ditional$43 6 .5 over the actual amount Table 3 If African Nations' Growth Rates Matched Those of Asian NICs If per capita income had grown at the same rate as in the Asian countries each individual African would have had $1,841 in annual income, or $1,336 more than th ey ac tually had.

The extra income resulting from higher economic growth would have al lowed African governments to deal with many of their social and economic problems. More bridges, roads, schools, power stations, and hospitals could have been built. Wit h more money in their pockets, individual Africans could have afforded food, better housing and consumer goods PRODUCTIVITY AND DEVELOPMENT The rising economic productivity needed by a country to grow and prosper is attained when such factors of productio n as manpower, land, capital, and raw materials are employed as efficiently as possible. This requires an economic system to be flexible enough to allow these factors to be allocated or redistributed quickly from less to more profitable and productive vent ures.

For this, the primary economic actor is the individual. Thus an economic sys tem must allow those individuals who are best at providing goods and ser vices to meet public demand to profit directly from their actions.

This, by and large, is what the four Asian "ICs have done.The result of their relatively free market economies is increased economic productivity and prosperity.They have allowed market forces to operate and protected the property rights of their people. This contrasts dramatically with the socialist systems of most African countries. There, governments rather than markets have been allocating resources. Often, corrupt politicians and bureaucrats to work hard and to be as productive as possible.

A report issued by AID in March 1987 outli ned the consequences of such policies. First it found that production was discouraged, new savings and in vestments were reduced, and what investments were.made were relatively un productive from poorer groups, mainly small farmers, to better off urban dw e llers pocket revenues. The. result:-there are usually few incentiyes for-bdividuals Second, the AID report found that government policies shifted income 5 Third, the study found that by diverting investment funds to usually money losing capital intensive i ndustries and away from the labor intensive sectors African governments created high unemployment Finally, the study found that The more control government has on economic life, the more it uses administrative means to ration resources rather than the mar ket, the qeater the opportunity for extortion and bribery and corruption of all kinds Thus while Africa has pursued policies of government control and regula tion, the four Asian NICs limited government and promoted free-market policies.

A number of examples illustrate the different outcomes of the policies of Africa and Asia. a i INFLATION Money, usually in the form of paper currency, acts as a medium of ex change to facilitate economic transactions, and as .a store of value for those wh o save for future investments or consumption. A countrys central bank usually provides the paper currency.To promote economic growth a countrys money supply must remain relatively stable, expanding only slowly to meet market needs. If a central bank prints paper money far in excess of actual economic growth the currencys value will drop and prices for real goods and services will be higher. This will make currency less useful as a medium of exchange or a store of value.

People will be reluctant to accept cu rrency if its value is shrinking. This in flated currency will discourage economic transac- tions and thus will lower a countrys Chart 1 Asian Inflation Rates Annual Average, 1980- 1987 01234507~1 Percent B.rllu8 m8Chut figures from World Development Repo rt 1989, issued by the World Bank, Table

13. Money and Interest Rates, p. 188-1

89. Taiwan hue from Tdwan Stafistical Data Book 1989, p. 1

81. Figure given f& average annual increase of the consumer price index-TheWorld Bank does not keep figures on Tai wan. productivity 2 Stephen M. Haykin, Policy Ri$onn A.ogrems in Aficc A Preliminary Assessment of Impacts Washington D.C Bureau for Africa, Office of Development Planning, Agency for International Development, March 1987 p. i 6 A comparison of the four A s ian NICs with Sub Saharan Africa il lustrates the destructive effects of inflation. Be tween 498Oand 1987 the average annual inflation rate in the four NICs was well below 10 percent Seechart 1 The 10most populous African Nigeria Ethiopia Zaire Tanzania S udan Kenya Uganda Yosamblque Ghana Ivory Coast 0 Chart 2 African Inflation Rates Annual Average, 1980-1987 i I I I I I COUntrieS, however, Figures from World Development Report 1989, issued by the World which include near- Bank, Table

13. Money and Interest rates, p. 188-1

89. Population ly 70 percent of the order from Table

1. Basic Indicators, P. 164-165 continents people, have had high rates of inflation See Chart 2 The two African countries with inflation rates below 10 percent further il lustrate t he point. Ethiopia is listed by the World Bank as the worlds poorest country; AIDS figures place it among the poorest. As a Marxist dictatorship with a completely centrally planned and controlled economy, Ethiopia strictly limits price increases, which ar e the usual measure of inflation. But, while prices are officially low, there is virtually nothing to purchase openly with money.The goods that are available are so only through unofficial and even il legal transactions on the grey or black markets.There p rices are very high. Thus in Ethiopia, the inflation is hidden, meaning that to actually ob tain various goods would requires substantially more than the official prices.

There are no good figures on real costs.

African standards.The Ivory Coast, for example, has invited foreigners to in vest in such economic activities as agricultural production and manufacturing.

The Ivory Coast also has tended to protect private property rights The Ivory Coast, by contrast, has a comparatively strong economy by COMMERC IAL BANKING The commercial banks provide a place for individuals and businesses to deposit savings and to obtain loans. Banks in African countries are often owned by the governments. Governments strictly regulate those that are not setting interest rates a nd dictating lending practices. Interest rates are often held below the level of inflation.This means that savers lose money. Savings thus is discouraged I I I I 7 Where funds exist, governments decide where they are to go. Often governments force banks t o fund inefficient government-owned and managed industrial and manufacturing sectors As the public sector becomes unable to compete, loans go bad and banks loose money. Many Sub-Saharan banks fail and are prevented from merging with other institutions to d ivers

the losses As a result, banks in Africa are in terrible shape. Examples Ghana The banking system here had a negative net wofih'in'i9

88. The reison'waS3he'great number of loans made to the publicly owned sector of the economy because of government pressures. The businesses failed and the loans went bad Kenya. Most banks in Kenya started in the mid-1970s have failed, including several major banks, because of bad loans! Government corruption involving banks and regulation of lending is in large part r esponsible Madagascar. By 1988, some 21 percent of all loans were considered difficult to collect and another 25 percent were considered uncollectible. This made the entire banking system insolvent. Here too the cause of such losses were the government ta rgeted loans to huge public sectors Tanzania. Some 85 percent of the credit in this country goes to the state sector. Half of this goes to government-owned agricultural marketing boards.

And 42 percent of this sum simply goes to cover these boards' debts! Tanzania's banking losses in 1987 totaled nearly 10 percent of their ntire Gross National Product because of bad loans. 5 By contrast, the Asian NICs have had more open banking systems. H ong Kong is a major world banking center. And even though public sectors exist in these countries, especially in South Korea and Taiwan, banks have been free to lend money to compar;ies hatthey-feelwouliimake good invGtmeiiK 3 World Development Report 198 9 , op. cit p. 71 4lbid 5 Bid 6 Figures from theTanzanian Chamber of Commerce, from meeting between Edward Hudgins and Chamber's President, Mr. Mwapachu on June 27,1989 7 World Development RepH 1989, op. cit p. 72 8 When a banking crisis does occur, the fre e market allows banks to merge and prevent the entire collapse of larger banks. For example, in South Korea 78 banks merged b tween 1986 and 1987, preventing $5.9 billion worth of assets from being lost CAPIT'ALMARKETS I I a I I I Capital markets, in which stocks and bonds are bought and sold, provide in vestment opportunities and help businesses raise funds for productive ac tivities, expansion, and innovations. The four Asian NICs gradually have in creased their equity, bond, and stock markets. African co untries continue to have very small capital markets. Hong Kong has a major world stock market.

In South Korea, in 1987 the average of the total value of listed stock made up 19 percent of the GNP. South Korea even offers special tax credits to en courage c orporations to offer stock. But in Nigeria, the most populous African country and a major oil exporter, the listed, stocks made up only 4 per cent of GNP In the United States and Japan, the averages can be as high as 80 to 90 percent Developing larger mon e y and capital markets help to pro vide the necessary sources of capital to fund economic growth PRICING Most developed nations rely on market forces to set the prices of goods and services. Many less developed countries are suspicious of or even hostile t o the market and thus allow government to set prices. Prices set below the costs of production and that do not respond to the forces of supply and demand, create shortages of some items and massive surpluses of others.

Africa has a history of economically destructive price controls. Example: In Benin, government price controls caused otherwise efficient cement plants to operate at a loss. Example: In Sierra Leone, state-owned transport enterprises were forced to absorb cost increases without timely price i n creases, again creating losses. Example: In Zambia farmers had to a more than a dollar for fertilizer for every dollar's worth of food produced 1989 report by the World Bank and the United Nations Development Project finds chat price controls continue to - harmmany Sub;Sa~a~an-c~u~t~ies'says the report: "Where producer prices are fixed high domestic inflation in some 9 8 World Development Report, op. cit p. 71 9 John R. Ne Atblic Enterprise in Sub-Saharan Afica (Washington, D.C World bank Discussion Papers N ovember 1989, pp.21-21 lOHaykin op cit, p. 1 9 countries (Sierre Leone, Somalia, Sudan, and Tanzania) continues to erode the purchying power of producers income despite agricultural price policy changes I MARKETING BOARDS 3 I Although never used extensive l y by Asian countries, marketing boards have been used throughout Africa over the last two decades. In many African countries, farms are collectively owned or the rights of the farmers severely restricted. For example, farmers might be required to grow onl y crops ap proved by the government. Governments usually regulate agriculture through marketing boards. Farmers are required to turn over their crops to these boards, which pay them a price well below world market rates. The govern ment board then might ei ther export the crops and keep the profit or sell the crops cheaply to urban dwellers who tend to be the bureaucrats and political supporters of the government.

Farmers often are required to send their crops to distribution centers using government transpo rtation, which is often inadequate and fails to deliver crops where they are needed. Marketing boards usually are the sole legal dis tributers of such farm inputs as fertilizer and seed.

Marketing boards and state control of agriculture have harmed Africa n farmers and led to agricultural disaster. In Cameroon, for example, in 1986 the coffee marketing board paid farmers only $150 per ton for their crops while the world market price was between $2,250 and $4,500 per ton Disastrous Results. Tanzania, for ex ample, in the 1960s and 1970s wholeheartedly imposed marketing boards on its mostly agrarian economy.

Ten state agencies were put in charge of buying, processing, and marketing 42 products. The results have been disastrous. Prices declined rapidly and it t hus no longer paid for farmers to plant more crops than were needed for farming self-sufficiency. The result: agricultural output fell and food shortages oc curred. Further, in late 1987 Tanzanian government officials cracked down on informal sector distr i bution of crops, stranding some 300,000 tonsof crops in the field, since the government distribution system could not handle the cargo A report by the U.N. Food and Agriculture Organization in 1985 found that while in Asia marketing costs accounted for ab out 20 percent of the value of agricultural products, in Africa these costs accounted for 55 percent.

This inefficiency usually leads to black markets or informal sectors. Example: l2 11 Africas Adjustment and Gnnvth in the IWs, the World Bank and the Unit ed Nations Development Project Washington, D.C 1989. p.21-22 12See Melanie S. Tammen, The Failure of State Agriculture in Sub-Saharan Africa,unpublikhed draft, 1988 10 In the mid-1980s Kenya monoplized the marketing of corn.The poorly in tegrated distribu t ion systems led to an informal sector that offered farmers better service at cheaper rates TAXATION Xhe.Asian-NICs have had a neutral, workable tax structure.that promoted economic growth A report by Alvin Rabushka, a Senior Fellow at the Hoover Instituti o n, finds that Responsible officials in Hong Kong, Taiwan, Korea Singapore, and Malaysia (the latter until 1970) got the basics right.They were therefore able.to utilize either the model of a neutral, broad-based, low-rate tax system or that of selective i ncentives coupled with light taxation of capital to propel their nations from the ranks of low-income developing nations to upper middle-income advanced status in theshort 13 span of one generation.

African countries, by contrast, have had very high margin al tax rates. In Ghana, for example, cocoa farmers were taxed at a top marginal rate of 90 percent.14 In their attempts to squeeze the last amount of wealth out of their citizens, the African countries have removed much of the incentive for productive eco nomic activity. The top marginal tax rate for the lowest income tax bracket in Hong Kong is 5 percent,15 for South Korea, 7.1 percent, and for Singapore, 3.6 percent. These rates would be paid by the poorest citizens.

The lowest tax rate in Tanzania, howev er, is 20 percent Lower Top Rates. The top tax rates in Asian countries tend generally to be lower than in Africa and are applied only tb the highest incomes. For ex ample, the top rate in Hong Kong is 25 percentf6 which applies only to incom es over $S,1 28.17 The top rate in Singapore is 40 percent but applies only to incomes over $340,909, far below the $7,940 average per capita income.

South Koreas top rate is 70.12 percent. But this applies only to incomes over 68,976, compared to a per capita income o f $2,690 l3Alvin Rabushka, Tax Policy and Economic Growth in Adv~ced Developing Nations, Hoover Institution Stanford University, California, 1987. p.6 14Haykb.1, op. cit p. 1 World Bank Economic Review, Vol. 2, No. 1,1988 p.128-9 16Rates from Bruce Bartle t t, The International Tax Revolution, unpublished paper. Rates as of 1985 l7These per capita income figures are in terms of real incomes, not purchasing power parity. What is important here is the level at which the tax rates apply, not the real buying pow er of the these incomes. figures are for 1987 from World Development Report 1989, op. cit Table

1. Basic Indicators, p. 164-165. l5Figures from the Gerard0 P. Sicat and Arvind Vbmani, Personal Income Taxes in Developing Countries 11 In Kenya, on the other hand, the top'rate of 65 percent is levied on in come over 730, in a country with a annual per capita income of only $330 Ghana's top rate of 60 percent affects people making at least $250, in a country with a per capita income of 390 forts of their citi z ens. It is little wonder that these countries are not produc tive The African countries use their tax code to punish the the productive ef L I I CONCLUSION Well-meaning policy makers in the U.S. and in other democratic, industrial ized countries see Afric ans' suffering as the tragedy that it is. Yet the billions of dollars of development assistance donated in the past decades to Sub Saharan Africa have done little to end or relieve this suffering.

If anything the situation has deteriorated good unless Afri can nations adopt free market-oriented policies that en courage individual farmers and entrepreneurs to create wealth Fuel for Progress. It has been economic growth, not foreign aid, that has fueled the four Asians NICs' dramatic economic and social chang e s. It is this that has raised their citizens' standards of living, health, education, and con sumption The lessons taught by the Asian success can be learned by Africans: In dividuals must be free to pursue their own economic good in the free market to ha v e secure private property, to freely trade with their fellow citizens, and to benefit directly from their own economic activities. Only when individuals have positive economic incentives to produce will the productivity of a country rise Africans, to be s ure, need continued foreign aid. But this will not do much Edward L Hudgins, Ph.D.

Director Center for International Economic Growth Bryan T. Johnson Research Associate 12 APPENDIX Per capita Gross Domestic Prodgt Using Purchasing Power Panty Asian countri es 1965 1985 Hang Kong 2 704 8,972 South Korea 808 3,082 Singapore 1,753 9,791 Taiwan 1,133 3,581 Average 1,080 3,948.7 African countries Angola Benin Botswana Burkina Faso Burundi Cameroon Central African Republic Chad Congo Ethiopia Gabon Gambia Ghana G u inea Ivory coast Kenya 1965 1,008 633 530 287 263 55 463 496 841 320 1,286 510 361 452 889 453 1985 609 552 1,987 359 331 1,138 441 254 1,189 304 3,313 497 527 919 592 18Purchasing Power Parity takes into account currency devaluations mchange rates, and i nflation rates.

Lesotho Liberia Madagascar Malawi Mali Mauritania Mozambique Niger Nigeria Rwanda Somalia Senegal Sierre Leone Sudan Tanzania Togo Uganda Zaire Zambia Zimbabwe I Average 310 557 614 254 327 527 864 340 569 152 396 800 411 729 256 550 333 305 854 680 503 7 95 588 477 347 337 s26 1 528 311 590 373 348 756 474 548 295 486 374 197 629 990 505 14

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