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5.2 Is it factor accumulation or total factor productivity that drives growth in Africa?: Economic Report on Africa 2007

Written by: United Nations Economic Commission for Africa

Article Overview: To investigate the link between growth and diversification, it was important to first quantify the contribution of TFP to economic growth. This section analyses the sources of growth for African countries using the standard growth accounting method, making it possible to disaggregate the shares of growth contributed by TFP, capital and labour. Growth in output is the sum of the growth in capital, labour and TFP. Capital accumulation is an essential element in the growth process, as it enlarges the economy’s capacity to produce. Increases in labour or labour force have traditionally been considered a positive factor in stimulating economic growth.

5.2 Is it factor accumulation or total factor productivity that drives growth in Africa?: Economic Report on Africa 2007

To investigate the link between growth and diversification, it was important to
first quantify the contribution of TFP to economic growth. This section analyses
the sources of growth for African countries using the standard growth accounting
method, making it possible to disaggregate the shares of growth contributed by TFP,
capital and labour. Growth in output is the sum of the growth in capital, labour
and TFP. Capital accumulation is an essential element in the growth process, as it
enlarges the economy’s capacity to produce. Increases in labour or labour force have
traditionally been considered a positive factor in stimulating economic growth.

Technical progress through TFP is also important and is the main factor in the
growth process. Advances in technology continue to stimulate growth in the rich
industrial countries, especially as their population growth rates are close to replacement
levels. In Africa on the other hand, there is accumulating evidence that it
is factor accumulation that drives economic growth, with below-average contribution
by TFP growth. Diversification is expected to have a positive contribution to
TFP growth, and by extension, to economic growth. This report has identified the
determinants of diversification and suggests that it may be possible to influence the rate at which TFP contributes to diversification and growth, by influencing these
determinants.

Before decomposing the contribution of capital, labour and TFP to growth, it was
necessary to find out the historical shares of capital and labour in Africa’s output.
As in other studies on Africa, the share of capital was found to be 0.39 and that of
labour to be 0.61. Estimation of these shares allows us to see the growth that is not
accounted for by labour or capital but by TFP.

Some results were derived from the growth accounting for individual countries
for five-year averages from 1981 to 2000 (see Ben Hammouda et al. 2006a). The
results confirmed that economic growth in Africa is driven by accumulation of the
factors of production. The average contribution of TFP to growth is negative for
the majority of African countries, with the exception of a few countries such as
Botswana, Burkina Faso, Cape Verde, Chad, Equatorial Guinea, Ethiopia, Gabon,
Guinea-Bissau, Malawi, Mauritius, Mozambique, Senegal, Swaziland, Uganda,
Zambia and Zimbabwe.

Another important result is that in the majority of countries, the contribution of
TFP growth to growth was positive in the 1980s, especially for the period 1981-
1985. By the early 1990s, most of them experienced negative contributions from
TFP. Even for a country such as Botswana, the first half of the 1990s saw a negative
TFP contribution. There was therefore a reversal in the sources of growth across the
continent in that the TFP contribution declined significantly from the second half
of the 1980s. In a good proportion of the countries, TFP contributed at least 30
per cent of the growth, and in some cases, more than half of the total growth. This
clearly changed especially at the beginning of the 1990s and to a significant extent in
the second half of the 1980s. Thus, in Botswana, except for the period 1991-1995,
TFP contributed more than one-third of the growth. For Burkina Faso, in 1981-
1985 and 1991-1995, TFP contributed half of the growth. Another important
observation worth pointing out is that the period 1996-2000 witnessed a return to
positive contribution to growth by TFP, although lower than its contribution in the
1981-1985 period.

How can one explain the transition of TFP contribution to economic growth from
positive to negative? As indicated, it was in the late 1980s and early 1990s that
the transition to negative TFP contribution occurred. To understand the causes
of this transition, it is worth recalling that the stylized facts of African economic
diversification indicate that the diversification efforts of the 1970s yielded favourable
results as Africa entered the 1980s. The favourable though fragile results of the
diversification efforts in the early 1980s correlated with the favourable growth results
of the same period. Thus, the positive and significant contribution of TFP in the
early 1980s explains the better diversification results at the time. However, these
gains could not be sustained in the later years of the 1980s. Two explanations come
to mind. First is the direct impact of the economic crises of the early 1980s itself and second is the fact that the adjustment measures addressing these crises had some
constraining consequences.

The adjustment measures instituted to deal with the economic crises required
stringent macroeconomic policies, which took the form of fiscal and monetary
conservativeness. This meant, on the fiscal front, that countries had to make hard
choices, such as cutting development expenditure and curtailing the rate of growth
of private sector credit. Reduced development spending by the public sector and
weak private sector investment might have led to the weakened TFP contribution
to growth.

The tight macroeconomic policies reduced the flexibility to pursue diversificationenhancing
programmes. This may have contributed to the transition from positive
to negative TFP contribution to growth. In the next section, the link between
diversification and growth through the TFP is explored and discussed further. The
significance of this transmission mechanism is that it can validate the proposition
that the hard macroeconomic choices that countries had to make to deal with the
economic crises invariably affected the role of TFP in Africa’s growth, by undermining
the diversification efforts at the time.

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Article Tags: accounting, advances in technology, africa, african countries, capital accumulation, determinants, diversification, economy, element, estimation, factor accumulation, industrial countries, labour force, population growth rates, stimulating economic growth, technical progress, tfp



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