Development as freedom

February 6, 2018

 As the synchronised global economic upturn continues its momentum, slowing growth across the frontier countries speak a different story

 

The FT reported this week the slowing of economic convergence between low income and middle-income countries, as differentials in real GDP growth per capita turned negative in 2017, according to IMF data. This has sparked fresh concerns regarding poverty alleviation and development; 800 million people globaly still live below the extreme poverty line of $1.90.

 


Figure 1 – declining relative income in Africa

 

 

 

In short, the concept of modern economic growth and divergence began post Industrial-Revolution as endogenous growth through technology investments propelled Britain’s expansions. Market systems propelled this, encouraging growth diffusion and subsequently economic convergence within Europe. However, the majority of the world still lacked self-sustaining growth.

 

Much like divergence in the past, poverty traps through the political and geographical spheres provide similar explanations for the lack of synchronised uptick in 2017 amongst the frontier countries. As illustrated by the S-shaped curve in Figure 2, and described pertinently by Banjeree, “the scope for growing income or wealth at a very fast rate is limited for those who have too little to invest, but expands dramatically for those who can invest a bit more”. In particular, being landlocked and reliant on primary products has limited frontier countries’ participation in global trade, as higher transport costs and insufficient infrastructure networks reduce coastal access. As such, it has failed to see the benefits of the recent cyclical global recovery in growth and trade.

 

 

Figure 2

Furthermore, the slowing GDP growth figures is exacerbated by higher fertility rates frontier countries, with this more than double the replacement rate in Africa. As such, this further highlights the lack of economic growth which is still very much the limiting factor in tackling poverty and the lack of human capabilities and freedoms.

 

The consequences of the slowing growth have translated into increased capital flight, outflow and reduced FDI as returns decrease, inducing further economic slowdown. Indeed, poor economic growth has directly resulted in the recent increase in debt in sub-Saharan countries; the FT reported that “every sub-Saharan country bar Namibia (are) now rated as subinvestment grade”. As downgrades further increase debt servicing costs, this contributes to a loss of net government revenue as “median debt-to-GDP ratio of the 18 sub-Saharan nations rated by Fitch is projected to reach 52.6” (FT), thus further reducing scope for beneficial investment projects.

There is, on the other hand, room for optimism as Brent crude price continues its upward trend and aids the recovery of oil rich nations such as Nigeria. However, this may yet be seen to be double-edged sword as resource export reliance can increase the value of a nation’s currency, thus making alternate exports less competitive.

 

Microfinance has potential to play a key role in the development and continued growth of these countries. As sustainability continues to play a significant role in development, Microfinance Institutions can act as a safety net by providing recovery loans after natural disasters to increase stability. Further, demand nudges such as through the form of conditional cash transfer can guide development and encourage the take up of merit goods, such as education and insurance. Certainly, top down supply side intervention is necessary to achieve an efficient outcome by increasing local participation and breaking the vicious cycle of low expectation. Overall, development focus needs to be on growth and improvements of freedoms, especially through the increased participation of locals, thus creating incentives for governments to increase focus on social spending and long term economic convergence.

 

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