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Productivity Growth:

The Key to Poverty Reduction in


Africa

African Growth and Opportunity Forum

John B. Taylor
Under Secretary of Treasury for International Affairs
January 16, 2003
33_05

1.3 billion people, less than $1 per day


½ world’s population, less than $2 per day
U.S. average, nearly $100 day. Why?
Answer: Productivity Is Low

• Productivity = output (Y) per hour of work (L) = Y/L


– Sometimes called labor productivity
• It’s “the explanation” why some countries are rich and
other countries are poor
• Countries with few high productivity jobs are poor
• Creating more high productivity jobs—productivity
growth—is the only way to reduce poverty.
But Why Is Productivity So Low In
Poor Countries?
• Productivity (Y/L) depends on:
– capital (K/L) and technology (T)
• If there are no impediments to the spread and
use of capital and technology, then countries
behind in productivity should be catching-up
• Capital and technology would go to where they
are relatively scarce because the returns are so
high
33_01 GROWTH RATE OF
PRODUCTIVITY
OR
GROWTH RATE OF
INCOME PER CAPITA

Poor but growing


more rapidly

Catch-up line

Rich but growing


more slowly

LEVEL OF PRODUCTIVITY
OR
LEVEL OF INCOME PER CAPITA
GROWTH RATE OF
33_02

INCOME PER CAPITA, 1880-1980

3.5
Florida
Texas
3.0
Illinois
New York
2.5

California
2.0

States in the United States:


1.5 Catch-Up Clearly Seen

1.0

0.5
300 1,000 5,000

INCOME PER CAPITA IN 1880


(RATIO SCALE)
ANNUAL GROWTH RATE OF REAL
GDP PER CAPITA, 1960-1999 More Advanced Countries:
4.5%
Catch-Up Seen Here Too
Portugal Ireland

3.5% Greece Spain


Norway Luxembourg
Austria
Italy Belgium
Canada France
2.5%
Turkey Netherlands U.S.
UK Denmark
Sweden

1.5%
0 3000 6000 9000 12000 15000 18000

REAL GDP PER CAPITA IN 1960 (1995 $)


ANNUAL GROWTH RATE OF REAL
GDP PER CAPITA, 1960-1999 All Countries: Not Much
8.0% Catch-Up Seen Yet
Korea
Singapore
6.0% Hong Kong
Japan

4.0% U.S.

2.0%

Bangladesh
0.0%
Nigeria
-2.0%
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

REAL GDP PER CAPITA IN 1960 (1995 $)


Recent Productivity Trends
(1990s)

• East Asia 5.5


• United States 2.1
• Europe 1.2
• Latin America 0.7
• Middle East -0.1
• Sub-Saharan Africa -0.5
Why Isn’t There More Catch-Up
• Poor governance
– weak rule of law, corruption
– creates disincentives to invest, to start up new firms, to
expand existing firms
• Poor education
– reduces human capital
– impedes adoption of new technologies
• Restrictions on economic transactions
– lack of openness to trade, state monopolies, and
excessive regulation
– reduce incentives for innovation and investment needed
to boost productivity
The New Foreign Aid Agenda
• Increase foreign aid
(1) Funding for Millennium Challenge Account to
increase to $5 billion a year by 2006 — a 50% increase
over and above existing U.S. development assistance
(2) Contribution to World Bank’s International
Development Association (IDA) increase by 18%
(3) Larger fraction of IDA aid in form of outright grants
rather than loans
• Let good performance determine which countries
get aid for economic development
• Insist on measurable results
U.S. OFFICIAL DEVELOPMENT ASSISTANCE
US$ BILLION, 1986-2006

$18
Large Increases in Funding
$16 Compared to Historical Averages
$14

$12

$10

$8

$6

$4

$2

$0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
ODA held constant in 2001-06 for presentational purposes
Good Policy Performance is Part of the
Millennium Challenge Account
• “Ruling justly”
– lack of corruption, rule of law
• “Investing in people”
– good education and health policy
• “Encouraging economic freedom”
– good trade and macro policy
Measurable Results Are Part of
IDA-13
• U.S. Contribution to IDA up by 18%
– Year One: $850 million
– Year Two: $950 million
– Year Three: $1,050 million
• Each $100 million increment in year two and three
depends on measurable results
– time to start up a business,
– measles immunization,
– primary school completion rates.