Why poverty levels in Africa remain high despite growth

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A FEW weeks ago I wrote about the transformation taking place in Africa and the dramatic growth Africa has experienced over the last two decades.

The Ritesh Anand Column

A number of readers asked why it felt like in many countries, the number of people getting poor was increasing. Was the average African truly benefitting from the rapid growth in Africa? This week I explore some of the reasons why the number of poor people in Africa is increasing when Africa’s economies are growing so rapidly?

This year marks the 20th year since Sub-Saharan Africa (SSA) embarked on a path of faster economic growth. Over this period, growth has averaged at 5,2% per annum, whereas the number of people on the continent reportedly living under US$1,25 a day has continued to creep up from 358 million in 1996 to 415 million in 2011; the year 2011 being the most recent year for which official estimates are available.

Can these divergent trends be explained?

The most obvious reason would be that all the benefits of growth were captured by the rich, resulting in ever-increasing inequality in each country — the rich are simply getting richer.

The data, however, doesn’t show much evidence of that. Distribution trends within African countries vary dramatically. The distribution is widening in as many countries as it is narrowing and in most countries it is not changing much at all.

It is possible that the very rich people, the top 1%, are benefiting from the share of the spoils of growth, by more than their fair share, but this is missing from the data as this rarified class tends not to participate in household surveys from which statistics and distributions are derived.

There are five other factors that can account for SSA’s alarming poverty numbers.

The first is the region’s rapid population growth of 2,6% a year. Incidentally, this correlates almost exactly to the average percentage increase of those living with less than US$1,25 per day from 1996 to 2011. While African economies are generating more income, that income has to be shared among an ever-increasing number of people.

Since the region’s income is growing faster than its population, average incomes are rising and the share of Africans living in extreme poverty is falling — from 60% in 1996 to 47% in 2011. But the rate at which poverty is falling is less than the rate at which the population is rising resulting in the number of people living in poverty continuing to grow.

In more general terms, SSA’s record of economic growth looks much less impressive in per capita terms. The World Bank has just released a revised growth forecast for the region in 2015 of 4%.

When you lop off 2,6% in population growth, you’re left with per capita income growth of only 1,4%, which in comparison to the world average where projected economic growth of 2,9% combined with population growth of 1,1% results in per capita income growth of 1,8% in 2015, is low. Africa’s growth this year, in per capita terms, is expected to be almost as much as 29% below the global average.

The second factor is the depth of Africa’s poverty compared to poverty elsewhere. In other words, poor people in Africa start further behind the poverty datum line than the rest of the world.

Therefore, even if their income is growing, it is rarely enough to push them over the US$1,25 threshold. In 2011, the average person living in extreme poverty in Africa lived on US$0,74 a day, whereas for the rest of the developing world it was 98 US cents.

The third factor is that even though inequality isn’t rising in most African countries, inequality is already at an unusually high level, making economic growth unable to deliver more poverty reduction, since the absolute increases in income associated with rising average incomes will be that much smaller for the have-nots versus the haves. Furthermore, the degree of inequality that exists on the continent is worse than it appears. The fact that Africa is divided into so many countries masks the big differences in incomes among them.

If Africa were a single country, its inequality would look much worse — worse even than Latin America. Since incomes across African people vary so widely, only a fraction of people are likely to cross the poverty line at any one time. That contrasts with India where a concentration of people immediately below the US$1,25 mark means that even a small increase in incomes can result in a sudden flood of people moving above the poverty line.

The above three factors explain why you would expect relatively little poverty reduction for a given amount of growth in Africa compared to elsewhere. These factors, nevertheless, cannot explain why the number of poor people in Africa has actually increased since the start of the century. For this, we consider the two final factors.

The fourth factor is that there is a degree of mismatch between where growth is occurring and where the poor are on the continent. Undoubtedly, the region’s growth acceleration has benefited some of its poorest countries, including Ethiopia, Mozambique and Rwanda, whereas, others such as the Democratic Republic of the Congo and Madagascar have recorded little or no growth over the past 20 years and the number of poor people in these countries has risen accordingly. As long as a handful of the region’s fragile states struggle to build and sustain economic momentum, the number of poor people in Africa will not decline.

The fifth and final factor concerns data quality. Poverty estimates are drawn from household surveys, which in most African countries are conducted infrequently. Those that do take place often suffer from operational glitches that affect the credibility of the results. In Nigeria, for example, which accounts for a quarter of the people on the continent living in poverty, there are some well-documented flaws within its most recent national survey of living standards (not to be confused with the issues concerning the country’s national accounts, which were recently rebased). When new data becomes available, one may discover that Nigeria’s poverty rate is considerably lower and has been falling at a faster pace than previously thought.

As a general rule, aggregate poverty numbers for Africa should be handled with care, and small increases or decreases should not be taken seriously.

The dissonance between Africa’s growth performance and its poverty numbers is a striking phenomenon that demands an explanation. While intuition may lead us to call into question the region’s growth — it only seems to benefit the rich, the quality of growth is deficient and growth numbers are exaggerated — the above five factors suggest that the answer can instead be found by analysing Africa’s poverty data more closely.

The same five factors can explain why this difference is unlikely to go away any time soon. The World Bank anticipates much of the same for the next few years: the number of poor people in Africa is expected to remain close to 400 million until 2020, despite a forecast of ongoing robust economic growth.

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