Africa’s Growth Tragedy:

Policies and Ethnic Divisions

Presentation Sequence 2
Introduction

● Why Africa’s growth is a tragedy even after decades of development all around the globe?
● Africa is the home to a major share of the world’s natural resources and still the most
underdeveloped amongst all.
● In 1960s, Africa was viewed to have high growth potentials compared to the other continents, but
a completely opposite scenario has been observed as decades passed.
GDP per capita growth (annual %) - Sub-Saharan Africa

(Source : World Bank Data Site)

 Introduction Contd.

● This paper intends to provide a general proposition for the influence of ethnic diversity on
economic performance which reflect from many key economic factors.
● Ethnic diversity is a key factor in the growth differential between Africa and East Asia.
● ETHNIC, a ethnolinguistic diversity measure is used in this paper.
● The paper’s findings’ thereby support the view that ethnic diversity hinders economic growth,
thereby explaining to some extent Africa’s growth tragedy.
Using Cross-country ● Quantifying the empirical association
between
Regressions to ● Long-run economic growth and a
wide variety of indicators.
explain growth ● Many indicators have a close
association with growth
● Set stage for important answers to
questions like why do countries
select growth retarding policy-
packages?
Regression Framework

● Attempt to abstract from business cycle fluctuations by studying economic performance over
decades
● Account for cross-country growth differences, we use an array of right-hand-side variables
● Different intercept terms for each decade
● Control for political instability is included in the framework
Growth Regression Results
● Results derived using traditional measures of
initial income, schooling, political stability, and
policies.
● All of the variables are significant at the 0.05
significance level.
● Political assassinations are negatively
correlated
● While educational attainment is positively
correlated
● Dummy variables → significant and negative
Analysis Contd….

● Compare the most slowly growing region,

Africa, with the most rapidly growing
region - East Asia
● This gives average values of the
explanatory variables of regression (4) of
Table I.
● East Asia had twice the financial depth
● Even the size of black market premium
affected a lot
Ethnicity: Growth ● Root of Ethnic Divisions ..???

and policy choices ● Correlated with economic growth

● Greater ethnic diversity increases the

likelihood of adopting poor policies

● More negative impact on economy

than inter-ethnic violence

Ethnic Diversity: Concepts and Country Examples

● High levels of ethnic diversity have encouraged growth-impeding policies

● Ethnically diverse societies may produce instance of bribing and bribe takers

● Impose an overvalued exchange rate and strict exchange controls

● Similarly another group may impose opposite rules.

Effect of Ethnic Diversity on public goods

● Some models show that polarized preferences across groups leads to a low provision of public
goods shared by all, lowering the level of growth.
● Some work on data from US localities finds evidence for ethnic diversity affecting public goods
choice:
○ Larger fraction of elderly people in a jurisdiction leads to lower public spending on education when elderly
and school age populations are from different ethnic groups.
○ Public goods -- roads, schools, trash pickup, libraries -- worsen or receive less funding with higher ethnic
diversity in a sample of US cities.
Few country anecdotes

1. Kenya:
○ More than 40 ethnic groups
○ Political instability among different communities - worsened GDP
2. Ghana: Example of how ethnic conflict adversely affects policy choices.
○ Cocoa - Main export crop - tensions in the ethnic groups for the production of cocoa
○ Ethnic conflicts in the country led to instability in the cocoa prices, exchange rates, rents and taxes. Cocoa
exports were 19% of GDP in 1955 and fell to 3% of GDP in 1983.
3. Botswana: An African success story
○ Botswana has a growth rate comparable to South Korea’s.
○ We have to note that this growth was correlated with its ethnic homogeneity. Botswana has one of the most
ethnically homogenous populations in Africa and has adopted some of the best policies in Sub-Saharan Africa.
Measuring Ethnic Diversity

● Measure of ethnic diversity in 1960 by 70 researchers, Miklukho-Maklai Ethnological Institute

(Soviet Union). Data is obtained from Taylor and Hudson [1972] World Handbook of Political and
Social Indicators.
● ETHNIC → The probability that two randomly selected individuals in a country will belong to
different ethnolinguistic groups.
● Taylor and Hudson [1972] listed two alternative measures of linguistic diversity but these
alternatives cover fewer countries and omit significant groups within countries.
The results from the soviet study

● The results → 14 out of 15 most ethnically

heterogeneous societies in the world are in
Africa.
● Eight high-income countries are the most
ethnically homogeneous and no rich
countries are among the top-15 most
ethnically diverse countries.
● Two of the East Asian fast growers (Japan
and Hong Kong) are among the most
ethnically homogeneous.
Alternative measures suggested by Taylor & Hudson

● Roberts [1962] omitted the second largest group in Kenya, the Luhya. Correlation between
Roberts and Soviet → 0.95 (highly significant).
● Muller [1964] omitted many ethnic groups, especially in Africa. Correlation between Muller and
Soviet → 0.82 (significant).
● The Soviet data - more comprehensive
● Main → Soviet data, understand the sensitivity of the results from main → Roberts and Muller.
Other measures used

● Gunnemark[1991] - two indicators:

a. 1) The share of the population of each country for whom the language spoken at home is
not the official language of the country.
b. 2) The share of the population not speaking the most widely used language.
c. Correlation with ETHNIC → 0.78, 0.90 respectively.
● The soviet data - various other studies - fields of social science, geolinguistics and political
conflicts and risk studies.
● ETHNIC’s close association - diversity and conflict - gives some reassurance that ETHNIC is a
meaningful measure of ethnic diversity.
Growth Regressions

● Simple Regression of Growth on ETHNIC Highly Significant (t-statistic= -4.4)

● One S.D increase in ETHNIC => Decrease of 30% in per capita growth

● Significance of the ETHNIC variable

● Evidence of Empirical Association between ETHNIC and economic growth, Ceterus Paribus
● ETHNIC variable sufficiently correlated with the long-run growth with public policy indicators;
loses independent association with long-run growth
● The Three Measures remained significantly correlated with the long-run growth
● Muller’s measure also yields similar results.
● ISSUES:-
● 1) Measurement errors
● 2) AFRICA dummy variable
Ethnic Diversity,
Political Instability,
Policy Choices
● Effect of Ethnic Diversity on Political
Instability and Policy Choices
● Relation b/w Ethnic Diversity and
Assassination Insignificant
● Only Constitutional changes is
correlated with Ethnic Diversity
Results Inferred From Regression

● Africa does not have significantly above average Political Instability

● Result : For some countries, high level of ethnic conflicts coexist with government which get

suppressed over long periods

● Correlations of Ethnic Diversity

● Conclusion : Some degree of Correlation between ETHNIC and public policy indicators
Assessing Africa’s Performance:
the East Asia comparison
East Asia’s Growth Miracle vs. Africa’s Growth Tragedy

● East Asia - Africa growth differential is accounted for by the public policy indicators (ignoring
ethnicity)
● Taken together, Africa’s high budget deficits, financial shallowness, substantial black market
exchange rate premiums, high political instability, weak infrastructure, and low human capital
account for 2.6 percentage points of the 3.4 percentage
● The convergence effect predicts that Africa should have grown 1.1 percentage points faster than
East Asia, so that on net, the non-ETHNIC explanatory variables in regression account for 1.5
percentage points of the 3.4 percentage point growth differential.
● The non-ETHNIC variables account for about two-fifths of the growth difference.
Ethnicity and Growth Differential

Direct Ethnic effect: 0.2 percentage points of growth differential.

Indirect effect of ETHNIC on growth: ETHNIC helps account for long-run growth differences by
explaining public policy decisions. ETHNIC is 0.74 in the 27 observations for the Africa group included
in this sample and 0.53 in the 19 observations for the East Asia group.

We find that ETHNIC indirectly accounts for about 28 percent of the 2.6 percentage point growth
difference attributable to political/policy indicators. When we include the direct effects of ETHNIC,
ETHNIC alone explains about one percentage point of the 3.4 percentage point growth differential
Levels of income and ethnic diversity
How is income related to ethnicity?
● First, we regress the levels of income in 1960, 1970, 1980, and 1990 on ETHNIC
● We impose the same coefficient on ETHNIC across decades, but allow for different intercepts. The
resulting regression statistics are shown
● . The coefficient on ETHNIC in the income regressions is large and significant.
● A movement from complete heterogeneity to complete homogeneity is associated with an income
increase of 3.8 times.
● A one standard deviation decrease in ETHNIC is 27 associated with an increase in income of .4
standard deviations.
 Africa suffered from:

Conclusions ● low schooling

● political instability
● underdeveloped financial systems
● distorted foreign exchange markets
● high government deficits
● insufficient infrastructure

Analysis on a broad cross-section of

countries.
 Sequence 2 Group:

Thank You! 1.

2.
Sai Harshavardhan PVVN

Pravek Reddy Tirupari

2019B3A40677H

2019B3PS0714H

3. Saketh Pulluri 2019B3A70599H

4. Adarsh Bharadwaj 2019B3A40611H

5. Sathvik Kantheti 2019B3A30638H