Transcript . The Problems of Small States in Africa

The Problems of Small States
in Africa
• Small states have long been viewed by
international organizations as a special category
with specific handicaps requiring special
assistance
• The UN has an Office of the High Representative
for the Least Developed Countries, Landlocked
Developing Countries, and Small Island
Developing States
• This shows that the UN regards small developing
states that are landlocked or islands as being on
par with the least developed countries (LDCs)
• LDCs = low income states with a 3 year
average income per capita of less than $905
• Typically have human resource weakness (low
indicators of health, food security, education
levels etc).
• Also economically vulnerable (e.g. instability
of agricultural production, instability of
exports, handicap of economic smallness,
susceptible to natural disasters etc.)
• Generally stated that small states have intrinsic disadvantages
• The provision of public services usually yield increasing
returns to scale - reduction in the cost per unit resulting from
increased production and operational efficiencies
• In other words, big states supposedly more efficient because
provision of services at a larger scale is achieved at a lower
cost
 small states may suffer from “scale diseconomies”
• Returns on private investment may also have increasing
returns to scale, which may be difficult to realize in small
states, whilst small size may also limit an economy’s scope for
diversification
• Many small states are islands or landlocked, and
often face problems of remoteness
• Or they may only produce a few items and have to
import the rest
• Being relatively open economies (they have to be, in
order to import needed goods) they are then more
exposed to trade shocks /increase in prices etc
AFRICA
14 countries are classified as small states
THE INHERENT DISADVANTAGES OF SMALL AFRICAN STATES
Five supposed disadvantages of small African states:
1. High infrastructural costs
2. High public service and institutional costs
3. High costs of tertiary education and limited
opportunities for high-skilled employment
4. High exposure to natural hazards
5. High volatility of GDP
1. High Infrastructural Costs
• One study (Winters and Martins 2004) examined the extent to
which business costs for exports were higher than in mediansize countries (population 10 million) for four categories of
small states:
i. micro (under 12,000 inhabitants)
ii. very small (under 200,000) Seychelles, Sao Tome & Principe
iii. threshold (under 1.6 million) Swaziland, Cape Verde,
Comoros, Djibouti, Eq. Guinea, Gambia, Gabon, GuineaBissau, Mauritius
iv. small (under 4 million) Botswana, Lesotho, Namibia
Cost disadvantages—reflecting higher charges for transport,
utilities, and skills—were modest for countries with up to 4
million population
But the disadvantages worsened rapidly as size diminished - very
high for the “very small” and “micro” categories
Business costs were between 30–40% higher than in mediansized states.
Such countries would find it difficult to compete in
manufacturing - even with very low wages
 Their viability lies in finding economic niches – tourism is the
main strategy
2. High Public Service and Institutional Costs
• The share of government consumption in GDP is
higher in small states because the fixed costs of
many government services—such as defence,
bank supervision and higher education—are high
• Government administrative capacity tends to be
limited in states with very small populations.
• In response, small states have devised innovative
ways to overcome scale diseconomies.
• For example, the West African states have created a telecom authority and
an economic community (ECOWAS) to promote regional integration
• Francophone states have created monetary unions in West
Africa and Central Africa respectively, and use a common
currency (the CFA franc). A number of small states are
enthusiastic members:
• Benin, Burkina Faso, Côte d'Ivoire, Guinea Bissau, Mali, Niger,
Senegal and Togo form the West African Economic and
Monetary Union (WAEMU);
• Cameroon, Central African Republic, Congo, Gabon, Equatorial
Guinea and Chad form the Central Africa Economic and
Monetary Community (CEMAC)
•  This reduces costs whilst hopefully improving monetary
policy, professionalism etc
3. High Costs of Tertiary Education, Limited Job Opportunities
• Universities and technical training institutions need a minimum size to
attract suitable staff and students
• Those that create skills often suffer a brain drain
• The problem is worst in countries where poor policies have reduced
economic growth and job opportunities
• World Bank report revealed that nationals who attended university and
have left their country the most are from
- Cape Verde (68 %)
- Gambia (63 %)
- Mauritius (56 %)
- Seychelles (56 %)
 of the more than 1 million individuals of Cape Verdean ancestry, fewer
than half actually live on the islands
 61% of physicians born in Sao Tome and Principe have emigrated the
country
BUT Remittances are a critical lifeline for families and entire
communities across Africa
• some 30 million African workers outside their countries send
home approximately $40 billion a year in remittances.
Top remittances per capita (US$) to Africa:
1.
2.
3.
4.
5.
6.
Cape Verde
Seychelles
Swaziland
Botswana
Senegal
Nigeria
262
129
86
75
75
62
Remittances are large, come in
foreign currency and go
directly to households 
means that these transfers
have a significant impact on
poverty reduction, funding for
housing and education, basic
essential needs and even
business investment
4. High exposure to natural hazards
• In Africa, disaster damage as a proportion of GDP averaged
58% in small states - against 8% for large states
Compounded by:
• Limited natural resource base, high competition between
land use, intensity of land-use, spatial concentration of
productive assets
• High external transport costs, time delays and high costs in
accessing external goods, delays and reduced quality in
information flows, geopolitically weakened
• Small exposed interiors, large coastal zones
• Weak disaster mitigation capability
• Limited hazard forecasting ability, complacency, little
insurance cover
• Small economies, dependence on external finance, small
internal market, dependence on natural resources, highly
specialised production
 Cape Verde suffered a hurricane that struck the island of
Brava in 1982, a severe volcanic eruption on Fogo in 1995, a
deadly flooding in Sao Nicolau in 2009, and a dengue fever
epidemic in 2009
5. Small States Have Higher GDP Volatility
• Small states are typically dependent on a few economic
activities, and a boom or bust in these sectors can propel GDP
up or down much more than in large countries.
• Such countries are generally relatively open economies, highly
sensitive to changes in the global economy
• Volatility (measured as the standard deviation of the growth
rate of per capita GDP) globally:
 3.9 in small states
 1.4 in low-income countries
 1.5 in middle-income countries (World Bank)
• However, Africa, the region that is poorest and most
dependent on commodity exports, is an exception
• While volatility of GDP growth is high in Africa, it was lower
between 1981 and 2002 in small states (5.85) than in large
states (6.63)
WHY?
• In Africa, some larger states are relatively undiversified commodity producers.
• Many small states are more diversified, since even a modest amount of tourism
or industry creates substantial diversification out of commodity production
 Share of agriculture in GDP in small African states = 17 % vs. 32 % in large African
states
 Share of services in GDP was 50% in small African states vs. 43% in large African
states
NOTE: volatility is declining
This reflects, among other things, the diversification of economies into services,
reducing traditional dependence on commodity exports
Characteristics of African Small States
1. African small states are very a heterogeneous group
SIZE: Contrary to groups of small states in the Caribbean, the Pacific or
Europe, African small states show a wide range of population and land area
from 460 km² in Seychelles to 823,290 km² in Namibia
LOCATION: Some African small states are islands (e.g. Cape Verde, Comoros
and São Tomé e Príncipe), while others are landlocked (Botswana, Lesotho,
Swaziland)
ECONOMY: Some of them have valuable natural resources (Botswana, Gabon
and Equatorial Guinea), while most others do not
GOVERNANCE: Institutions are generally strong in many African small states
such as Botswana and Mauritius, but a few have experienced recurring civil
war (Comoros and Guinea-Bissau)
WEALTH: Variation in GDP per capita is substantial, ranging from $1,881 in
São Tomé & Príncipe to $21,600 in Seychelles
2. All sub-Saharan IBRD (i.e. quasi-commercial)
borrowers, with the exception of SA, are small states
reflects that small states are on average substantially
richer than the average SSA country
Median GDP per capita of African small states
$2,217- more than 4x median of larger SSA states
African small states are, however, much poorer than
the average small state globally: the GDP per capita
of all African small states, with the exception of
Seychelles, falls below the small states average.
Name
Population
Area (km²)
Density (per km²) Per capita GDP ($)
Comoros
2,170
752,438
346.7 1,202
Djibouti
23,000
516,055
22.4 2,555
Mauritius
2,040
1,284,264
629.5 12,838
Seychelles
455
87,476
192.2 21,600
28,051
633,441
22.6 18,143
267,667
1,514,993
5.6 14,419
1,001
212,679
600,370
1,990,876
Lesotho
30,355
2,130,819
70.2 1,468
Namibia
825,418
2,108,665
2.6 6,900
Swaziland
17,363
1,123,913
64.7 4,500
Cape Verde
4,033
429,474
107.3 3,700
Gambia
11,300
1,782,893
157.7 1,900
Guinea-Bissau
36,120
1,533,964
42.5 1,100
Equatorial Guinea
Gabon
São Tomé &
Príncipe
Botswana
212.4 1,881
3.3 15,489
African small states are more open than their African subSaharan counterparts
In general, small states tend to be more open, the
argument being that trade enables small states to alleviate
constraints associated with their small domestic market
Most small African countries have increasingly integrated
into the world economy during the last twenty-five years
BUT whilst small African states are more open than other
SSA countries, a lot remains in terms of making them easy
to do business in
Global “average ease of doing business”
But this varies massively….
Infrastructure is better, on average, in African small states than in other
SSA countries
As a consequence of higher GDP and larger capital expenditure,
infrastructure (measured as the paved roads as a share of total roads
and the number of telephone lines as a share of population) is substantially
better in African small states compared to SSA overall.
Nonetheless, several African small states continue to suffer from a weak
infrastructure, in particular Djibouti, Gabon and Guinea-Bissau
 Infrastructure and geography have been identified as the main
determinants of trade costs
A small population size implies lower ethnic fractionalization
African borders were drawn to a large extent ignoring ethnic
boundaries, which arguably resulted in higher ethnic
fractionalization in SSA
But states that happen to have smaller populations are likely to
include a smaller number of ethnic groups - suggesting a strong
correlation between small size and ethnic fractionalization
Since high ethnic fractionalization has been linked to a higher
probability of conflict and weaker institutions, “smallness”
actually turns out to be an advantage in the African context
Countries with high degree of ethnical fractionalization
tend to have weaker governance
Ethnic fractionalization also tends to weaken institutions
 ethnic fractionalization may lead to uncoordinated rentseeking activities where each ethnic group does not
take into consideration the effect of one’s group’s
actions on the rents of the other group
Moreover, ethnic fractionalization may weaken the
centralization of control and useful checks and balances,
facilitating rent-seeking activities, weakening
accountability and opening the door for corruption.
• In line with this theory, governance is generally stronger in
African small states, partly as a result of lower
fractionalization
• The institutional quality of the average small African states
is higher than the sub-Saharan African average, across all
the standard indicators
• The indicators show that small African states are less
corrupt, have more effective and accountable government,
a better regulatory environment and better rule of law
overall
• This difference between small and larger African states is
particularly large in the case of rule of law: ten out of 14
small states fare better than the average sub-Saharan
African state
Small African states are also show a remarkable degree of political
stability
Only Djibouti is less stable then the average for sub-Saharan Africa.
Not only are governments in African small states less likely to be
overthrown or challenged in armed conflicts, but political rights in these
countries are actually stronger on average than in sub-Saharan Africa
Political stability is reflected in a lower incidence of armed conflict and
state failure among the African small states
Armed conflict is substantially rarer in African small states compared to
the average for sub-Saharan Africa
The probability of state failure (which includes coups, but also civil wars,
genocides etc) is much less in a small state, compared to the average subSaharan state
State Performance
• The literature suggests that there are three key determinants
of small state performance: geographical location, natural
resources, and policies and institutions
Geographical Location
• Determines distance to export and tourist markets, transport
costs, and ease of integration with neighbours
• Small states are mainly islands or landlocked, and both
categories undoubtedly suffer from disadvantages in this
respect
• But not always: the small landlocked states (Botswana,
Lesotho, and Swaziland) are well linked to the big market and
good infrastructure of South Africa
Natural Resources
• Natural resources - the most important are minerals
and agricultural resources for tropical crops
• Many small states are commodity exporters:
• Gabon and Equatorial Guinea have oil and gas
• Mauritius has excellent conditions for growing
sugar
• Guinea-Bissau exports cashews
• All islands have fish in the surrounding seas
• Donor policies in the past encouraged commodity exports - substantial aid
and trade preferences focused on developing and protecting commodity
exports (e.g. by EU)
 Yet recent research demonstrates that the most important natural
resource of small states is often tourism potential—weather, scenery, and
beaches
 Tourism is now one of the most important service industries, and has
become one of the most important invisible export sectors in many small
states in Africa (and the world)
 Tourism fetches foreign exchange, generates income and employment not
only directly, but also through multiplier effects in the economy through
creating demand for other sectors which are indirectly related to this
sector
• Action to simulate tourism development is sometimes a part
of the diversification strategy of small states, e.g. Cape Verde
and Sao Tome & Principe
• Tourism may make a positive contribution to the economic
diversification and development of small states, particularly in
small states with few possibilities to diversify and develop
• But international tourism is a highly competitive industry and
tourists have a lot of options
• the returns from developing the tourism industry in a small
African state will depend on its ability to meet foreign
competition
• EXAMPLES: Gambia vs. Cape Verde
Policies and Institutions
• The large number of small-state successes suggests
that good policies and institutions can overcome
disadvantages arising from geographical location or
factor endowments.
• Very small states have exceptionally high disadvantages
in transport, infrastructure, and governance costs
• Small states such as Mauritius and Seychelles have no
great mineral or agricultural endowments, but their
policies and institutions have attracted enough foreign
investment, financial services, and tourism to make
them (relatively) rich
• However, other small states that have suffered
from poor policies and governance have been
among the weakest performers
• In Africa, small states with good policies and
institutions (notably Botswana and Mauritius)
have prospered, while those with weak
governance and policies (Comoros, GuineaBissau) have remained poor
 Governance is central
Conclusion
• Most of Africa’s states do not serve the interests of their
citizens, neighbours or international community
• Despite the advantage for growth that large states with
resource bases and domestic markets should theoretically
enjoy, Africa’s three most populous countries — Nigeria,
Ethiopia and the DRC are per capita income very poor
• Yet per capita income in countries with lower than 2 million
inhabitants has shown steady growth over the last 15 years
• Big African states have generally not succeeded in establishing
political and administrative systems capable of coping with
the challenge posed by their size
• In contrast, a number of small African states have relatively
reconciled their internal political, ethnic, and religious
differences and to establish political systems capable of
accommodating the demands and interests of their various
constituencies
 Africa in some respects represents a paradox in the literature
on small states