Historically there has been a lot of news on economic growth across the globe but more so on the Africa. On average the GDP of countries in Africa grew at 4% per annum from the year 2010. This has led to a forage of investment from developing countries all wanting a piece of the African success pie. However, the previous decade’s (2000-2009) growth was slightly higher at an average 5%, hence Africa has been on a steady growth pattern for the last 20 years in GDP terms. For example, Kenya had an average growth rate of 4.5% between 2001-2009 and 5.5% between 2010-2020, Mozambique 8% and 5.5%, Nigeria 7.97% and 3.97%. Rwanda 8.23% and 7.14%, and these rates are exceptional compared to the sub 3% in OECD countries.
However, If one looks at the 2020 human development index statistics, not a single African country ranks in the top 60 countries in the world. The ranking of the human development index is categorized by the United nations as very high HD, high HD, medium HD and low HD. It is sad to note that only one African country is in the high HD category, 13 in medium and the remaining 30 in low HD. Why is this economic growth not translating into improvement in the standards of living? What is the purpose of economic growth if it does not reduce poverty?
Today we look at the interaction between two of the past blogs, what is GDP and employment. When economic growth does not translate into jobs then we end up with the above scenario of stellar growth but no change in standard of living. When we looked at the GDP formula below:
GDP = C + G + I + NX
C = consumption or all private consumer spending within a country’s economy, including, durable goods (items with a lifespan greater than three years), non-durable goods (food & clothing), and services.
G = total government expenditures, including salaries of government employees, road construction/repair, public schools, and military expenditure.
I = sum of a country’s investments spent on capital equipment, inventories, and housing.
NX = net exports or a country’s total exports less total imports.
There are many components that drive the GDP figures we hear. However, from research you would then notice that most GDP growth is driven mainly by the G component. See selected chart below:
Is there then a link between how much a government spends and jobs creation? I would like to say it is where the government spends that is key to translate economic growth to jobs created and higher incomes for the populus.
In the developed countries most government spending goes towards social protection, for example family, health, old age, housing. Countries like Finland, Denmark, Spain and the United Kingdom spend upwards of 30% of government spending on social protection, as the adage goes a healthy population is a productive population. In contrast African countries are spending the majority of the government spending on salaries or payrolls at an average rate of 40% with an exception to South Africa which is around 13%, no wonder they are ahead of their peers on the continent. Africa also has a huge debt payment problem which takes an average of close to 40% of government expenditure.
African economic growth is not translating to jobs and higher incomes because government spending is going to areas that don’t create a conducive environment for businesses to thrive or expand and employ more and raise wages. What is your country spending on? Take a look at the budget policy statement of your country to know whether the future is going to be bright.
Some African countries are spending a bit on Education laying the foundation of a skilled workforce as the average demographic age in Africa is below 20. Are these going to be the future stars?