Working Paper

Real Sector Macroeconomic Stabilization and Structural Resilience in Africa

Kiel Working Papers, 2229 Download PDF

Over the past 30 years (1990-2019), African economies have experienced remarkable improvements in real macroeconomic conditions, characterized by higher and more stable real per-capita growth rates, and lower and more stable inflation. This paper documents and seeks to explain these changes at the aggregate and sectoral levels. Sectoral analysis shows a particularly strong reduction in growth volatility, of more than 50%, in the agricultural sector, and a gradual stabilization in services. On the expenditure side, private consumption and investment have also stabilized considerably. Most of the decline in aggregate growth volatility is due to within-sector changes in volatility, structural change explains less than 5%. Correlates of African stabilization are firstly a more favorable external environment through lower levels of external debt, higher levels of FDI and remittances, and improved terms of trade (ToT), as well as lower volatility of ToT and financial flows. These developments were complemented by better exchange rate management (resulting in lower exchange rate and inflation volatility) and more fiscal stability through the adoption of fiscal rules. Domestic financial deepening and higher levels of reserves, both official and by banks, as well as slightly higher national savings, further increased Africa’s resilience to shocks. Regarding structural characteristics, the quality of the institutional and business environment appears to be the most important factor for stability, followed by the intensity and volatility of financial flows, trade intensity and diversification, natural resource dependence, natural disaster and conflict incidence. Some of these factors encourage deeper investigations, for example how improvements in business conditions in multiple African economies interacted with broader macroeconomic stabilization.