ratios had been increasing in EAP and SA. But investment rates have held up well since the financial crisis, actually rising further in LAC and SSA, raising hopes that the crisis may have only a limited adverse effect on growth in developing countries.10 It is also important to note that the investment share in GDP has recovered in SSA to levels that had prevailed in the 1970s even though in LAC it is still lower than it was in the earlier period. The maintenance of investment rates raises the hope that the worsening current account balance may have a limited effect on growth rates. Furthermore, the worsening of the current account may be only temporary if the investment raises the output of tradables, leading to higher exports and lower imports.
Another hopeful sign is that the capital output ratios (ICORs) have been falling in these regions, whereas in Asia these have remained at about 4 since the 1970s. They had risen to double-digit levels in the 1980s in the other regions. But currently, they seem to vary from about 4 in SSA to 5.5 in LAC.11 The fall in the ICORs means that the same investment GDP ratio would lead to a higher rate of growth than it would have in earlier years. Current levels of the investment ratio and the ICOR would result in GDP growing at over 5% a year in SSA and almost 4% in LAC, which would be lower than the growth rates achieved in these regions during 2006–2008 but higher than those achieved during 2011–2016.12
Table 7. Correlation of growth rates with different regions
Source: Authors’ calculations from data in World Bank World Development Indicators.
Table 8. GFCF by Region (% of GDP)
Note: High Y is high income.
Source: World Bank Data Bank, World Development Indicators, World Bank: Washington D.C.
The limited effect of the current account deficit on investment is because domestic savings have increased, so investment is less dependent on inflow of foreign funds whether official or private (Table 9). However, savings rates in SSA and LAC remain lower than in those achieved in the 1980s. So SSA remains vulnerable to negative trends in the current account balance.
In brief, GDP has increased the slowest in SSA. There had been higher growth rates in the years before the crisis, but SSA has been particularly hard hit by the crisis. Countries in SSA also have done less well than countries in other regions in increasing export share, and despite increased remittances they are experiencing a worse current account position than countries in the other regions. We now examine the performance of the countries in SSA based on their export orientation.
Economic Performance by Export Orientation
A possible explanation for the poor performance of the countries in SSA could be because they are exporters of primary goods. In this section, we examine the differences in economic performance between countries according to the nature of their exports. We divided the countries by their export orientation, namely the commodity group which had the largest share. The countries were divided into those exporting final agricultural commodities, agricultural raw material, ores, fuels and manufactures. There were 18 countries exporting final agricultural commodities and 8 exporting manufactures.
Table 9. Domestic Savings
Source: World Bank Data Bank, World Development Indicators, World Bank: Washington DC.
We find that growth rates for most of the groups have increased since the 1990s except for manufacture exporting countries (Table 10). Furthermore, exporters of agricultural commodities and ores have not only maintained their good performance after the financial crisis but also further raised their growth rates. The other groups have seen some decrease in their growth rates during 2011–2016 as compared to the 2000s, but except for manufactures, they have maintained a growth rate higher than in the 1990s. Also, whereas in the 1990s exporters of manufactures generally did the best among the different groups, they did the worst in the 2000s. Slower growth since the 2008 crisis seems to have had a particularly unfavourable effect on demand for manufactures. Most of the groups raised the share of investment as a percentage of GDP from the 1990s; again, the exception was the manufacturing exporting countries. It is particularly important to note that the share of GFCF which had increased between the 1990s and the 2000s for the groups except manufacture exporters further increased the share of GFCF during 2011–2016. But all groups had higher share of exports in GDP in the period 2000s than in the 1990s. Unfortunately, the share declined during the period 2011–2016 for all the groups except ores, though it usually remained above the share in the 1990s. The poor export performance by the manufacture exporting countries maybe a possible cause for their lacklustre economic growth. Their inability to maintain their competitiveness needs further analysis. One possible explanation could be that large retailers such as Wal-Mart find it more economical to meet all their requirements from a large supplier such as China or Bangladesh than from several smaller suppliers in SSA. Their performance in exports of services is particularly poor. Except for the exporters of manufactures and ores, the other groups have experienced a continuing decline in the share of service exports in GDP.13
Table 10. Economic Performance by Export Orientation
Source: Authors’ calculations based on data from World Bank Data Bank, World Development Indicators, World Bank: Washington D.C.
The successful service exporters, ores and manufactures exporters, have increased the share of information technology (IT)-related exports in their service exports. The three groups which saw a decline in the share of their service exports in GDP also experienced a decline in the share of IT-related exports in their service exports. This is significant as IT-related exports have been particularly dynamic in the world economy.
The countries in SSA have usually had a deficit in their current account balance. But only the agricultural exporters have experienced a very large increase in their current account deficit. Countries in most groups have experienced an increase in FDI inflows as a percentage of GDP except for the ore-exporting countries.
An earlier paper had found that the overall trends in Latin American countries by export orientation were highly similar to those in SSA (Agarwal and Pirzada, 2015). Growth of GDP accelerates for all groups of countries just as it does in SSA, and the share of XGS in GDP increases for all groups just as it does in the case of SSA. The behaviour of investment is, however, different. In the case of SSA, the share of GFCF in GDP increased for all groups except the manufacturing exporters. In the case of LA, it increases for manufacturing exporters also. However, it is almost constant for exporters of natural resources, fuels and ores. The similarity in trends suggests strongly that the economic performance of these countries is driven by forces in the world economy.
The acceleration of growth for exporters of agricultural and manufactured goods has been greater in LA than in SSA. Also, the absolute growth rates have been higher for these two groups. So, in general, countries in SSA have performed worse than those in LA even when the export orientation was similar. However, the increase in share of XGS and of GFCF has generally been greater in SSA when countries with similar export orientation are
