Expensive Africa

Just read a paper on why Africa has not industrialized (Alan Gelb, Christian Meyer and Vijaya Ramachandran, Does Poor Mean Cheap? A Comparative Look at Africa’s Labour Costs, Centre for Global Development, Working Paper No 325, revised June 2013).It shows that although wages in African countries are low, output per worker is even lower; consequently, their unit labour costs (wage costs divided by sales) are higher than in non-African poor countries like Bangladesh, Vietnam, Philippines and Turkey; that is why they cannot compete with other poor countries.

The authors should have asked how the African countries’ prices compare with those in other poor countries; it is possible that African wages are high because their price levels, compared at current exchange rates, are high.

If that were so, the question would arise: how can African countries manage in a competitive world if their wages are uncompetitively high? 

The answer would be, they get lots of foreign aid, mainly from the European Union, which regards the ex-colonies of its member countries as its backyard and gives them piles and piles of aid. The resulting increase in the supply of foreign exchange leads to overvaluation of African countries’ currencies; that is what makes them uncompetitive.

India too was uncompetitive from the 1950s till the 1970s, when it received a lot of foreign aid. Then Indira Gandhi had a row with the US, US PL480 aid dried up, and India had to devalue to balance its payments. Once that happened, India’s growth took off in the early 1980s. The high growth rates lasted till 2008.

Then world growth slumped, India was one of the few countries still growing respectably, so foreign investors flocked to India. That led to overvaluation of India’s exchange rate. I think India’s poor performance just now is possibly a case of African disease.