Getting a measure of African poverty

By Tunde Obadina

Africa is clearly a land of extreme poverty. The continent epitomises destitution, its images commonly used by media and charity organisations to depict human want and suffering. But precisely, how poor are African countries?

One of the most commonly used indicator for expressing the wealth or poverty of nations is Gross National Product (GNP), which is the sum of the value of a nation's output of goods and services. This is calculated by adding up the amount of money spent on a country's final output of goods and services or by totalling the income of all its citizens, including the income from factors of production used abroad. The measure of progress, or lack of it, is indicated by GNP growth rates, i.e., the percentage change in GNP over a period of time, usually a year. The average income of a country's citizens is contained in the GNP per capita, which is the GNP divided by the population.

Structural adjustment programmes of the World Bank and the International Monetary Fund (IMF) are predicated on the assumption that progress can be measured in terms of movements in the GNP or the Gross Domestic Product (GDP), which is similar to GNP but does not include income from abroad. Governments everywhere judge their performance by changes in economic growth rates, congratulating themselves when they achieve or surpass their GDP growth targets.

Using these indices as currently calculated by governments and international organisations African nations are many decades behind developed nations. In 1996, the average of GNP per capita in the industrialised world was $27,086, compared with $528 in Africa. This means that industrialised countries are roughly 51 times wealthier than African nations. At an annual growth rate of three percent it would take Africa about 120 years to reach today's level of wealth of the West. Of course, western nations are unlikely to stand still in the 21st century, so, it seems that African societies striving to catch up with the west have an impossible mission.

How relevant are GNP and GDP data to economic development? Do improvements in GDP growth rates necessarily reflect greater prosperity for the general population? Should African governments give weight to economic growth as presently constructed? These are questions that all who are concerned with development in Africa should seriously ponder.

In recent decades some people have challenged the importance of economic growth, the foundation of classical and orthodox economics, with its roots in the late eighteenth century and early nineteenth century. Some writers questioned the validity of the system for accounting the size of economies and asked whether the benefits of growth are wisely distributed.

With respect to developing countries, particularly in Africa, there are a number of flaws in the prevailing method of measuring the size and growth of economies. Firstly the system reflects the general preoccupation of orthodox economics with monetary transactions. The obsession is for what is bought and sold for money, as distinct from the actual output of a community. It means that in developing nations, where a large proportion of economic activity takes place outside the market, GDP figures tend to be understated. Modern conventions of national accounts do not adequately recognise economic activities in the household and community that do not involve the exchange of money.

In developed economies virtually every activity has been commercialised. For instance, the national accounts of any western nation include payments for personal beauty care, which for the US is around $60 billion a year. Such an item would hardly feature in the accounts of African nations. However, this does not mean that African men and women living in villages do not enjoy 'beauty' treatments - it's simply that such activities are not commercialised. In 1996 people in Britain spent some $33 billion on beer, wine and spirits, larger than the GDP of most African countries. But the consumption of palm wine, local spirits and other indigenous alcoholic brews in African villages is not valued and incorporated in national accounts.

In Western capitalist societies, where everything is priced, virtually all aspects of culture is monetized and incorporated in the national accounts. For instance, the total annual expenditure on marriages and funerals in the US runs into several billions of dollars a year. Yet, people marry in African societies in elaborate and joyful ceremonies and the dead are buried with appropriate ritual, but little of these activities get into the national accounts. Leisure and entertainment sectors account for a large proportion of the GDP of western nations, but in the GDP of poor countries these universal components of life hardly figure.

GDP statistics of African nations and other non-western societies do not adequately reflect their cultural output, whilst cultural output forms a significant proportion of the GDP of western nations.

Another reason why prevailing accounting conventions underestimate the national income of developing countries is that a very large proportion of economic activity in these places takes place outside the recorded sector. The so-called informal sector is responsible for most economic activity in African nations but does not appear in the national income sheet because its transactions are unrecorded. The sector, ranging from illegal black market activities, to tax evaders and small-scale producers using simple technology, is essentially defined as economic activity that is unmeasured, unrecorded and, in varying degrees, illegal.

No one knows the size of this sector, also called the black economy or the second economy. Some economists have estimated that it may be as much as two or three times the size of the official GDP. With the rise in corruption and the alienation of the indigenous business community from the state, the size of the informal sector has grown. It does not comprise only of small producers, but includes businesses with large turnovers which to avoid paying taxes or escape stifling state bureaucracies, operate outside the formal recorded economy. With the virtual collapse of the formal sector, tied to external economy, during the past two decades, many producers in the sector have crashed and others have moved into the informal sector.

If African policymakers do not know the actual size and dynamics of their nation's real economy, i.e., the combination of the formal and informal, they cannot properly assess changes in national output to determine whether their society is progressing or regressing. It is possible that an increase in output in the formal sector is more than offset by a decline in the informal sector, meaning that the real economy is actually in recession, as opposed to the official increase in GDP growth. Similarly, when formal sector growth slows, it is possible that the performance of the informal sector is strong enough to push up the growth rate of the real economy.

According to official figures, Nigeria's GDP grew by an average 2.5 percent between 1994-1998, largely reflecting movements in the country's oil export earnings, said to account for about 40 percent of the national output. But no one really knows how Nigeria's real economy fared during this period of heightened corruption and economic demoralisation. Many private sector operators believe that the economy was in recession. In reality, we do not know the truth because a reliable measure of Nigeria's real economy does not exist.

The World Bank and IMF frequently produce GDP data showing that nations that follow SAP prescriptions perform better than those who do not, but these claims are made without information on the output of the informal sector. GDP growth based on the building of new restaurants in urban areas and destruction of indigenous industries hardly amounts to progress.

By arguing that African economies are larger than official GDP statistics suggest, we are not denying the existence of severe poverty in the continent. However, Africa's poverty is so glaring that it does not need to be overstated. To say that Nigeria's GDP per capita is $250 and Mozambique's is $80 as stated in official data is clearly absurd. Given the unequal distribution of income, where the richest 20 percent of the population gulp half or more of the national income, official GDP per income would give an income for the majority of Africans on which it would be impossible to survive. Anyone visiting Nigeria will see evidence of intense poverty, but they will not see millions of people dying of starvation.

To account for differences in the purchasing power of the dollar in different countries, economic agencies publish national income figures that have been adjusted for purchasing power parity (PPP). This is a method of measuring the relative purchasing power of different countries' currencies in order to compare living standards. Using PPP results in substantial increases in the GNP per capita of African countries. For instance, according to World Bank date standard GNP per capita and GNP per capita PPP adjusted for Nigeria was $260 and $1,220 respectively in 1995 and $80 and $810 respectively for Mozambique. On PPP basis, the US per capita income is 24 times Nigeria's, compared with 116 times when standard GDP per capita is used.

Though using PPP allows more accurate comparisons of standards of living across countries, it does not address the question of the under accounting of national economies in Africa and elsewhere in the developing world. It could be argued that it makes no difference whether Britain's GDP per capita income is 78 times bigger than Nigeria's or 17 times larger when GDP is adjusted for PPP, or perhaps only fives times larger when Nigeria's informal sector and cultural output are incorporated into its national income. But it can make a difference.

Getting a more accurate picture of the size of African economies will give us a better perspective on the challenge facing African governments and development agencies. The exaggeration of the wealth gap between Africa and the West has the effect of making the prospect of Africans achieving a standard of living comparable to what exist in the West seem almost impossible. When faced with GDP data that suggest that their nations are a century behind developed countries, Africans understandably feel overwhelmed or defeated by the enormity of the task of catching up, and some opt for personal short-cuts to the higher living standards.

We may find that after the formal and informal sectors are integrated into one measured real economy, and financial value is ascribed to non-monetized cultural output of the population, the actual size of African economies are significantly larger than indicated by current GDP data. Furthermore, if the cost of industrial growth, such as environmental degradation, were deducted from the GDP figures of western economies, the prosperity gap between developing and developed nations will narrow further. The GDP of industrialised nations could be discounted for waste of world resources due to over-development, i.e., producing beyond the needs of society.

When considering the material conditions of people in Africa, a distinction should be made between absolute poverty and relative poverty. The former relates to the absence of basic social facilities, such as access to safe water, education, health services and reasonable nutrition. While the latter relates to the lack of access to living standards that are available in modern industrialised societies.

Though abject poverty is widespread in Africa, it does not require decades or a century to eradicate it. With political will and increased investment in human development, within a generation it can be drastically reduced if not eliminated. The costs will be substantial, but not beyond the means African countries. According to the World Bank, in 1988 the estimated cost of providing safe water supplies in Nigeria's rural and urban areas within 20 years was $4.3 billion. This was a piffling amount compared with the more than $200 billion of public funds that has been stolen or squandered on inessential projects since the 1970s, including more than $8 billion spend on a steel industry that has produced little or no steel.

Rather than follow GDP statistics that tell us little about the real economy, African governments should concern themselves with the quality and structure of the growth they pursue. We should focus on those aspects of human existence that define our poverty and ignore those aspects of wealth in the west that are cultural. Africans are not poor because they do not eat beef-burgers, have private cars or attend beauty saloons. They are poor because they lack access to basic social utilities. This requires channelling resources into human development, especially improving the health, education and skill levels of the people as well as expanding job opportunities.

In presenting Africa's poverty relative to the rich west, we should be careful not to devalue the culture of African people. By using GDP statistics which give little or no recognition to the everyday toil and output of ordinary Africans, both the friends and enemies of the continent present Africans as hapless, lazy and unproductive people. Africa's poverty does not need to be overstated or the output of its people ignored to make a case for debt relief or aid for the continent.

Tunde Obadina is director of Africa Business Information Services



Date Uploaded 1/23/2008
Copyright Africa Economic Analysis 2005