Characteristics and Behavior of African Factor Markets and Market Institutions and Their Consequences for Economic Growth

Recent evidence from the endogenous growth models has shown that traditional factors, such as low level of savings, low level of investment, poor technology and inappropriate government policies, may not be sufficient to fully explain the African growth experience. So what does explain the poor growth?

One of the institutions identified, as constraining African growth potentials is the African factor markets.This paper provides a detailed characterisation of the structure and behaviour of African factor markets and the institutions that impact on their operations.

Theoretical linkages between factor market and economic growth are presented. The structure and operations of the African labour market and the institutions, which impart on its performance are then discussed. A review of the African financial market is given and the paper then discusses how African factor markets affect economic growth.

Findings include:

• the distortions in the African factor market have been a hindrance to the African growth process
• in spite of economic reforms, the market is far from being competitive and efficient
• institutional factors continue to impact on the functioning of the markets, and the failures of other markets have a direct impact on the performance of the factor markets
• The labour market has been made to bear most of the brunt of the economic reform with the suppression of wage increases an important part of the reform policies
• sharp falls in real wages have profound impact on productivity in both the private and public sectors
• the low rate of financial deepening in Africa has contributed to the slow growth of the continent, the financial sector has been very inefficient in performing the task of mobilising and transmitting savings into investments
• The existence of a sizeable informal factor market in Africa has significant implications for economic growth by: creating information distortions, which affects the conduct of economic policy and the efficiency of resource allocation; reallocating resources from the formal factor market to the informal factor market resulting in a net welfare loss, since informal activities are, in general less productive than formal activities being unable to access to the formal financial market; negatively impacting government fiscal position

Conclusions include:

• understanding the structure and behaviour of the African factor markets is quite vital in finding a solution to the African growth crisis
• part of the solution to the African labour problem involves how best to tap and harness the potential of the informal market for development
• there is a need to strengthen the informal financial sector so that it can play a complementary role to the formal sector in financing development
• for the current reform programmes to succeed, policy that enhances the efficiency and competitiveness of the African factor markets must be put in place