|Our research covers four thematic areas: Productivity and Economic Growth, Innovations in Financial Services and Governance and Leadership
Productivity and Economic Growth
I. Growth Diagnostics and Structural Transformation
Economic analysis reveals that countries grow rich, not by producing more of the same products, but rather by diversifying into new and more sophisticated economic activities. These new economic activities engender higher levels of productivity, higher wages and increased welfare of a country’s population. Herein lays the challenge: How can a country identify new activities that are economically feasible? Is it possible to predict a country’s growth trajectory?
In 2011, the Growth Lab produced and published the first Atlas of Economic Complexity: Mapping the Paths to Prosperity to address this challenge. The Atlas identifies specific industrial opportunities that are closely related to a country’s current productive knowledge and capabilities. In so doing, we have made it easier for governments to channel limited resources to yield maximal results. This year, the Growth Lab will conduct an Economic Growth Diagnostics for Kenya, Rwanda, Nigeria and Ghana.
For a glimpse of CID’s previous diagnostic work, please visit our South Africa Growth Intiative site.
II. Commercial Agriculture in Africa
According to the UNCTAD 2008 report, African agricultural exports are still dominated by traditional commodities such as tea, coffee and cocoa yet even in these crops, African countries have lost competitiveness. As a result, many African governments have tolerated land grabs in the hope that large, capital-endowed investors would develop the sector.
However, commercial agriculture need not be relegated to large-scale farmers – though they too have a role to play. Smallholder farmers, when properly positioned in the right business ecologies, can be equally – if not more – effective at commercializing agriculture.
The Growth Lab is conducting research to determine what business models can work best to enable farmers to become more efficient. Atomistic farmers have low efficiency when they have poor access to both inputs and outputs markets, and their incentives can be biased by risk aversion and myopia when they lack access to credit. Business models that relax some of these constraints allow farmers to intensify their use of productivity-enhancing technologies, expand their participation in markets, and ultimately raise their output, incomes and living standards. For the purposes of this research, business models refer to the institutional arrangements that are used to organize agricultural production, processing and marketing. Our research this year will also focus on case studies of successful smallholder commercialization in countries such as Nigeria and Ghana.
Innovations in Financial Services
Savings are the linchpin of a thriving economy. Yet according to a 2009 Gallup survey of 18 sub-Saharan African countries, only one in five Africans reported having a personal bank account.
The gap between rural and urban savings yawns wide because access to banking services is much more restricted in rural areas. In addition, savings instruments rarely fit their needs. As a result, in order to insure against shocks such as drought or illness, or to save for investments in improving farming or starting non-farm activities, rural households have to resort to inefficient forms of savings such as livestock, crops and material goods which are illiquid and involve large transaction costs.
There is a therefore need for innovations in financial services in order to cater for the large proportion of unbanked African households and to help them grow from micro to small businesses. The success of Standard Bank, Equity Bank, M-Pesa and others all allude to the untapped potential that can be unleashed with the right amount of ingenuity and local knowledge.
This year, the Growth Lab has forged a partnership in Ethiopia with the Ethiopian Development Research Institute (EDRI), the Association of Ethiopian Microfinance Institutions (AEMFI), and Amhara Credit and Savings Institution(ACSI) - to better understand savings behavior in Ethiopia. The team is conducting focus group meetings and is implementing a survey of rural and urban households to understand their savings and investment needs more precisely. This analysis will help to identify policies that will foster greater savings and investments, not just in Ethiopia, but in other parts of Africa. Findings will also be useful in advising African banks on how to improve the dynamism and competitiveness of the financial sector.
Our Ethiopia research is highly complementary to the work of CID’s Entrepreneurial Finance Lab Research Initiative (EFL-RI). Together, such ventures are leading CID’s research in financial innovation, and providing valuable guidance for policy makers and the financial sector alike. The EFL-RI works to develop effective, automated and scalable tools to identify high potential, credit worthy entrepreneurs. These tools are based on psychometric principles and decades of research, and have been statistically proven to reduce risk. The results of EFL-RI have been used by financial institutions in 20 countries, including Kenya, South Africa, and Rwanda.
Governance and Leadership
Professor Matt Andrews and others are working on closing the gap between policy and implementation through a new approach called Problem Driven Iterative Adaptation (PDIA). PDIA deals with state building issues in a contextually relevant way – where organizations take a gradual approach to solving shared problems and find locally relevant hybrid solutions in the process. We hope to make this framework available to government entities throughout Africa who are committed to improving their effectiveness and capacity to execute the delivery of key social services such as health, education, financial services, etc.
Extensive state-business interactions are an essential part of the development process. These can form the basis for dynamic capitalism and demand for an effective state. Conversely, they can become sources of influence, corruption and other forms of rent-seeking that distorts politics, regulation, judicial functioning and business incentives. Professor Diwan and others are also looking at the Egyptian case to identify the weaknesses in the Egyptian regulatory framework and institutions that led to corruption and state capture. They will then propose improvements that would prevent the excesses observed in the past.