Development Accounting of Africa’s Largest Economies – Explaining Differences in Income Levels

Drawing upon the experiences of Africa’s largest economies – Nigeria, South Africa, Egypt, Algeria, Angola and Morocco – this paper studies the phenomenon of income discrepancies in Africa and applies, in the spirit of Konya (2013), the combined methodologies of Development Accounting (DA) à la Caselli (2005) and Business Cycle Accounting (BCA) à la Chari, Kehoe and McGrattan (2007) in a standard neoclassical small open economy model. The economies, classified into 2 equal-numbered groups – G1 and G2 – based on output size and region of location, comprise Sub-Saharan Africa’s top 3 economies (G1: Nigeria, South Africa and Angola), with a combined output size of c.$1.07 trillion, and North Africa’s top 3 economies (G2: Egypt, Algeria and Morocco), with an aggregate output size of $625 billion. Distortions in production efficiency, labour and capital markets, collectively termed wedges, are calculated and the extent, evolution and impact of the wedges are determined for the economies between 1990 and 2013. Empirical results show that the efficiency wedge has the most consistent influence on growth across Africa, followed by investment wedge, while there is a lower importance of labour wedge, especially in the late 2000s. Our results, at least for the African countries examined, suggest that although the efficiency wedge plays a leading role in explaining income differences, investment wedge and, to some extent, labour wedge are equally important for understanding the income differences and, by extension, bridging the gap.