Sathosa
Mar 23, 2018

Why Africa’s poor pay high prices

“WE FEEL so hungry,” says Agatha Khasiala, a Kenyan housekeeper, grumbling about the price of meat and fish. She has recently moved in with her daughter because “the cost of everything is very high”. The data back her up. The World Bank publishes rough estimates of price levels in different countries, showing how far a dollar would stretch if converted into local currency. On this measure, Kenya is more expensive than Poland.

This is surprising. The cost of living is generally higher in richer places, a phenomenon best explained by the economists Bela Balassa and Paul Samuelson. They distinguished between goods that can be traded internationally and many services, like hairdressing, that cannot. In rich countries, manufacturing is highly productive, allowing firms to pay high wages and still charge internationally competitive prices. Those high wages also drive up pay in services, which must compete for workers. Since productivity is low in services, high pay translates into high prices, pushing up the overall cost of living.
Among developing economies, however, the relationship between prices and prosperity is less clear-cut. Prices in Chad, for instance, are comparable to those in Malaysia, where incomes are 14 times higher. Fadi Hassan of Trinity College Dublin finds that in the poorest fifth of countries, most of them in Africa, the relationship goes into reverse: penniless places cost more than slightly richer ones. A paper in 2015 from the Centre for Global Development (CGD), an American think-tank, accounts for various factors which could explain differences in prices, including state subsidies, geography and the effects of foreign aid. Even then, African countries are puzzlingly expensive.

One explanation is dodgy statistics. African countries may be richer than they seem. When Nigeria revised its figures in 2014 to start counting industries such as mobile phones, GDP almost doubled. They may also be less pricey than economists reckon, because poor people buy second-hand clothes or grow their own food.

A more intriguing explanation comes from food prices. The relative cost of food, compared with other goods, is higher in poor countries. In Africa, the absolute cost is sometimes high, too. Nigerians would save 30% of their income if they bought their food at Indian prices, finds a recent study by the OECD, a think-tank. Meat costs more in Ghana than in America.

Mr Hassan thinks that low agricultural productivity explains the puzzle. In much of Africa farmers scratch away at thin soils, with little fertiliser and no irrigation. An Asian-style Green Revolution is only slowly taking root. Weak infrastructure also drives up prices, as can be seen in Wakulima, a wholesale food market in Nairobi. Moses Mungai has driven a maize lorry for four hours to get here, from a border town in the foothills of Kilimanjaro. But he says it took four days to collect the crop from local farms. When the rains come he has to hire a tractor to navigate soupy roads. Counties charge levies on commodities passing through. Middlemen take a cut.

Whereas Balassa and Samuelson divided economies into two (manufacturing and services), Mr Hassan divides economies into three, by also distinguishing agriculture. Like manufacturing, agricultural productivity can grow vigorously. But like services, this fresh farm output is sold locally, he assumes, which drives down prices. Thus when farm productivity rises, the poorest countries become both richer and cheaper.

The CGD researchers note an interesting corollary: manufacturing wages in Africa, though low, are higher than in Asian countries at similar levels of income. African workers need more dough to buy their daily bread.

If that is right, then cheaper food may boost manufacturing by making wages more competitive. From 18th-century Britain to 20th-century Asia, industrial revolutions are often preceded by agrarian ones. Poor countries must hope for a repeat.

(economist.com)

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