OVERVIEW LEVELING the PLAYING FIELD Addressing Structural Inequalities to Accelerate Poverty Reduction in Africa Edited by Nistha Sinha, Gabriela lnchauste, and Ambar Narayan OVERVIEW Leveling the Playing Field Scan the QR code to see all the titles in the Africa Flagships collection OVERVIEW Leveling the Playing Field Addressing Structural Inequalities to Accelerate Poverty Reduction in Africa Edited by Nistha Sinha, Gabriela lnchauste, and Ambar Narayan This booklet contains the overview from Leveling the Playing Field: Addressing Structural Inequalities to Accelerate Poverty Reduction in Africa, doi: 10.1596/978-1-4648-2160-8. A PDF of the final book, once published, will be available at https://openknowledge.worldbank.org/ and http://documents.worldbank.org/, and print copies can be ordered at www.amazon.com. 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Contents Foreword vii Acknowledgments ix Key Messages xi OVERVIEW 1 Addressing structural inequality can help reignite, accelerate, and sustain progress in poverty reduction 1 Africa’s poverty and inequality challenges persist 3 People in Africa face an unlevel playing field for building their productive capacity 11 Workers, firms, and farms in Africa face an unlevel playing field for using their productive capacity 19 Low and inefficient tax and spending hamper African governments’ ability to level the playing field 29 It is possible to level the playing field and accelerate poverty reduction 39 Notes 47 References 47 BOXES O.1 Poverty and inequality influencers: Fragility, conflict, and forced displacement 11 O.2 Poverty and inequality influencers: Climate change 12 O.3 Poverty and inequality influencers: Gender gaps 15 O.4 Job creation, structural transformation, and the role of manufacturing and services 26 O.5 Poverty and inequality influencers: Debt 33 O.6 Successful poverty reduction episodes in six countries 41 v FIGURES O.1 Triple-pronged policy framework to create a level playing field and accelerate poverty reduction and growth 3 O.2 Estimates of extreme poverty 4 O.3 Median global and regional elasticity of poverty reduction to growth, nonoverlapping episodes, 1990–2019 5 O.4 Composition of population, by poverty status, 2000–22 6 O.5 Prosperity gap: Africa and the world 6 O.6 Inequality in Africa versus other regions 7 O.7 Share of consumption inequality explained by circumstances at birth 8 O.8 Poverty by fragility and conflict-affected situations and resource-rich typologies 10 O.9 Share of population ages 13–16 in poorest and richest consumption quintiles finishing primary school on time 13 O.10 Access to electricity among the poorest and richest consumption quintiles 13 O.11 Changes in absolute upward mobility over time 14 O.12 Education and health care expenditures, Africa versus other regions 16 O.13 Access to land among the top 10 percent: Land value versus land area 17 O.14 Share of African households with agriculture, household enterprises, wage jobs, and remittances as largest income source, by consumption decile 19 O.15 Cross-country correlation between Gini index and size of wage sector 20 O.16 Markets and performance of firms and farms: Analytical framework 22 BO.4.1 Long-run gross domestic product per capita and industrial sector employment shares, 1801–2021 26 O.17 Firms identifying transportation as major constraint 28 O.18 Fiscal redistribution in Africa 30 O.19 Impact of taxes, transfers, and subsidies on poverty 32 O.20 Share of total subsidy expenditures, by income 34 O.21 Effects of removing energy subsidies on poverty and inequality, by compensation measure 35 O.22 Social safety net coverage for the poorest quintile, by country 36 O.23 Public financial management indicators, 2022 39 TABLES O.1 Typology and population share of African countries, based on fragility and resource wealth 9 O.2 Policy matrix: Promoting growth and poverty reduction by reducing structural inequalities 43 vi Contents Foreword Accelerating progress to eliminate extreme poverty in Africa is possible. To do so, the region must address structural inequalities. Africa has enormous potential; it is rich in natural resources and home to a growing, youthful, vibrant, and entrepreneurial population that can seize opportunities to make the most of innovation, trade, and the global transition to greener technologies. With the region’s population forecast to rise from around 1.4 billion today to close to 2.5 billion by 2050, access to these opportunities is crucial for its youth. The battle against poverty is most urgent in Africa. As of 2022, more than 60 percent of the world’s extremely poor population live in Africa. Growth has been slower, more volatile, and vulnerable to exogenous shocks over the past decade as climate change, fragility, and debt pressures have gained importance. Countries in the region also find it more difficult relative to the rest of the world to translate growth into poverty reduction, because the fruits of economic growth all too often do not reach the poorest households. At the heart of this slow progress in bringing people prosperity is inequality. More than half of the countries for which consumption data are available are highly unequal. As of 2022, Africa was the second-most unequal region in the world after Latin America. This flagship report shows that much of this inequality is structural: instead of differences in individual effort or talent, more than half of income inequality is attributable to circumstances over which individuals have no control. Structural inequalities are the result of laws, institutions, and practices that create advantages for a few but disadvantages for many. They include differences in living standards that come from inherited or unalterable characteristics, such as where people are born and their parents’ education, ethnicity, religion, or gender. Moreover, market and institutional distortions, such as lack of competition, give some firms, farms, and workers privileged access to markets, employment, and opportunities while limiting access for the majority, curtailing their productive potential and limiting earning opportunities. Tax and benefit policies are inefficient and ineffective, unable to make up for structural inequality, particularly in a tight fiscal context. As such, structural inequality slows poverty reduction, curbs social mobility, and hampers sustainable and stable economic growth. But structural inequality is not inevitable: societies can remove and replace barriers to opportunities. Drawing on the latest evidence and global experience, this report revisits the challenges and opportunities to tackle Africa’s poverty and inequality and proposes a three-pronged vii policy framework aimed at leveling the playing field by building up productive capacities, creating jobs and better earning opportunities, and leveraging fair fiscal policy and state effectiveness to invest in people, firms, and farms. For policy makers focused on helping Africa build a better future, the report’s message is that it is possible to alleviate poverty in all its forms if countries strive to create a level playing field. By bringing together comprehensive data, analysis, and country experiences, the report paints a more accurate picture of the complexity of inequality in the region and outlines the best ways to address it. The report advances knowledge of what it will take to achieve the goals of eradicating extreme poverty and boosting shared prosperity on a livable planet. Ousmane Diagana Victoria Kwakwa Regional Vice President for Western Regional Vice President for Eastern and Central Africa and Southern Africa The World Bank The World Bank viii Foreword Acknowledgments This Overview is a summary of Leveling the Playing Field: Addressing Structural Inequalities to Accelerate Poverty Reduction in Africa, which is an output of the Poverty and Equity Global Practice in close collaboration with the Africa Chief Economist Office of the World Bank. The preparation of the report was co-led by Nistha Sinha, Gabriela Inchauste, and Ambar Narayan. P. Facundo Cuevas co-led the drafting at the concept stage. The core team included Aziz Atamanov (chapters 1 and 3), Cesar Calderon (debt spotlight), Elwyn Davies (chapter 4), Elizabeth Foster (chapter 2), Alastair Haynes (chapter 4), Ruth Hill (climate spotlight), Christopher Hoy (chapter 5), Jeremy Lebow (chapter 3), Hugo Nopo (gender spotlight), Ana Maria Oviedo (gender spotlight), Regina Pleninger (chapter 4), Mariano Sosa (chapter 5), Liliana Sousa (chapters 1 and 2), Olive Nsababera (conflict spotlight), Daniel Valderrama (chapter 5), and Haoyu Wu (chapter 2). Tom Bundervoet provided key inputs on the elasticity of poverty reduction. Daniel Mahler provided technical advice in calculating inequality of opportunity. Vincenzo Di Maro drafted inputs on top incomes. Walker Kosmidou- Bradley provided geospatial inputs. Valentina Martinez-Pabon and Maria Sarrabayrouse provided key assistance in finalizing the report. Rose-Claire Pakabomba, Santosh Sahoo, Tsehaynesh Seltan, and Arlette Sourou provided administrative support to the team. This work was conducted under the overall direction of Victoria Kwakwa and Ousmane Diagana, with guidance from Abebe Adugna, Asad Alam (at concept stage), Andrew Dabalen, Luis Felipe Lopez Calva, and Hassan Zaman. The team is also grateful for guidance, advice, and critical inputs from Johan Mistiaen and Pierella Paci. The team gratefully acknowledges the advice from peer reviewers and external advisers. The report was peer reviewed by Kathleen Beegle, Haroon Bhorat, and Keith Hansen. Mary Hallward Driemeier provided peer review comments at the concept stage. The team also benefited from many helpful discussions with experts across the World Bank Group, including Tom Bundervoet, Luc Christiaensen, Wendy Cunningham, Mitja Del Bono, David Evans, Elena Glinskaya, Aparajita Goyal, Marek Hanusch, Johannes Hoogeveen, Tehmina Khan, Vinny Nagaraj, Ambika Sharma, Venkatesh Sundararaman, Paolo Verme, and Ruslan Yemtsov. Feedback from outside experts, including with the Poverty and Equity Global Practice’s Advisory Council, is gratefully acknowledged, with special thanks to Francois Bourguignon, Ashwini Deshpande, Shanta Devarajan, Cecilia Garcia-Peñalosa, Ravi Kanbur, Peter Lanjouw, Santiago Levy, Nora Lustig, and Danielle Resnick. The team also benefited from discussions with Nancy Benjamin. ix The report would not have been possible without the support of Beatrice Berman and the communications, editorial, and publishing teams. Paul Gallagher provided key support in the drafting of the Overview. Flore Martinant de Preneuf led the communications strategy. The Overview was edited by Michael Harrup and proofread by Ann O'Malley; the full report was edited by Kathie Porta Baker and proofread by Alfred Imhoff. The Overview and full report were designed by Melina Rose Yingling. Caroline Polk from the World Bank’s Publishing Program managed the production of the Overview and full report. x Acknowledgments Key Messages The state of poverty and inequality in Africa • Addressing structural inequality represents one of the continent’s best prospects to accelerate poverty reduction, increase productivity and earnings, and ensure fairness. Tackling structural inequality requires confronting its many root causes, which include inadequate and inequitable public investments, market distortions, and differential exposure to high and uninsurable risks, such as conflict and climate change. • Africa is the world’s second-most unequal region after Latin America. More than half of African countries have a Gini index above 40, indicating high levels of inequality. The evidence suggests that the sources of this inequality are structural. Structural inequality results from inherited or unalterable characteristics—such as where people are born; their ethnicity, religion, or gender; and their parents’ education—or from market and institutional distortions that privilege some firms, farms, and workers to access markets, employment, and opportunities while limiting access for the majority, curtailing their productive potential, and limiting earning opportunities. • Poverty reduction in Africa has stalled since the mid-2010s. Although the incidence of extreme poverty was rapidly reduced to single digits worldwide, the pace in Africa slowed down and flatlined in the past decade. As of 2022, Africa’s extreme poverty rate stands at 38 percent, the highest of all regions, with the region home to more than 60 percent of the global extreme poor population. Tackling high poverty is complicated by the region’s vulnerability to shocks. • Economic growth has been low and volatile, with limited impact on poverty reduction. Since 2014, economic growth has barely kept pace with population growth. Moreover, economic growth has been less efficient in reducing poverty because a 1 percent growth in per capita gross domestic product is associated with only a 1 percent reduction in the poverty rate in Africa, whereas it is associated with a 2.1 percent reduction in the rest of the world. This lower level of efficiency is closely tied to the region’s high inequality. xi • This is the region’s moment to make a change. Africa has the talent potential of the 8–11 million youths expected to enter the labor market each year between 2020 and 2050 and significant revenue potential from green minerals to support a clean energy transition. A policy framework to level the playing field and accelerate growth and poverty reduction • Foster strong economic and institutional foundations. Promote macroeconomic and fiscal stability, and ensure the institutional framework eliminates barriers to competition, prevents undue privilege, and safeguards property rights to allow productive firms, farms, and workers to prosper. • Address inequalities in acquiring human capital and other assets to build productive capacity. Invest in education, health, and basic infrastructure to significantly enhance workers’ productive capacity. Expand land registration and property rights, encourage investments in natural capital, and improve service delivery to build productive capacities. • Enable markets to function well, boost the use of productive capacity, and create jobs and better earnings opportunities for all workers. Remove market distortions and enable markets to work in ways that expand the access of firms, farms, and household businesses to capital and technology, domestic markets, and global trade while facilitating job searches for workers. • Apply fair fiscal policy. Shift the focus away from subsidies while strengthening social safety nets, shift toward progressive taxation, and improve efficiency and effectiveness of government spending to enhance the redistributive impacts of taxes and transfers. xii Key Messages Overview Addressing structural inequality can help reignite, accelerate, and sustain progress in poverty reduction1 Rebounding from a global pandemic but beset by fiscal constraints and mounting fragility, policy makers in countries across the developing world are challenged to revitalize economic growth, strengthen resilience, reduce poverty, and build prosperity. This report argues that policies to address high levels of structural inequality in Africa are critical for reigniting progress toward these objectives. The report profiles structural sources of inequality across the region—which are rooted in laws, institutions, and practices that create advantages for a few but disadvantages for many—and proposes a triple-pronged policy framework aimed at supporting the productive capacity of people, creating jobs and better earning opportunities, and leveraging fair fiscal policy and state effectiveness to invest in people, firms, and farms. Such a policy framework for leveling the playing field has proved successful in several African countries, and there is reason for optimism that it can help accelerate poverty reduction across Africa and unleash more opportunities for people to enjoy greater prosperity. Africa is rich in natural resources and home to a growing, youthful, vibrant, and entrepreneurial population that can seize opportunities to make the most of innovation, trade, and the global economic transition to net zero. It is crucial to ensure that youth have equal access to opportunities, given the expected population increase from 1.4 billion people today to 2.5 billion by 2050. And the time for action to reignite, accelerate, and sustain progress is now. Between 2000 and 2014, the regional per capita growth rate averaged 2.4 percent annually, and Africa was on the rise. However, the past 10 years have proven more challenging—growth has been slower, more volatile, and vulnerable to exogenous shocks—and the region’s economy is 30 percent smaller today (World Bank 2024b) than expected a decade ago. Countries in the region also continue to find it more difficult to translate growth into poverty reduction. Per capita gross domestic product (GDP) growth in Africa is 50 percent less efficient in reducing poverty incidence than the global average. Inequality in consumption also remains high, and nearly half of Africa’s countries reporting data have Gini index values—a benchmark of inequality—above 40. High inequality is both a symptom and a cause of missed opportunities to accelerate poverty reduction and growth and to build economies that are more resilient to shocks. Throughout this Overview, “Africa” refers to Sub-Saharan Africa. 1 This report argues that the roots of structural inequality are at the heart of Africa’s slow progress in reducing extreme poverty. Structural inequalities in living standards result, not from differences in talent or effort, but from either inherited or unalterable characteristics—such as where people are born; their ethnicity, religion, or gender; and their parents’ level of education—or market and institutional distortions that privilege some workers, firms, and farms in regard to access to markets, employment, and opportunities, while limiting access for the majority, curtailing their productive potential, and limiting their earning opportunities. By one summary measure discussed in this report, structural inequality accounts for from one-quarter (Ethiopia) to three- quarters (South Africa) of overall inequality in consumption across African countries. Deeply entrenched, uneven chances to learn and earn result in significantly lower rates of poverty reduction in Africa than elsewhere in the world. But there is nothing inevitable about structural inequality. Economies that put up barriers to opportunities can also remove them and replace them with policies aimed at reducing these inequalities, which also lead to faster growth and poverty reduction. Indeed, across the world, countries where inequality of opportunity is lower tend to grow faster and have lower incidences of poverty. Broadening access to opportunities represents one of Africa’s key prospects for accelerating poverty reduction by raising productivity and earnings and improving fairness in society. Policy makers can level the playing field to create more opportunities and better jobs, and they can harness fiscal resources more effectively and efficiently. This report highlights country examples, from the region and around the world, in which removing barriers to opportunities has helped reduce structural inequalities and drive successful episodes of poverty reduction and growth. The policy framework proposed in this report to address structural inequality has three prongs (refer to figure O.1): addressing inequalities in acquiring human capital and other assets to build productive capacity; removing market and institutional distortions that limit jobs and earning opportunities and prevent people, firms, and farms from using their productive capacity; and leveraging fair fiscal policy to increase the redistributive impacts of taxes and transfers. This overview is organized in five parts and starts with a summary of the key and latest data that help frame and quantify the poverty and inequality challenges in Africa and across and within African countries. The subsequent three sections, respectively, present report findings that underpin and substantiate the recommendations in each of the three policy prongs in the proposed policy framework. Finally, a policy section offers successful country examples, describes how the three prongs working together can help accelerate poverty reduction and growth, and provides a policy matrix with examples of good practices with a focus on people, firms, farms, and state effectiveness. 2 Leveling the Playing Field FIGURE O.1 Triple-pronged policy framework to create a level playing field and accelerate poverty reduction and growth Apply fair fiscal policy Address inequality of taxes and Grow jobs and transfers Reduce poverty better earning Accelerate opportunities poverty reduction Address inequality and growth in using skills and assets to Build earn income productive capacity Address inequalities in acquiring human capital and other assets Source: Original figure for this publication. Africa’s poverty and inequality challenges persist Poverty rates remain stubbornly high in Africa, and its extreme poor population is on the rise (refer to figure O.2, panels a and b). The incidence of extreme poverty in Africa was measured at 38 percent in 2022—the highest in all world regions and 28 percentage points higher than that in the next-highest region, South Asia—and the region is home to more than 60 percent of the 725 million people worldwide who live on less than $2.15 per day (at 2017 purchasing power parity [PPP]).1 Almost one-third of Africa’s extreme poor live in two countries—the Democratic Republic of Congo and Nigeria— and another third in six countries: Ethiopia, Kenya, Madagascar, Mozambique, Tanzania, and Uganda. Whereas extreme poverty incidence has been reduced rapidly toward single digits worldwide, the pace in Africa has slowed during the past decade. Africa reduced its extreme poverty rate by an average of 2.8 percent per year during 2010–14 (4 times slower than the rate in the rest of the world), after which poverty reduction almost stopped, with the pace slowing to an average of 0.8 percent annually during 2015–19 (11 times slower than the rate in the rest of the world). Recently, extreme poverty rates have increased, following the COVID-19 pandemic. The cumulative result is that Africa is falling behind the rest of the world in terms of well-being. Overview 3 FIGURE O.2 Estimates of extreme poverty a. Number of extreme poor and Africa’s share b. Rate of extreme poverty Number of poor (millions) Share (%) Rate (%) 2,000 70 60 56 1,800 60 50 1,600 1,400 50 40 38 1,200 40 1,000 30 29 30 800 20 600 20 9 400 10 10 200 0 0 0 0 2 4 6 8 10 12 14 16 18 20 22 0 2 4 6 8 10 12 14 16 18 20 22 0 0 0 0 0 0 0 0 0 0 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Year Year AFR Other SAR EAP EAP SAR AFR LAC AFR share (RHS) ECA MNA World Source: World Bank 2024. Note: Estimates based on $2.15/day extreme poverty line (2017 PPP). In the AFR region, population coverage was below 50 percent between 2020 and 2022. In the MNA region, population coverage was below 50 percent between 2019 and 2022. Dotted lines indicate World Bank estimates. AFR = Sub-Saharan Africa; EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MNA = Middle East and North Africa; PPP = purchasing power parity; RHS = right y axis; SAR = South Asia. Africa has been least successful among the world’s regions in converting economic growth into poverty reduction (refer to figure O.3). The association between economic growth and household consumption growth is significantly weaker in African countries compared with that in other developing countries, and inequality plays a prominent part in the difference. Even after initial differences in poverty, income levels, and inequality are controlled for, growth of 1 percent in per capita GDP is associated with only a 1 percent reduction in the poverty rate in Africa, compared with 2.1 percent for the world (Wu et al. 2024). This difference is mainly due to weaker transmission from GDP growth to growth in household welfare (consumption) in Africa, which is consistent with findings that growth there has not been evenly shared, often bypassing the average household. To accelerate poverty reduction, Africa's growth must be higher and less volatile, and transmission of growth to poverty reduction must be enhanced, underpinned by a more equitable distribution of household welfare. The region needs average growth above 3 percent per year just to keep up with its population growth, which it has barely done since 2014. Regional real per capita GDP growth in 2021 was 5 percent below that in 2014. Moreover, the absence of large improvements in the distribution of household 4 Leveling the Playing Field FIGURE O.3 Median global and regional elasticity of poverty reduction to growth, nonoverlapping episodes, 1990–2019 Elasticity 0 –1 –1.0 –1.1 –2 –1.6 –1.8 –1.8 –2.1 –3 –2.5 –3.0 –2.9 –2.8 –3.0 –3.3 –4 –3.9 –5 –5.1 –6 MNA ECA EAP SAR LAC AFR Worldwide Elasticity of poverty to growth in household expenditures per capita Elasticity of poverty to growth in real GDP per capita Source: Wu et al. 2024. Note: Figure is based on elasticity of poverty change to growth in household expenditures and per capita gross domestic product (GDP), as reported in Annex Table 1 of Wu et al. (2024). AFR = Sub-Saharan Africa; EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MNA = Middle East and North Africa; SAR = South Asia. welfare was a lost opportunity for making greater and faster progress in poverty reduction. When economic growth in the region was robust, growth in household income accounted for 84 percent of the reduction in poverty, whereas a more equitable distribution of this income accounted for only 16 percent. And when economic growth declined during 2015–19, growth in households’ income still accounted for all of the region’s poverty reduction, pointing to the potential for improvements in the distribution of income to contribute further to this goal. Africa has also made slow progress in expanding the ranks of its middle class. Even Africans not living in poverty are often precariously close to it. Most continue to live in poverty as defined by higher global welfare standards. Just 12 percent of Africans were living on more than $6.85 (at 2017 PPP) per day in 2022, only a slight increase from 8 percent in 2000 (refer to figure O.4). A growing and aspiring middle class contributes to a country’s social stability and economic prosperity. Slow expansion of this group can limit progress in different ways, such as curtailing the size of domestic markets and hence opportunities for firms to expand and hampering the ability of societies to support good policies and hold leaders accountable. Slower progress in poverty reduction over the past two decades means that the differences in the prosperity gap faced by Africa and the world have also widened (refer to figure O.5). The prosperity gap measures the average shortfall in income with Overview 5 FIGURE O.4 Composition of population, by poverty status, 2000–22 Percent 100 8 11 13 12 80 34 45 61 63 60 40 20 0 2000 2009 2019 2022 2000 2009 2019 2022 Africa Rest of the world $2.15 per day $3.65 per day $6.85 per day Nonpoor Source: Tabulations based on World Bank 2024a. Note: Share of population living below the international poverty line (at 2017 purchasing power parity). FIGURE O.5 Prosperity gap: Africa and the world Prosperity gap 20 18 16.7 17.2 16 13.6 14 12.0 12 10.7 9.4 10 8 7.0 5.0 6 4 2 0 90 92 94 96 98 0 2 4 6 8 10 12 14 16 18 20 22 0 0 0 0 0 20 20 20 20 20 20 19 19 19 20 20 19 20 19 20 20 20 Africa World Source: World Bank 2024a. Note: “Prosperity gap” refers to the average factor by which incomes need to be multiplied to reach the global prosperity standard of $25 per person per day (at 2017 purchasing power parity). respect to a standard of prosperity set at $25 per person daily (adjusted for differences in PPP across countries). This is the typical (median) poverty line in high-income countries today, which is an aspirational benchmark for most developing countries. In 2022, individual incomes in Africa needed to increase, on average, by a factor of 12 to reach the global prosperity standard, compared with a factor of 5 for the world. 6 Leveling the Playing Field Consumption inequality is unusually high in Africa (refer to figure O.6). Although all world regions appear to have become less unequal since 2000–10, with an average Gini index of 41, Africa remains the second-most-unequal region in the world after Latin America and the Caribbean (refer to figure O.6, panel a). Inequality in countries in Africa is 10 Gini index points higher than in countries in other regions with similar levels of economic output (refer to figure O.6, panel b). Measuring the extent to which structural sources of inequality affect individual outcomes is difficult, but one approach is to measure inequality of opportunity, which is the portion of overall inequality in consumption that is attributable to differences in circumstances at birth. This serves as a summary measure of the effects of inequality in each of the three prongs in the framework on overall consumption inequality (introduced earlier in this Overview). This measure, nevertheless, is partial in that it does not show the contributions of unequal opportunities in domains other than birth circumstances. FIGURE O.6 Inequality in Africa versus other regions a. Average unweighted Gini index b. Inequality and economic output: Countries in Africa versus other regions, 2000–19 Gini index Gini index 60 70 51 65 50 46 45 60 41 55 40 37 37 36 37 38 35 34 34 50 32 31 30 45 40 20 35 30 10 25 0 20 ECA SAR MNA EAP NA AFR LAC 5 6 7 8 9 10 2000–10 2011–22 Log of GDP per capita (constant 2015 US$) AFR World AFR fitted line World fitted line Source: World Bank 2024a. Note: For Africa, the Gini index measures inequality in the distribution of consumption; for other regions, it measures inequality in the distribution of consumption or income. Panel b displays a cross-country scatter plot of Gini index and log of GDP per capita. To focus on low- and middle-income countries, panel b includes only observations with GDP per capita less than $14,000 (2015 dollars). The fitted lines reflect the best-fitting second- order polynomials for the set of African countries and for all other countries. AFR = Sub-Saharan Africa; EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MNA = Middle East and North Africa; NA = North America; SAR = South Asia. Overview 7 FIGURE O.7 Share of consumption inequality explained by circumstances at birth Percent 100 90 26 80 36 38 40 40 42 43 43 46 46 46 47 50 51 52 55 70 59 60 74 50 40 74 30 64 62 60 60 58 57 57 54 54 54 53 50 49 48 45 20 41 10 26 0 in go re i al na u ria a ia ia er on a i e a so w al nd ic ni Th sa g op er en oi ig M a Fa ha be ab To fr a ne is al ig ga Iv N nz B hi a, A G -B Li G M na Se N d' bi Et U Ta h a ki ut am e ne ôt ur So ui G C B G Inequality of opportunity (inherited circumstances) Residual inequality (effort, choice, etc.) Source: Analysis of household surveys in Atamanov et al. 2024. Note: Dotted line indicates 50 percent. In 13 of 18 countries in Africa that are examined, birth circumstances, such as place of birth, religion, ethnicity, and parental education and sector of employment, explain at least half of overall inequality in consumption (refer to figure O.7). On average, birthplace explains about 40 percent of inequality of opportunity. Cross-regional comparisons suggest that inequality of opportunity in Africa is broadly in the same range as that in Latin America and South Asia but is notably higher than in Southeast Asia, Central Asia, and high-income countries. The fragility and reliance on natural resources that characterize the countries in the region also shape rates of poverty, prosperity, and inequality across the continent. African countries can be clustered into four distinct groups (refer to table O.1) based on their resource wealth and fragile and conflict-affected situation (FCS). This clustering enables a better understanding of rates of poverty and inequality in different countries depending on their circumstances. Thirty countries in the region—accounting for 72 percent of the region’s population—were included in the World Bank FCS list at some point between 2006 and 2023. On the other hand, 17 countries in the region derive rents from natural resources (excluding forests) that have exceeded 10 percent of GDP over the past decade. These resource-rich countries are home to almost half (44 percent) of the region’s population. 8 Leveling the Playing Field TABLE O.1 Typology and population share of African countries, based on fragility and resource wealth Not FCS FCS Group 1: Resource rich, Group 2: Resource rich, FCS (37%) not FCS (7%) Angola, Chad, Dem. Rep. of Congo, Resource Botswana, Equatorial Rep. of Congo, Guinea, Liberia, rich Guinea, Gabon, Namibia, Mauritania, Niger, Nigeria, Sierra Leone, South Africa, Zambia South Sudan Group 3: Not resource rich, Group 4: Not resource rich, FCS (35%) not FCS (21%) Burkina Faso, Burundi, Cameroon, Benin, Cabo Verde, Eswatini, Central African Republic, Comoros, Not resource Ghana, Kenya, Lesotho, Côte d’Ivoire, Eritrea, Ethiopia, rich Mauritius, Rwanda, Senegal, The Gambia, Guinea-Bissau, Seychelles, Tanzania, Madagascar, Malawi, Mali, Mozambique, Uganda São Tomé and Príncipe, Somalia, Sudan, Togo, Zimbabwe Source: Original table for this publication. Note: Percentages refer to the percentage of the African population, FCS = fragility and conflict-affected situations. Resource abundance, which should be a blessing to a country’s economy, often proves to be a curse. Countries rich in natural resources, such as minerals, oil, or natural gas, often suffer from low productivity and high inequality. These characteristics often go hand in hand with low levels of diversification and volatile growth. Countries in this group that do not suffer from fragility and conflict, such as Namibia and South Africa, are among those with the highest levels of inequality in Africa. In these countries, the top 10 percent of the population, by income, spend more than four times what the poorest 40 percent do. The mean Gini index for non-FCS resource-rich countries reached 53 in 2022, among the highest in the world. The high level of inequality in these countries—and the fact that nearly 30 percent of their populations remain in extreme poverty—suggests that wealth is concentrated in the hands of a few. Panel a of figure O.8 depicts how resource-rich countries perform on measures of poverty. Resource wealth in a context of fragility or conflict is associated with the highest average poverty rate, 46 percent in 2022. Panel b of figure O.8 shows that countries that are neither resource rich nor fragile have reduced poverty faster than their counterparts that are fragile, rich in resources, or both. Overview 9 FIGURE O.8 Poverty by fragility and conflict-affected situations and resource-rich typologies a. Trends in extreme poverty rate b. Average annual change in share of populations living in extreme poverty Poverty rate (%) Percent 65 0.0 60 –0.5 55 50 –1.0 46% 45 –1.2% –1.5 –1.4% 40 34% 35 –2.0 –1.8% 30 29% –2.5 25 –2.5% 20 –3.0 C , C e FC ce FC ce t F ich 0 10 20 8 18 2 12 22 4 14 6 16 t F rc 0 0 0 0 0 S 20 h, ur h, ur 20 S S S 20 20 20 20 20 no e r 20 20 20 no ou 20 20 ric eso ric eso rc h, res ou r R Not resource rich, FCS Not resource rich, not FCS ric ot ot es N N R Resource rich, FCS Resource rich, not FCS Source: Tabulations based on World Bank 2024a. Note: Estimates are based on a poverty line of $2.15 per day (2017 PPP). FCS = fragile and conflict-affected situation; PPP = purchasing power parity. Fragility, conflict, and violence, as well as climate-change-related shocks, represent major challenges that Africa needs to address for progress. In fact, 20 of 39 countries considered to be experiencing fragility, conflict, and violence in 2023 were in Africa (refer to box O.1). Not only do fragility and conflict curb economic growth, their effects also tend to persist over time. Volatile growth, coupled with high levels of fragility, conflict, and violence, tends to erode economic stability and sustainability. Countries with high levels of fragility, conflict, and violence often find themselves caught in a “fragility trap” of slow growth and poor governance. Political instability, violence, and corruption, including insecure property rights, make the trap harder to escape. Countries experiencing fragility and conflict tend to have lower levels of inequality, but this is often because they have extremely low levels of growth, a situation in which no one is better off. Moreover, even in these countries, the top 10 percent consume approximately double the total amount consumed by the poorest 40 percent. Finally, many countries in the region are among those most vulnerable and least prepared for climate-change-related shocks (refer to box O.2). 10 Leveling the Playing Field BOX O.1 Poverty and inequality influencers: Fragility, conflict, and forced displacement Conflict disrupts normal economic activities. In conflict situations, households may resort to survival strategies that put a priority on immediate needs over long-term investments. This can perpetuate the cycle of poverty. Most of Africa’s population has known fragility, conflict, and violence in the past 20 years. On average, countries that were considered fragile over the period between 2010 and 2019 had higher poverty rates than those that were not. Evidence shows that fragile countries have higher poverty rates and that fragility is associated with lower growth. Moreover, fragile countries are also less effective at converting economic growth into poverty reduction. An increase of 1 percent in gross domestic product per capita is associated with a 0.5 percent reduction in poverty in fragile countries, lower than the 0.8 percent rate in countries that have never been fragile. Armed conflicts, civil wars, political instability, and persecution are the major drivers of displacement in Africa. As of 2022, more than 35 million forcibly displaced individuals resided in the region, approximately a third of the world’s forcibly displaced population. The number of displaced individuals in the region has tripled in the past decade alone. A distinctive feature of forced displacement in Africa is that the majority of those displaced remain internally displaced. The largest share of displaced individuals in Africa, estimated at more than 75 percent in 2022, are displaced within their own countries. Increasing the access of forcibly displaced persons to employment and economic opportunities is vital to increasing the resilience of displaced people and to helping them avoid poverty. People in Africa face an unlevel playing field for building their productive capacity Structural inequalities in Africa are rooted in the outsized role of inherited circumstances and characteristics when children are building their productive capacities, prior to beginning their adult working lives. This results in high inequality of opportunity, in which individuals’ inherited characteristics, and not their levels of effort or talent, strongly influence their productive capacity through how much human capital or physical capital they acquire. Health care, schooling, and access to property such as land can provide strong foundations for building economic success. They can drive the earnings potential of individuals, families, communities, and countries. For many children in Africa, the circumstances into which they are born play a prominent role in determining their access to sanitation, clean water, education, and technology. Overview 11 For example, there are stark differences in access to education and electricity services, with African children in the poorest consumption quintiles least likely to finish school on time or have access to electricity (refer to figures O.9 and O.10). The immunization rate among children with uneducated mothers is about 68 percent, compared with 85 percent among children with mothers having secondary or higher education. About 46 percent of African children finish primary school on time, but when this rate is adjusted downward to allow for inequality in access, as is done when calculating scores on the Human Opportunity Index, the effective coverage rate goes down to an average of 39 percent. BOX O.2 Poverty and inequality influencers: Climate change Climate change hits the poorest households hardest. They have less resources available to prepare for, respond to, recover from, and rebuild after storms, drought, and floods. Climate change deepens the risks of poverty and inequality, with Africa on the front line. Whereas 29 percent of the world’s population is both poor and exposed (when measured against a $6.85 poverty line at 2017 purchasing power parity [PPP]), this rate is 38 percent in Africa. At the extreme poverty line of $2.15 (2017 PPP), the difference is even starker: 5 percent of the world’s population is exposed and poor, but in Africa, the rate is more than three times as high, at 16 percent. That makes Africa’s poor particularly vulnerable to climate change. More than 4 of 10 people in Africa (42 percent) are exposed to at least one of the following extreme weather events: floods, droughts, heat waves, and cyclones. This is not too far from the global average of 55 percent. Higher shares of the populations in South Asia and in East Asia and Pacific are exposed. Drought is the shock to which the largest share of the African population is exposed, followed by floods and heat waves. Africa has a much higher rate of exposure to droughts than do other regions in the world. The worst weather conditions observed in the past 13 years, relative to the best, raise poverty rates by 1 to 12 percent, according to an eight-country analysis of the impacts of drought on welfare in Africa (Gascoigne et al. 2024). This would amount to an increase in the total poverty gap ranging from $22 million to $3.4 billion (at 2017 PPP). The poorest households have less capital—financial, physical, human, social, and natural—to generate returns and to cushion the blow of climate-change-related shocks. They are less likely to be able to rely on savings, credit, or insurance to manage losses of income and assets. They tend to cope with such losses by depleting the few resources they have. Reducing the impact of climate change on poor and vulnerable households is thus essential for hastening poverty reduction. 12 Leveling the Playing Field FIGURE O.9 Share of population ages 13–16 in poorest and richest consumption quintiles finishing primary school on time Percent finishing primary school on time 100 80 60 40 20 0 N A K A FA A SWA C A C A B A A LBD G D O O C O B U R R R R G N G P S B I G I LI H M N IN EN N N M M Z E M F GT IV W D G W M TZ H G W U ST TC O N E M LS SG TG R D O ZA SL O ET E SE SD A M C B M G M B N Poorest (bottom 20 percent) Richest (top 20 percent) Source: World Bank staff calculations using data from the World Bank’s Global Monitoring Database. Note: For country abbreviations, refer to https://www.iso.org/obp/ui/#search. FIGURE O.10 Access to electricity among the poorest and richest consumption quintiles Percent of population with access to electricity 100 80 60 40 20 0 TC I LI N I TH N IN EN M EN G N SLG G MD N D O SDO O M Z G Z E TZ B B B F R T M R N R R SE P IV C A A A A FA SWA A A D W R ZA O ST M N E LB M D O O A G W G W H LS G TG M B G C R M B K B G U C C Poorest (bottom 20 percent) Richest (top 20 percent) Source: World Bank staff calculations using data from the World Bank’s Global Monitoring Database. Note: For country abbreviations, refer to https://www.iso.org/obp/ui/#search. As a consequence of children’s prospects being deeply tied to the fortunes of their parents, Africa has a low degree of socioeconomic mobility, which is a serious obstacle to meeting societal aspirations of fairness and progress. Africa is behind all other regions except for South Asia in relative intergenerational mobility, as measured by the extent to which the education attainment of individuals is associated with that of their parents. This implies that Africans born to parents with relatively low levels of education for their (parental) generation have little chance of moving up the education Overview 13 FIGURE O.11 Changes in absolute upward mobility over time a. High-income countries in Africa plus b. Across regions developing countries outside Africa Probability child will surpass Probability child will surpass parents’ education level parents’ education level 70 70 60 60 50 50 40 40 30 20 30 10 20 0 1950 1960 1970 1980 1950 1960 1970 1980 Cohort of child (child’s birth year) Cohort of child (child's birth year) High-income countries AFR—daughter AFR—son Developing countries outside of Africa Other developing countries—daughter AFR Other developing countries—son Source: World Bank staff calculations using March 2023 data from the World Bank’s Global Database on Intergenerational Mobility. Note: Figure uses data only from surveys with retrospective questions. AFR = Sub-Saharan Africa. scale of their own generation. Relative mobility, as well as the gap with other regions, has also remained almost unchanged between African generations born in the 1960s and the 1980s. Such stagnation is also seen for absolute intergenerational mobility, in which Africa fares poorly as well. African children, especially African girls, have the lowest probability of surpassing their parents’ education of those in any world region (refer to figure O.11). Absolute mobility in education in Africa has not changed much across the 1960s and 1980s cohorts, in sharp contrast to what has taken place in other parts of the world. Gender gaps continue to be large, limiting the economic inclusion of women and reducing countries’ growth potential (refer to box O.3). Structural inequalities when people are building their productive capacities prevent and perpetuate unequal access to opportunities and assets and present a major stumbling block to economic progress and poverty reduction in Africa. In part, the inequalities occur because of low coverage of public services, which is linked to low public spending on education and health care in the region. Although African countries meet common international benchmarks for education spending (4–6 percent of GDP), it still adds up to very little when absolute amounts per school-age child are considered, as a result of the region’s large young population 14 Leveling the Playing Field (refer to figure O.12, panel a). Few students from the lowest income quintiles complete upper-secondary or tertiary education, for which spending per child is highest. Moreover, in some countries more public resources go to schools in wealthier, more urban areas, partly reflecting the fact that trained and experienced teachers are more likely to be available in urban areas and that urban public schools often have better infrastructure. Health care expenditures, both in per capita terms and as a share of GDP, are lower in Africa than anywhere else in the world (refer to figure O.12, panel b). Not only is spending in the health care sector lower there than in other regions, but government expenditures are also skewed toward tertiary services, which are disproportionately used by the wealthy. BOX O.3 Poverty and inequality influencers: Gender gaps Gender gaps in human development and economic outcomes remain so wide in Africa that it is now the most gender-unequal continent in the world. Women in Africa frequently lack equal rights and opportunities. Weak legal protections, cultural norms, and limited access to education and economic opportunities contribute to prevalent early marriages and parenthood among Africa’s young women. African women work predominantly in vulnerable jobs, and their productivity and earnings trail those of men. The World Bank’s Women, Business and the Law Index indicates that of 2.4 billion working-age women lacking equal legal rights globally, 330 million are in Africa. Although the region has recently made notable progress in this area, women’s legal rights continue to vary widely across its countries, with 23 below the global average score (77) on the index and 5 scoring below 50—meaning that women have less than half of men’s rights in those 5 countries in key areas of life. Policies that promote gender equality foster a level playing field while contributing to equal access to opportunities and resources. Equality of opportunities, in turn, allows the full use of human capital by broadening the talent pool and stimulating innovation and entrepreneurship, all contributing to a more robust, inclusive, and sustainable economy. Nine African countries deny women equal ownership rights to immovable property, and the same number restrict women from controlling jointly owned assets. Property inheritance rights are also unequal in 12 of the region’s countries, favoring sons over daughters. Not surprisingly, systematic gender disparities persist in property ownership, with about 8 percent of married women owning land or housing alone, compared with about 25 percent of married men across 37 countries. Equality before the law is crucial to leveling the playing field. Addressing gender disparities is not only a matter of social justice but also a crucial step toward unlocking the region’s full economic potential. Overview 15 FIGURE O.12 Education and health care expenditures, Africa versus other regions a. Education expenditures b. Health care expenditures Percent of GDP Percent of GDP 7.0 17 North America 6.5 North America 15 6.0 13 AFR MNA LAC 11 5.5 World average 9 5.0 EAP World average EAP ECA 7 LAC 4.5 AFR SAR 5 MNA ECA SAR 4.0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,0 0 0 0 0 0 0 0 ,0 2, 3, 4, 2, 4, 6, 8, 10 Dollars per capita at 2017 PPP Dollars per capita at 2017 PPP Source: World Bank staff calculations using data from the World Bank’s 2017 International Comparison Program and World Development Indicators. Note: Dotted line represents simple correlation. AFR = Sub-Saharan Africa; EAP = East Asia and Pacific; ECA = Europe and Central Asia; GDP = gross domestic product; LAC = Latin America and the Caribbean; MNA = Middle East and North Africa; PPP = purchasing power parity; SAR = South Asia. Access to basic services in Africa ranges from relatively high levels for improved water (average Human Opportunity Index of 66) to low and unequal levels for electricity (average of 36) and even lower levels for improved sanitation (average of 27). Moreover, a child’s location (rural or urban and region) is responsible for more than half of the inequality among children in access to basic services (water, electricity, and sanitation). Whereas access to mobile phones is relatively high (Human Opportunity Index of 71), access to the internet is very low (index of 14 in countries where it is possible to measure). Similarly, there is evidence that access to valuable agricultural land is concentrated among those in upper income groups. Inequality in land ownership is particularly high in Namibia and South Africa. In Ethiopia, The Gambia, Malawi, Niger, Nigeria, and Tanzania, the top 10 percent (by land ownership) of those who own land either own or have user rights to more than 30 percent of land by area and 40 percent or more by land value (refer to figure O.13). In Ethiopia and Tanzania, the richest 10 percent have rights to close to 60 percent of total land value. Taking the landless population into account increases the measured inequality. Moreover, the share of households with registered land is low and highly unequal by income distribution and gender of owner. 16 Leveling the Playing Field FIGURE O.13 Access to land among the top 10 percent: Land value versus land area Percent 90 80 70 60 50 40 30 20 10 0 l i am h an a na a a ua a ia a Ta ria ia r er zi aw do di si al m bi es op an ra ig st hi ag e ne m In am tn na al ad ua ig N nz B C ki hi te ar M ie do Pa N Pa gl Ec Et G ua V ic In an N G B SAR EAP LAC AFR Land value Land area Source: Bauluz, Govind, and Novokmet 2020, figure 3. © World Inequality Lab. Adapted with permission from the World Inequality Lab; further permission required for reuse. Note: Figure is based on household survey data and includes estimates of the share of area and value held by the top 10 percent of owners (from both urban and rural areas) or of those with land user rights. AFR = Sub-Saharan Africa; EAP = East Asia and Pacific; LAC = Latin America and the Caribbean; SAR = South Asia. Policy portals can be opened for building productive capacities Policies to reduce inequality of opportunity and unequal access to assets in the early stages of a person’s life are critical. Five policy directions would promote greater equality of opportunity and address structural inequality in building productive capacities. Investing in health and education among underserved populations: Focusing on early-childhood interventions and girls Quality investments in early-childhood development should be an integral part of national plans for accelerating learning. Recent cross-country analysis finds large long-run returns to schooling in low- and middle-income countries compared with those in high-income countries (Bendini and Devercelli 2022). Education has far-reaching impacts on girls and women, influencing factors such as age at first marriage, fertility, productivity, and intergenerational poverty transmission. Raising student attendance rates requires several multisectoral policies, with cash transfers, improving hygiene in school infrastructure, and community-based monitoring being found effective. Alongside building foundational skills of literacy and numeracy and socioemotional skills, the school systems in the region can also do more to increase students’ technical and job-specific skills, which will prepare them for the world of work. There is also evidence that investments in basic health care interventions have long-term benefits. For instance, interventions such as deworming and providing vitamin A supplements are known to generate large impacts relative to their Overview 17 up-front costs (Bhula, Mahoney, and Murphy 2020). In Mali, a scientific study demonstrated substantial improvements in child health from a program that delivered free care for children followed up by visits from community health workers (Dean and Sautmann 2022). Investing in basic infrastructure targeting underserved populations and regions The key rationale for public spending on basic services is that the private sector will likely not make the investments needed to support these services. An explicit focus on equity through interventions targeted toward underserved populations and regions may bring the best results to populations with the lowest coverage in regard to basic services, including electricity, water, and sanitation. Subsidizing access to piped water and electricity has not proven effective in universalizing access. Strategies to expand access include identifying barriers to connecting to existing networks, covering unserved populations living physically close to infrastructure networks, understanding community needs, and rethinking the way connection costs are recovered (Foster and Briceño-Garmendia 2010). In general, limiting subsidies to connections in new network rollouts rather than densification of existing networks could encourage investment in infrastructure in highly underserved population groups. Eliminating regulatory barriers to land or asset registration and property rights: Focusing on women Expanding land registration and securing property rights is an essential intervention that can have large impacts in ensuring that people can maximize their productive capacities. In Ethiopia and Rwanda, for example, public policy has facilitated registration and formalization of use rights. Special attention is needed when inheritance laws or other regulatory barriers limit women’s ownership rights, as these have important consequences for women’s productive capacity. In this regard, Ethiopia has been successful in ensuring gender equality in land user rights. Encouraging investments in natural capital Efforts to encourage investments in the environment, including tree planting and soil and forest conservation, have been shown to have large positive environmental externalities (Baquie and Hill 2023). Moreover, they can lead to improvements in output, thus promoting growth and, if targeted appropriately, reducing poverty—a triple win. Improving service delivery and strengthening local capacity to deliver services Effective service delivery in education and health care is a challenge across the region. Deficient learning is correlated with teachers’ low levels of content knowledge and subpar pedagogical skills. Challenges in delivering payment, inadequate monitoring, lack of access to transport and health care facilities, and school administrative responsibilities are all to blame. Similarly, lack of health care providers is a concern, as is their low ability to diagnose and treat common health conditions correctly, particularly in rural areas. Strengthening local capacity and involving communities with 18 Leveling the Playing Field clear mandates and tools for monitoring providers can help strengthen the quality of services. Properly implemented decentralization also has the potential to increase accountability and strengthen service delivery. Workers, firms, and farms in Africa face an unlevel playing field for using their productive capacity Surveys from Africa show that households’ income from all sources, earned as well as nonearned, is highly unequally distributed. Studying the structure of household incomes provides useful insights. Most of this inequality in income is accounted for by wage income and household enterprise income. Moreover, where people work and the type of job they have varies across the income distribution in Africa. Agricultural earnings dominate incomes among those in the lowest consumption deciles, whereas wage earnings dominate incomes in the top deciles (refer to figure O.14). Wage employment in productive establishments tends to provide the highest and most robust earning opportunities across the region. In contrast, nonfarm household enterprises are an important source of jobs and earnings, particularly for those in the middle of the income distribution. Structural sources of income inequality are rooted in the markets in which workers, firms, and farms operate; these sources of inequality, in turn, determine how much they earn. Although ownership of productive capacities, the skills intensity of technology, and gender norms affect where people use their productive capacities to earn an income, the distortions firms and farms face during the production process play an additional role.2 These distortions create unequal access to good earning opportunities FIGURE O.14 Share of African households with agriculture, household enterprises, wage jobs, and remittances as largest income source, by consumption decile Households (%) 60 50 40 30 20 10 0 Poorest 2nd 3rd 4th 5th 6th 7th 8th 9th Richest Decile of per capita consumption expenditures Agriculture Household enterprises Wages Remittances Other None Source: Original figure for this publication based on calculations using data from World Bank Group Living Standards Measurement Study surveys for Ethiopia, Ghana, Malawi, Nigeria, Tanzania, Uganda, and West African Economic and Monetary Union member countries. Note: “Household enterprises” include self-employed workers. Overview 19 FIGURE O.15 Cross-country correlation between Gini index and size of wage sector Gini index 65 ZAF y = –0.0811x + 41.171 60 NAM R2 = 0.08 55 SWZ MOZ ZMB BWA AGO 50 COG ZWE COD COM LSO SSD RWA 45 UGA GHA CAF MDG CMR STP CPV 40 TZA KEN GMB BDI TGO MWI GAB TCD BFA MUS SLE MLI LBR CIV SEN 35 NGA BEN SDN ETH GNB MRT NER 30 GIN 25 20 0 10 20 30 40 50 60 70 80 90 100 Percentage of wage employment in total employment Sub-Saharan Africa Middle East and North Africa Europe and Central Asia East Asia and Pacific South Asia North America Latin America and the Carribbean Source: World Bank estimates using World Development Indicators (https://databank.worldbank​ .­org/source/world-development-indicators). Note: Grey line represents correlation. Gini index for consumption distribution except for countries in Latin America and the Caribbean. For country abbreviations, refer to https://www.iso.org/obp​ /ui/#search. in two ways. First, they curb creation of high-quality and well-paying wage jobs, making these jobs accessible to only a few workers, largely in the public sector. Second, they constrain the productivity and profitability of firms and farms, dampening earnings for those engaged in business and farming activities, many of whom end up in low- productivity or low-earning “fallback” activities as a result. Across the globe, income inequality is higher in countries in which the share of workers engaged in wage jobs is lower (refer to figure O.15). An understanding of the market distortions that create an unlevel playing field for firms and farms opens policy entry points for addressing inequality. Tackling these distortions would have an additional payoff in spurring productivity growth. Africa’s jobs and earnings challenge lies where people work, not whether they work In the Africa region, most people engage in some type of work. In globally comparable estimates, the share of 15- to 64-year-olds (that is, the working-age population) who participate in economic activities in Africa is among the highest, at 68 percent, comparable to that in Latin America (69 percent) and higher than that in South Asia 20 Leveling the Playing Field (55 percent) and the Middle East and North Africa (45 percent). In addition, rates of employment and unemployment and the share of people not in the labor force differ little between the poor and nonpoor in Africa, indicating that employment status (whether someone works) itself is not a major driver of income inequality. The challenge, however, arises from where people work: in what sector, under what type of contract, and in what type of firm or farm. Because wage employment is desirable and well paid, opportunities for it are scarce. Many people resort to “fallback” work because their opportunities to pursue more attractive jobs are in short supply or because these fallback jobs offer more attractive employment terms compared with what available wage jobs have to offer, as studies from Côte d’Ivoire and Ethiopia suggest (Abebe, Buehren, and Goldstein 2020; Karlen et al. 2023). These fallback jobs include household enterprises, farm work, and self-employment, most of which have low levels of productivity. Across Africa more than half of workers are engaged in family farms and in nonfarm household enterprises. Just under a quarter of workers (22 percent) are employed in wage work, in which earnings are higher. African countries have lower shares of wage employment than countries in every other region of the world. Although this share is growing, it remains less than half of that in East Asia and Pacific (52 percent), Latin America and the Caribbean (63 percent), and the Middle East and North Africa (65 percent), according to data from the World Bank’s World Development Indicators. Most of Africa’s farms are small: an estimated 70–80 percent of farms in the African region are smaller than two hectares. In Ethiopia, for example, the average landholding in rural areas is close to 1 hectare. On average, nearly 60 percent of all workers in FCS countries and 40 percent in non-FCS countries work in agriculture. Most private sector firms that create wage jobs are also small: the average African manufacturing establishment employs 6 workers, compared with 19 in East Asia and 16 in high-income countries. The situation is similar in the services sector. There is also a significant gap in productivity and employment between the most productive frontier firms and less productive firms in the rest of the economy. Small firms are overrepresented among all firms. Midsized firms (“the missing middle”) are few and far between. There is a small but important group of frontier firms. Public sector employment forms an important part of wage employment, corresponding, on average, to a fifth of overall wage employment in the region. In countries like Ethiopia and Nigeria, more than 40 percent of all wage workers are employed in the public sector, as administrators, teachers, and doctors, as well as in other positions. Those earning public sector wages tend to be in the higher income deciles, with roughly a third of wages in the highest income decile corresponding to public sector employment. Inequalities in the ability of people to access public wage employment can be another source of structural inequality. Overview 21 Distortions in Three Markets Matter for Structural Income Inequality Market and institutional distortions in three markets, namely, capital and input markets, product markets, and labor markets, play a sizable role in limiting the expansion of productive employment opportunities and in this way create structural income inequalities (refer to figure O.16). Distortions in these three markets prevent firms and farms from expanding and workers from finding productive earning opportunities. First, in capital and input markets, distortions prevent firms from acquiring the productive capacities needed to boost productivity. Productive capacities include not only the physical capital that firms and farms possess and the technology that they use but also the managerial and organizational practices they adopt. Second, in product markets, distortions creating limited and unfair market access—both domestically and abroad—prevent firms from achieving scale economies. Limited contestability, including the presence of state- owned enterprises, can constrain access to domestic markets, while limited integration with regional and global value chains limits access to markets abroad. Third, frictions in labor markets constrain the hiring of workers and thereby reduce the creation of wage jobs, whether in firms or on farms. In each of these three markets, distortions result from market failures as well as inefficiencies associated with policies and regulations. Market failures include those that limit contestability in markets (for example, monopoly and monopsony power) as well as those that increase transaction costs (typically as a result of information asymmetries and often exacerbated by weak contract enforcement). Regulations can create further distortions, through, among other things, regulations that vary by firm FIGURE O.16 Markets and performance of firms and farms: Analytical framework Distortions limit Access to capital Labor market frictions access to capital and and technology reduce access to technology productive earning opportunities Input markets Factor markets Firms and People farms Labor markets Product markets Limited access to domestic and foreign Access to markets limits scale domestic markets economies and trade Source: Original figure for this publication. 22 Leveling the Playing Field size, age, or sector (for example, those that govern whether firms can benefit from preferential treatment, such as special tax regimes); regulations that restrict market access, such as product market regulations; and legal provisions that restrict market access for women, including restrictions on sector of work. Discretionary provisions that treat similar producers differently, including those that do so for political or other noneconomic reasons, further limit the playing field. Access to technology and capital is limited Distortions in capital and input markets restrict access to finance and technology, resulting in firms and farms having limited access to resources to upgrade their productive capacities. Lenders’ information about creditworthiness differs across types of borrowers and may be most limited in regard to those who are poor and seeking to borrow small amounts. This differential information on creditworthiness raises financial institutions’ cost of lending through market-driven products to small businesses and poorer borrowers. Institutional challenges also affect credit provision. The high cost of using judicial systems in case of default is another factor holding back the flow of credit. As a result, most self-employed workers and household enterprises rely on their own resources, on resources from family and friends, or on informal sources to obtain capital to start up their businesses. According to analysis of household survey data from five African countries, on average 85 percent of self-employed workers and household enterprises indicate that their own resources or those from family and friends are their main source of financing. Small firms in the region might prefer to borrow from friends and family, as lower transaction costs and personal relationships provide a better opportunity to enforce repayment. Also, many firms, including larger ones, rely on nonbank resources as the main source of finance for their day-to-day operations. Among African firms with fewer than 19 employees, only about 1 in 10 rely on bank financing. These firms are also more likely to report accessing credit as a major constraint. Among larger firms, about a third rely on banks for financing. Data for five African countries from the World Bank’s Firm-Level Adoption of Technology survey show that African firms have low levels of technical sophistication, lowering productivity. Unequal access to information—firm owners’ not knowing what type of technology or practice would be beneficial for their business—is a constraint to adopting more sophisticated technologies and more structured organizational practices. For farmers, the obstacle is the limited availability of technologies that have been developed for commonly grown crops. Access to markets is often impeded, effectively reducing the size of product markets Africa’s geography and low population density outside of capital cities, limited and low-quality road infrastructure, and imperfect competition in transportation result in limited access to product markets and customers. For roughly 9 of 10 self-employed workers and household enterprises in the region, local customers form the most important source of demand. Only 6 percent of self-employed workers and household Overview 23 enterprises sell to other businesses or in nearby markets. Among larger firms with at least five employees, about 14 percent of African firms are exporting directly or indirectly, against 17 percent of firms globally. Smallholder farmers who have market surplus also tend to sell their produce in nearby markets. In Ethiopia, the share of smallholders relying on local markets increases the farther away they are from urban centers. In Malawi and Nigeria, smallholders’ main buyers are friends and family and local markets, regardless of how far a smallholder is from an urban area. Agricultural markets are also not integrated, and prices vary spatially such that smallholders earn less at the farm gate while consumers pay higher prices. A consequence of fragmented domestic markets and limited purchasing power is that countries do not fully benefit from the potential of agricultural food systems to respond to urban demand. All these features put an inherent limitation on scale and job creation: local markets determine the potential size and productivity of businesses or farms. The region’s firms also participate in only a limited way in global or regional value chains. The African Union Commission and Organization for Economic Co-operation and Development estimated in 2022 that Africa accounted for 1.7 percent of total participation in global value chains in 2019 and that regional value chains accounted for only 2.7 percent of Africa’s global value chain participation, compared with 26.4 percent in Latin America and the Caribbean and 42.9 percent in Asia. Firms’ and farmers’ ability to respond to the opportunities for expanding exports requires regional integration and improving subregional connectivity (physical and digital), among other factors such as addressing nontariff barriers. Foreign direct investment (FDI), another channel for participation in global value chains, tends to be concentrated in resource- rich sectors, which have relatively limited scope for creating links with firms in the host economy in which the investment initiates. Participation in global value chains come with the risk that the monopsony power of buyer-driven foreign firms could lead to poor working conditions (in the case of factories) or low farmer earnings (for example, in coffee value chains) if there are no complementary regulations to enforce labor standards. State participation in markets that the private sector can effectively serve and regulations that favor state-owned businesses further limit the size of domestic markets available for firms and farms. Analysis of product market regulations by the World Bank and the Organisation for Economic Co-operation and Development suggests that between 2013 and 2018, product markets in African countries tended to have higher barriers to competition, owing to a high degree of state involvement in markets. More recent data from the World Bank’s Business of the State database shows that by 2023, in countries like Ghana, Kenya, and Uganda, businesses with state ownership were operating in close to or more than half of business sectors, often in those in which the private sector could provide products and services efficiently, such as hospitality, manufacturing, and wholesale and retail trade. In Ethiopia, Kenya, and South Africa, some state-owned businesses benefit disproportionately from favorable regulations, creating an unlevel playing field for firms (World Bank 2023b). 24 Leveling the Playing Field Access to productive work opportunities is curbed Distortions in labor markets make it difficult for firms and farms to find workers when they need them. Distortions also prevent workers from finding jobs for which they would be a good match. As a result, fewer workers end up with productive earning opportunities that can raise their incomes, and firms and farms are prevented from recruiting the workers needed for expansion. The friction workers face arises from factors such as high transportation costs and costly job searches. For women, restrictive gendered legal provisions and costly childcare may exacerbate such frictions. Although Africa performs well globally, discriminatory laws exist in a number of countries. For example, as of 2022, women in Cameroon, Chad, Equatorial Guinea, Guinea-Bissau, Mauritania, and Niger could not get jobs without their husbands’ permission. The friction firms face include unequal access to information about potential employees and costly screening of workers. Distortions in capital and input markets, product markets, and labor markets exacerbate income inequality by adversely affecting firm growth and limiting expansion in wage employment opportunities and growth in farm productivity, and they give rise to the composition of employment seen in Africa. The distortions also enable top income earners to thrive, especially in “rent-thick” sectors (real estate, oil, mining, telecommunications, and cement, among others). In general, politically connected wealth accumulation can affect growth negatively (Burgis 2015; Gandhi and Walton 2012). Specifically for Africa, the nexus between higher resource rents and more corruption, especially in less democratic countries, has been documented (Arezki and Gylfason 2013). Removing market and institutional structural distortions is therefore essential to tackling income inequalities from both the bottom and top ends of the income distribution. Policy portals can be opened to grow jobs and provide better earning opportunities for all workers For Africa’s workers who find themselves in small firms or farms and fallback sectors, the availability of jobs and better earning opportunities rests on removing market distortions and allowing markets to work in ways that expand access to capital and technology, domestic markets, and global trade, as well as facilitating job searches among workers. When access to these opportunities is universalized in ways that are not distortionary, structural sources of income inequality will be removed. Of course, the effectiveness of these measures depends on sound macro policies, fair fiscal policies, and strong market institutions. A payoff to leveling the playing field is that it can unlock economic growth as well. From a sectoral transformation perspective, it is important to address the barriers manufacturing and services firms face in accessing inputs, product markets, and workers, as these are the sectors that are well placed to create good jobs and earnings opportunities for more workers (refer to box O.4). Evidence from high-income countries suggests that allowing productive firms to grow is key to boosting productivity growth and jobs. While productivity gains might reduce the number of jobs, job losses are outweighed by job gains because firms can expand market share. Overview 25 BOX O.4 Job creation, structural transformation, and the role of manufacturing and services Manufacturing has played an important role in driving growth and job creation in high-income countries as well as in East Asian countries in general. In Africa, its role has been more limited, as most of the growth experienced has been in less productive services sectors. Developing the manufacturing sector in Africa will require increasing the sector’s productivity as well as access to global markets that facilitate participation in global value chains. This includes addressing important frictions highlighted in this chapter, including transportation. FIGURE BO.4.1 Long-run gross domestic product per capita and industrial sector employment shares, 1801–2021 Share of employment in industrial sectors (%) 60 50 40 30 20 10 0 500 5,000 50,000 GDP per capita, constant 2011 PPP (US$) India 1960–2010 Ghana 1960–2011 Kenya 2006–2019 Indonesia 1961–2012 Brazil 1950–2011 Philippines 1971–2012 France 1856–2007 United Kingdom 1801–2011 United States 1840–2012 Other countries Sources: Adapted from World Bank 2023a, based on Our World in Data; Herrendorf et al. 2014; the Gronigen Growth and Development Center’s GGDC 10-Sector Database (https://www.rug.nl/ggdc/overview-databases​ /?lang=en); and the Maddison Project (Bolt and Van Zanden 2020). Kenyan data are estimates modeled by the International Labour Organization on the basis of Kenya National Bureau of Statistics statistics. Note: GDP = gross domestic product; GGDC = Groningen Growth and Development Centre; PPP = purchasing power parity. However, the choice between manufacturing and services might be a false dilemma. Many currently growing economies are relying much less on manufacturing than in the past (refer to figure BO.4.1). Enabling services sectors, such as transportation, logistics, and administrative and support services, play an important role in facilitating growth of other sectors, including manufacturing and agriculture. They also employ workers across the full spectrum of work skills. Digitization within these sectors is creating new, productive employment opportunities. Although some of these digital services require workers with a high level of skill, many tasks within digital services can be completed with a more basic level of skills, such as literacy and basic computing skills, which might be within reach for many more people. 26 Leveling the Playing Field Promote market-based innovations to provide better access to capital and to suitable technology First, traditional microfinance loan products have been found to have limited impacts on business outcomes of micro- and small borrowers. Innovative financial products are needed, such as asset-based microfinance and supply chain financing to microborrowers—for example, retailers—to provide better access to capital. Tailored loan products such as harvest time microcredit to smallholder farmers can help smooth seasonal variations in incomes. Second, instead of special regimes or size-based policies, technology-driven efforts to facilitate the flow of information to lenders about borrowers’ creditworthiness are better placed to improve firms’ and farms’ access to productive inputs, given that unequal access to information is pervasive among those who make lending decisions. Digital technology is increasingly being used to fill the gap. Fintech and digital financial loan products for working capital or investment needs are another promising approach, particularly for microbusinesses. For example, Kenya’s M-Shwari is a digital bank account offering savings and credit services to those without any credit score or collateral; a rigorous study shows the loan products it offers help borrowers cope with short-term shocks (Suri, Bharadwaj, and Jack 2021). On the side of the banks, the introduction of M-Shwari appears to have increased competition and led to the introduction of similar products in the market. As digital infrastructure expands and fintech facilitates the introduction of loan products, it will be important to put adequate financial consumer protection regulations in place. Furthermore, a package of measures for firms that includes building business capabilities through training can help offset inadequate business practices. For farms, too, training will help, building on lessons about how to ensure that training leads to adoption of technology and makes farmers’ investment climate smart. A package of coordinated interventions can help address multiple constraints that farmers face, including knowledge gaps, input access, and technology access. Complementary public investments in irrigation infrastructure and research and development are also required. Adopt policies to improve firms’ and farms’ market access, domestically and globally Policy reforms that facilitate the expansion of connective infrastructure such as rural roads, transport, and digital infrastructure can promote better access to markets. These policy reforms include regulations that level the playing field. Improving the commercial viability of bankable projects while focusing public investment on basic infrastructure targeting poor and underserved populations would improve allocation of resources. In the case of roads, the relative returns to investing in highways and rural roads differ, because they serve different populations. Investments in rural roads are found to improve development indicators in Africa, with the greatest benefits accruing to the most remote locations (Foster et al. 2023). For example, Ethiopia’s Universal Rural Road Access Program, which connected villages to market centers, boosted agricultural incomes. Investments in digital technology have also been shown to Overview 27 increase economic growth, contribute to improved education and labor market outcomes, and reduce inequality (Foster et al. 2023). Making transport affordable is a complementary policy priority, because close to 25 percent of firms in World Bank Enterprise Surveys for Africa report transportation to be a major constraint, one of the highest shares across all regions (refer to figure O.17). In particular, ensuring competition in the trucking services sector will be important, as trucks are the dominant mode of transport within and across countries in the region. For smallholder farmers who are already part of the food system, participating in integrated agricultural value chains can be an important opportunity to boost market access and incomes. Agricultural value chains such as those for dairy allow participants to add value at each step of the process to deliver products to buyers, typically large businesses or retailers. Smallholders who are part of integrated value chains are contractually connected to other participants in the chain and in return receive credit and agronomic information and reduce their risks. This arrangement therefore enables them to overcome distortions at the input and market-access stages. Along with continued focus on raising farm productivity, policies will need to assess what works best with regard to contractual arrangements, upskilling participants along the value chain, and providing financial institutions with incentives to participate. Fostering participation in global value chains is another important channel for enhancing market access. International trade agreements and programs, such as economic partnership agreements between African countries and the European Union and the US African Growth and Opportunity Act provide African countries with important pathways for obtaining access to international markets. Additional gains can be made through implementing the African Continental Free Trade Area and opening up trade within the continent. FDI can be a source of growth and foster participation in global value chains, among local firms and others, and workers can benefit. Enforcement of labor standards will help ensure that participants in global value chains enjoy fair working conditions and earnings. FIGURE O.17 Firms identifying transportation as major constraint Sub-Saharan Africa Middle East and North Africa Latin America and the Caribbean All countries South Asia Europe and Central Asia East Asia and Pacific 0 5 10 15 20 25 Percent Source: World Bank Enterprise Surveys (http://www.enterprisesurveys.org). 28 Leveling the Playing Field Facilitate the matching of workers and employers Public policy that facilitates workers’ searches for jobs does not appear to be effective in isolation from other measures. What seems to help is providing employers with information about workers’ skills. For example, job skills certification seems to increase wage employment in Ethiopia (Abebe, Buehren, and Goldstein 2020). In Ghana, an apprenticeship placement program connecting unemployed youth with placement in small firms has been effective in expanding employment (Hardy and McCasland 2023). Enhance legal certainty for firms and farms, promote competition, adopt gender-equal labor laws, and ensure strong macro-fiscal frameworks Strong institutions for enforcing contracts that are tailored to meet the needs of small firms and farms can facilitate market transactions and investments by firms and farms. Although almost all countries in the region have adopted laws governing competition, enforcing these laws, along with reassessing state involvement in competitive markets and governance arrangements to minimize distortive impacts, will help enhance market access. In addition, legal reforms that remove institutional barriers to women’s economic participation can reduce gender differences in labor market outcomes. Recently, Côte d’Ivoire and Gabon, for example, removed legal restrictions on women’s employment. Adequate macro-fiscal frameworks promote market confidence. The policies discussed here are critical for creating a level playing field for firms and farms and for forging new pathways for people to grow their income. Low and inefficient tax and spending hamper African governments’ ability to level the playing field Fiscal policy, through taxes, subsidies, and social spending, is a powerful weapon in the fight against poverty and inequality. Although the combination of tax and spending policies reduces inequality in Africa, high levels of poverty mean that revenue collection is low, limiting fiscal redistribution. In fact, most African households pay far more in taxes than they receive in transfers and subsidies, effectively leaving many households poorer than they would be in the absence of any fiscal intervention. Given the increasingly constrained fiscal environment in the region, this section proposes three policy shifts that could make a real difference in leveling the playing field through fair fiscal policy. Africa’s taxes and spending reduce inequality, but not enough to overcome prefiscal inequality Africa has insufficient fiscal redistribution to overcome its high levels of prefiscal inequality. For instance, Africa has a prefiscal Gini index score of 46, compared with a score of 41, on average, for non-African countries. The high level of prefiscal Overview 29 inequality that this score represents is accompanied, however, by relatively high levels of redistribution (refer to figure O.18). Although higher-income countries redistribute more than lower-income countries worldwide, the average reduction in inequality due to taxes, transfers, and subsidies is larger in Africa than that in countries with comparable income levels outside of the continent. This is especially true in regard to upper-middle-income countries, but it is also true in low-income countries and lower-middle-income countries. For instance, the combination of tax, social assistance, and subsidy policies in Kenya and Tanzania leads to reductions in inequality of 5–7 Gini points compared with a reduction of only 2 points, on average, for lower-middle-income countries outside of Africa. But this redistributive effort is not enough to level the playing field, as prefiscal inequality is much higher in Africa than in other regions. In fact, postfiscal inequality in Africa (that is, inequality after taxes, transfers, and subsidies are considered, as measured by consumable income) is higher than prefiscal inequality in comparable FIGURE O.18 Fiscal redistribution in Africa Gini index (higher values indicate higher levels of inequality) 70 65 60 55 50 45 40 35 30 IC R R IC C IC IC C S S R R LI LI C C M LM M LM N -F -F U U R R d d R R an an N IC IC Non-AFR AFR AFR H H Market income Disposable income Consumable income Sources: Original figure for this publication, using estimates based on data from Data Center on Fiscal Redistribution of the Commitment to Equity Institute at Tulane University (https://commitmentoequity​ .org/datacenter); Organisation for Economic Co-operation and Development; and World Bank. Note: Prefiscal income, or market income, is the sum of labor and capital income. Disposable income is constructed by adding income from direct transfers and discounting the amounts paid in direct taxes given country-specific tax and benefit policies. Consumable income is defined as disposable income plus indirect subsidies, minus indirect taxes paid on consumption. AFR = Sub-Saharan Africa; FCS = fragile and conflict-affected situations; HIC and UMIC = high- and upper-middle-income countries; LIC = low-income countries; LMIC = lower-middle-income countries; NRR = non-resource-rich countries; RR = resource-rich countries. 30 Leveling the Playing Field countries elsewhere in the world. For instance, lower-middle-income countries in Africa have an average postfiscal consumable income Gini index of 43, higher than the average prefiscal Gini index of 34 for the same group of countries outside Africa. This highlights the need to do more to reduce prefiscal inequality across the region. Fragility and conflict also limit Africa’s redistributive capacity. Countries that are affected by fragility, conflict, and violence redistribute much less than countries that are not, regardless of whether they are rich in resources. Resource-rich countries tend to start off with higher levels of prefiscal inequality compared with non-resource-rich countries, but despite their natural wealth, they succeed only in very limited redistribution in an environment of fragility, conflict, and violence. In contrast, countries not affected by these conditions tend to have much higher levels of redistribution, and that redistribution has especially large impacts through the countries’ in-kind spending on education and health care, compared with that in countries affected by fragility, conflict, and violence. Poor households in Africa pay far more in taxes than they receive in cash transfers and subsidies, increasing short-term poverty Although fiscal redistribution reduces inequality in Africa, poverty rates in the region increase after-tax and transfer interventions, even in the region’s high- and middle- income countries, and even more so than in comparable countries in other regions (refer to figure O.19). This occurs because social assistance spending in the region is too small to make up for the impact that indirect taxes have in increasing the prices of goods and services that households consume, even after accounting for the fact that low-income households largely purchase goods in informal markets. Taxes are critical for enabling countries to fund public investment in building the productive capacity of individuals and ensuring that people, firms, and farms have critical public infrastructure in place to maximize their potential. The negative impact of fiscal policies on poverty in Africa points to the need to ensure that efforts to improve domestic revenue mobilization do not increase poverty further. Fiscal redistribution has become increasingly challenging in the context of limited fiscal space Globally, governments have committed to taxing and spending in ways that reduce both inequality and poverty. Sustainable Development Goal 10, promoting reduced inequality, embodies this global commitment. However, sharp increases in public debt worldwide since 2012, combined with steady declines in official development assistance and lower liquidity in international capital markets since mid-2022, have increased costs of external borrowing greatly and limited financing options in Africa (refer to box O.5). Between 2019 and 2021, 25 African countries, nearly half the continent, spent more on interest payments than on health care. Overview 31 FIGURE O.19 Impact of taxes, transfers, and subsidies on poverty Change in poverty rate (percentage points) 6 4 2 0 –2 –4 –6 (2 ) ne (2 ) bi R 4) (2 ) nz a ( IC C en (20 ) G al ( 2) on (20 ) FR ) ) U ue MIC ur uin (2 ) na ea 14) ng (2 ) ) IC (2 ) ôt Be (2 ) ) M No os 23) ) -A au a ( 5) ) ) d’ in 22 Se ire 22 19 18 er 14 -A 14 0 16 a 17 19 16 7 Le ola 15 8 Es nia 015 LI Za nd 17 M g 02 am -A 201 1 on M ibi 01 am oth 201 nd 02 20 at 20 oo (20 0 M 20 ig 20 Fa (20 20 0 0 0 0 0 U L 2 2 ga (2 ( ( ( N o( am a ( ( i o a i F n H us in om a al y ic Ta bi s a C an n or i a fr o q m FR rit oz n h er Iv w A N s K G A h N ki ut e C So B C N HIC and UMIC LMIC LIC Direct taxes and transfers Indirect taxes and subsidies Total increase in poverty Source: Original figure for this publication, using estimates based on data from Data Center on Fiscal Redistribution of the Commitment to Equity Institute at Tulane University (https://commitmentoequity.org​ /datacenter); Organisation for Economic Co-operation and Development; and World Bank. Note: Outlined bars indicate non-AFR countries. The figure combines poverty rates estimated under different purchasing power parity (PPP) thresholds for extreme poverty, given limitations in data availability. The $2.15/ day line at 2017 PPP is used for Angola, Benin, Cameroon, Côte d’Ivoire, Ghana, Guinea, Mauritius, Mozambique, Senegal, Uganda, and Zambia. The $1.90/day line at 2011 PPP is used for Comoros, Eswatini, Kenya, Lesotho, Namibia, South Africa, and Tanzania. The $1.25/day line at 2005 PPP is used for Burkina Faso, Mali, and Niger. Pensions are treated as deferred income in all cases except Burkina Faso, Mali, and Niger, where they are treated as government transfers. HIC and UMIC = high- and upper-middle-income countries; LIC = low-income countries; LMIC = lower-middle-income countries; AFR = Sub-Saharan Africa. To the extent that many countries have large debt repayments coming due in the near future, they face growing pressure to undertake fiscal consolidation and, in some cases, seek debt restructuring. In the constrained fiscal environment that these pressures create, greater equity and efficiency in tax and spending policies will be paramount, while the design of policies aimed at domestic resource mobilization must guard against placing an undue burden on the poor. 32 Leveling the Playing Field BOX O.5 Poverty and inequality influencers: Debt Africa’s debt burden weighs heavily on its ability to spend money on basic public services that can help households escape the poverty trap. General government gross debt in Africa jumped from 29 percent of gross domestic product (GDP) in 2012 to 53 percent of GDP in 2019. It reached 57 percent of GDP at the height of the pandemic (2020–21) and continued rising to 61 percent in 2023. In that year, median public debt for low- and middle-income countries in the region reached 60 percent of GDP and 61 percent of GDP, respectively (IMF 2023; World Bank 2022). At the same time there has been a shift toward nonconcessional financing under less generous terms. This increases the vulnerability of borrowers to shocks, such as those arising from climate change and conflict, and raises their risk of debt distress. According to the International Monetary Fund–World Bank Debt Sustainability Framework for Low-Income Countries, the share of countries in the region at high risk of debt distress expanded from 19 percent in 2015 to 32 percent in 2023. Over the past decade, nearly two-thirds of market-access countries in the region and about one-third of low-income countries have tapped into international markets. In 2018 and 2019, African countries had record international bond issuances of about $30 billion each year. On average, sovereign credit ratings in the region deteriorated after 2018, meaning that African countries gained access to these international markets amid worsening creditworthiness. Rising debt service ratios, at a staggering 47 percent of revenues and 31 percent of exports in the region in 2023 (based on data from IMF 2023), are depleting the resources available to support public investments and social programs. Several countries have resorted to debt restructuring. As a result, the region’s room to maneuver on spending and poverty reduction remains limited. Policy portals can be opened to better redistribution Four policy shifts could make a real difference and help level the playing field through fair fiscal policy. The first is shifting away from subsidies. The second is to strengthen social safety nets. The third is a shift toward more progressive taxation. In the poorest and most fragile countries, however, this will not be enough. Here international development assistance will continue to play a critical role in poverty reduction. The fourth is a shift toward improving the efficiency and effectiveness of taxes and spending. Shift away from subsidies African governments spend a substantial share of their budgets on subsidies for energy and other consumables. Consumer price subsidies can be enacted relatively easily, without the need to establish complex delivery systems. As such, they are often the tool of choice when a shock hits. Energy subsidies largely benefit higher-income households, Overview 33 however, either because these households consume more or because they have greater access to energy-intensive assets and services. In fact, less than 20 percent of spending on energy subsidies typically benefits the poorest 40 percent of the distribution in African countries (refer to figure O.20). As such, subsidies are inefficient at reducing poverty and inequality. Moreover, fossil fuel subsidies contribute to global warming and pollution. Similarly, fertilizer subsidies are inefficient because they do not necessarily lead to higher agricultural productivity and are not always targeted toward the poor (Goyal and Nash 2017). This is because crops usually respond little to nitrogen application because smallholder farmers are often unable to use fertilizer efficiently and profitably on account of low water availability and poor soil, chronically late deliveries of fertilizer, poor management practices, and insufficient complementary inputs, including extension services. Corruption, elite capture, and resale of government-provided fertilizer for profit also limit the efficiency of fertilizer subsidies. Nonetheless, removing energy and fertilizer subsidies still hurts the poor. Fuel and fertilizer subsidies make up a nontrivial share of budgets of households at the bottom of the income distribution, so removing them makes the poor worse off, even though most of the benefits go to high-income households. For instance, simulations for seven African countries show that removing energy subsidies in these countries would reduce inequality but increase poverty (refer to figure O.21). Therefore, compensatory measures are critical to cushion the impact of removing such subsidies. FIGURE O.20 Share of total subsidy expenditures, by income Benin (2019) Botswana (2010) Burkina Faso (2014) Côte d’Ivoire (2015) Ethiopia (2016) Gambia, The (2016) Ghana (2012) Guinea (2019) Mali (2014) Namibia (2016) Niger (2014) Senegal (2019) Tanzania (2018) Togo (2015) Uganda (2016) Zambia (2015) 0 20 40 60 80 100 Share of subsidy expenditures (percent) Poorest 40% Middle 40% Richest 20% Source: Original figure for this publication, using estimates based on data from Data Center on Fiscal Redistribution of the Commitment to Equity Institute at Tulane University (https://commitmentoequity.org/datacenter); Organisation for Economic Co-operation and Development; and World Bank. 34 Leveling the Playing Field FIGURE O.21 Effects of removing energy subsidies on poverty and inequality, by compensation measure a. Change in poverty rate (percentage points) b. Change in inequality (points on Gini index) Kenya 0.0 Kenya 0.0 Guinea 0.3 Guinea –0.1 Benin 0.4 Benin –0.1 Senegal 0.6 Senegal –0.2 Côte d'Ivoire 1.5 Côte d'Ivoire –0.3 Angola 2.1 Angola –0.5 Cameroon 2.5 Cameroon –0.4 –5 –4 –3 –2 –1 0 1 2 3 –4 –3 –2 –1 0 Percentage points Gini points Increase in coverage and benefit amount of cash transfer Increase in coverage of cash transfer UBI Public student transfer No compensation Source: Original figure for this publication, using estimates based on fiscal microsimulation models for each country. Note: The dashed line indicates 0. The figure shows the change in poverty (panel a) and inequality (panel b) resulting from a change in consumable income under five different simulations. In panel a, the poverty line is defined as $3.65/day at 2017 purchasing power parity. UBI = universal basic income. Removing subsidies and shifting the corresponding spending toward strengthening social safety nets or school feeding programs would be more efficient, enhance equity, and curb the impact of fossil fuel and fertilizer consumption on the world’s climate. For instance, figure O.21 shows that using even half of the potential savings from the removal of energy subsidies for compensatory programs would decrease poverty and inequality. To successfully manage such a shift, however, governments must show consumers what they are gaining from compensation policies in return for giving up subsidies. Strengthen social safety nets Globally, direct transfers, as part of strong social safety nets, have a significantly larger impact on the income of the poor than subsidies. In Africa, social assistance is limited, even when it is well targeted. Important exceptions are the high- and upper-middle- income countries in Southern Africa, where targeted direct transfers make up a very large share of household income for the poorest. However, outside of Southern Africa, social assistance payments tend to be small and on a small scale. Social safety nets cover only a small share of the region’s poor: less than 50 percent of the poorest quintile of the population in most countries (refer to figure O.22). Coverage of the poorest quintile is even lower in countries with higher Overview 35 FIGURE O.22 Social safety net coverage for the poorest quintile, by country Coverage of social safety net programs in poorest quintile (percent of population) 100 Eswatini 90 South Africa Lesotho 80 70 Botswana 60 Zimbabwe Mauritius Gabon Burkina Faso Malawi 50 Namibia Mauritania 40 Ghana Ethiopia Kenya 30 Côte d'Ivoire Nigeria Sierra Leone 20 Liberia Niger Mozambique Angola 10 The Gambia Tanzania Uganda Zambia 0 10 20 30 40 50 60 70 80 90 Poverty headcount rate ($2.15 per day at 2017 PPP) Source: Original figure for this publication based on Atlas of Social Protection Indicators of Resilience and Equity (ASPIRE) database (https://www.worldbank.org/en/data/datatopics/aspire), using data for 2011–19. Note: The dotted line indicates the correlation between the poverty headcount rate and the coverage of social safety net programs among the poorest quintile in each country. PPP = purchasing power parity. poverty rates. Moreover, cash transfer programs in the region offer only a very low benefit amount. According to the World Bank’s World Development Indicators, over 2011–19, low- and lower-middle-income countries in Africa provided an average daily cash transfer of less than $0.25 per capita (at 2011 PPP); upper-middle-income countries distributed less than $2 a day. For these reasons, outside of Southern Africa, direct transfers do not have a meaningful impact on the income of most African households, making up less than 3 percent of prefiscal incomes among those at the bottom of the income distribution. This is why compensation policies using the existing cash transfer programs simulated in figure O.21 resulted in lower reductions in poverty in some cases than a hypothetical universal basic income or transfers to public school students. The fact is that current social assistance programs have very low benefits or are too narrow to fully compensate the poor. Adaptive social protection schemes, which can flexibly adjust the amount of cash transfers that programs distribute, their coverage, and their targeting based on circumstances, are particularly potent in helping the poor cope with shocks. Through the provision of transfers and services directly to households affected by shocks, 36 Leveling the Playing Field these schemes can support vulnerable households in preparing for, coping with, and adapting to shocks, thus averting long-term scarring. School feeding programs can also serve as a critical safety net and have been shown to improve the nutrition of beneficiaries, increase children’s height and weight significantly, boost enrollment, and significantly raise rates of school attendance (Wang et al. 2021; World Food Programme 2021). Critically, these programs are a lifeline in times of crises, preventing negative coping strategies, as nutritious meals reduce anemia and stunting while increasing immunity, particularly for girls and for vulnerable children. Shift toward progressive taxation Africa’s low-income countries would find it challenging to redistribute more than they currently do, given their low revenue collection, reflective of the small size of their economies. However, the region’s middle-income countries and some of those that are resource rich could tax the nonpoor at reasonable rates and thereby raise domestic revenue to close the poverty gap. For example, closing the poverty gap would imply a marginal income tax rate of less than 10 percent among the nonpoor population in 13 of the 19 lower-middle-income countries in the region for which data are available. It would amount to a marginal tax rate of less than 2 percent in the 5 upper-middle-income countries for which there are data. Similarly, 5 resource-rich African countries (Angola, Botswana, the Republic of Congo, Gabon, and Mauritania) could close their poverty gaps with a direct transfer of 15 percent (or less) of government natural resource revenue. More generally, there is room to improve the progressivity of tax revenue in the region, focusing on three areas: tax expenditures, property taxes, and improving compliance among high-revenue individuals and firms. Examine tax breaks. It is worth looking more closely at tax breaks for (or tax expenditures on) individuals and firms that might harm rather than help achieve greater equity. Tax expenditures through exemptions, allowances, deductions, and reduced rates are substantial in Africa. Although information is patchy, recent efforts to build a global tax expenditure database, based on government-reported data, demonstrate the potential for additional revenue mobilization in the region. Tax expenditures amounted to an average of 15.6 percent of revenue in Africa in 2021, based on data for 22 African countries. About three-quarters of these tax expenditures were foregone revenue from taxes on goods and services, and nearly half were from foregone value added taxes (VATs), largely in the form of exemptions. VAT exemptions and reduced tax rates on nonfood products do not substantially reduce poverty and drain already-stretched government budgets. This is a significant point, because the richest households benefit most from VAT exemptions, simply because they consume the most. As such, VAT expenditures are very costly, have limited impact on poverty, and exacerbate inequality. As in the case of energy subsidies, eliminating these exemptions and protecting the poor through direct transfers would go a long way in raising revenue while reducing poverty and inequality. Overview 37 Another 12 percent of tax expenditures in the region arose from foregone revenue from taxes on income, of which three-quarters was for corporate income tax expenditures, largely in the form of deductions (as opposed to exemptions). Governments could reduce foregone revenue by decreasing tax incentives offered to corporations. Examine property tax. Governments can take a closer look at the potential to raise revenue through property taxes. Recent country studies from the Democratic Republic of Congo (Balan et al. 2020), Ghana (Dzansi et al. 2022), Senegal (Knebelmann 2021), and Uganda (Regan and Manwaring 2023) show that property tax collection remains at 10–20 percent of potential in most African cities. Technology can help, as local government officials often underestimate the value of the wealthiest properties (Knebelmann, Pouliquen, and Sarr 2023). Improve compliance at the top. Direct taxes, primarily personal income taxes, reduce inequality, because those with high incomes are almost exclusively the ones who pay them. Increasing compliance with corporate income taxes among large firms and personal income taxes among rich individuals is a promising path to raising tax revenue and reducing inequality. In resource-rich countries, tax instruments should allow governments to benefit from high commodity prices or be directly linked to the profitability of the commodities sector or both. Extractive industries that are bad for the environment should be taxed appropriately. For small and medium firms with very low sales and profits, some design features of simplified tax regimes, such as tax-free thresholds, can minimize the impact on their employees, who are often the working poor. Furthermore, cooperation among governments in the region could reduce tax evasion among multinational firms, and greater harmonization of revenue collection strategies could help minimize the risk of a “race to the bottom” among countries. It is important to note, however, that substantial improvements in tax enforcement, when not accompanied by improved social spending and greater service delivery, can increase poverty and inequality. Shift to greater efficiency and effectiveness Finally, governments can improve the efficiency and effectiveness of their spending, thus contributing to greater debt sustainability. Reallocating government spending to sectors that are critical for the poor—such as agriculture; water, sanitation, and hygiene; education; health care; and social safety nets—would make an important difference in governments’ ability to level the playing field. Better management and planning of expenditures can also make a real difference. Africa lags other regions on standard public financial management indicators (refer to figure O.23). Improved management of public expenditures and debt can free up money to be spent on the poor. Better financial planning can also help governments respond effectively and efficiently in times of crisis. In particular, developing a disaster risk management strategy is critical to ensuring a timely and efficient response in countries that are heavily exposed to climate-change-related shocks. 38 Leveling the Playing Field FIGURE O.23 Public financial management indicators, 2022 External audit and scrutiny Accountability and reporting Predictability and control in budget execution Policy-based fiscal strategy and budgeting Management of assets and liabilities Transparency of public finances Budget reliability 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Performance index, 0 (lowest) to 4 (highest) AFR (n = 31) SAR (n = 5) EAP (n = 14) LAC (n = 15) MNA (n = 5) ECA (n = 10) Source: Public Expenditure and Financial Accountability program. Note: AFR = Sub-Saharan Africa; EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MNA = Middle East and North Africa; SAR = South Asia. It is possible to level the playing field and accelerate poverty reduction Africa must act. More than half the world’s extremely poor live in Africa. Among all regions, Africa’s average per capita consumption remains furthest from the prosperity line of $25 per day (2017 PPP), despite some progress over the past 30 years. And consumption remains concentrated among a few: despite progress, more than half (25 of 47) of the countries in the region for which data on consumption inequality are available have Gini indices higher than 40, making the countries highly unequal, based on a new global benchmark adopted by the World Bank for monitoring countries with high levels of inequality.3 In sum, the pace of poverty reduction has stalled in the past decade while inequality has persisted. Three factors make this the right time to act. Africa has access to the talent potential of the 8–11 million youths expected to enter the labor market every year between 2020 and 2050. The region’s large number of resource-rich countries have a valuable source of revenue mobilization in mineral endowments, including green minerals, that are in high demand to support a global clean energy transition. As a region that has been the home of leapfrog innovations like mobile money and digital platforms, Africa can leverage digital infrastructure to bring knowledge, information, and services to people, firms, and farms, particularly those located far from capital cities. For instance, the laying down of submarine cables that brought high-speed internet access to Africa improved labor market outcomes for workers with high levels of education, as well as those with low ones, in 12 African countries studied (Hjort and Poulsen 2019). Overview 39 What actions will accelerate poverty reduction? The answer lies in leveling the playing field by tackling the drivers of structural inequalities. These drivers shape which individuals get a good education, own assets, or have access to basic services like water, sanitation, and electricity. Sources of structural inequalities also play out during the production process, through distortions that curb access to markets and opportunities, reducing good earning opportunities for workers, lowering productivity and profitability for businesses and farms, and ultimately slowing growth for economies. Sources of structural income inequalities have many root causes. These causes include inadequate and inequitable public investments that limit access to education, health care, roads, and electricity. They include market failures that lead to poor access to credit for small and medium businesses and microenterprises. They also include differential exposure to high and uninsurable risks, such as those arising from conflict and climate change. Together they constitute a series of inequities that weaken Africa’s ability to accelerate poverty reduction and achieve sustainable and steady growth. An unlevel playing field that creates structural inequality is not inevitable, as the development path of several countries demonstrates. In a context of a challenging growth and debt outlook, however, business-as-usual responses will not be sufficient to create a level one. Policies that promote the economic potential of everyone, irrespective of background, can replace rules and barriers that create or worsen structural inequalities. These policies include investments to universalize access to quality basic education, health care, and training that promotes skills. They also include policies that create a level playing field and ensure that workers, firms, and farms maximize their productive potential, promoting widespread access to good jobs and earning opportunities. More efficient and effective tax and transfer policies are also required. Learn from successful episodes around the world Six countries on three continents have achieved three remarkable goals in the past three decades, all based on policies that have, in one way or another, addressed structural inequalities (refer to box O.6). In all cases, episodes of success have been characterized by large declines in extreme poverty and increases in GDP per capita, while reducing inequality or keeping it in check. These countries have achieved their successes by promoting productive capacity, striving to make the most of everyone’s economic potential. In the course of their successes, human development improved. Agricultural productivity was strengthened. Export-oriented manufacturing grew. Some countries that have had successful episodes are rich in resources, including the oil exporters Colombia and Ghana. Other countries that are not resource rich, including Bangladesh, Kenya, and Viet Nam, have trodden similar paths, however. Moreover, some countries have done so while emerging from conflict and with institutions that were fragile, such as Colombia and Ethiopia. Although each country has charted its own course, there are three common denominators. 40 Leveling the Playing Field BOX O.6 Successful poverty reduction episodes in six countries In Bangladesh, extreme poverty ($2.15 per day, 2017 purchasing power parity) fell from more than 40 percent in 1991 to 5 percent in 2022, with no increase in inequality (its Gini index remained about 33) and with growth in per capita gross domestic product (GDP) rising from 1.5 percent (1991) to 6.7 percent (2019). Colombia cut extreme poverty almost in half, from 14.8 percent to 8.1 percent, between 2004 and 2014; reduced inequality (its Gini index for income fell from 57.2 in 2002 to 50.8 in 2017); and increased growth of per capita GDP from 0.9 percent (2002) to 3.5 percent (2014). Ethiopia’s extreme poverty rate fell from a high of 69 percent in 1995 to 27 percent in 2015, alongside a decline in inequality (its Gini index fell from 44 to 35) and an acceleration of growth in GDP per capita from 2.7 percent (1995) to 7.5 percent (2015). Ghana more than halved its rate of extreme poverty, from 55 percent in 1998 to 25.2 percent in 2016; the decrease was accompanied by a moderate increase in inequality (its Gini index rose from 40.1 to 43.5) and an acceleration of growth in per capita GDP from 2.2 percent (1998) to 11 percent (2011) before falling back to 1 percent (2016). Kenya experienced a successful episode between 2005 and 2015, during which its extreme poverty rate fell from 36.7 percent to 29.4 percent, inequality in the country declined (its Gini index fell from 46.5 to 40.8), and its rate of growth in per capita GDP rose from 2.8 percent (2005) to 5.1 percent (2010) before falling back to 2.8 percent (2015). Viet Nam essentially eradicated extreme poverty between 1993 and 2022 (extreme poverty fell from 45 percent in 1993 to 1 percent in 2022). The country did not experience a significant increase in income inequality over this period (its Gini index remained close to 36), with high and sustained rates of growth in GDP per capita (6 percent in 1993 and 7.3 percent in 2022). Sustaining progress in the pace of poverty reduction and growth is difficult, and all six of these countries have experienced headwinds in recent years owing to a mix of factors, including COVID-19. As of 2024, Ethiopia, Ghana, and Kenya were grappling with high levels of sovereign debt that have undone some of their past success and weakened the link between growth and the pace of poverty reduction. During such reversals, it is important for countries to keep pursuing policies that level the playing field and expand people’s opportunities. First, these countries have built the productive capacities of their children and youth. Each country has sought to provide universal access to opportunities for human development, including education, sanitation, roads, and electricity. In Bangladesh, nongovernmental organizations joined the government in promoting social services to communities, generating remarkable progress on the country’s human development indicators. Improvements in schooling reduced inequalities between boys and girls and rich and poor. Viet Nam widened access to primary education and health care, while investing extensively in paved roads, electricity, piped water, and sanitation. It made great progress in reducing child mortality and child stunting. It did so, in part, by expanding health care, targeting women and children’s health, and promoting family Overview 41 planning. Ethiopia expanded access to land user rights, helping to promote investment in agriculture. Although the state owns all land, elected councils have issued user certificates to both women and men. Second, these countries have invested to promote agricultural productivity, create manufacturing jobs, and connect farms and firms to customers, expanding access to good earning opportunities. All have been successful in boosting farm output and productivity through a mix of government-led investments alongside market-oriented reforms. In Ethiopia, public investments in rural roads increased agricultural income. Market-friendly financial products, like microfinance in Bangladesh and mobile money in Kenya, boosted financial inclusion and households’ ability to cope with shocks. FDI and effective transport and logistics created job opportunities for low-skilled workers, such as those in manufacturing in Bangladesh and Viet Nam and in cut flowers in Colombia, Ethiopia, and Kenya. Bangladesh and Viet Nam are well known for their success in creating nonagricultural, labor-intensive wage employment opportunities for workers in manufacturing by becoming attractive destinations for FDI. Moreover, Bangladesh’s reforms in the 1990s paved the way for greater private sector participation in trade, finance, and land ownership. Structural improvements between the early 1990s and mid-2000s provided a strong impetus for the rapid expansion of export-oriented, labor-intensive industries producing ready-made garments. A shift of workers from agriculture to industry and services and from rural to urban areas accompanied strong nonagricultural job creation. Women’s employment increased at a faster pace than men’s and brought millions of women into the workforce, boosting women’s economic power. Third, these countries have ensured macroeconomic stability and coupled it with spending on productive capacities. Colombia stands out for its success in harnessing revenue to expand access to education and health care as it emerged from more than half a century of conflict. It pressed forward with structural reforms at a time when it was enjoying an oil boom. The country used revenues from oil production (3.3 percent of GDP in 2013) and higher economic growth, combined with a series of tax reforms, to expand public spending on universal access to health care and education. General government spending on health care increased to 5.1 percent of GDP by 2014; government spending on education represented 4.6 percent of GDP that same year. Improved human development accompanied this increased spending. By 2017, a year after a landmark peace deal, Colombia achieved almost universal health care coverage. The average number of years of education among its citizens also rose from 6.8 to 8 between 2005 and 2015 (World Bank 2019; World Bank Group 2018). Root out the drivers of structural inequalities The right policies can root out structural inequalities to level the playing field for people, firms, and farms (refer to table O.2). 42 Leveling the Playing Field TABLE O.2 Policy matrix: Promoting growth and poverty reduction by reducing structural inequalities Stage 1: Build productive Stage 2: Grow better jobs Stage 3: Apply fair fiscal capacity and earning opportunities policy Economic • Promote macro-fiscal stability. and • Adopt institutions that enhance institutional the contestability of the foundations decision-making process. People • Invest in expanding and • Facilitate low-income workers’ • Implement progressive universalizing health care job searches (job certification personal income and and education (focus on programs). property taxes. early-childhood • Build capacity through training • Eliminate exemptions to and interventions and girls). for business owners and reduced rates on value- • Target underserved farmers. added taxes. populations and regions • Facilitate female work through • Strengthen adaptive social when investing in basic gender-equal labor laws and safety nets. (resilient) infrastructure provision of childcare services. • Consider school feeding (water, sanitation, or programs to reach vulnerable electricity). children. • Invest in early warning systems to warn against natural disasters. Firms and • Invest in skills-building • Create policies to facilitate • Tax extractive industries. farms and technical and asset-based microfinance, supply • Eliminate energy subsidies. vocational education chain financing, and other • Repurpose agricultural programs. Focus on market-based financial products subsidies toward public women and youth. for small firms and farms. goods. • Eliminate regulatory • Connect firms and farms to • Implement tax-free barriers to land or asset markets by investing in building thresholds for small and registration and property and maintenance of spatially medium enterprises. rights. Focus on women. connective infrastructure (rural • Encourage investments by roads and transport and digital smallholders in natural and mobile connectivity). capital (tree planting and • Promote smallholder adoption soil and forest of agriculture technology (by conservation). providing climate information, as well as using other methods) through multisectoral or integrated packages. • Adopt multisectoral policies to foster participation in agricultural or global value chains. (continued) Overview 43 TABLE O.2 Policy matrix: Promoting growth and poverty reduction by reducing structural inequalities (continued) Stage 1: Build productive Stage 2: Grow better jobs Stage 3: Apply fair fiscal capacity and earning opportunities policy State • Improve service delivery • Enforce financial consumer • Increase tax compliance, effectiveness for all; develop shock- protection laws to protect small particularly among high- resilient delivery plans, borrowers. income taxpayers. particularly for those in • Design and enforce inclusive • Improve public expenditures underserved locations. market institutions (contract and debt management. • Strengthen local capacity enforcement, competition, and • Adopt sovereign disaster risk to deliver services. justice). management practices to • Adopt and enforce labor protect vulnerable groups. standards in firms, particularly • Promote regional those that are part of global cooperation on taxation of value chains. extractive industries and multinational firms. Source: Original table for this publication. Policies are not made or put into practice in a vacuum. They are created in a complex world in which individuals and groups with unequal power interact within changing rules as they pursue conflicting interests. Exclusion, state capture, and clientelism lead to imbalances of power. This, in turn, creates structural inequalities and can lead to conflict and fragility. Strong institutions are thus vital to ensuring economic stability and to delivering vital public services. Governments have at least four pathways for promoting growth and poverty reduction by tackling structural inequalities at all stages of the production process. The first pathway is fostering strong economic and institutional foundations. It is impossible to imagine progress on poverty reduction without macroeconomic stability. In fact, evidence from economic crises during the 1980s and 1990s shows that the number of people living in poverty increased by as much as 25 percent during large contractions in output (Farah-Yacoub et al. 2022). Similarly, it is difficult to imagine progress on poverty reduction without strong institutional foundations. Policy environments that shift the incentives of those with power in favor of positive development outcomes, along with efforts that enhance the contestability of decision- making processes, can work against power asymmetries to bring about sustainable improvements in poverty. In this light, it is crucial to ensure that the region’s resource- reliant countries have strong institutions in place so that the global shift to clean technologies does not reinforce existing structural inequalities or burden local communities with environmental damage and increased rent seeking or corruption. 44 Leveling the Playing Field The second pathway is using sectoral policies to reduce inequalities in building people’s productive capacity by equalizing opportunities to learn and earn and to strengthen governments’ capacity to deliver basic services. By 2060, Africa will be the only world region with an increasing working-age population. This growing population could contribute to growth and productivity if provided with the right skills and opportunities. The region must continue to expand basic education and health care services, because these have been shown to bring high returns. Targeting basic investments in water, sanitation, and electricity toward underserved populations and regions is likely to bring strong returns, but the suitable modality for reaching these population groups will depend on the context. For example, Kenya expanded electrification considerably, using both on-grid and off-grid solutions. Expanding land registration and securing property rights, as Ethiopia and Rwanda have done, are essential to ensure that people can maximize their access to productive capacity and give them incentives to make climate-smart investments. The third pathway is creating more and better earning opportunities by harnessing policies, institutions, and regulations that remove market distortions and reduce inequalities in using people’s productive capacities in firms and on farms. Facilitating workers’ job searches through skills certification can be effective, as studies from urban Ethiopia and other countries show (Abebe et al. 2021; Caria et al. 2024). For women, access to affordable and easy to access childcare services can additionally improve employment outcomes (Ahmed et al. 2023). Training farmers and business owners can help them overcome disadvantages arising from low levels of education, as evidence from training programs studied in several countries such as Kenya and Niger has demonstrated (Aker and Jack 2021; McKenzie and Puerto 2021). Gender-equal labor laws are important for leveling the playing field for women; recently, Côte d’Ivoire, Gabon, and Togo removed legal restrictions on women’s economic participation. And given the region’s geography, improved connectivity (via rural roads or digital technology) is crucial to help firms and farms connect to markets and customers. The region stands to gain significantly if the goal of regional integration through the African Continental Free Trade Area is realized. Innovative, market-based, and private-sector-led solutions can help deliver finance to small firms and farms without the need for costly, size-based distortions. Supply chain financing and asset-based microfinance are promising innovations in this regard. Governments’ role in creating and enforcing inclusive market institutions is central to the effectiveness of policies that support these solutions. A suite of economic laws and effective delivery of justice are needed to facilitate market transactions, be they between farmers and input providers or small and medium enterprises and financial institutions, as studies of the impact of judicial capacity from Brazil and India have shown (Lichand and Soares 2014; Rao 2024). And finally, the fourth pathway is better leveraging of fiscal policy to ensure that the drivers of structural inequality do not hold back the potential for redistribution. This requires a progressive strategy for mobilizing domestic revenue that protects the poor and improves the efficiency of spending. On the side of fiscal spending, shifting away from inefficient subsidies toward targeted adaptive social assistance and school feeding Overview 45 programs can significantly increase the redistributive impact of fiscal policies, while at the same time guarding against shocks that can prevent children and youth from reaching their full potential. With respect to firms and farms, policies include reducing tax expenditures, ensuring that taxes are linked to benefits from higher commodity prices, implementing market-based solutions to environmental externalities, and carefully designing simplified tax regimes to protect the vulnerable. State effectiveness includes improving tax administration and compliance, as well as efforts to improve public expenditure management. Successful pursuit of the four pathways calls for an integrative strategy: one that recognizes interlinkages, complementarities, and trade-offs. A study of 27 countries in Africa finds that improving access to roads together with increasing access to grid electricity leads to better employment outcomes in urban areas and a shift to more skilled occupations in rural areas (Abbasi et al. 2022). Integrative and multisectoral strategies are needed that go well beyond current practice. Policies must also be comprehensive, cohesive, and coordinated to achieve the needed progress. For instance, improving access to quality education and other basic services will not be enough if millions of young people entering the workforce each year are unable to find employment that makes maximum use of their skills. Efforts toward women’s financial inclusion will prove insufficient if women face legal barriers to land and asset ownership that can serve as collateral for loans. Similarly, greater trade integration without rural connectivity may risk isolating remote rural areas. Moreover, short-term trade-offs are inevitable to secure a long-term reduction in structural inequalities across Africa. Although policy priorities will depend on country contexts, interlinkages in structural inequalities across the three stages of the income generation process (building productive capacities, growing better job and earning opportunities, and creating fair fiscal policies) mean that careful timing and sequencing of reforms is required. Africa’s countries affected by fragility, conflict, and violence must assign the highest priority to actions that can restore confidence by providing people with security, jobs, and key basic services, particularly in conflict-affected areas. For resource-rich countries not affected by conflict, the priority should be to promote economic diversification to create opportunities for firms and farms to grow and offer better earning opportunities; these countries should use their natural resources to reduce structural inequalities in building productive capacity. They can capitalize on their mineral endowments to drive transformative sustainable growth and economic diversification, as well as local and regional development through value-added processing and manufacturing. Countries that lack resource riches and are not afflicted by conflict can do more to address structural inequalities across all stages of the income generation process. 46 Leveling the Playing Field An unlevel playing field prevents equal and perpetuates unequal access to opportunities and assets and presents major obstacles to economic advancement in Africa. 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In support of this commitment, we leverage electronic publishing options and print-on-demand technology, which is located in regional hubs worldwide. Together, these initiatives enable print runs to be lowered and shipping distances decreased, resulting in reduced paper consumption, chemical use, greenhouse gas emissions, and waste. We follow the recommended standards for paper use set by the Green  Press Initiative. The majority of our books are printed on Forest Stewardship Council (FSC)–certified paper, with nearly all containing 50–100 percent recycled content. The recycled fiber in our book paper is either unbleached or bleached using totally chlorine-free (TCF), processed chlorine-free (PCF), or enhanced elemental ­chlorine-free (EECF) processes. More information about the Bank’s environmental philosophy can be found at http://www.worldbank.org/corporateresponsibility. Structural sources of Africa’s inequality are rooted in laws, institutions, and practices that create advantages for a few but disadvantages for many. They include differences in living standards that come from inherited or unalterable characteristics, such as where people are born and their parents’ education, ethnicity, religion, and gender. They also arise from market and institutional distortions that privilege some firms, farms, and workers to access markets, employment, and opportunities while limiting access for the majority and limiting earning opportunities. Leveling the Playing Field: Addressing Structural Inequalities to Accelerate Poverty Reduction in Africa argues that policies to address high levels of structural inequality in Africa are also at the heart of what is needed to accelerate progress in reducing extreme poverty. There is nothing inevitable about structural inequality. Economies that put up barriers to opportunities can also remove and replace them with policies that create a level playing field. Indeed, across the world, countries where opportunities are distributed more fairly grow faster and have lower poverty incidence. Broadening access to opportunities represents one of Africa’s key prospects for raising productivity and earnings and accelerating poverty reduction. Leveraging the most recent data available for the region, Leveling the Playing Field provides recommendations aimed at improving the productive capacity of the poor, the ability of poor individuals to use their capacities for well-paying job opportunities, and the design of fair fiscal policies. SKU 33719