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CGD in the News

Why Africa’s Poor Pay High Prices (The Economist)

March 15, 2018

From the article: 

“WE FEEL so hungry,” says Agatha Khasiala, a Kenyan housekeeper, grumbling about the price of meat and fish. She has recently moved in with her daughter because “the cost of everything is very high”. The data back her up. The World Bank publishes rough estimates of price levels in different countries, showing how far a dollar would stretch if converted into local currency. On this measure, Kenya is more expensive than Poland.
This is surprising. The cost of living is generally higher in richer places, a phenomenon best explained by the economists Bela Balassa and Paul Samuelson. They distinguished between goods that can be traded internationally and many services, like hairdressing, that cannot. In rich countries, manufacturing is highly productive, allowing firms to pay high wages and still charge internationally competitive prices. Those high wages also drive up pay in services, which must compete for workers. Since productivity is low in services, high pay translates into high prices, pushing up the overall cost of living.
Among developing economies, however, the relationship between prices and prosperity is less clear-cut. Prices in Chad, for instance, are comparable to those in Malaysia, where incomes are 14 times higher. Fadi Hassan of Trinity College Dublin finds that in the poorest fifth of countries, most of them in Africa, the relationship goes into reverse: penniless places cost more than slightly richer ones. A paper in 2015 from the Centre for Global Development (CGD), an American think-tank, accounts for various factors which could explain differences in prices, including state subsidies, geography and the effects of foreign aid. Even then, African countries are puzzlingly expensive.
One explanation is dodgy statistics. African countries may be richer than they seem. When Nigeria revised its figures in 2014 to start counting industries such as mobile phones, GDP almost doubled. They may also be less pricey than economists reckon, because poor people buy second-hand clothes or grow their own food.
A more intriguing explanation comes from food prices. The relative cost of food, compared with other goods, is higher in poor countries.


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