Africa has much more growth potential than is commonly believed. But the continent needs fresh policies, institutional reform and a swift solution to the debt problem if it is to fully exploit this potential. Other resource-rich developing countries that have grown successfully have not always started from better initial conditions than those prevailing in many African countries. In its Trade and Development Report, 1998 (260 pages) released today, UNCTAD provides an in-depth analysis of the economic situation in Africa. Ways are proposed to achieve a dynamic investment-export nexus that could expand both the production capacity and competitiveness of African economies. The Report argues that structural adjustment programmes in the continent left price-setting to highly imperfect markets and recommends corrective actions. But the single most important step at the international level, it emphasizes, is the rapid removal of the debt overhang based on an independent assessment of debt sustainability.
A false dawn? Hopes of a sustained recovery may be misplaced unless...
Since 1995, Africa has been enjoying positive per capita income growth, after two decades of almost continuous economic decline. The recovery has been fuelled by higher commodity export prices (between 1993 and 1996 prices of non-oil primary commodities rose by 25 per cent), more favourable weather conditions and, in some countries, diminished civil strife. Growth peaked in 1996 at 4.6 per cent, before dropping to 3.3 per cent in 1997. For the current year, a growth rate of 3.7 per cent is expected, but it could be lower since commodity prices may decline further in the wake of the East Asian crisis. This performance should be seen against the target of 6 per cent growth set by the United Nations to reverse the marginalization of the region.
... the international community adequately addresses the external debt problem...
Africa´s external debt burden is crippling long-term growth. Not only does it impede public investment in physical infrastructure and human resources, it also deters private investment, including foreign direct investment. Nearly 80 per cent of Africa’s debt is owed to official creditors, and a good deal of this public debt is simply unpayable. In fact, two-thirds of the increase in debt since 1988 has been due to arrears. By 1996, debt arrears had reached over US$64 billion, over a quarter of the total debt stock.
The recent World Bank/IMF Heavily Indebted Poor Countries Debt Initiative is more comprehensive and equitable and better coordinated than earlier debt initiatives. But UNCTAD says that debt relief for Africa is still insufficient and too slow. Recent trends in official development assistance, which have been falling in real terms in the 1990s, are squeezing debtor countries even tighter and bode ill for the prospects for future investment and growth in the region.
An assessment of the sustainability of African debt by an independent body is urgently needed. Because of possible conflicts of interest, UNCTAD argues, such an assessment cannot be left to creditors alone. The proposed body would be composed of eminent persons experienced in finance and development, appointed by agreement between creditors and debtors, with a commitment by creditors to implement its recommendations swiftly and fully. Such a procedure would be consistent with recognized principles of debt "workouts", and fulfil a major precondition for converting Africa´s recovery into sustained growth.
... and a comprehensive reassessment of policy is undertaken ...
Policy reforms in the region have emphasized macroeconomic stability, a reduced role for the State, greater reliance on market forces and a rapid opening up to international competition as the keys to unlocking the potential for growth. Unfortunately, despite many years of such reforms, adjustment policies do not suffice to explain the recent economic upturn. Indeed, of the 15 countries in the continent identified as "core adjusters" by the World Bank as recently as 1993, only three are today classified by the IMF as "strong performers".
In particular, policy reforms in Africa have failed to bring about what is essential for economic take-off: an investment recovery. The share of investment in GDP currently stands at 17 per cent, down from 25 per cent in the 1970s and well below that of other developing regions. Moreover, because the agents and institutions that are critical to the functioning of a modern market economy have been weak or totally absent, the policy emphasis on removing price distortions has not induced a strong supply response.
The Trade and Development Report details four important reasons why a sustained take-off is not likely to be achieved in the present policy environment:
- Trade policy reforms have been dominated by theoretical notions of non-distortion, to be attained through low and uniform tariffs, rather than by pragmatism. Imports of luxury and other consumer goods often receive the same treatment as imported intermediate and capital goods. This has created difficulties for domestic firms competing against imports as well as for enterprises with export potential.
- Exchange rates have become exceedingly unstable and uncertain because of de facto liberalization of the capital account and the shallowness of domestic markets. This discourages long-term planning and investment, especially in sectors with export potential.
- Agricultural liberalization has not increased the proportion of export prices received by farmers because private traders operating in imperfect and underdeveloped markets have captured most of the benefit. Institutional shortcomings in agriculture have been made even more acute by the dismantling of marketing boards and the discontinuation of their services to farmers.
- Interest rates are high and unstable because financial liberalization has been allowed to take place without first ensuring the conditions for its success. Among the consequences of excessively high interest rates have been fiscal instability, a rapid accumulation of public domestic debt and widespread insolvencies.
... in order to help resolve Africa´s structural constraints.
Major reforms must be implemented if African Governments are to tackle successfully the immense development challenges that confront them. Some of the problems are common to most of the countries of the region, and therefore call for similar policy approaches. Among these are the urgent need for a more efficient, dedicated and better remunerated civil service, and the building of greater trust between the State and private actors in the economy.
Fears associated with the emergence of a dynamic indigenous entrepreneurial class as a rival economic power to ruling elites have to be overcome if a market-based approach to development is to succeed. After a decade of experience with policies premised on the assumption that government failures are far worse than market failures, there is now growing recognition of the need to ensure complementarity between State and market.
Fresh policy thinking should focus on capital accumulation and institutional development under conditions of market imperfection and economic volatility. The successful experience of resource-rich countries in East Asia and Latin America as well as in Africa itself shows that policy requirements at early stages of export promotion are relatively less demanding and can yield rapid results.
The process of capital accumulation in Africa must be strengthened by encouraging the emergence of a strong and dynamic indigenous entrepreneurial class willing to commit resources to development; the provision of sufficient public investment to complement private capital formation; and consolidation of property rights in ways that would encourage private investment.
While recognizing that there is no universally applicable formula, the Report makes the following proposals for African countries:
- Target credit: There is a continuing need for institutional arrangements, including development banks, to channel credit on favourable terms to farmers and small and medium-sized enterprises.
- Regulate interest rates: Given the difficulties associated with ensuring the depth and soundness of financial institutions, it might be prudent to move towards administered interest rates to help check the accumulation of domestic debt and financial instability.
- Manage exchange rates: Since growth must come largely from increased exports, the exchange rate is too important a variable to be left to the whims of shallow and volatile financial markets and the vagaries of capital flows. It requires appropriate regulation and control.
- Adopt selective trade regimes: African countries should take a gradual and differentiated approach to trade liberalization. Trade regimes should be devised in a manner that provides exporters with easy access to inputs at world prices, facilitates investment and discourages luxury consumption. Selective support to industry should be time-bound and closely tied to performance criteria. While WTO agreements have reduced the scope for some policy options in this sphere, most African countries are covered by exemptions under these agreements and may continue to apply selective strategies.
- Expand regional cooperation: In seeking to expand and diversify trade, the possibilities of intra-regional trade and investment flows should be exploited. Even marginal increases in such trade could help develop export capacities. This, in turn, could generate regional growth dynamics by easing balance-of-payments constraints and helping African exporters learn to be competitive globally.
