ECONOMIC REPORT ON AFRICA 2003

EXCERPTS FROM THE REPORT

Foreword by ECA Executive Secretary K.Y. Amoako
The Economic Report on Africa 2003 is the fourth in an annual series that reviews the continent's economic performance and near-term prospects. Targeted to African and global policymakers, the reports are meant to stimulate discussion and change.

This year's report builds on the work of the three previous reports in laying out an agenda for Africa based on systematic benchmarking of economic performance. It finds that growth slowed in Africa, to an average of 3.2% in 2002, from 4.3% a year before. That modest performance reflects the slower than expected recovery in world trade, the drought and AIDS in southern and eastern Africa, and the political and armed conflicts in several countries. Even so, well-managed countries, with solid reform agendas and good governance, performed well. Mozambique grew at 12%, among the fastest in Africa. And other well-managed reformers -- Ethiopia, Rwanda, and Uganda -- grew at 6% or more.

This mixed performance underscores the point that stop-go growth in Africa is not conducive to poverty reduction or sustainable improvements in living standards, and that one of the biggest challenges facing African countries is to sustain growth over a long period.

The report also identifies policies that are the best catalysts for sustained growth and development. The main message is that success in accelerating the pace of development will come to countries that maintain fiscal discipline, address deep pockets of poverty, provide opportunities for private entrepreneurs to flourish, and modernize their bureaucracies.

The report continues the innovation of last year's by supplementing the traditional region wide analysis with seven in-depth country studies. Those studies show the strong relationship between poverty and agroclimatic conditions -- that poverty is more severe in rural Africa than in urban Africa. For example, Uganda's solid economic growth has been accompanied by substantial poverty reduction, but within-country disparities are vast and the incidence of poverty is much higher in the north. And in Egypt, one of Africa's emerging modern economies, poverty has declined overall, but it rose in southern Egypt between 1996 and 2000.

Drawing insights from the in-depth country studies, the report sharpens the policy prescriptions, making them much more relevant and practical for policymakers. First, sound economic governance creates an environment that encourages private groups and individuals to take risks, invest capital, and export. Second, governance is the result of strong public institutions -- including the bureaucracies essential for policy formulation and implementation. Another major message: only sound governance can stop poverty from becoming entrenched, investment from dwindling, chronic fiscal deficits from draining and then driving away international resources, and precious human resources from fleeing a country.

Strengthening the rules and institutions to sustain growth is thus central to Africa's quest for sustained long-term development. The issues highlighted in this year's report are central to that quest, but confronting them will require vision and courage -- from African leaders, from the African people, and from all others with a stake in Africa's future.

Excerpts from the report

Commodity prices -- surging

Since the beginning of 2002 commodity prices have recovered remarkably, reflecting a rebound in global economic activity. The World Bank price index for petroleum increased from 84.4 in the fourth quarter of 2001 to 117.7 in the third quarter of 2002, while the index for non-energy commodities rose from 75 to 84.9. There was also an increase in the index for metals and minerals, from 69.4 to 71.5.

Crude oil prices have been rising since the beginning of 2002 despite weak world oil demand and ample supplies. Cocoa prices, which have generally increased since 2000, surged in 2002 because of declining supply and the fact that in July, Armajaro -- a U.K. trading company -- bought vast quantities of cocoa at the London International Financial Futures Exchange in an apparent bid to push up prices. In addition, the recent outbreak of political and armed conflict in Côte d'Ivoire -- the world's largest producer of cocoa, with approximately 40% of global output -- generated concerns about the stability of global cocoa supply and resulted in cocoa prices hitting a 17-year high in October. The average annual price of cocoa increased from 90.6 cents per kilogram in 2000 to 169.9 cents per kilogram in 2002.

The prices of tea and coffee have generally been on the decline since 2000, due to oversupply and high stocks. But the price of tea picked up slightly in the beginning of 2002. Gold prices increased from $278 per troy ounce in the fourth quarter of 2001 to $314 in the third quarter of 2002.

Foreign direct investment -- still on the decline

African countries have the highest rate of return on investment in the world -- four times more than in the G-7 countries, twice more than in Asia, and two-thirds more than in Latin America. Despite this fact, and the improvements in the macroeconomic policy environment since the mid-1990s, the region has difficulty attracting foreign investment.

In 2002 world foreign direct investment (FDI) dropped by 27% because of the lower than expected recovery in the global economy and the adverse effects of the corporate auditing and accounting scandals in some advanced countries. In Africa FDI inflows declined by $6 billion, from a peak of $17 billion in 2001. The decline is attributable to the unusual increase in inflows to South Africa and Morocco in 2001 as well as the intensification of political and social conflicts in some African countries, affecting investor sentiments.

Agriculture and food security

Since 2000 there has been a general deterioration in agriculture, reflecting the slowdown in global economic activity and poor weather. Estimates for 2001 suggest that agricultural production grew by a meager 0.8% in Sub-Saharan Africa (excluding South Africa). Although this is better than the 0.3% decline in 2000, it is far below the sector's average growth of 3.9% in 1992-96.

In 2002 unfavourable weather created severe problems. In Kenya flooding due to heavy rains affected about 30,000 people. In Senegal flooding in February killed 500,000 livestock, destroyed 20,000 homes, and damaged 2,500 hectares of crops. In Algeria agricultural output fell by 3.2% in 2002, partly because of flooding in the east in July and August. In Botswana, Ethiopia, Lesotho, Malawi, Mauritania, Namibia, Niger, Swaziland, Tunisia, Zambia, and Zimbabwe drought and generally dry conditions reduced agricultural production. Tunisia's agricultural output declined by 14% in 2002.

Privatization -- still slow and reluctant

As part of efforts to deepen economic reforms and increase private sector involvement in economic activities in Africa, many countries have developed privatization schemes to increase private investment in key public enterprises. Government-run telecommunications companies have been privatized or are being privatized in Tunisia, Ethiopia, Mauritius, and the Central African Republic. State-run agricultural firms have been privatized in Ethiopia and Morocco.

In 2003 privatization efforts are intensifying in Algeria, Ghana, South Africa, and Uganda. But Cameroon, Egypt, Gabon, and Niger are finding it difficult to accelerate the pace of privatization due to concerns about possible outbreaks of violence and resistance by trade unions and other interest groups. Although privatization of public enterprises would eventually increase the overall efficiency of domestic resource use, it has not yet led to more total investment on the continent.

Indeed, the region has privatized only about 40% of its state-owned enterprises. And much of the divestiture has been for smaller, less valuable, often moribund manufacturing, industrial and service concerns. Of the roughly 2,300 privatizations in 1991-2000, only about 66 involved higher value, economically important firms. An additional 92 transactions were in transport, some of which might have been classified as infrastructure. But even if these are included, less than 7% of the sales have touched upper-end infrastructure firms.

Fiscal policy -- stronger fundamentals

Before the late 1990s African governments had a tendency towards excessive fiscal spending. Since then, more countries are showing fiscal restraint and adopting sound macroeconomic policies.

But fiscal profligacy remained a problem in some parts of the region, as evidenced by the countries with fiscal deficits of more than 3% of GDP in 2002: Algeria, Angola, Ghana, Kenya, Malawi, Mauritius, Morocco, Namibia, and Nigeria.

In some countries -- such as Algeria and Nigeria -- the higher deficits were due to government attempts to influence voters and get re-elected. The amended Nigerian budget for 2002 brought a 20% increase in government spending. This boost, in the run up to elections in March 2003, increased the already high inflationary pressure in the economy and is likely to force authorities to tighten their monetary stance in the second half of 2003, with adverse consequences for growth in the short term. In Angola the higher deficits were needed to finance reconstruction after the devastating armed conflict between the government and the UNITA rebels.

Combating HIV/AIDS, malaria, and tuberculosis

HIV/AIDS has reached epidemic proportions in Africa. At the end of 2001 Africa remained the region most severely affected by HIV/AIDS, with an estimated 28.5 million people living with the disease, including an estimated 2.6 million children under 15 (UNAIDS 2002). Africa is the only continent with HIV prevalence higher for women than for men. Of 28.5 million Africans living with HIV/AIDS, 15 million are women. More telling, 83% of the world's women with HIV/AIDS are African. The disease orphaned more than 10 million children in Sub-Saharan Africa by the end of 2001.

Worst affected are Botswana, Central African Republic, Kenya, Lesotho, Malawi, Mozambique, Namibia, Swaziland, Zambia, and Zimbabwe, and the epidemic is also escalating in Cameroon and Côte d'Ivoire. But some African countries have combated HIV/AIDS with interventions aimed at behavioural changes. Adult prevalence rates continue to decline in Senegal and Uganda (UNAIDS 2002).

Sub-Saharan Africa has the highest tuberculosis incidence in the world, contributing to 20% of the global caseload, with an estimated 200 million of about 600 million Africans carrying the tuberculosis bacillus (Nyarko 2001). People who are HIV-positive are more likely to develop active tuberculosis than those HIV-negative (Anderson and Maher 2001). The number of tuberculosis cases in the region is projected to rise to about 4 million new cases per year by 2005.

Modest improvement in growth in 2003

The pace of economic activity is expected to improve next year in all the five subregions. In 2003 growth is projected to be 4.9% in North Africa, 4.4% in East and Central Africa, 3.6% in Southern Africa, and 3.3% in West Africa. North Africa is projected to have the highest growth rate in the region, driven by strong growth in Algeria (5.9%), Sudan (5.7%), Tunisia (5.5%), and Egypt (4.6%). East Africa is projected to have the second highest growth rate in the region, driven by strong growth in Rwanda (6.5%), Uganda (6%), Madagascar (5.5%), Tanzania (5.2%), and the Democratic Republic of Congo (3.8%).

All West African countries -- except Côte d'Ivoire, Guinea-Bissau, Liberia, and Sierra Leone -- are projected to have growth of 3.0% or more in 2003, underpinned in part by an expected improvement in the prices of key commodities exported by the subregion -- notably gold, oil, and cocoa. Guinea-Bissau will grow by a meager 1.5%, and Liberia by 1.6%. Economic activity is expected to pick up in Nigeria, with growth projected at 3.0%. Underpinning the improvement would be an increase in oil revenue if OPEC increases its oil quota. Nigeria has already indicated that it would ask for an increase in its quota, likely to be approved if political tensions between the United States and Iraq continue unabated.

In Southern Africa, growth is expected to increase from 3.3% in 2002 to 3.6% in 2003 reflecting improvements in the prices of key export commodities -- gold, oil, diamonds, and copper. Zimbabwe is expected to have a negative growth rate (-4.6%), explained in part by the political and economic crisis in the country. With an expected growth rate of 10.2% Mozambique will be the fastest growing economy in the subregion, thanks to sound macroeconomic policies and funds from debt relief under the HIPC Initiative. Because of the likelihood that gold and diamond prices will increase, growth is expected to rise in South Africa from 3.0% in 2002 to 3.3% in 2003. With Equatorial Guinea continuing to have very impressive growth of 21.7% and with strong growth in Cameroon and São Tomé and Principe, the Central African subregion is expected to have a slight boost in growth from 4.0% in 2002 to 4.4% in 2003.

Africa Recovery
Room S-955
United Nations
New York, NY 10017 USA

Tel: (212) 963-6857
Fax: (212) 963-4556
Email: africa_recovery@un.org

Website: www.africarecovery.org
Contact us by email: africa_recovery@un.org