From Africa Recovery, Vol.12#2 (November 1998), page 17 (part of special feature on Asia and Africa)

Africa needs greater public investment, UNCTAD argues

Africa's development cannot be left to highly imperfect markets, but must be supported by increased public investment, careful management of exchange rates, the targeting of credit on favourable terms to farmers and small and medium-sized enterprises, and a selective and gradual approach to trade liberalization, argues the UN Conference on Trade and Development (UNCTAD). Focusing extensively on both the Asian financial crisis and the cumulative experience of African development policies, UNCTAD's 1998 Trade and Development Report, released on 16 September, makes a strong appeal for tempering economic liberalization with more effective and far-sighted state action and regulation.

Contrary to some views of the origins of the current Asian crisis, which see it rooted in an outdated "Asian model" of development, UNCTAD believes that it was "the departure from the 'model' rather than its pursuit that is the main cause of the crisis." In several countries, the government relinquished control over the financial sector, leading to imprudent corporate borrowing and over-investment, which in turn left them vulnerable to external runs on their debt and attacks on their currencies.

While Africa's circumstances are different, UNCTAD nevertheless finds that in a number of African countries "the pendulum appears to have swung too far" toward financial market liberalization, bringing increased exchange rate instability. More fundamentally, notes UNCTAD Secretary-General Rubens Ricupero in his introduction to the report, the structural adjustment programmes adopted in many African countries have not brought sustained growth. Most mainstream assessments of Africa's growth prospects have been overly optimistic, he says, "because they have been based on an act of faith in growth-enhancing market forces, rather than on a careful examination of constraints and opportunities."

In particular, the report notes that adjustment has severely constrained imports and led to a sharp decline in investment, which as a share of gross domestic product (GDP) fell from an average of 25 per cent in the 1970s to just 17 per cent in 1995-97. Public investment bore the brunt of this impact, "but private investment has not, as conventional wisdom might suggest, stepped into the breach," the report says. Rather, "private investment requires complementary public investment in physical and human infrastructure." Therefore, UNCTAD argues forcefully for measures to increase such investment, especially in agriculture, alongside a range of other measures to stimulate production, improve export performance and expand trade and investment flows within Africa.

"After a decade or more of reform [in sub-Saharan Africa] premised on the assumption that government failures are far worse than market failures," the report observes, "the need for a different emphasis is now increasingly recognized, stressing the complementarity between the state and the market and promotion of the developmental state."

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