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From Africa Recovery, Vol.13#2-3 (September 1999), page 22 (part of special feature on ECA conference "Financing for Development")

Pointing Africa to its future

Recent progress must be sustained, or 'the boom will turn to bust,' says ECA

By Nii K. Bentsi-Enchill, Addis Ababa

First the good news: for the fourth consecutive year, Africa's gross domestic product (GDP) grew faster than its population, meaning a continued rise in the average income of all Africans, according to the Economic Report on Africa, 1999, released in May by the UN Economic Commission for Africa (ECA). This is in marked contrast with the previous 15 years of falling per capita income, and Africa's 3.3 per cent growth in GDP in 1998 (from 2.9 per cent in 1997), was the highest among world regions.

But the continent must grow at 7 per cent a year in order to halve poverty by 2015, the target agreed at the 1995 World Summit on Social Development in Copenhagen. And only three countries (Botswana, Republic of Congo and Equatorial Guinea) grew at 7 per cent or more in 1998. Hence, the bad news: two of every five Africans live in absolute poverty, and their numbers are rising. Also, four-fifths of "low human development countries" -- those with high population growth rates and low income, literacy and life expectancy -- are in Africa.

Although the past four years of solid GDP growth have improved medium-term prospects, Africa remains vulnerable to two variables that are critical to its growth and also beyond its control: the weather and the external economic environment. Good weather cannot be counted on every year, although it has occurred for the last four, and the global economy seems unlikely to improve in the medium term. So, the report says, Africa faces the "formidable" challenge of more than doubling its growth rate and sustaining it at the level necessary to reverse the rising tide of poverty.

However, most African countries -- containing 60 per cent of the continent's population and producing 76 per cent of its GDP last year -- lack the basic structures for sustained growth and poverty reduction, ECA observes. Indeed, only Botswana, Mauritius and South Africa "satisfy the minimal requirements" to maintain growth and to develop. Notable features common to these countries are the high levels of human capital development and economic diversification, and relatively low transaction costs, the report notes.ECA uses a number of different indicators -- including three it created (the Annual Performance Trend Index, the Economic Sustainability Index, and the Economic Policy Stance Index) -- to identify some preconditions for growth. Among its conclusions is that only 11 countries (with 23 per cent of Africa's population) meet the three conducive conditions -- minimal degrees of social and macroeconomic stability, and of allocative efficiency. The data for this finding by the noted economist Paul Collier were from 1996; today, the estimate is down to barely 15 per cent of Africans living in an environment considered minimally adequate for sustainable growth and development. Unsurprisingly, the lowest scoring countries on all the indices are those hit by civil conflict.

Understanding the depth and extent of poverty is a first and necessary -- but not sufficient -- step towards poverty reduction. Consequently, the report presents key policy challenges that each country must tackle in its own national context. And as there is no single formula that guarantees growth and poverty reduction in all African countries, ECA says the report aims to challenge policy makers to respond to their unique circumstances while learning from the experience of others.

Inadequacy of orthodoxy

A central theme of the report is that orthodox macroeconomic policies have recently spurred growth "across an impressive array of African countries," but are "by themselves inadequate to sustain it." Indeed, says ECA, the "key mistake" of the past 20 years "has been the focus on macroeconomic stabilization" while capacity and structural and institutional elements have been neglected. Pursuing the structural adjustment goal of stabilization has meant sacrificing the investment "needed to build the requisite institutions and infrastructure, and to invest in human capital development and retention." Also, policies aiming for both macroeconomic stability and sustainability "have either not been drawn up and adopted, or are not being implemented." These are the urgent tasks at hand, ECA declares, adding that its "ultimate objective is to help focus policy advice on longer-term structural issues while responding to the shorter-term issues and measures that have tended to dominate economic policy discourse."

For the next two decades, ECA says, the critical issues include human and institutional development, diversifying structures, lowering transaction costs, raising competitiveness, taking care of natural resources, and mobilizing resources for development financing. All of these are crucial elements in increasing the capacity of Africa's economies to accelerate and sustain growth to the 7 per cent level required each year to reduce poverty.

Uneven performance

While Africa's overall performance in 1998 was positive, it was also unevenly distributed in several ways. Total output grew in the North and Central African sub-regions, but shrank everywhere else. Growth in the group of oil-exporting countries continued (from 3.6 per cent in 1997 to 3.7 per cent in 1998), but fell in Gabon and Angola. Africa's oil-importers benefited from low oil prices and good weather, progressing from 2.3 per cent in 1997 to 2.9 per cent growth last year. The continent's 33 least developed countries (LDCs) did even better, their output growth rates rising from 2.4 per cent in 1997 to 4.1 per cent. And only two countries (Comoros and Democratic Republic of Congo) had negative GDP growth in 1998 compared with four (Comoros, Democratic Republic of Congo, Republic of Congo, and Morocco) in 1997.

With the recession in emerging markets hitting Africa mainly through depressed commodity prices, all of Africa's exports were affected. Oil, the source of 60 per cent of Africa's foreign revenue, was the worst hit, its prices falling 42 per cent. The continent's total export revenue fell 17 per cent, terms of trade deteriorated by 13 per cent and, for the first time in the 1990s, Africa's trade balance turned negative, the current account deficit reaching $16 bn.

Turning to financial resources, the report notes that total inflows fell from $4.5 bn in 1997 to $3 bn due to lower private flows and bilateral credit. And there are startling figures: net transfers for sub-Saharan countries fell nearly 40 per cent, and Africa's total debt service rose to nearly $36 bn, or 31 per cent of goods and services exports. On a positive note, investment as a percentage of GDP increased from 21 per cent in 1997 to 23 per cent, considerably better than the 1990-97 average of 19 per cent. This was due to higher income levels and lower consumption spending, particularly by governments, which prompted an upturn in domestic savings from 17 to 18 per cent of GDP.

However, says ECA, overall investment remains inadequate and foreign currency too scarce to import needed capital goods. Countering an important part of prevailing orthodoxy, the report argues that among the causes of low investment levels are tight monetary policy, high interest rates and cuts in government spending, particularly in public sector investment. Notably, the report says such investment attracts the private sector, rather than "crowding [it] out."

The sectoral picture

Agriculture and industry should be fuelling Africa's growth at this stage of the continent's development, because they are sectors that produce goods that can be traded, says ECA. Instead, these key sectors have contracted, while, the services sector has grown from 39 to 49 per cent of GDP in the same period, creating a "huge and increasing imbalance." While the public sector has been withdrawing from economic activity, and as market-led resource allocation has been favouring the services sector -- again, one that produces no tradable goods but consumes an "inordinate share" of hard currency earnings -- Africa's exports have become more concentrated on fewer raw materials, worsening the continent's marginalisation in world trade, ECA points out.

Largely due to good weather, the growth rate of agriculture progressed from 1.7 per cent in 1997 to 3.8 per cent in 1998. But if policy reforms improved the availability and distribution of inputs including credit, they also ended subsidies and cut extension services, hurting small farmers. Cuts in donor support for rural development projects and lower investment in rural social services in turn combined to aggravate rural poverty and hamper progress towards food self-sufficiency.

In the industrial sector, growth rates fell from 3.8 per cent in 1997 to 3.2 per cent in 1998. The causes include low productivity, and low investment in the manufacturing sub-sector, where growth fell from 2.5 per cent in 1997 to 2 per cent in 1998. ECA notes that manufacturers producing for the domestic market remain constrained by liberalization measures and the high-cost environment, often leaving them "unable to compete in the home market."

Poverty and investment

Among world regions, Africa has the second most unequal income distribution after Latin America. And of course, even poverty is unequally distributed. Overall, 44 per cent of Africans live below the region-wide poverty line of $39 per capita per month. In North Africa, only 22 per cent are under the poverty line of $54 per capita per month, while 51 per cent of sub-Saharan Africans live below the poverty line of $34 per capita per month. Africa-wide, the average income of the rural poor is $14 per person per month, compared with $27 for the urban poor.

To halve poverty by 2015, Africa's economic growth must reach an annual 7 per cent. But while North Africa and Southern Africa need to grow by 5-6 per cent and Central Africa by 6-7 per cent, West and East Africa need 7-8 per cent growth. In order to propel such growth rates, Africa as a whole needs investment equivalent to 33 per cent of GDP. This level of investment would be financed by domestic savings and by foreign inflows. Current domestic savings rates average about 15 per cent of GDP, and with total official development assistance (ODA) running at some 9 per cent, the residual financing gap is 9 per cent.

But again, financing needs vary greatly among the sub-regions. North Africa needs only about 5 per cent of GDP in external resources to reach the growth target. ODA to the sub-region has averaged about 3 per cent of GDP, leaving a financing gap of about 2 per cent of GDP. In contrast, the Central African sub-region has a residual financing gap of about 27 per cent.

As recent foreign resource inflows have been far short of the volume required, African countries also face the "stark reality" that even as they strive to raise domestic savings rates, they cannot expect significant change in view of the existing low levels of income. Real income remains the most important determinant of savings in Africa, and incomes must rise well above subsistence level before savings can rise. The report gives the sobering example that it would take 18 years of 5.3 per cent GDP growth for sub-Saharan Africa to reach the threshold where further increases in overall income result in higher savings rates. And African governments have "weak institutional capacity to mobilize what has been saved" and "few policy instruments to increase savings in the medium run," ECA observes.

So what can Africa's policy makers do? The ECA report says more effort must go into attracting foreign investment and reducing capital flight. Macroeconomic stabilization, government prudence and fiscal discipline will contribute to increased savings, it adds.

However, the continent seems caught in a vicious circle: it has to create an economic environment of sustained high growth that attracts foreign direct investment (FDI), but also needs FDI to help create that environment and achieve that rate of growth. Similarly, deterrents to FDI inflows -- the underdeveloped workforce and physical infrastructure -- can be reduced through huge investments to develop a more skilled and productive labor force and expand basic infrastructure. Unfortunately, the report affirms, persistently high real interest rates engendered by financial liberalization and volatile exchange rates or rates that do not reflect the true scarcity of foreign exchange tend to distort investment incentives and decisions. It adds that trade liberalization that "confers undue advantage on foreign competitors" has in turn constrained domestic investment.

Another disincentive to foreign investment is the massive flight of capital out of Africa, estimated at $22 bn between 1982 and 1991. By end-1991, the average ratio of capital flight-to-debt was estimated at over 40 per cent for a sample of 18 countries for which data were available. For four countries, the rate exceeded 60 per cent (see graph). Some past and current top African officials are thought to hold much of this capital -- largely the result of rent-seeking and corrupt activities -- in foreign accounts. And while Africa obviously needs these resources for investment, ECA wonders "what African governments can do to obtain the repatriation of those funds, and how the countries in which the accounts are held can be persuaded" to cooperate.

Medium-term outlook

Presenting a very mixed picture, the ECA report says the last four years of good performance provide grounds for optimism. But global economic prospects are uncertain, commodity prices are likely to continue their historical decline, and Africa's resource inflows, "especially from the private sector," will probably stay low. Nevertheless, with continued good weather and some recovery in the global economy, Africa is "poised to attain and sustain" the higher levels of growth required to reduce poverty in the next 15 years.

The report makes a series of observations for policy makers to consider. It notes that when a country's GDP growth is relatively high, it is praised as a "good performer" due to its "sound" policies. But let that country falter and drop out of the list of good performers, and "bad" policies are blamed. Even the publicized "high" performers of today are also at high risk of faltering. And for most African countries "now on the verge of recovery, the capacity to sustain growth and development over time is low," ECA warns. It also affirms that "significant and sustained" economic progress will not be achieved until the continent's economic performance, "affected by wars, droughts, and other temporary conditions -- ceases to be so volatile."

While there is an "emerging consensus" that the pursuit of orthodox macroeconomic stability must not be at the expense of long-term sustainability, "mere recognition of the problem is not equivalent to its solution," the report says dryly. It repeats that the critical task facing Africa's policy makers and development partners is that of devising and implementing policies for both stability and sustainable growth. In a strong conclusion, ECA stresses that the manner and urgency with which this issue is tackled "will determine whether African economies have reached the turning point, or that the...temporary booms will soon turn to bust."

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