From Africa Recovery, Vol.14#3 (October 2000), page 23 (part of article on World Bank report)

Africa needs more aid, not 'hot money' -- UNCTAD

After two decades of structural adjustment, Africa is still caught in a vicious circle. It needs higher savings and investment levels to generate growth, but it does not have the income to raise those levels, according to Mr. Carlos Fortin, deputy secretary-general of the UN Conference on Trade and Development (UNCTAD). So far, the international community has looked toward a combination of aid and private investment flows to Africa to fill the gap, "but this approach is not working," said Mr. Fortin in July, upon releasing a new UNCTAD report, Capital Flows and Growth in Africa. Since private capital tends to follow growth, not lead it, he said, official development assistance to Africa must be significantly increased if the continent is to achieve the kind of growth that eventually will attract foreign investment and make aid less necessary.

UNCTAD estimates that an increase in official flows to Africa to about $20 bn annually, about twice current levels, could boost domestic investment rates to about 22 per cent of gross domestic product. This in turn should help support sustained GDP growth rates of about 6 per cent a year.

While aid will be important, African countries also must overcome the policy errors of recent years, says UNCTAD. Essentially, it notes, "structural adjustment programmes have sought to leave accumulation and growth to market forces without adequate attention to shortcomings in markets, institutions and infrastructure." It proposes "a more active government role than permitted under adjustment programmes."

Governments should guard against unstable short-term capital flows, the report says. Like private capital flows in general, such "hot money" remains relatively minimal in Africa. Yet because financial markets in most African countries are "rather thin," UNCTAD observes, fluctuations in short-term flows still can have a disproportionate impact on currency markets. Africa has not yet experienced the kind of boom-bust cycles that have hit Latin America and East Asia over the past decade, but UNCTAD's analysis nevertheless shows "a significant increase in the instability of both net short-term inflows and outflows during the 1990s compared to the 1980s."

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