From Africa Recovery, Vol.17 #2 (July 2003), page 21

After slowed growth, rebound lies ahead

ECA finds institutional reform vital for speeding Africa's development

Overall economic growth in Africa fell moderately in 2002, but is likely to recover to around 4.2 per cent this year if weather forecasts and current international trends prevail, reports the UN Economic Commission for Africa (ECA). All five regions of the continent -- Southern, Central, East, West and North -- will probably demonstrate stronger growth this year, compared with just one, Southern Africa, in 2002, notes the ECA's Economic Report on Africa 2003.

There were multiple causes for the decline in the growth rate from 4.3 per cent in 2001 to just 3.2 per cent last year (see graph), the report observes. They included a weaker global economy, the impact of low commodity prices, drought in parts of Southern and East Africa and political and armed conflicts in a number of countries. Four of the five largest economies in Africa -- Algeria, Egypt, Morocco and Nigeria -- experienced slower growth, pulling down the continental average.

Among the large economies, only South Africa improved performance, with a gross domestic product (GDP) that grew by 3.0 per cent in 2002, compared with 2.5 per cent the year before. This was fuelled by increases in the prices of its export commodities, especially gold.

'Risk premiums' and subsidies

Several international trends had a significant impact across the continent. After the downturn in global growth in 2001, there was a recovery in early 2002, but by the end of the year it was weaker than initially anticipated due to a slowdown in the US recovery, declines in equity prices in major markets, economic deterioration in several large Latin American economies and rising "risk premiums" stemming from political instability in the Middle East, including higher oil prices.

World commodity prices for some key African exports, such as cocoa, rose significantly in 2002, but others, including tea and coffee, remained on the decline. Moreover, the ECA observes, the US decision in May 2002 to increase its domestic agricultural subsidies by 67 per cent "doesn't help Africa's prospects. The subsidy will reduce agricultural prices, making it difficult for small African economies to compete."

Such subsidies and other external factors will also pose risks for this year's economic performance. In addition, the continent's high rates of HIV/AIDS infection, widespread poverty and persistent capital flight will hold back economic growth.

Despite such actual or potential obstacles, the ECA considers the prospects for growth in 2003 to be more upbeat than last year. The reasons include:

A reduction in armed conflicts, such as the ceasefire in Angola, cessation of hostilities between Ethiopia and Eritrea, accords between the Democratic Republic of Congo and Rwanda and the resumption of peace talks between the government and southern rebels in Sudan.

An increase in the number of African countries eligible for debt relief, which will free up resources for social expenditure and investment.

Expectations of improved economic growth in most of the world's regions by the third quarter of 2003, which will stimulate economic activity in Africa through increased aid, trade and foreign investment.

Looking at specific regions, the ECA foresees growth of 4.9 per cent in North Africa, 4.4 per cent in East and Central Africa, 3.6 per cent in Southern Africa and 3.3 per cent in West Africa.

'Second generation' reforms

Economic policy continues to be a major influence on performance, the ECA finds. Most African countries have made significant progress in improving their macroeconomic policies. This has contributed to the continent's generally stronger growth over the past decade, compared with the stagnation and decline of the 1980s and early 1990s. But pursuing sound fiscal policies and macroeconomic equilibria are only first steps, the report suggests. To accelerate the pace of development, a "second generation" of reforms is also essential, following those begun under structural adjustment.

These reforms, explains the ECA, are essentially institutional and structural:

-- poverty alleviation and the promotion of social equity

-- contract enforcement, by securing property rights, strengthening legal and judicial systems and creating effective conflict-resolution mechanisms

-- enhancement of policy ownership, by promoting the participation of all stakeholders and building consensus

-- improvement in the quality of public regulation of liberalized economies

-- appropriate policies for developing individual economic sectors

Surveying the policy stances of 35 African countries, the ECA finds that progress in these areas has lagged in far too many African countries. The costs of electricity and transport are restrictively high, corruption adds significantly to the cost of economic activity, and market and institutional development remain weak.

The report, however, also identifies a number of African countries that have made notable progress in at least some of these areas. It singles out the top five: Botswana, South Africa, Mauritius, Namibia and Tunisia. In these countries, "the legal system is more effective at enforcing contracts, laws and regulations are more predictable and transparent, laws and regulations are applied more uniformly, the quality of the civil service is better, and the access to and reliability of telecommunications, transport and electricity are greater." These countries also have made notable efforts to promote women's access to education and health, and to achieve gender equality in employment.

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