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From Africa Recovery, Vol.16 #2-3 (September 2002), page 32

African economies show an upturn

But performance remains vulnerable and uneven, reports ECA

Contrary to expectations during this global economic slowdown, African economies grew by a robust 4.3 per cent in 2001, reports the UN Economic Commission for Africa (ECA). This was markedly higher than the 3.5 per cent growth rate in 2000, and made Africa the only developing region to register faster growth last year.

This year, Africa's gross domestic product (GDP) may expand by another 3.4 per cent, reports ECA's Economic Report on Africa 2002, released in July. Even this somewhat slower growth will still be above the continent's average population growth rate (of around 2.6 per cent), translating into continued, though modest, gains in per capita income. In light of the economic recovery in an increasing number of African countries since the mid-1990s, there is solid ground for "cautious optimism" about the continent's medium-term prospects, says ECA.

Leather goods factory in Ethiopia: Peace has helped economic growth.

Photo : ©UNIDO

Forecasts made shortly after the 11 September 2001 terrorist attacks in the US predicted that economic growth in Africa would stagnate because of lower world prices for the primary commodities that Africa exports and reduced private capital flows, including foreign direct investment. Economic activity did slow significantly in all seven of the major industrialized countries, and world trade grew by no more than 2 per cent overall. But this downturn had a less pronounced impact on Africa than expected.

The reasons, according to ECA, were multiple:

-- Oil prices remained lower than in previous years, helping ease pressures on foreign exchange, inflation and public spending in the 42 African countries that import oil.

-- Thanks to favourable rainfall, agricultural output continued to improve across much of Africa.

-- In many countries, better economic management brought lower inflation, improved public revenues and a stronger external financial position.

-- Exports to the US grew more than anticipated.

-- Conflict and insecurity declined in a number of countries, including Burundi, the Democratic Republic of Congo, Eritrea, Ethiopia, Guinea and Sierra Leone.

-- The currency in South Africa -- the continent's largest economy -- depreciated, stimulating exports.

-- Domestic demand rose across Africa, reflecting increases in average per capita incomes, and was buoyed in some countries by more remittances from migrant workers.

Mixed performance

The ECA cautions that such factors should not be overstated. "Many African countries are dependent on international markets, and sharp and sustained deterioration in global conditions will eventually take a toll on the region's economies." That is the main factor influencing ECA's prediction of somewhat slower growth in 2002.

That slowdown will be felt mainly in North Africa, where the largest economies -- Algeria, Egypt and Morocco -- are more closely integrated with global markets than most other countries in Africa (see graph). By contrast, the growth rate in sub-Saharan Africa is projected to rise, from 3.3 per cent last year to 3.7 per cent in 2002. Within sub-Saharan Africa, Central and East Africa performed the best in 2001. West Africa matched the sub-Saharan average, while Southern Africa dipped to a low 2.4 per cent, mainly because of slow growth in South Africa and actual decline in Zimbabwe (see box below).

Overall, the number of African countries with growth rates exceeding 3 per cent increased from 26 in 2000 to 37 in 2001, and may rise to 40 this year. Taking into account average increases in population, 30 African countries achieved per capita income growth above 1.5 per cent in 2001, with another two countries expected to do so this year. This may have positive implications for reducing poverty, ECA notes, but is still much too low to achieve the UN's Millennium Assembly goal of cutting poverty in half by 2015. (That goal appears even more remote in Africa's 33 least developed countries, where a separate study by the UN Conference on Trade and Development points to steadily increasing poverty rates; see "Poverty is worsening in Africa".)

Commodity prices

With Africa so dependent on exports of raw materials, trends in world commodity prices have had a great impact on general economic performance. The drop in oil prices in 2001, following a 56 per cent increase over the two previous years, was good news for Africa's oil-importing countries. It freed up scarce resources for other essential imports and minimized inflationary and other pressures. Meanwhile, Africa's oil exporters were able to sustain growth despite the fall in oil prices, by using revenues earned during the boom of 1999-2000.

Commodity prices in general fell during most of 2001, in line with the strong downturn in global activity. This brought an end to the brief rally in non-oil commodity prices the year before. Africa's terms of trade show no signs of improving.

The ECA points to a couple bright spots. African exports to the US grew considerably, from an average of $1.5 bn a month in 1999 to $2.3 bn a month in 2000. But with the US economy slowing, those levels declined slightly during 2001.

Tourism will remain an important source of foreign earnings. Accounting for more than 11 per cent of sub-Saharan Africa's GDP, the sector is expected to grow by more than 5 per cent a year until at least 2010.

Earnings from merchandise exports brought Africa $133 bn in 2001, significantly up from $106 bn two years earlier. This, combined with debt relief to some countries, has reduced Africa's debt burden. According to ECA estimates, annual debt servicing as a percentage of exports declined from 23.3 per cent in 1998 to 18.9 per cent in 2001. Over the same period, Africa's actual debt stock also fell, from $291 bn to $275 bn.

Simultaneously, however, continuing declines in aid have hurt Africa's financial position. Between 1991 and 1999, ECA reports, total aid to Africa fell by half.

'Emerging markets'

Although private investors shied away from "emerging markets" in other regions of the world after the 11 September attacks, they did not immediately pull out of Africa. In fact, the continent's five major emerging markets -- Algeria, Egypt, Morocco, South Africa and Tunisia -- saw a virtual doubling of private capital inflows between 2000 and 2001, from $4.9 bn to $9.5 bn. In addition, net equity investments jumped from $5.2 bn to $9.3 bn, mainly reflecting large-scale deals in Morocco and South Africa.

Elsewhere in Africa, stock markets had a mixed performance in 2001. Even in the five bigger emerging markets, last year's inflows are likely to be reversed in 2002, as investors become wary of the heightened risks in stock markets across the globe.

Africa's overall share of foreign direct investment (FDI) in developing countries fell from 25 per cent in the early 1970s to just 5 per cent in 2000. However, ECA reports, this average masks some interesting new trends. Several of the smaller industrialized economies -- Canada, Italy, the Netherlands, Norway, Portugal and Spain -- have seen their share of FDI in Africa rise from 10 per cent to 25 per cent, reflecting some diversification away from France, the UK and the US.

Such external factors can have a big impact on Africa. But ultimately, argues the report, "Africa's future depends on how it addresses economic and political governance, resolves civil conflicts and responds to the need for deeper economic and social reforms."

Contrasting fortunes

Why have some African countries performed so much better than others? Sound economic policies and a judicious use of available resources supply part of the answer, says ECA's Economic Report on Africa 2002. Good governance, political leadership and efforts to curb corruption provide another part. By complementing its analysis of overall economic trends in Africa with detailed case studies of seven countries, the report helps highlight such critical issues. Each country's story is unique, and each brings out different aspects of a complex mix of opportunities and obstacles.

South Africa: Africa's largest economy by far weathered the global slowdown better than other emerging market economies, from Asia to Latin America. It borrowed little from abroad, enforced financial sector regulation and boosted exports. But so far, annual growth rates have not been high enough to stem high unemployment. Nevertheless, social spending has increased, especially in education and health, which will strengthen human capital and help sustain growth in the long run.

Zimbabwe: In stark contrast, neighbouring Zimbabwe is doing badly. Its economy contracted by 7.3 per cent in 2001 and is expected to shrink by another 5 per cent this year. About three-quarters of the population is living in poverty. Although poor weather hurt agricultural output, so did the land invasions encouraged by the government. Poor governance and "runaway fiscal spending" also have eroded economic performance, reports ECA. "Zimbabwe faces a crisis of governance that has effectively put a stop to economic progress."

Ethiopia: Since 1992, Ethiopia has had average annual growth rates of 6 per cent, among the highest in Africa. The ECA report attributes this to peace, favourable weather and wide-ranging economic reforms. The national poverty rate has dropped, and child mortality and malnutrition rates have improved.

Kenya: Next door, Kenya realized only 1.8 per cent growth in 2001, continuing a downward slide since the mid-1990s. "For Kenya, the main impediment to development is poor economic governance," says ECA. "Weak infrastructure, widespread corruption, escalating insecurity, poorly managed public resources, and the public sector's inability to deliver services efficiently have undermined development."

Guinea: This small West African country has been making "tremendous progress" in moving from a command to a market economy, ECA reports. However, reform "has been a difficult road," yielding uneven results. The ECA predicts that an end to cross-border conflicts (as a result of wars in neighbouring Liberia and Sierra Leone) should enable Guinea to increase its regional trade.

Nigeria: The giant of West Africa, following the restoration of democracy, achieved growth rates of 3.8 and 4 per cent in 2000 and 2001, respectively. Yet this was too low to significantly increase per capita income, and many Nigerians are still awaiting their "democracy dividend." To fulfill Nigeria's enormous potential, ECA stresses the need to halt the "substantial leakage of public revenue" resulting from mismanagement, political patronage and corruption. Nigeria also should lessen its dependence on oil by investing in economic diversification and human capital development.

Morocco: This North African country achieved an impressive growth rate of 6.5 per cent in 2001, largely thanks to agriculture. Realizing that Morocco's heavy reliance on agriculture makes it vulnerable to weather conditions, the government is seeking to diversify the economy through greater integration into global markets and policies to attract foreign investment.

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