Taking Africa Seriously: Reduce Poverty

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TAKING AFRICA SERIOUSLY: A Case for Enhanced Resource Flow to Facilitate Development and Reduce Poverty Ernest Aryeetey1 1. INTRODUCTION There are a number of ways in which Africa has been perceived within the context of global development. These have been negative, positive or indifferent. But in the last three decades, most of the discussion of development in Africa throughout the world has been largely negative. Individual countries in the region as well as the entire region have sometimes been described as “basket cases”, both in the popular press and in academic writings. States in Africa have generally been referred to as “predatory”, particularly when compared to the “developmental” states of other regions. Reference to “Banana republics” in the popular press was quite common in the 1970s and 1980s. But more fundamentally, countries in the region dominate the group of “Less Developed Countries” and also the “Least Developed Countries” in view of the widespread nature of poverty. The negative perceptions and descriptions of Africa gained full steam in the 1980s when pictures of starving African children hit the homes of non-Africans, courtesy of international television. The links between famines, starvation and man-made conflict did a lot to worsen the already poor perceptions of Africa and its ability to solve developmental problems. The perception of weak capacity to solve those problems led not only to African states receiving humanitarian support from industrialized states, but groups of individuals in Europe and America were mobilized to generate resources to feed and clothe starving African children and households. Obviously, the fact that the problems were caused by a combination of natural disasters and man-made governance disasters did not help in improving the already poor images of Africans and African states. But by far the strongest negative perceptions of Africa have been reinforced by the growing menace of the HIV/AIDS pandemic. It has contributed to the growing cynicism about Africa’s future in no small way. In that regard, Africa is, in the minds of many people, a doomed place. The positive perceptions of development in Africa have been few and far between. For those few who view Africa with greater optimism, the most positive development in the region in the last two decades has been the greater pluralism in political systems of many countries. The fact that elections have been organized, and these have been contested by more than one party in several countries is seen as a sign of possibly better things to come in Africa. Aside from this, signs that African nations are showing greater interest in the development of functioning markets and greater recognition for private economic agents are viewed with optimism. The number of conflicts appears to have gone down, 1 Institute of Statistical, Social and Economic Research, University of Ghana and Department of Economics, Swarthmore College (2001-2002). 1 and new ones are not erupting as fast as used to be the case. While natural disasters are still present on the continent, these have not shown the same venom in as many places as was the case with the great Sahelian drought of the 1970s or the Ethiopian famine of 1984. The way Africa is viewed by the world has also been largely affected by developments elsewhere. It is often contrasted with southeast Asia, where the major positive achievements in economic growth and human development make developments in Africa appear more insignificant than they probably need to be. It is quite common to contrast the economic conditions of Ghana and Korea in 1960 with the conditions in 2000 and draw the obvious conclusion that something went awfully wrong in the former. Until the Asian crisis in 1997, it was common to contrast Nigeria’s difficulties with managing a large multi-ethnic and multi-religious nation in the midst of generous oil resources with the situation in Indonesia. So, Africa has not done as well as other developing nations have. But even more serious, relatively few people, particularly outside of Africa, are optimistic about its ability to turn things around in the foreseeable future. The problem for Africa, as a result of these strong negative perceptions is not only a dampening of the self-esteem of many otherwise proud Africans, but they have led to increasing difficulty to harness and mobilize the necessary resources for generating a turn-around. As the region gets marginalized in the minds of people, both within and outside the region, such marginalization gets played out in the area of resource flows. Thus the strong negative perceptions, together with poor social and economic conditions in countries, cause Africa to lose invaluable human capital as a result of the brain drain. Beyond the flight of human capital, the flight of its little financial wealth is reported to be still massive. Strong negative perceptions even feed adversely into the aid discussion as politicians and academics argue in the donor countries that additional aid to countries with “low absorptive capacity” is a waste of resources. The discussion of donor fatigue is indeed nothing but a question of “are we not wasting resources that could have been better used in other regions besides Africa?” Even more problematic for Africa, as a consequence of these negative perceptions, is the fact that it is unable to attract private capital on a scale comparable to anything that other developing regions have attracted in the last decade. Indeed, it is this last outcome of the negative perceptions that makes many people believe that “nobody is taking Africa seriously”. Investors think Africa is too risky a place for investment. And the recent literature provides a litany of things that are wrong with the region and hence making it difficult to take it seriously. The list includes inadequacy of the policy environment, weak institutions with specific reference to the lack of security of property rights and the absence of transparency, the high transaction costs as a result of the poor institutional environment, poor human capital, inadequate infrastructure, etc. While the list of possible reasons for not taking Africa seriously is long and has varying credibility, there is growing concern elsewhere that Africa has done quite a bit to improve itself and how it is perceived in the last decade and a half, but these efforts are not as widely appreciated as the negative developments that take place there. There is of 2 course the fact that despite considerable improvements in the policy environment in the period, private investment did not improve. Despite improvements in the governance environment, this has not been accompanied by growing recognition by private investors. As a consequence, attempts at “good behavior” in the management of Africa always appear to be inadequate to achieve the desired results. William Easterly (2001) draws attention to the fact that significant improvements in the policy environment have not led to improvements in growth performance. He notes that in 1980-98 median per capita income growth was 0.0% when it had been 2.5% in 1960-79. He observed that this happened despite improvements in financial depth and over-valuation of currencies. He further notes that the period saw improvements in the conditions of health and education, as well as in fertility and life expectancy. It is not surprising therefore that the question of when Africa will be taken seriously has engaged this panel. In this panel presentation, I will first discuss in section 2 what it means for Africa to be taken seriously, focusing on the factors that have shaped perceptions. I will follow it with a more detailed discussion in section 3 of how seriously the world takes Africa, with reference to how resource flows have not matched positive changes in the policy and governance areas. This will be followed with a discussion in section 4 of how seriously Africa takes itself. It will reflect the problems that arise in resource mobilization when Africans also show a lack of confidence in the development environment. In section 5, I will highlight some current attempts by African governments to catch the attention of the world in order not to be further marginalized. I then present in section 6 how aspects of these initiatives could affect development in the region and encourage a more positive perception of the region. Section 7 concludes by summarizing why the world needs to take Africa more seriously. 2. WHAT DOES IT MEAN TO TAKE AFRICA SERIOUSLY? There is a literal sense in which Africa can be taken seriously, and that is what Cecil Rhodes did in 1873-1902 in southern Africa. He simply took African lands and their contents, a little bit too seriously perhaps. A lot of developments in many parts of southern Africa since the death of Rhodes have been simply motivated by a need to correct actions taken in the name of the different people that occupy the lands. In other parts of Africa that had no Cecil Rhodes, there were events and characters that matched those of Rhodes, may be not equally. But the fact that Africa was ‘taken’ by different people in the two centuries before becoming independent meant that independent Africa has devoted considerable attention to taking back in a serious way what had been lost. To a large extent policies in the last four decades have been intended to address problems related to how the earlier ‘taking’ of Africa was carried out. Obviously in the course of doing so, new problems have been added on to the list of problems that Rhodes and others left behind. Taking Africa seriously is read in this paper as “developing confidence in the capacity of African nations to manage their economies successfully”. Such successful man3 agement of economies is expected to result in increased resources for production, or the enhanced capacity of African economies to push the production possibility frontier further and further outwards. The successful management of those economies is also expected to reflect in improving human development conditions and the reduction of poverty. Ideology and Perceptions Soon after independence in the 1960s and 70s, many development policies in Africa were driven by what was regarded to be the urgent need to reverse the impact of Rhodes and associates. The poverty of most African people was blamed on their being marginalized from modern production systems by the colonial system of governance and economic management. Hence Africa, very early, pursued import-substitution industrialization in a number of countries in a bid to accelerate its drive to modernization, often believing in the trickle-down effects of economic growth. The large role of the state in the pursuit of ISI was often noticeable and often problematic. The whole idea of ISI was driven by the perceived need to reduce dependence on the colonial powers while accelerating the pace of development. The assessment of the capacity of African nations to achieve those goals with the tools they chose varied considerably both within Africa and outside. How poor that perception was, varied strongly with how actions by African nations to assert themselves as a group of newly independent nations could be interpreted, often ideologically. Indeed, when import-substitution industrialization (ISI) was initiated, the arguments for and against the policy choice were often developed more on ideological lines than on sound intellectual rationalizations. Thus, while the broad approach of ISI initially had some substantial support among development economists (see Killick 1978), that support fizzled out quite early, and put a strong damper on ISI as the ideological debate intensified. The questions of ideology became more important, particularly as they were closely linked to the aid environment and the role of technical assistance in the preparation of new development policies. Even though production based on ISI was regarded by a number of governments as necessary to reduce the dependence on outside economies and for creating a feeling of being on the path to self-sufficiency, as well as for gaining the respect of other developed nations, it sometimes generated conflicts internally which affected how government development programs were seen. For example, any suggestions for the gradual development of agriculture for export as proposed by the few available liberal economists were “severely attacked by the Marxists who argued that international trade, dependency and capitalism were the primary constraints to development” (Falola 1997). The Fortunes of Development Economics 4 It is also important to remember that the issue of credibility of development approaches in Africa was always strongly tied to the fortunes of development economics, at least up to a point. Thus, how seriously governments and their development programs were taken, was often a matter of which well-known development economists were advising the newly independent economies and what sort of relationships had been established with them. For example, the presence of Arthur Lewis in Ghana in the 1960s was regarded as significant for initiating new policies and getting them to be seen as credible. But his approach for bringing about the ‘big push’ was regarded to be overly slow for politicians that wanted rapid development, and this led to a cooling off in the relationship with the authorities in Ghana and affected somewhat the credibility of the development program in that country.2 (Apter 1975). In a sense, how seriously country development programs came to be regarded was dependent on which established development economists endorsed them, often within the environment of technical assistance programs, observing that many of such economists influenced the extent to which official assistance (probably from the old colonial power) would be available to support those programs. No Change When Change Was Required The poor perceptions of African capacity to manage economies intensified in the 1970s when many believed that it was time to change the basic development approach. The fact that ISI had lost most of its international credibility by the 1970s, but African countries were slow to change tack, led to a considerable erosion of confidence in the future of the region. As economies charged on with ISI, there was little evidence of their import bills shrinking but significant reductions in their export earning capacities as a result of misdirected investments. In this situation, terms of trade volatility always made economies vulnerable. In particular, the crisis that various economies were thrown into as a result of the oil price shock of 1973, revealed the very significant vulnerability of most of the region. The oil price shock was the beginning of the first serious debt crisis for Africa, and it led to the question of whether the crisis could have been avoided, or at least contained with a different set of policies. A lot of the literature on economic policies in African countries prior to economic reform in the 1980s suggested that policies should have been altered much earlier. That is what the Berg Report was all about. Even though the report suggested that there were three sets of factors behind the economic crises, namely the structural factors (i.e. historical, geographical, political and climatic), external factors (terms of trade declines) and domestic policy deficiencies (in particular over-valued exchange rates, inappropriate agricultural policies and an excessive public sector role in the economy), the solutions proposed put strong emphasis on the deficient policies and tended to downplay the other factors. Indeed, the fact that governments did not alter policies sooner rather than later generated an international lack of confidence in the capacity of African governments to respond appropriately to developments in the economy. Bates’ (1981) work on markets and states in tropical Africa summarized the extent to which the state could be hijacked by 2 Ghanaian policy makers were always happy to note the advice they received from Nicholas Kaldor during the preparation of the Seven-Year Development Plan (1963/64-69/70). 5 different urban interest groups to the detriment of a sound policy environment. It basically questioned the basis for policy making in Africa and raised doubts about the capacity of institutions in Africa. In other words, the blame for the increasing vulnerability of African economies lay squarely on the shoulders of African governments. Confidence in the African state was very low and it could hardly be taken seriously. Inadequate Reform Measures After a decade and a half of economic reform, there is little sign that governments in Africa are taken any more seriously. This is largely borne out by the fact that they are generally not seen to have done much about the other sources of crisis in their economies besides “half-hearted” attempts to correct deficient policies. The growing literature of weak institutions as explanations for low private investment and hence growth is evidence of this. A number of papers have quite rightly suggested that existing institutions in Africa do not engender productivity growth (Ndulu and O’Connell 1999). They write that “the policy environment, and weaknesses in governance combine to create a capitalhostile environment, limiting accumulation and undermining productivity growth by diverting investible resources to unproductive uses” (p.2). The work by Knack and Keefer (1995) threw some light on the significance of the security of property rights in economic growth and drew attention to how little effort had gone into establishing that. Hernando de Soto (2000) explains the inability of poor nations to accumulate capital in a capitalist world with the weaknesses of the institutions for securing property rights. The little confidence in the management capacity of African institutions is reflected by the new work on aid effectiveness. Despite the standing debate on “whether aid works or not” in different policy environments, the increasing attention to greater selectivity in the targeting of aid is generally interpreted as evidence of less and less confidence in the management structures of African nations. Greater selectivity is regarded by its proponents to be the best means of differentiating between slow reformers and strong reformers. But since the analysis only shows a couple of countries as strong reformers, the perception that very few countries can handle additional resources in the regular manner of ODA, including program aid, this leaves room for the interpretation that Africa does not require additional financial resources; at best increased technical assistance would do. While the weak management capacity of most African nations is not in any doubt, and has never been in doubt, the issues that are raised by the increasingly negative attitudes, with respect to how resource flows to the region should respond, are what have not been properly assessed and determined. In other words, does the fact that the region has weak institutions mean it should not attract the resources that could help change the situation? And should new attempts to improve the capacity to deliver development go unrecognized and unsupported? 6 3. HOW SERIOUSLY DOES THE WORLD TAKE AFRICA? As indicated earlier, a sense of how seriously the world takes Africa is provided by the magnitude and type of financial flows it commits to the region. African countries have not been able to offset the large negative current account balances with significant growth in capital flows. I consider here some issues with foreign direct investment and portfolio capital and how movements in them do not amply reflect the major changes that have occurred in Africa since the mid 1980s. Foreign Direct Investment In the 1980s and the early 1990s, Africa's share of foreign direct investment to developing countries was under 1% of the estimated total of around $200 billion per annum (Collier 1994). This low share was despite the fact that private capital flows into the developing world grew remarkably in the 1990s.3 FDI to low income countries rose from $5,732 million in 1990 to $53,517 million in 1998, an increase of over 800%. For sub-Saharan Africa, however, FDI only rose $834 million to $4,394 million, i.e. at half the rate of growth to the rest of the low-income world. By 1998, FDI formed only 7% of GDI in sub-Saharan Africa and 1.3% of GDP, compared to 12.4% and 3.9% respectively in East Asia. Trends in North Africa (classified together with the Middle East) showed trends that were better than for subSaharan Africa. Table 1: Private Capital Flows in Selected Countries Country Cote d’Ivoire Ghana Indonesia Kenya Korea Malaysia Nigeria Senegal South Africa Thailand Uganda Zimbabwe Net Private Capital Flows Foreign Investment $ millions 1990 57 -5 3235 124 1056 769 469 42 -4399 16 85 $ millions 1990 48 15 1093 57 788 2333 588 57 -2444 0 -12 1998 181 42 -3759 -57 7644 8295 1028 24 783 7825 198 -217 Direct Bonds $ millions 1990 1998 -1 -23 0 0 26 -141 0 0 168 1220 -1239 -314 0 0 0 0 -303 -87 -632 0 0 -30 -30 1998 435 56 -356 11 5415 5000 1051 40 550 6941 200 76 Bank and TradeRelated Lending Portfolio Investment Equity $ millions 1990 1998 0 6 0 15 312 250 0 4 518 4096 293 592 0 2 0 0 0 619 449 2341 0 0 0 3 $ millions 1990 1998 10 -237 -20 -29 1804 -3512 67 -72 -418 -3087 -617 3017 -121 -25 -15 -16 --689 1593 -826 16 -2 127 -266 Source: World Bank (2000), World Development Indicators. 3 There is, however, a growing view that private capital flows to Africa are much more significant than some official data from international financial institutions would suggest (Bhinda et.al 1999). Bhinda et.al, suggest that FDI flows to Africa more than tripled in the 1990s and that the growth rate was comparable to that in SE Asia and Latin America. They note that “FDI is diversifying its source and recipient countries and sectors, largely due to innovation by non-OECD investors”. The under-reporting by countries is attributed to a poor monitoring capacity. 7 Matching economic performance with capital inflows suggests some problems for Africa. Even though a number of studies have shown that FDI usually flows to countries that are experiencing growth (UNCTAD 2000), experiences in Africa suggest that significant and consistent growth does not necessarily lead to equally significant growth in FDI, as the experience of Ghana in the second half of the 1980s and early 1990s quite clearly showed. Despite the fact that Ghana’s GDP growth rate was on average 5.5% for the period 1984-91, FDI only moved from 0.4% of GDP to 0.7%. FDI growth in Ghana only went up from $15 million in 1990 to $56 million in 1998, significant by African standards but far less than in other developing regions. Obviously a lot more needed to be done to attract FDI than simple growth. But there were some new and interesting trends in FDI flows to Africa shortly before the Asian crises. The sources of new FDI had begun to vary considerably. Whereas for most countries, the sources have traditionally been the previous colonial powers, these seemed to change considerably in the last decade. Thus Malaysia became a new source of FDI to a number of African countries, including South Africa. Australian and Canadian firms also become important sources of FDI in the mining sector, just as South African firms began to move into the brewery and service sectors in many African countries. A question that is raised by the more recent trends has been why firms in the stronger OECD countries have not been as keen as the new players to engage the risk situation in many of those countries. Why is it acceptable that a South African firm would buy into the Railway system in Cameroon and European firms not? Why do European firms shy away from telecommunications development in Africa when Malaysian and South African firms do not? The fact that Africa attracts far less private capital than it ‘deserves’ (based on economic performance) has been attributed to its not being “structurally able to assimilate these large flows” (Aron 1996).4 Other Private Capital Flows Portfolio investment in sub-Saharan Africa in 1998 amounted to $250 million worth of bonds and $679 million of equity. This had dropped from almost five times the amount in 1995. For North Africa (together with the Middle East) equity holdings were only marginally higher than SSA while far more bonds were available. The East Asia and Pacific region attracted $1,870 million of bonds and $9,007 million of equity holdings. Africa’s share of private flows to developing countries has averaged 1.6% in the last decade. In 1998, Senbet referred to an article in Time Magazine (March 1998) that was captioned “Africa is Rising” in the wake of the visit of President Clinton to Africa and came out with an overly positive assessment of the changing perception of Africa outside. He expected this to counter the largely negative press that the region experienced in “the lost decade”. Senbet’s optimism did not only come from what had been reported by Time Magazine, but by the fact that private capital flows were beginning to rise appreciably by 4 But Bhinda et.al (1999) believe that this is due mostly to poor information being sent to investors all the time about Africa. 8 the beginning of 1992.5 He makes reference to the 18 Africa-oriented funds trading in Europe and America considering that portfolio equity flows had been non-existent before 1992, and suggests that the wheels of globalization were finally beginning to draw Africa in. Citing the increased flows up to 1997, Senbet (1998) suggests that the increased flows were a response to the global need to diversify portfolios. Africa provides international capital an opportunity to improve the global risk-reward ratio faced by international investors in view of the low correlation between risk in Africa and in the developed countries. Aside from this, the recent return performance of the various stock markets in Africa suggested significant untapped value potential for global investors as African stock market indices out-performed emerging market indices of the IFC. There are indeed other indicators of the huge potential of capital markets in Africa, including the low priceearnings multiples. Unfortunately, within months of that assessment, the optimism appeared to have been dimmed as all private capital flows took a dip in the wake of the Asian financial crisis. Table 1 indicates that while bonds and equity capital are very much missing in African countries they seemed to diminish further after the Asian financial crisis. Africa definitely was affected in no small way by the shrinking that has followed in the emerging capital markets. While acknowledging the prevailing difficulties of African financial markets,6 it is important to observe that considerable institutional change has taken place in the wake of economic reforms that has gone unrewarded by increased activity and inflows. Indeed the irony of the developments in global capital markets is that they are occurring at precisely the time that many African countries are attempting to develop their own capital markets. Reforms of the 1980s yielded a positive outcome in terms of growth of the number of stock markets. There are about sixteen stock markets, and they have become a basis for the commensurate introduction of Africa – based funds trading in New York and Europe. The stock markets have emerged as a real potential for integration of Africa into the global economy. However, the markets remain the smallest of any region in terms of capitalization, except South Africa, and are very illiquid (Senbet 1997). 4. HOW SERIOUSLY DOES AFRICA TAKE ITSELF? A way to look at how seriously Africans take the region is to consider their attitudes towards resource mobilization in the period of reforms. Needless to mention, the picture does not suggest that they have taken the region anymore seriously than non-Africans have. Domestic resource mobilization has not improved as capital flight has worsened. Indeed many Africans continue to respond to the problems that engulf the region by vot5 Indeed there are indications that portfolio investments were beginning to rise in Africa up to 1996, with Bhinda et.al. (1999) suggesting that they were the fastest growing source of private capital. 6 The serious impediments and challenges facing African financial markets can be summed up as follows: fragmentation, illiquidity, informational inefficiency, limited size and capacity, underdevelopment of human capital, inefficient regulatory schemes, excessive risk factors, dearth of risk-sharing and hedging mechanisms, legal and contract enforceability issues. 9 ing with their feet. This is reflected by the massive capital flight involving humans and financial wealth from the region. The Flight of Financial Wealth Capital flight is a problem inasmuch as the outflows present major macroeconomic problems for countries. Claessens and Naude (1993) carried out estimates of capital flight for various countries that suggested that capital flight in the preceding decade had been more of a problem for some African countries than it had been for southeast Asia. In 1981-91, Nigeria was the seventh largest source of flight capital in the world, with an average annual flow of over $2800 million. The stock of capital flight at the end of 1991 for subSaharan Africa represented more than 85% of the region’s GDP. The situation was worse only in the Middle Eastern and North African region, with the region’s capital flight stock equivalent to 118% of 1991 GDP. Southeast Asia had a capital flight of only 15% of 1991 GDP, which was the least in the developing world. More recent figures by Ajayi (1997) placed the stock of flight capital at $22 billion, which is more than has been estimated as required to fill the resource gap. Collier and Gunning (1997) reckon that African wealth owners have chosen to locate 37% of their portfolio outside Africa. This share is compared to 29% for the Middle East, 17% for Latin America, 4% for South Asia, and 3% for East Asia. For individual countries, it may be noted that Gabon, Nigeria and Uganda were included in the top-ten countries for the ratio of capital flight stock to GDP in 1991. Gabon had a stock of capital flight that was almost triple its 1991 GDP. Nigeria and Uganda had the equivalent of about 150% and 140% respectively of their 1991 GDP staying out. Other major sources of capital flight from Africa in the 1990s were Zambia and Sudan. Ajayi (1992) indicated that trade faking was an important vehicle for capital flight in Nigeria. For the period 1970-89, he suggested that, “a significant amount of underinvoicing of exports and over-invoicing of imports took place” (p.59). Exports were under-invoiced to the tune of $8.2 billion while imports were over-invoiced by up to $5.96 billion. Most of this was related to Nigeria’s oil trade. He concluded that domestic macroeconomic policy errors were largely responsible for the capital flight. These included high inflation, exchange rate misalignment, fiscal deficit and the lack of opportunities for profitable investment in the domestic economy. There are indications, however, that criminal transfers arising from political malfeasance and corruption are also a major source capital flight in many countries, and these have to be dealt with differently through the institution of sound governance structures. Some studies have suggested that if there were to be a reversal of capital flight, the private capital stock of most of Africa would go up by as much 64% (Collier et.al 1999). The issue that this raises is how best to achieve such reversals. There are, obviously policy as well as institutional issues to be taken care of in order for African capital owners to take the region more seriously. 10 Flight of Human Capital Another growing dimension of the problem of capital flight is the exploding rate at which African countries are losing their human capital. Human capital is the stock of skills and productive knowledge embodied in people. Ndulu (2001) has indicated that “Africa is a capital-scarce region and loss of this limited resource is widely considered detrimental to the prospects of sustained growth and development”. He makes reference to an UNCTAD report that estimated an annual cash value of each African professional migrant, based on 1979 prices, at $184,000. This brings the value of the estimated 95,000 African professionals in the US to an annual amount of US$17.5 billion, far in excess of the US$4 billion technical assistance the region receives each year from all sources. The US Social Research Council has indicated from its own survey that as many as 34% of Africans receiving Ph.Ds from American institutions between 1986 and 1996 did not return to Africa. Only 57% of them returned to their countries of origin. My own way of presenting the enormity of the problem is that, of every graduating class from the University of Ghana Medical School since 1985, 50% of the graduates will leave Ghana within two years and a total of 80% will leave within five years (Kwapong et.al. 1997). And this is a country that receives considerable technical assistance from Cuba to run its rural health programs. Ndulu (2001) reviews the growth literature that focuses on the significance of human capital in growth regressions largely as a result of its effect on productivity. He looks at the conditions in African nations that make them lose such vital assets as well as the conditions in the recipient countries that help to attract African human capital. All of this is done within the background of globalization. He argues that “the region is losing its talent because it can not remunerate, preserve and utilize it effectively. Low productivity in the economy and sluggish growth of employment opportunities are largely behind the low rates of return to education. When governments have tried to contain the flight of human capital as well as financial wealth by erecting barriers to their exit, these have not worked and they have often been done with methods that contribute to the problems of the region. There is increasingly today, a focus on improving conditions at home in order to minimize the incentive for leaving. While this may be the long-term solution to the problem, the immediate costs put governments at an enormous disadvantage as they try to find solutions to the numerous developmental problems of the region. The capital flight makes it more and more difficult for Africa to justify its growing assistance requirements. 5. WHAT IS AFRICA DOING IN ORDER TO BE TAKEN SERIOUSLY? In the last decade the pressure on African governments to do something meaningful about the economic conditions for their people has been significant. The pressure comes from both within the region and from outside. The first indications of a preparedness to improve the conditions of people and to improve how the region is perceived came with the 11 widespread adoption of economic reform programs/structural adjustment programs in the last decade and a half. In the last decade, political liberalization to accompany liberal economics has been observed in many African nations. Yet another manifestation of Africa’s anxiety is the acceptance of the conditions attached to the HIPC initiative, leading to the preparation of poverty reduction strategies in a number of countries. While it is tempting to see these initiatives as being externally imposed on governments in the region, there are other indications that the governments are also willing to take the initiative in addressing their developmental problems. The first signs of a desire to establish an own path to recovery and development came with the Millennium Partnership for the African Recovery Programme (MAP), initiated by the leaders of South Africa, Nigeria and Algeria. Prior to this being first mooted in 1999, President Nelson Mandela had declared that “Africa is beyond bemoaning the past for its problems. The task of undoing the past is ours, with the support of those willing to join us in a continental renewal. We have a new generation of leaders who know that we must take responsibility for our own destiny, that we will uplift ourselves only by our own efforts in partnership with those who wish us well”. Indeed, the seriousness that has been attached to carving out a new path for African development in the last few years is also reflected by the fact that many more leaders in the region showed interest in such an undertaking, as reflected the President of Senegal, Abdoulaye Wad, proposing an Omega Plan. The UNECA attempted to provide a more conceptualized organization of these initiatives when it came out with the “Compact for African Recovery” in 2001. The “Compact for African Recovery” discusses key strategic national actions that must be pursued by African governments including the pursuit of good governance, peace and security as well as improvements in macroeconomic performance. It also highlights the need for joint African-international action in such areas as the fight against HIV/AIDS, the provision of basic health, increasing resources for education, the development of infrastructure, including for ICT and the strengthening of regional cooperation. The compact also proposes a format for a new international partnership with Africa in order to increase resource flows. It is important to emphasize the importance the compact attaches to enhancing the role of the private sector in economic development. The political leaders of the region have however given their blessing to a newer document which is a merger of the MAP, aspects of the Omega Plan and aspects of the Compact. This is what has come to be widely known as the “The New Partnership for Africa’s Development” (NEPAD). The areas addressed by NEPAD are very much in line with what is being discussed all over Africa, by governments, civil society and the private sector. Indeed, at the meeting of African Finance Ministers held in Addis Ababa in November 2000, in preparation for the UN conference on ‘Finance for Development’, the issues discussed were very similar to those proposed in the NEPAD. The proposals earned the agreement and support of both the ministers and the participating civil society organizations. 12 6. SOME VIEWS ON THE NEW INITIATIVES FOR AFRICAN DEVELOPMENT The broad nature of the current initiatives to address the many problems of Africa have caught the attention of a much broader segment of African society and the larger world than a number of similar initiatives earlier. This is largely a consequence of the fact that the new initiatives acknowledge where problems have been created by African governments, and their management approaches. Such thorny issues as corruption, bad management, the lack of accountability and the absence of transparency in public business are highlighted. They also seek a new relationship with their development partners in which the ownership of the development agenda is not seen as foreign. The new frankness among African policymakers is generally appreciated. These attributes notwithstanding, many people suggest that the new efforts are bound to suffer the same consequence as earlier ones unless the institutional redesign implied takes place as soon as possible. Peace, Security and Governance NEPAD advocates the establishment of a political order and system of governance that enjoys the support of the people of Africa, addresses their fundamental development interests and allows them to engage effectively in the global processes of the world economy. In effect it advocates the development of strong states that will work to ensure equity and avoid conflict. The people are to be empowered to take advantage of the opportunities for development that may exist. It is important in this regard to consider how strong states are formed: It is important to appreciate the fact that in very simple terms the strong state is one that is able to harness the resources of its people and deliver to them the means to satisfy their livelihood requirements. Strong states make it possible to create jobs and facilitate income earning. Strong states can protect individuals from arbitrariness and unlawful acts. Strong states are firm but just. And finally, strong states are not feared by the citizenry but admired. In the strong state, peace is achieved because there are credible institutions for resolving conflict. It is important to acknowledge that good governance is about the existence and functioning of institutions for mediating the individual aspirations of millions of people against the limited resources in order to achieve acceptable social ends. Bargaining their separate interests in a rational manner is an essential aspect and the institutions of the state need to be used to address that requirement. It is when strong institutions exist that the parochial interests of class, ethnicity and religion can be mediated. For example, while ethnic divisions may be behind many of the conflicts that engulf Africa today, the multi-ethnic nature of African communities cannot be said to be the source of the region’s problems. It is how this attribute of African socie- 13 ties has been exploited in failing states that is the problem. When politicians run to their ethnic groups for support in times of crises, largely because they have failed to deliver what is expected of a strong state, it is because they have failed to develop the institutions for bargaining group interests. As a result the skewed distribution of national resources is used as a tool for maintaining the positions of leaders that preside over weak states. It is therefore crucial that NEPAD focuses on institutional development that strengthens the state with respect to the role assigned to it. Growing awareness in countries of citizens’ rights through education is the best possible way of ensuring improved governance in Africa. Investing in Africa’s People It is highly commendable that NEPAD seeks to bring about an “investment in Africa’s people” It focuses on moving from “social exclusion to global inclusion”. In doing so, it enjoins governments to consider programs for reducing poverty, limiting the scourge of HIV/AIDS, malaria and other diseases, empowering women, developing the environment for bringing up children, improving basic social service delivery, investing in health, education and other basic needs, etc. It is important that in investing in people, Africa rationalises its approach to ensure that various initiatives complement one another instead of creating tensions in resource allocation. It is obvious that, in view of the enormity of Africa’s developmental problems, investing in people is a rather tall order, calling for action on several fronts at the same time. It is almost impossible to prioritise on this score as each element carries a certain sense of urgency in its own right. But underlying all the various themes identified is the issue of poverty. To fight poverty in Africa requires action on the following fronts: • • • • • Continuing Macroeconomic Reforms with a Focus on Long-Term Growth Capacity-Building Developing Safety Nets for the Poor Ensuring Effective Decentralisation of Public Sector Activities Achieving Public-Private Partnerships For the above sets of issues, the essence of a liberal economic regime may prevail. What this implies is that markets will essentially continue to determine the prices of goods and services in both input and output markets. Thus, in the labour markets, wages will be determined by the productivity of labour in an increasingly competitive market, while in the financial markets the returns to capital will continue to be freely determined by market forces. The rationale behind such an approach is basically to provide market incentives for the owners of various resources to mobilise such resources for the common good. It is important, however, to recognise the fact that when markets are far from perfect, as they are in most of Africa, their capacity to efficiently allocate resources is severely compromised. Such situations call for interventions, based on sound judgement and good information. In the face of structural and institutional bottlenecks to the pursuit of 14 economic transactions, transaction costs rise enormously and discourage otherwise necessary transactions. African countries thus face a major collective action problem. Potential gainers need to act together and take the necessary steps to promote the establishment of efficiency enhancing institutions (including effective private markets), that would bring transactions costs to a more manageable level and help put the economy on a dynamic growth path. Achieving this dynamic growth path has enormous political economy dimensions that point to a potentially crucial role for governments in taking bold social and economic initiatives, including legal measures that can help remove existing risks and uncertainty in the economic environment. Action needs to be taken to create an effective functioning of private markets and non-market institutions. In this context the issue of corruption needs particular attention. People must become convinced that the predatory state is a thing of the past. For this to happen, the state needs to be strengthened to enable it to put appropriate regulatory structures in place. Development is impossible without the active participation of governments. What is required is therefore not extreme forms of deregulation but a regulatory redesign that promotes competition where it is viable and ensures that monopoly power is not badly exploited when competition is absent. In sum, government intervention in the market should be designed to lead to a strengthening of the market mechanisms, instead of replacing them. Governments should seek to apply a set of ‘common sense’ policies in the management of the economy. The generation of employment from increasing private sector activity should be the anchor of development objectives, and a major departure from earlier reforms that took the generation of jobs for granted. Considering that most of the poor in Africa live in rural areas, making rural development the core of the poverty reduction effort is appropriate. This requires local administrative bodies that are well-resourced and capable. Limiting the debilitating effects of HIV/AIDS and malaria requires that investment is carried out in both education of the public as well as in scientific research. Improving health and education, housing, water delivery requires a combination of economic growth and proper social policy that strengthens individuals. Diversification of Africa’s Production and Exports For many countries, the largely negative current account balance for most of the last three decades shows relatively little change in the structure and composition of both exports and imports. Most countries are still heavily dependent for export earnings on a very limited number of primary commodities which fail to provide either a stable or growing source of revenues. What is remarkable about the poor external performance of African economies is the fact that aside from being unable to match SE Asia in the area of manufactured exports, they also lost ground with the export of primary commodities, as Africa’s competitiveness in world markets decreased. 15 NEPAD provides some conditions to enable the diversification of production and exports to take place; including appropriate regulatory and macroeconomic conditions, as well as supporting infrastructure; attraction of domestic and foreign investment, and finally the removal of barriers to developed country markets. It is important to acknowledge however that to facilitate the growth of exports in the shortmedium term, governments should pay attention to: • The pace, sequencing and phasing of trade liberalisation with a view to generating early supply response. • The development of export promotion and import substitution policies in a complementary manner. • The re-building of the primary commodity export sector and creating of capacity for processing export commodities. • The raising of the competitiveness and technological capability of industrial firms in view of the pressing need for export diversification. • Pursuing a temporary and strictly-time bound protection for selected industries. • Designing forward-looking industrialisation strategies with a well-formulated and coherently executed industrial and technology policy. • Pursuing regional integration since it offers the most significant opportunity to expand exports for most countries. Investing in ICT and Other Basic Infrastructure NEPAD recognises the inadequacy of basic infrastructure in Africa and rightly sees it as a hindrance to integrating into the world economy. Indeed the fact that ICT has become the basic avenue for moving faster into the global economy is acknowledged, leading to the plan that working to reduce the ICT infrastructure deficit is the way to go. The document acknowledges not only the change that ICT could make to production in different spatial settings, but also the possibility of introducing new knowledge to poor communities that would otherwise be excluded. It is important that while African countries continue to invest in infrastructure to support domestic production and distribution, the need to link up with the rest of the world suggests infrastructural requirements that are well beyond the individual capacity of most African economies. This calls for regional or sub-regional approaches to the development of such infrastructure. Developing Financing Mechanisms NEPAD recognises the crucial nature of the need to develop financing mechanisms for the enormous development task facing African countries. The document highlights the need for improved domestic resource mobilization as well as the increased availability of foreign savings. But it is crucial to recognize that while the closure of the resource gap requires effective action to mobilize domestic resources, in the short-medium term con- 16 siderable attention would have to be paid to mobilising external resources. But the mobilization of external resources would depend largely on how the region positions itself in the global market. Action on both the domestic and international fronts will require steps to a. Improve the generation of financial resources from domestic assets in the medium-long term by taking steps to: • reduce the risks associated with rural production (e.g. seasonality of rainfall) possibly through improved irrigation and other infrastructure, and technology application. This will reduce significantly the higher liquidity preference of households, at the same time that incomes go up in the medium term. • stabilise the macroeconomic environment that ensures that the returns on financial assets are relatively stable and predictable. • reduce the transaction costs of holding financial assets through the development of appropriate institutions, e.g. microfinance institutions. b. Attract foreign and domestic investment. African countries will need to take concerted action on many fronts including improving infrastructure, strengthening banking systems, developing further their capital markets by accelerating the pace of privatisation and broadening the domestic investor base, developing an appropriate regulatory framework and a more liberal investment regime, introducing competitive labour market policies while creating and maintaining institutions for upgrading human capital, reforming the judiciary system and containing corruption. It is important that these are carried out in a comprehensive framework and not in a piecemeal manner. But more importantly, • Countries must have a strategic framework for industrial development and make clear choices about where and how they want foreign participation; these choices can then be reflected in the various incentive packages that countries may offer. • Countries must have fairly stable macroeconomic regimes, governed in a transparent manner that keeps exchange rates stable. Exchange rate determination must not be dogmatic but based on country capacity and its position in the world market. • Financial systems must be made more robust and in tune with global developments. There is no question about whether capital accounts should be opened. It is more a question of the extent and the conditions under which this should take place. c. Attract additional official development assistance. African governments and their development partners need to do the following in order to expand aid inflows: • Improve aid effectiveness and assure all about that. For this, the general policy environment will have to be cleaned up, making it essential for governments to adopt measures that generate substantial growth and also cater directly to the requirements of sustainable poverty reduction. Institutions for managing aid have to be made transparent. • Increase specialisation among donors which will see the World Bank, African 17 Development Bank and the European Union pay greater attention to the finance of regional infrastructure projects, based on the understanding that regional integration is the most feasible path to the transformation of economic structures in the region. d. 5. Make debt relief enhance growth. It may be observed from the enhanced HIPC initiative that countries would continue to borrow even as they received relief in order to settle other obligations in the pursuit of poverty-reduction goals. It is important that payments on these do not slow down growth. The main issue is how to make debt relief growth-enhancing in order to facilitate the achievement of sustained poverty-reduction. To this end • Debt-relief must be recognised by creditor countries as additional to new and increased ODA with a focus on enhancing and sustaining both growth and poverty-reduction explicitly. • Making debt-relief pro-growth requires that relief must come early rather than later. There is a tension between quick debt relief and comprehensive countryowned poverty-reduction strategies. The solution to this problem is to make countries focus on their medium and long term development frameworks, showing the anticipated growth paths and how these provide for poverty reduction. • A part of the freed-up resources from debt relief must be channelled to the private sector for job creation purposes. Governments have to exploit such mechanisms as debt-equity swaps inasmuch as they promote private investment. • Improved debt management in African countries is very essential. Governments need to monitor closely future borrowing in order to prevent a reoccurrence of the debt problems. CONCLUSION: CAN AFRICA BE TAKEN SERIOUSLY? After reading and listening to some of the proposals in the new initiatives to push forward a new agenda for African development, one often hears murmurs of “What is new?” A lot of the remaining skepticism comes from the feeling that the new enthusiasm may be similar to the enthusiasm that surrounded the failed attempts of the 1960s, as Kwame Nkrumah and other African leaders pursued a “grand design” for lifting up Africa. It is important to note that what is new here are the following: • A new sense of desperation among most Africans following impoverishment and the development of new forums for collective action in order to bring about change. The many civil wars are a reflection of the new cries for change by the people of Africa and a new preparedness by the people to bring about change. The fact that populations no longer accept cooked election results is also an indicator of that wind of change blowing through the region. It puts pressure on leaders to bring about genuine and desirable change or be swept aside. 18 • • • African governments have embraced new initiatives from their development partners, starting with structural adjustment programs through acceptance of pressures for democratization of governance structures, and finally the adoption of PovertyReduction Strategies in association with the HIPC initiative. While the ownership and efficacy of these actions may be viewed skeptically by some, the fact that within countries there is increasingly discussion of development strategies and government policies in relation to donors is a sign that African governments have no choice but to commit themselves to change.7 The need to be taken seriously is reflected by a changing environment and a greater commitment to regional initiatives. Regional integration is no longer viewed simply as a political arrangement to enhance the positions of overambitious leaders. Increasingly, African intellectuals view it as the best approach to developing new markets and for mobilizing resources. There is also growing awareness among societies in the developed world that their own future well-being is increasingly tied to the fortunes of the poorer parts of the world. Evidence of this is provided by the recent speeches of the British Prime Minister, Tony Blair, reflecting new thinking in the light of new trends in globalization and the social tensions created by these. They put pressure on the world’s leaders to take Africa more seriously and facilitate a more effective flow of resources for African development. 7 Listening to various call-in programs on the numerous radio stations in Ghana, both urban and rural, about joining the HIPC initiative gives an indication of how little room governments are now given by their populations. 19 References: Ajayi, S.I., 1992, “An Economic Analysis of Capital Flight from Nigeria”, Policy Research Working Paper (WPS 993), Western Africa Department, The World Bank, Washington, D.C. Ajayi, S.I., 1997, “An Analysis of External Debt and Capital Flight in the Severely Indebted Low-Income Countries in Sub-Saharan Africa”, IMF Working Paper 97/68, International Monetary Fund, Washington D.C. 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