Sep 18, 1998

AFRICA: NEEDS FRESH POLICIES TO REGAIN DEVELOPMENT MOMENTUM

Geneva, 16 Sep (Chakravarthi Raghavan) -- Marginalisation is not an inevitability for Africa, and the continent can fully exploit its growth potential and regain its post-independence development momentum, but needs fresh policies (national and international) and institutional reforms, and swift solution to its debt burden.  

The international community should not remain passive but act decisively, and indeed, on one key issue, that of debt, it can make a demonstrable commitment to the new generation of African policy-makers, says UN Conference on Trade and Development, in its just published Trade and Development Report 1998.  

In advocating a rethinking of national and international policies on Africa, and writing in Part II of its Report 1998 under the theme 'African Development in a Comparative Perspective', UNCTAD argues that while Africa has begun to recover since 1995, largely due to temporary upsurge in commodity prices, this kind of growth cannot be sustained, without a new policy orientation to address directly the structural constraints and institutional hiatus in the African economies. 

Such fresh policies and orientations would need to focus on capital accumulation and on nurturing and building the institutions needed for an efficient market economy, including a dynamic indigenous entrepreneurial class, major reforms to build a more efficient, dedicated and better remunerated civil service and to ensure complementarity between States and the market. 

An important requisite is the lifting of the debt burden on Africa, says UNCTAD and towards this end advocates a significant revision of the HIPC (Heavily Indebted Poor Countries) Debt Initiative to establish the conditions for sustained growth, meet the basic concerns relating to the eligibility for and adequacy of debt reduction as well as speed of grant of relief. 

"There should be a comprehensive assessment of African debt, carried out under an agreement of creditors and debtors, but by an independent group of eminent persons who would not be unduly influenced by the interests of creditors, with the latter committed to implement fully and swiftly recommendations of such a body," UNCTAD recommends. 

The structural reform programmes like dismantling of state marketing boards -- aimed at getting the prices "right" in economies with a total absence of markets or with very imperfect ones have failed -- and there are a range of activities relating to commodity markets that only the State and the marketing boards can fill, TDR notes and is critical of the haste with which African economies have been forced to liberalise their trade regimes for goods and services, resulting in de-industrialization in many economies, and even more so in financial liberalisation and de facto opening of the capital accounts. 

While growth resumed in Sub-Saharan Africa (SSA) over the last three years, even if this could be sustained in the coming decade, that would not reverse the marginalization of the region or make much dent in widespread poverty, and would do little more than recover the ground lost during the past two decades.  

"The challenge for policy-makers is to turn this recovery into a stronger and sustained economic take-off, with the aim of attaining the 6% growth target for Africa set by the United Nations. In the past three years only a handful of countries have been able to sustain growth rates reaching or surpassing this target.  

"However, there should be no illusions about the difficulties in meeting this challenge. Nor should faith be placed in quick fixes or outside panaceas."  

And while lessons that can be drawn from other developing countries which have emerged from economic and social instability into periods of fast and sustainable economic growth, "Africa must also regain the developmental momentum which underpinned the social and economic gains of many African countries in the decade following their independence," adds the TDR. 

It advocates a range of domestic policy actions including supporting exports through duty drawbacks etc, discouraging luxury consumption, infant industry protection and industrial policies, UNCTAD notes that while the WTO agreements "have reduced the scope for some policy options, selective strategies can still be applied." 

Also, the TDR points out, the exemptions provided under the Agreement cover most of the countries in Africa. 

In calling for fresh policies and thinking, the UN Conference on Trade and Development (UNCTAD) says that the current approaches to structural reforms have failed. Despite many years of policy reform, barely any country in the region has successfully completed its adjustment programme with a return to sustained growth.  

Of the 15 countries identified as "core adjusters" by the World Bank as recently as 1993, only three (Botswana, Lesotho and Nigeria) are now classified by IMF as "strong performers", the report points out.  

While some of the reform failures are due to bad implementation, the basic problem has been with the design and contents of the reform programmes.  

"Mainstream assessments of Africa's growth prospects have almost invariably proved over-optimistic, "largely because they have been based on an act of faith in growth-enhancing market forces, rather than on a careful examination of constraints and opportunities. Such assessments, as well as the policy advice proffered, have not always taken proper account of the external constraints.  

Raising net resource transfers through debt relief will not succeed, however, says the TDR, unless it is accompanied by appropriate domestic policies to overcome low productivity and heavy dependence on a small number of primary commodities. 

Expanding investment in both primary and secondary industries and in both the public and the private sector is a vital prerequisite for, if not a guarantee of, rapid structural change and productivity growth. Whilst there is a growing consensus on this point, the current approach to structural adjustment is unlikely to achieve such an outcome. 

The most disturbing feature of policy reforms in SSA, is their failure so far to bring about an investment recovery; the average ratio of investment to GDP during 1995-1997 was 17 per cent, only slightly above that of the early 1990s and well below that of other developing regions. Public investment has borne the brunt of the adjustment impact, "but private investment has not, as conventional wisdom might suggest, stepped into the breach." Indeed, as a share of GDP, it is lower than in the 1970s. 

An important reason for poor economic performance has been slippage in programme implementation. Another is the failure to address the debt problem and to provide adequate external financing in designing the programmes. "More importantly, while there is consensus that structural constraints and institutional weaknesses prevent an effective functioning of markets and impede a positive response to private incentives, these obstacles are often neglected. Thus, policies are promoted to get prices "right" when some of the more important agents and institutions of a modern market economy are underdeveloped or totally absent.  

Again, there is no proper sequencing of liberalization of product and factor markets with prior institutional reforms needed for its success.  

"The outcome has been sadly predictable: greater instability in key prices and failure to generate appropriate incentives. Even when incentives are generated, structural constraints and institutional weaknesses prevent their resulting in a vigorous supply response: 

• Weak supply response to liberalization of agricultural markets largely reflects inadequate assessment of the factors constraining production. Evidence strongly suggests that the assumptions about the taxation of agricultural producers through pricing policies which underline these reforms are not entirely valid. While for some products African farmers have been heavily taxed compared with more successful exporters in other regions, that has not been so for all products or all countries;
• Agricultural liberalization has not been associated with a strengthening of price incentives. The domestic terms of trade have generally turned against farmers more in those countries which have sought to link domestic prices to world prices. The shift from public to private marketing agents has not increased the proportion of export prices passed on to producers, mainly because of imperfect and underdeveloped markets;
• The dismantling of marketing boards has tended to enlarge the institutional hiatus, as private institutions are generally unable to take up many of the functions previously rendered by marketing boards."
• Financial liberalization has often been undertaken without first ensuring the conditions for its success, including a high degree of price stability and fiscal discipline, sound financial institutions and corporate finance, depth in financial markets, and effective prudential regulation. Consequently, it has led to high and unstable interest rates, widespread insolvencies, a rapid accumulation of public domestic debt and fiscal instability;
• While there was certainly a need to move towards more realistic and flexible exchange rates, the pendulum has swung too far. Leaving exchange rates to markets has resulted in highly unstable rates as markets proved to be very thin. Instability has further been exacerbated by arrangements that have resulted in de facto liberalization of the capital account;
• Trade policy reforms have largely been driven by textbook notions of neutral incentives, to be attained through low and uniform tariffs, rather than by pragmatism. Nor have tariff reforms always been supplemented by adequate arrangements to support exports and investment.

"As a result, while exports and investment are sometimes too heavily taxed, imports of luxury goods occasionally receive favourable treatment. Numerous exemptions from duties, large-scale smuggling, and tariff reductions create serious difficulties for domestic firms with the potential to form the basis of a more export-oriented industrial base." 

A rethinking of policies is now needed that recognizes and addresses directly the structural constraints and institutional hiatus that pervade the African economies. It should draw on successful development experiences in Africa and elsewhere, and focus on capital accumulation and nurturing and building the institutions needed for an efficient market economy.  

Policy intervention should also be based on the recognition by governments that in market-based systems capital accumulation is closely linked to the consolidation of property rights and the emergence of a strong and dynamic indigenous entrepreneurial class willing to commit its resources to investment. Fears associated with the emergence of such a class as a rival economic power to ruling elites need to be overcome if market-based development is to succeed.  

There is no universal recipe, but some general principles can be laid down that are appropriate to Africa, in the light of its market imperfections and volatile economic environment:

• As elsewhere, private investment requires complementary public investment in physical and human infrastructure. Under-capitalization, including inadequate public investment, is the principal obstacle to sustained agricultural development in Africa. Neglect of agriculture in public spending is a more serious source of urban bias than pricing policies. At less than 5% of GDP the current level of public investment is barely sufficient to meet the development challenge;
• The poor past performance of many marketing boards and caisses de stabilisation does not imply that their original rationale is no longer valid. Some of the needs which they were established to satisfy can now be met by the private sector, but government action remains indispensable in several areas of commodity trade such as financing, risk management, market promotion, and the provision of infrastructure and services unlikely to be forthcoming from other sources. Thus there is a strong case for institutional pluralism in which reformed and depoliticized marketing boards and caisses are part of a landscape that also includes private organizations, parastatals and co-operatives;
• A more pragmatic approach would be to reconsider the case for financial restraint linked to administered interest rates and institutions that would mobilize domestic savings, direct credits toward investment and meet the diverse needs of small- and medium-sized enterprises in the primary and secondary sectors;
• In a continent seeking export-led growth, the exchange rate is too important a variable to leave to shallow and volatile markets and the vagaries of capital flows. Its management requires, inter alia, the of regulations and control noted above. Opening up the capital account is not likely to bring back flight capital, which on some estimates accounts for 70% of non-land private wealth in SSA. Much of the flight capital appears to have originated from the illicit diversion of public funds rather than from business incomes seeking economic stability or high yields abroad. 

"A change in the banking regulations of those developed countries where these funds are hidden could produce effective results in this respect," says UNCTAD. 

• The marginalization of SSA in world trade is a reflection of its inability to expand productive capacity, rather than a consequence of its resistance to openness. A gradual approach to trade liberalization is desirable in view of the existing weaknesses in supply capabilities.  

A trade regime that provides exporters with easy access to inputs at world prices, facilitates investment and discourages luxury consumption should also be built on a differentiated approach, supplemented by arrangements such as duty drawbacks and export retention schemes. The case for infant industry protection and industrial policies to promote learning and develop skills in domestic firms is no less relevant today in SSA than it has been for all successful late developers in this century. While WTO Agreements have reduced the scope for some policy options, selective strategies can still be applied, and exemptions provided under the agreements cover most countries in Africa. However, any such support must be time-bound and closely tied to performance criteria.

The experience of countries which have successfully launched a sustained process of economic growth based on a dynamic investment-export nexus built around primary activities gives ground for optimism that a similar process can be initiated in SSA. 

"For most countries in the region the opportunities are ample, and their exploitation should be the initial focus of policy. As the successful experiences of resource-rich countries in Latin America and East Asia have shown, policy requirements at such early stages of export promotion and accumulation are less demanding and can yield rapid results. Those countries have indeed succeeded in initiating strong and sustained export and output growth following many years of instability and economic stagnation, and they did not always start from more favourable conditions than those now prevailing in Africa." 

After a decade or more of reform in SSA premised on the assumption that government failures are far worse than market failures, the need to ensure complementarity between States and markets is now increasingly recognized, says the Report. 

"However, acknowledging market imperfections should not give way to a false ideology of state infallibility. Reforms are desperately needed if the African State is once again to assume its developmental role. This is a daunting task, and any comprehensive agenda of institutional reform can only emerge at the country level, where ownership of reforms can be ensured and the chances of success thereby increased. In general, governments need to diffuse a sense of national purpose. More specifically, there is an urgent need for a more efficient, dedicated and better remunerated civil service. At the same time, it is necessary to build greater trust and partnership between the state and private actors. 

Referring to the arguments that African tribalism and strife comes in the way of development, the Report points out that political instability on account of social, especially ethnic, fragmentation is not an intrinsically African problem. "While Africa is highly diversified in terms of social and ethnic minorities," notes the TDR, "there is less discrimination than in most other regions. But efforts since independence to build multi-ethnic political coalitions have entailed heavy economic costs. The experience of some South-East Asian countries illustrates that it is possible to achieve social and political harmony while nevertheless accelerating growth."  

The report also advocates that African countries should strengthen their regional economic ties, as they have already begun to do with their political ties. Special attention should be paid to a division of labour whereby trade and investment flows link countries at different levels of development. Intra-regional trade has been growing in SSA but is still very small. However, even marginal increases in such trade can help develop export capacities, which in turn can generate regional growth dynamics by easing balance-of-payments constraints and providing learning effects which will eventually make African exporters competitive globally.