A. Prospects for 1995-1996

The economic prospects for the African region in 1995 appear quite favourable in 1995, as the year opens, although there can be little certainty as to what the final out-turn might be, given the fragility of African economies and the deficient information base used for the forecasts. What is certain is that the overall economic performance in Africa in 1995 will, as in the past, depend heavily on developments in the region's external sector as well as on climatic conditions. Progress towards the resolution of the civil wars and ethnic tensions and conflicts that have had and continue to have a damaging impact and repercussions on the domestic economy and the population at large will no doubt have a favourable impact on performance in 1995.

While the overall outlook for commodity prices is bright for 1995, the situation remains mixed. A strengthening in international coffee prices is expected because of the stock retention programme being implemented and possible production declines, but cocoa prices may not change significantly owing to uncertain demand situation and sluggish consumption in North America and Europe. And little or no sign of recovery in the former USSR. Reduced stocks of rubber, together with the slowing down of supplies of synthetic rubber, is expected to result in a tight global market in 1995. There are indications also that the rise in metal and non-oil mineral prices on the world markets may persist well into 1995. The expected surge in copper prices is related to signs of economic recovery in the USA and Europe, and expectations of sustained growth in some developing countries. As for tin and lead, prices are expected to increase, based on a rising trend in consumption.

As for the oil market, the prospects are rather shrouded in uncertainties in 1995. Since demand is projected to increase at a meagre rate of less than 1 per cent per annum to the end of the decade, future movements in oil price would depend very much on the behaviour of producing countries. If, as has been the case in the past, they fail to observe the orderly supply arrangements established by OPEC, prices are likely to decline owing to excess supply. Current estimates of future trends in oil prices range from the US$17 to US$ 18 per barrel on average.

Whether there would be a substantial debt reduction and increased and sustained resource flows to the African countries in 1995 is far from clear. At the end of the G7 Summit in December 1994 at Naples, Italy, a new stage was reached whereby by the Paris Club to continue its efforts towards debt relief for the poorest countries. The Paris Club creditors decided to grant 67 per cent debt or debt-service reduction (the earlier limit was 50 per cent) to those countries whose per capita income is $500 or less and whose ratio debt/exports - an indicator of debt overhang - is more than 350 per cent. But an additional conditionality was that continued efforts be made by the countries to implement SAPs entered into with the IMF over three consecutive years.

Aid budgets have been considerably cut back and down-sized in the industrialized countries, while, at the same time, the recent crisis on the international financial markets and the turmoil unleashed in the "emerging capital markets" have demonstrated convincingly the fragility of a world financial system that is increasingly focused on speculative capital and the rapid movement around the world of short-term funds. The new surge in portfolio investment and short-term capital flows have generally bypassed the nascent stock markets in the Africa region and are likely to do so even in 1995 and the immediate future. However, there are grounds for believing that the improving business climate across the continent; the impact of developments in foreign exchange policies and the slow but steady growth of confidence in political stability; and continuity of economic policies and financial reforms in parts of the continent are some of the positive factors that may be helping to reverse the recent trends in disinvestment and the drying up of private investment, both foreign and African, in the region.

At the domestic level in Africa, there are as yet few definitive signs of the likely agricultural trends in 1995, apart from the limited indications from those countries that had entered their cropping season by the end of 1994. It appears, at this point, that weather conditions may not be favourable in the Maghreb, particularly in Morocco, and that the same situation may hold for some countries in southern Africa. There are grounds also for concern in the Horn of Africa, where the weather pattern at the beginning of the year was somewhat unusual. Those developments would suggest only a modest increase in agricultural production for the whole region in 1995. The ECA secretariat forecasts a 2.7 per cent increase in value added. At the same time, the overall food supply situation is expected to be fairly satisfactory in 1995 except for a few possible cases of short-falls associated with isolated cases of drought, flooding and pest and locust infestation. According to the latest FAO estimates, total cereal import requirements in the region were expected to decline by 8.7 per cent from 28.6 million tons in 1993/1994 to 26.1 million tons in 1994/1995.

It is expected that progress towards the restoration of peace in 1995 would launch countries previously embroiled in conflict on the path of recovery and sustainable development. It is hoped, similarly, that the fragile situation in Angola, Rwanda and Burundi will become more viable in 1995 and that significant breakthroughs towards peace and reconciliation will be forthcoming in Liberia, Sierra Leone, Somalia and southern Sudan, so that those countries could emerge from protracted emergency or relief dependency into rehabilitation, reconstruction and real development. It is also hoped that transition to democracy in other African countries will move forward under peaceful and less destructive conditions in 1995 and that the economic and social costs of such transition will be contained.

In South Africa, in 1995, it is expected there will be an intensification of efforts, through the implementation of the Reconstruction and Development Programme (RDP) to correct the gross socio- economic imbalances inherited from the apartheid era. Coupled with the firm stance towards fiscal responsibility, price stability, support for the private sector and encouragement of foreign investment, South Africa's economic growth rate should accelerate. That, however, will also require cooperation by labour and employers to build a new pragmatic relationship, based on a sympathetic understanding of each other's basic concerns as they set out to correct the labour market distortions entrenched by years of apartheid.

There is little doubt that African countries will continue to intensify their economic reforms in the direction of growth and transformation in 1995. Already, it is a good sign that most national budgets in Africa are indicating a reduction in deficits and in the inflationary spiral associated with excessive money creation. It is hoped that in 1995 the economic efficiency and macro-economic stability concerns of the reform process will be integrated within a sustained long-term programme to build critical capacities in the areas of human resources, institutions and economic and social infrastructure that will put Africa on a sustainable footing and make it fully competitive in the modern world economy.

Altogether, therefore, there are grounds for only modest optimism regarding the growth prospects of the regional economy in 1995. Based on the above considerations and assumptions, ECA secretariat estimates that Africa's regional output should grow by about 3 per cent in 1995. It is to be noted, as usual, that this is an average of widely divergent results by countries and subregions. In Central Africa, which was severely hit by political turmoil in 1994 and remains mired in political instability, real development remains somewhere on the distant horizon with only a faint hope for output rebound in 1995. In contrast, a strong recovery is expected in East and Southern Africa, the subregions badly affected by drought in 1992.

It is yet too early to quantify prospects for 1996, but it would seem that growth may not exceed the rate expected in 1995, which in itself is far from what is required to make an impact on poverty and social welfare in the region. African countries' earnings from agricultural and mineral exports may retain their current positive trends if the dynamics of the recovery in the OECD countries is maintained. On the other hand, the surge in commodity prices in 1994 and 1995 may well encourage an expansion in productive capacity that was previously discouraged in Africa and elsewhere by low and declining world prices; and it may cause prices to revert to their secular trend. As in 1995 and previous years, therefore, the vicissitudes of the weather and price movements on the international market continue to cast a cloud of uncertainty over future growth prospects in Africa, in view of the importance of agriculture's contribution to aggregate output, export revenues and employment. And so may the violent conflicts affecting a significant number of countries and the lack of democratic and enlightened governance in many cases. It would be an error, though, to conclude that mere political, economic and financial liberalization will automatically bring about development. A lot would indeed depend on the real changes in the production sphere, in terms of competitiveness and productivity - and in intra-African cooperation - all of which are crucial for socio-economic progress and transformation in the region.

B. Major policy challenges

African countries will have to cope effectively with a number of major challenges, if they are to cope with the demands of socio-economic transformation and structural change. On the domestic front, there is the urgent need to build and effectively utilize the human, institutional and infrastructural capacities for managing a modern economy and polity, harnessing the region's physical, and financial resource endowment to bring about a meaningful and sustained transformation of the African economy. In that respect, they need to revitalize the social sector and to step up the mechanisms for conflict prevention and peaceful resolution of political disagreements and differences in order to minimize the needless waste of human and national resources, promote popular participation in the political process and focus world attention on the development needs of the continent rather than on conflicts and emergencies.

In their management of the economy, African Governments need to adopt macroeconomic policies that are consistent with the maintenance of monetary and price stability and a realistic exchange rate; that provide an enabling environment for domestic and foreign investors; and that involve an incentives structure consistent with the maintenance of economic efficiency and a high level of productivity. They need to ensure that policies for sustainable economic growth stimulate employment and concentrate largely on employment-intensive approaches and strategies, particularly in the rural areas and in the urban informal sector. Above all, they will have to galvanize the institutions of regional and subregional cooperation more effectively to expand intra-regional trade and to promote regional and subregional approaches to sectoral development. On the external front, they need to arrest their declining share in world trade, diversify their trade structures, widen export markets and import sources, participate in the growing global linkages and interdependence of enterprises, expand trade in services and explore the opportunities provided by the Agreement which concluded the GATT Uruguay Round, while minimizing its adverse consequences.

The policy measures for coping with those challenges are closely interrelated. Indeed, focusing on the right priorities could achieve a number of objectives simultaneously. For example, virtually all the subregional economic communities have developed programmes in many of those areas, while at the regional level plans are afoot to strengthen the subregional initiatives and encourage regional programmes in many areas. The major obstacle is the failure to implement agreed decisions and strategies. It is on that issue that new and innovative efforts would have to be directed if the challenges facing African countries are to be met effectively.

1. Making more progress with diversification

There are two observations on the limited progress of diversification in the African countries so far: the first is that there are major gains to be reaped in the diversification process if certain critical bottlenecks can be removed; and the second is that there are a few success stories of diversification in Africa which the rest of the continent can emulate and is indeed beginning to emulate. Added to these, the spectacular examples of diversification in Asia and the Far East have become the subject of much discussion and debate in African countries. Comparisons have been drawn between Africa and Asia and the Far East, as a way of drawing attention to a number of lessons that Africa can learn if it is to make more rapid progress with the diversification process. The successful experience of diversification in Asia and the Far East illustrates, in particular, the important role played by education, foreign investment, small-scale enterprises, domestic resource mobilization, linkages with established transnational corporations (TNC), sound infrastructure and a generally supportive macroeconomic environment, in a successful diversification programme.

The experience has also demonstrated the role of a dynamic manufacturing sector as a promising vehicle for promoting a vibrant and diversified economy. In addition to expanding the production and export base, as well as easing balance-of-payments pressures, the manufacturing sector induces technological transformation and builds up know-how.

Finally, it has demonstrated the crucial role of the private sector in the diversification process. Clearly, if the structure of exports is to change and imports of manufactured goods decrease, the private sector must be supported and encouraged to exploit their entrepreneurial talent to take advantage of both domestic and external windows of opportunity. That requires, among other things, the creation of a conducive environment, improved incentives structures, access to targeted credit, and training in technological and marketing skills, as well as exposure to external markets. The rapid development of African economies in a free-market world environment, will be difficult to achieve without the active and dynamic participation of the private sector.

African Governments have a critical role to play in creating a supportive environment for rapid diversification. In particular, since diversification is a central objective of SAPs, the impact of current SAP policies on the diversification process need to be constantly evaluated, to ensure that this central objective is achieved.

The donor community needs to support the diversification effort of African countries by providing financial, technical and managerial assistance for the development of non-traditional exports, and the creation of a conducive environment for industrial development.

2. Expanding economic cooperation and intra-regional trade

Intra-regional trade is an essential vehicle for the promotion of diversification and the establishment of linkages between production units in different countries of the region. Not only will this contribute to improved productivity and greater competitiveness for African products, it would also provide a stronger basis for an effective participation of the African region in the evolving global linkages and interdependence of production units. The present slow progress of intra- regional trade is therefore a retarding factor in the diversification process and more needs to be done to remove the obstacles to intra-regional trade.

The present slow progress stems from (a) the limited market size of many countries; (b) survival of the historical links of African countries with their previous colonial centres, which have created production structures entrenched in supplying the centres with raw materials in return for manufactured goods; (c) concentration on increasing export earnings from a limited range of commodities at the expense of diversification; (d) failure to exploit the potentials of intra-African trade through coordination of development plans at subregional levels and the development of complementary links among production units; (d) poor and inadequate intra-regional transport and communication facilities to support expanding intra-regional trade; (e) lack of harmonization of standards, specifications and trade documentation; and (f) non-convertibility of African currencies, inappropriate exchange-rate policies and non-availability of trade financing, and insurance and credit facilities.

Needless to say, a good road and transport network will greatly facilitate intra-regional trade. Other essential measures are the improvement of trade information, cooperation in investment ventures to increase complementarity and harmonization of macro-economic policies. In that connection, the harmonization at the subregional level of the SAPs being pursued by various countries of the region would help the growth of intra-regional trade and open the way for the development of joint policies on major economic and social issues. Indeed, there has been much discussion of the implications of SAPs for regional economic cooperation. For example, it has been argued in the African Development Report (ADB), 1993, that: "Global trade liberalization, an important component of most SAPs, does not necessarily march hand-in-hand with preferential regional trade liberalization, since rapid global liberalization obviously reduces the margin of advantage that can be enjoyed from preferential trade liberalization. However, this very constraint may encourage speedy action by regional groupings to remove other impediments to intra-regional trade, such as payments restrictions and other non-tariff barriers which have placed such trade at a disadvantage relative to extra-regional trade. In this sense, structural adjustment and economic integration are mutually reinforcing."

Against that background, it may be asserted that, now that barriers on extra-regional trade have been substantially reduced, African countries should aim to remove all tariff barriers on goods of regional origin entering intra-regional trade in the shortest time possible. That will still leave a number of non-tariff barriers to tackle but it will give a major boost to intra-regional trade.

The current emphasis within African integration organs on the need to harmonize macroeconomic policies and the implementation of SAPs is an acknowledgement of the fact that trade is only one aspect of regional integration, albeit a very important and crucial one, and that other areas of cooperation are also important for the overall success of the integration process. Even if all the major barriers to intra-regional trade were swept away in one fell swoop, it should not be expected that it would be followed in the short and medium terms by a major surge in intra-regional trade. Such a measure will, without doubt, give a major boost to such trade, but its impact will still be very limited without major progress in subregional and regional cooperation in major sectors of economic activity - in particular, agriculture, industry and energy - such as would lead to growing linkages and interdependence among African economies.

This awareness also explains why many integration organs have been making serious efforts to expand cooperation in major sectors of economic activity, though with only limited results so far. In West Africa, the transmission of electric power from Ghana to some neighbouring countries and current moves to pipe Nigeria's natural gas to Benin, Togo and Ghana are examples that could be replicated in other areas, with much benefit to intra-regional trade in goods and services. Such efforts certainly deserve to be encouraged and supported.

3. Meeting the challenges of the Uruguay Round Agreement

Given the wide coverage of the new Agreement, which includes trade in goods and services, intellectual property, trade-related investment measures, the progressive integration of agriculture and textiles into the work of the successor World Trade Organization (WTO), and a wide range of international rules and disciplines, the outcome of the Uruguay Round poses particular challenges for Africa's international trade and payments. That is the more so since current assessments indicate that Africa is expected to lose up to $3 billion per annum during the initial years of implementation of the Agreement, while other trading countries share benefits that could amount to $500 billion per annum. Meeting these challenges implies taking measures to minimize the disadvantages of the Agreement and exploring any opportunities that it may provide.

The following represents a brief and preliminary evaluation of the challenges which the Agreement poses for Africa and their implications for future policy:

(a) Market access: Although tariffs on products of interest to developing countries have been cut, they will remain at higher levels than those applied to products traded among developed countries. Tariff escalation will be reduced but not significantly. Of more concern to African countries is the annulment of special preferential arrangements, in particular the Lomé Convention. With the annulment, African exports would confront more competition from other producing nations and higher tariffs in consuming countries. Early estimates by UNCTAD show tariff increases of up to 28 per cent in the European Union (EU), 40 per cent in Japan and 16 per cent in the U.S. markets;

(b) Agriculture: African agricultural exports are dominated to the extent of 50-100 per cent by tropical products. Those products, which enjoyed preferential treatment under the Generalized System of Preferences (GSP) and the Lomé Convention, have seen their preferential margins collapse under the Agreement. With regard to the preferential treatment enjoyed by African countries of the Africa, Caribbean and Pacific (ACP) group under the Lomé Convention, there has been an erosion of preferential margins by 100 per cent for coffee, coffee by-products and cocoa, 50 per cent for phosphoric acid, more than 30 per cent for petroleum by-products, crustacea and leather, and more than 20 per cent for tobacco. With trade liberalization, African countries would face greater competition from Asian and Latin American countries on those products. Since the bulk of Africa's foreign trade is with Europe, it is expected that the reduction of preferences in the important sector of tropical products would be about 80 per cent of the margins under GSP and 50 per cent under the Lomé Convention. African producers of the ACP group are likely to incur losses in their major exports - being the weaker trading partners - and to be the big losers in the short term.

The decision to reduce export and domestic subsidies would increase the world price of food, resulting in higher import bills for African net food importers. In the short term, th watill put pressure on their balance of payments, since they will have to spend more foreign exchange on food imports. In the long term, however, it could encourage them to undertake measures to increase domestic food production, by drawing attention to domestic bottlenecks that need to be removed if success is to be assured.

Reduced preferences are envisaged in the tropical products subsector of 80 per cent under the GSP and 50 per cent under the Lomé Convention. In the case of agricultural products based on natural resources, the preferential margin will fall by 60 per cent under the GSP and 16 per cent under the Lomé Convention. For exports like coffee and cocoa the EU tariff reduction will lead to the removal of preferential treatment enjoyed by those products, which would cause a significant decline in the export revenues of African countries;

(c) Global most-favoured-nation treatment: The underlying principle of the new Agreement is the non-discriminatory application of the most-favoured-nation (MFN) principle. In future, regional and subregional economic groupings would have to satisfy stricter rules and to be generally outward- looking, if they are to be consistent with the provisions of the Agreement;

(d) Textiles and clothing: A major gain for African exporters of textiles is that the Multi-Fibre Agreement (MFA) is to be phased out within 10 years. The textile exports of African countries are affected by the MFA quota system, which reduces their market shares. Mauritius is a case in point;

(e) Services: The General Agreement on Trade in Services (GATS) covers a wide range of services: tourism, transport, telecommunication, insurance industry, business services, financial services and other professional services. In all those areas, African services are relatively undeveloped, even in comparison with those of developing countries elsewhere. Opening them up to foreign competition could therefore have a negaveti impact on the indigenous service industries of African countries; and the choice facing them is not whether or not to liberalize their services sector but how quickly they can mobilize their collective effort to strengthen their service industries so that they will be better able to face the new competition. In that connection, there are many provisions of the Agreement which they can invoke to gain time to strengthen their service industries. First, they may have up to 10 years to claim sectoral exemptions from MFN treatment. Secondly, they may liberalize their services sectors to a lesser degree than developed countries and can make market access conditional on measures to assist them in strengthening their own services sector. Those provisions do not absolve African countries from the obligation to raise the competitive level of their service industries in the long term and to join the ranks of developing countries which are already competing effectively with the developed ones in a wide range of services, notably airline services, computer accounting services and writing software. For example, Swissair has transferred its revenue accounting operations to Bombay, India, as part of its overall cost- reducing and revenue-enhancement programme;

(f) Trade-related intellectual property rights: The agreement on trade-related intellectual property rights (TRIPs) mandates the extension of patentability to virtually all fields of technology recognized by developed countries. Its scope covers copyrights, industrial patents, trademarks, trade secrets, industrial designs, layout designs of integrated circuits, and geographical indications. It will oblige African countries to enact strict national legislation with regard to intellectual property protection according to standards prevailing in the developed countries. It will be a constraint on their decisions "over seeds and patents" and affect the costs of medicines and products or processes. African countries may also have to face higher costs in their quest for technological development, since they would have to pay for copyrights and patents;

(g) Trade-related investment measures: The agreement on trade-related investment measures (TRIMs) will permit only weak restrictions on foreign investments. It will make it difficult for Governments to use policy measures in the interests of national development, such as domestic content and trade-balancing requirements, for the regulation of the activities of foreign investors. African countries, in particular, are concerned that restrictive business practices by TNC will stifle competition from potential new rivals in the host countries and from other developing nations.

The results of the Uruguay Round, as they pertain to Africa, reflect not only the weak negotiating position of African countries but also the structural weakness of their economies. Africa participated in the negotiations from a position of conspicuous weakness. The continent (including South Africa) contributes no more than 3 per cent to globally traded goods, which is too small to have an impact on world trade. Secondly, the African contracting parties were negotiating individually rather than as a block with a common position, unlike other groupings, notably EU and most of Asia and Latin America. Failure of African countries to coordinate their position eroded whatever influence they could have had on the outcome of the negotiations. Thirdly, their negotiating leverage had been weakened by the trade liberalization programme which they had already adopted under the World Bank/IMF-inspired SAPs.
While Africa should accept the outcome of the Uruguay Round in principle, it should nevertheless explore all the provisions for exemption from full compliance and delayed implementation until it has been able to rehabilitate its economies and improve its competitive position. It should seek special compensation from Europe to be devoted exclusively to economic restructuring, in order to make up for the expected losses arising from the Agreement. It should also avail itself of the provision for amending the Lomé IV Convention in the event of multilateral trade negotiations within WTO or other measures relating to general trade liberalization which lead to the loss of competitiveness in the export of ACP agricultural products to the single European market. It should also join other developing countries in preparing the ground for future negotiations within WTO on issues of importance to them which were not completely settled during the Uruguay Round negotiations. Chief among these are: (a) the need for special balance-of-payments assistance to meet the difficulties that are likely to be encountered during the transition to the new system; and (b) the need to ensure that cooperation between WTO, the World Bank and the International Monetary Fund (IMF), for which the Agreement provides, is used to maintain the consistency of international policies in the areas of trade, money and finance, rather than as a new source of pressure to constrain the freedom of African countries in policy formulation and implementation.

In the long term, if Africa is to take advantage of the new open trading system, it would have to undertake reforms to improve its competitive position in many spheres and also to accelerate measures to diversify its economies from primary commodities to manufactured goods. It would also have to create the dynamic linkages within and among the various sectors of the domestic economies of individual countries. The dynamics of an increasing participation in world trade and technological transformation are clearly to be found above all in the manufacturing sector. Without greater effort to mobilize their collective strength through regional and subregional cooperation, such dynamic linkages would be very difficult to achieve under the conditions of free trade which the Uruguay Round Agreement aims to promote.

In the new competitive atmosphere created by that Agreement, a quick turn-around to sustainable growth will be difficult to achieve without the active support of the international community, in the form of trade concessions and increased resource flows. The relevant international agencies, including WTO, and the region's trading and development partners, should strive to assist African countries in the mobilization and effective utilization of external resources for rapid economic transformation. Helpful supportive measures by WTO would be such as to facilitate investment and greater lending for structural adjustment. They would assist African countries in dealing with balance-of-payments pressures and transitional strains consequent on policy reforms, and thereby to benefit from the implementation of the Final Act of the Uruguay Round. In the new circumstances which they face, African countries also need increased capital flows and an accelerated approach to debt relief. WTO could assist them to benefit from, rather than fall victims to, strengthened international rules and institutions, thus promoting trade and investment. WTO could also assist them to secure greater access to business technology, distribution channels and information networks, which would enable them to develop their capacity to participate effectively in the expanding trade in services.

4. Participating in global linkages and interdependence

One of the most remarkable developments in recent years has been the success of several developing countries, mostly in Asia and the Far East, in becoming major participants in the growing global network of enterprises linked together by trade in goods and services and by investment flows. Most of them have developed the capacity to provide efficient off-shore production facilities and services for TNC.

It has been noted in the United Nations World Investment Report (1993, p. 177) that "Those developments make it more important than ever for developing countries to build up their own human and physical infrastructure. In addition to providing the basis for industrialization and development of the domestic economy, it would allow national enterprises to join up with TNCs on a more equal basis. It would raise the quality and sophistication of the foreign direct investment (FDI) a host country could attract and would strengthen the prospects for technology acquisition. It would also enable host developing countries to build up supplier capabilities which are sometimes a precondition for the location of TNC activities and which, moreover, add to the economic and technological spillovers from affiliates. The building up of such facilities has been an essential feature in the developing countries, including those in Asia and Latin America, that have succeeded in restructuring both their international and domestic production sectors towards higher-value-added activities."

The same source has noted further, perhaps with most African countries in mind, that "Other developing countries that do not offer the locational advantages required by regionally or globally integrated firms, such as a skilled labour force, an open trading and investment environment, a developed communication and transport infrastructure and networks of local suppliers on which TNCs can draw, risked being further marginalized. Those countries need to consider how to formulate and coordinate policies so as to maximize the benefits to them from the emerging integrated international production system as well as from FDI in more traditional organizational forms which they may be in a better position to obtain."

As part of the implementation of SAPs, many African countries have developed a new openness towards FDI. They are improving infrastructure but are far behind in developing skills for its utilization and maintenance. They would have to move faster along that road if they are to participate effectively in the evolving global system.

5. Intensification of efforts at resource mobilization

The prospects for resource mobilization in support of the development process in Africa would depend on the success of the reforms of the financial sector which are in progress in a number of countries in the region. There is general agreement that much more needs to be done in order to make domestic financial markets effective avenues for mobilizing and allocating financial resources. Despite the abundance and vitality of informal financial institutions in Africa, their potential for enhancing the development process has not been effectively harnessed. Efforts so far exerted by central banks to bring about a closer relationship between the formal and informal financial institutions have been grossly inadequate. And the commercial banks have shied away for too long from financing smallholder agriculture and micro-enterprises, pleading the high transaction costs.

Prospects in most African countries for mobilizing adequate external resource flows in 1995 and beyond look rather difficult. First, competition for foreign aid resources is likely to intensify as more countries in Africa and elsewhere persevere in their economic reform programmes. Furthermore, aid donors have become more selective in their support to developing countries, as well as in the choice of the programmes and projects they fund. Secondly, the competitive global trading environment which will be engendered by the implementation of the provisions of the Uruguay Round Agreement may be expected to impose additional difficulties on African countries in their endeavours to compete effectively on international commodity markets and thereby to earn adequate foreign exchange to support their development process. Thirdly, the failure of the IMF Board of Governors and the World Bank at their last Annual Meetings, held at Madrid, Spain, to agree on a new allocation of Special Drawing Rights (SDRs) to increase international liquidity means that developing countries cannot expect an easing of the foreign exchange and balance of payments constraints on their economies. More importantly, it reflects a divergence of opinion among major developed countries as to whether adequate liquidity already exists to support world economic recovery.

While African countries should exploit all possible opportunities to increase the volume of external resource inflows, they should nevertheless be conscious of the limitations and difficulties likely to limit their success. The competition for foreign resources is growing steadily more intense, in consequence of which recipient nations could risk ending up losing more in the way of other benefits than they receive in the shape of increased inflows. The growing relative scarcity of foreign capital might well make it more expensive; and its phenomenal mobility - and, indeed, its instability - makes it increasingly hard to acquire and control.

In the circumstances, African Governments need to mobilize domestic resources more intensively and to ensure that investment resources as a whole are used more efficiently. The goal of self-reliant growth, whose banner African countries raised in the Lagos Plan of Action, may now be inaccessible because of restricted access to foreign resources. The situation is fraught with challenges and opportunities for the African people and their Governments. If they are to rise to the occasion, they must create a conducive environment by maintaining political stability and pursuing appropriate economic policies.

People must strive to increase domestic savings and Governments must assist by intensifying efforts to mobilize resources through appropriate fiscal, monetary, commercial and exchange-rate policies. Financial institutions should be expanded and widely dispersed throughout the countries, instead of maintaining the present urban bias. Countries must intensify efforts to diversify exports in order to generate additional foreign resources.

6. Erasing the debt burden

On the outlook for a solution to the African debt problem, there is scope for both hope and pessimism. The elements for hope may be found in the pronouncements made by the international community at various fora, including that of the Summit of the Group of Seven at Naples, Italy, the Summit of the Non-Aligned Movement at Jakarta, Indonesia, and the meetings of the Board of Governors of IMF and the World Bank. The international community and African countries are agreed that more needs to be done in order to bring the debt stocks of most African countries to sustainable levels and that durable solutions would invariably have to include more concessional terms for debt rescheduling and the cancellation of a larger proportion of the debt stocks. However, two things remain to be agreed upon: whether finding lasting solutions will need to be dealt with on a case-by-case basis or at a subregional and/or regional level; and what conditionalities should be attached to such debt relief. Those are the issues that will occupy African countries and the international community in 1995 and beyond. Pessimism as to whether a durable solution to the African debt problem can emerge in 1995 springs from the fact that, while a general consensus has emerged as to what the main elements of a lasting solution ought to be, implementation of appropriate measures by the international community has been dragging. That now appears to be the only stumbling block.

Editor: Dr. Ali B. Ali-Dinar, Ph.D
Previous Menu Home Page What's New Search Country Specific