Africa: Economic Report 2004, 05/14/04

Africa: Economic Report 2004

AfricaFocus Bulletin
May 14, 2004 (040514)
(Reposted from sources cited below)

Editor's Note

African ministers in the economic sector, meeting next week in Kampala, Uganda, plan to focus on what Africa can do to become more competitive in global trade. Current trade negotiations, as well as the perennial and unresolved issues of debt and aid, will feature in discussions at the meeting. But documents prepared for the meeting, including a preview of this year's Economic Report on Africa, stress that African countries must also build internal conditions for more competitive and diversified trade.

This AfricaFocus Bulletin contains excerpts from the overview of the Economic Report on Africa 2004, released by the Economic Commission for Africa (ECA) in time for the ministerial meeting. Other background documents are available on the ECA website at http://www.uneca.org/cfm/2004.

Another AfricaFocus Bulletin sent out today focuses on a new World Trade Organization ruling on cotton subsidies, and also contains additional links on related trade issues. See http://www.africafocus.org/docs04/cot0405.php.

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Economic Report on Africa 2004:
Unlocking Africa's Trade Potential in the Global Economy

Overview

E/ECA/CM.37/6

Setting the Scene for the Successful Integration of Africa into the Global Economy...

[Excerpts only: full text of the overview, including figures and footnotes, available at http://www.uneca.org/cfm/2004]

After fifty years of very significant progress, the future of the multilateral system of trade negotiations is currently surrounded by great uncertainty. The collapse of the Cancun World Trade Organization (WTO) Ministerial Meeting has put pressure on the Organisation of Economic Co-operation and Development (OECD) countries to reduce agricultural subsidies and other domestic support measures that distort global trade and contribute to the marginalization of Africa from the international trading system.

The Economic Report on Africa (ERA) 2004 takes the view that OECD trade policies represent a serious constraint to Africa s integration in the global economy. African exports have been handicapped by industrial country policies such as tariff escalation, tariff peaks and agricultural protectionism. At the same time, the Report argues that a very serious improvement is required in internal conditions, especially on the supply-side, if the continent is to improve its position in the international economy. Weak infrastructure, poor trade facilitation services, and the lack of physical and human capital pose a major impediment to export sector development. ERA 2004 thus takes an introspective look at what Africa needs to do to put its house in order so as to benefit from existing and future opportunities in the global trading system. It addresses the fundamental issues regarding pending reforms for African policy makers.

Africa needs to make a concerted effort in reforming its own economies through a large diversification of its productive structure if progress is to be made. Africa also clearly needs to adopt more proactive policies in order to promote the integration of the continent into the global economy. With these objectives in mind, this year's ERA contributes to the debate on how to strengthen areas such as energy policy, trade facilitation, and competitiveness.

Improving economic performance, but still insufficient....

Despite insufficient progress towards fulfilling the Millennium Development Goals (MDGs), and the persistence of serious political, social and economic problems in the continent, the overall message emanating from the Report is an optimistic one. Contrary to popular impressions, in recent years Africa has been making progress since the lost decades of the 1980s and 1990s. In 2003, Africa was the second fastest growing region in the developing world, behind Eastern and Southern Asia. Higher oil prices and production, rising commodity prices, increased foreign direct investments, better macroeconomic management, backed up by good weather conditions, underpinned this high growth. As a result, real GDP grew at 3.6 per cent in 2003 compared to 3.2 per cent in 2002, with North Africa putting in a particularly strong performance (of 4.7 per cent). West and Central Africa also exhibited respectable growth rates above 3.5 per cent. East and Southern Africa, in contrast, registered paltry growth of 2.5 per cent (see Figure 1.1)

...

Last year, the African continent in aggregate continued to exhibit good macroeconomic fundamentals. Fiscal deficits were largely kept under control, despite the challenge faced by many countries to balance increased spending on poverty reduction as set out under their Poverty Reduction Strategy Papers (PRSPs) and to preserve macroeconomic stability. Inflation rose slightly to 10.6 per cent compared to 9.3 per cent in 2002, reflecting higher food prices caused by poor weather conditions in some parts of Africa, higher oil-import prices and currency depreciation in several countries. The regional current account deficit fell from 1.6 per cent of GDP in 2002 to 0.7 per cent of GDP in 2003, driven by robust oil and commodity prices, and high worker remittances.

On the downside, some countries encountered severe economic setbacks. No less than seven African economies experienced negative growth rates, up from none in 1999 and only one in 2000. Moreover, when compared with the growth figures for 2001 and 2002, it becomes clear that there has been a slight deterioration in aggregate economic performance for sub-Saharan Africa (SSA), from 3.5 per cent in 2002 to only 2.9 per cent in 2003 (see Figure 1.2).

It has however to be borne in mind that these are not per capita figures. ... the real per capita growth rates for North Africa and SSA in 2003 are approximately 2.7 per cent and 1.7 per cent respectively, rates which are clearly inadequate to achieve the MDGs for poverty reduction. ...

The continent impatiently awaits the "Peace Dividend"...

One of the principal reasons for the holding back of Africa's economic performance has been the continuation of military conflicts. For example, the political crisis in Côte d'Ivoire has had a significant impact on the social and economic conditions of neighbouring countries such as Mali and Burkina Faso. In the early 1990s, in the aftermath of the Cold War, many political analysts were predicting a significant "peace dividend", in terms of a resolution of many historic conflicts which had blighted the region, and a subsequent economic, political and social recovery. As we now know, however, that "peace dividend" never materialized. The 1990s were the most conflict-ridden years since independence, and economic performance was lacklustre. African policy makers are keenly aware of the fact that substantial improvements in the economic and social situation of their populations are contingent upon the maintenance of peace. Without peace, little or nothing can be achieved. ...

Insufficient and inconsistent external support hinders progress....

.... At the Monterrey Conference on Financing Development in Mexico in 2002, the industrialized countries made a strong pledge to increase the quantity and quality of official development assistance (ODA) flows towards Africa. However, at US$19.4 billion in 2001, ODA flows are still significantly below the 1990 peak value (ECA, 2003). It is estimated that there is a shortfall of between US$20-25 billion annually if African countries are to attain the Millennium Goals. ...

Tied aid is another major concern. Tied aid (i.e. the requirement in return for ODA to purchase exports from the donor country) reduces the value of aid to the recipient country by 25-40 per cent, by obliging them to purchase uncompetitively priced imports. Admittedly, some donors have made significant progress. For example, the UK, Norway, Denmark and the Netherlands provided more than 90 per cent untied aid in 2001. But some other countries continue to insist that a high percentage of aid be used to purchase exports from their own producers. This brings to the forefront an important issue which is central to this year's ERA - it is not so much the volume of trade which is important, but rather its qualitative aspects that make a demonstrable difference from a developmental point of view.

Difficulties on the road towards the liberalization of Northern agriculture...

In recent years there have been a number of initiatives to improve market access for the poorest developing countries. The European Union's "Everything but Arms" (EBA) agreement, and the United States' African Growth and Opportunity Act (AGOA) are two notable examples (Box 1.1). Preliminary evaluations of these two initiatives show modest but important gains for some sub-Saharan countries. In this sense, both initiatives set encouraging precedents for the future liberalization of industrial and agricultural markets in the OECD countries. However, because neither initiative involves the dismantling of damaging agricultural subsidies, they stop short of fulfilling Africa's needs if the continent's export potential is to be realized. As a result of high subsidies to domestic producers in the United States and the European Union, for instance, the costs of lower cotton prices to a country like Mali have been estimated at US$43 million in 2001. Coincidentally, that was exactly the amount of debt relief received by Mali from the World Bank and the IMF in the same year under the enhanced Highly-Indebted Poor Country (HIPC) initiative (Oxfam, 2002). ...

Moving beyond primary commodity production....

In the past, a number of ECA reports have analysed how Africa's heavy dependence on primary commodities as a source of export earnings has meant that the continent remains vulnerable to market vagaries and weather conditions. Price volatility, arising mainly from supply shocks and the secular decline in real commodity prices, and the attendant terms-of-trade losses have exacted heavy costs in terms of incomes, indebtedness, investment, poverty and development. According to one World Bank study, for African countries which are not oil exporters, the cumulative terms of trade losses in 1970-97 represented almost 120 per cent of GDP, a massive and persistent drain of purchasing power. According to the same study, losses of that magnitude almost completely wipe out the benefits from the substantial increase in aid provided to the continent after 1973. Nor has the story been much more encouraging for oil producers like Nigeria, Gabon or Angola; despite benefiting from massive terms of trade gains, the income derived from oil exports has been used neither to finance the necessary structural diversification of the economy nor to place these countries on a sustainable growth path.

The logical policy advice stemming from this situation, for oil-producing and non-oil-importing countries alike, is that Africa needs to diversify out of agricultural and other primary products, and into sectors with a higher value-added. ...

Focusing on export diversification....

During the 1990s, it became commonplace to argue that trade has a central role in providing the basis for economic growth and development. Throughout the period of structural adjustment, the policies promoted by the international financial institutions (IFIs) were designed precisely to that end - to increase the "openness" of African economies to trade. Based on trade as a percentage of GDP, however, African economies are already surprisingly open. This trade share is 62.2 per cent in SSA, actually above the world average of 57 per cent, and far above the average for Latin America and the Caribbean (35.9 per cent).16 Bearing in mind that informal (i.e. unregistered) trade is generally considered to be much higher in Africa than in comparable regions, and the fact that the continent has been adversely affected by the deterioration in the terms of trade, Africa's degree of integration into the world economy is thus much higher in this respect than is commonly thought.

The low incidence of Africa in world trade essentially reflects Africa's small GDP, rather than a lack of openness per se. Contrary to popular advice, therefore, the volume of trade is not the primary challenge facing African policy makers. Rather, the issue is a qualitative one: although the volume of trade is only loosely related to economic success, econometric investigations reveal that the share of manufactured goods in total exports is a more significant indicator of economic success. Manufacturing is also one of the main vehicles for technological development, innovation, and an economy with a higher share of manufacturing in total value added is generally less exposed to external shocks, price fluctuations, climatic conditions and unfair competition policies.

Contrary to some opinions, it is not true that Africa has made no progress towards export diversification over the last two decades

• simply, the progress that has taken place has been insufficient (see Table 1.1). A few African countries, like Uganda and Kenya, have increased exports by diversifying into non-traditional exports, typically, vegetables, fruits, and flowers. Such achievements are not to be gainsaid, but particularly relevant are the experiences of the small number of diversifiers which have successfully promoted manufacturing exports, such as Tunisia and Mauritius. ...

The experience of the more successful diversifiers reveals that trade liberalization alone is unlikely to enable such countries to emerge as exporters of manufactures: in developing countries which are poor in terms of infrastructure development, sound macroeconomic policies, openness and fiscal incentives are not enough. A concerted effort to focus on strengthening the supply-side response of African industries is therefore required. Providing some policy recommendations to this end is the main theme of ERA 2004. ...

Confronting supply-side problems...

To ensure greater export diversification African countries need to identify key domestic obstacles to international business development and take appropriate measures to improve local conditions for business. Firm-level surveys in countries such as Senegal, Ghana, Uganda, and Kenya have identified infrastructure constraints as a significant factor affecting export development. African countries naturally require good infrastructure facilities in order to be able to compete effectively in the international market. Many types of infrastructure - roads, air transport, railways, ports etc. - are important.

The Report highlights the energy sector and its role in facilitating export diversification. Despite Africa's enormous potential for producing energy, many African countries continue to be plagued by sub-standard infrastructure in this field and the African power sector is small in comparison with its geographic size and population. Africa's electricity generation was 479.8 terawatt hours in 2001, representing only 3.1 per cent of world electricity production. Even this very limited supply is prone to repeated failure as manifested by power rationing, "brownouts" and blackouts. A number of problems have reduced the ability of the sector to power Africa's export diversification drive. These include: high system losses in transmission and distribution; unsustainable tariffs; climatic factors; poor technical, managerial, and financial performance; and inefficient government interventionism. Comparisons of unit costs between Tunisia, a country with an efficient state-owned energy sector and a well-diversified economy, and countries of West Africa reveal unit energy costs which are more than twice as high in countries like Togo and Cote d'Ivoire, and more than four times higher in Senegal and Mali (see Figure 1.3). ,,,

Africa's energy sector has not been able to attract the levels of FDI necessary to upgrade Africa's power network. Foreign direct investment in the power sector in SSA between 1990 and 1998 was US$363.2 million, representing only 6 per cent of all infrastructure FDI flows to the region. Energy schemes in which foreign private investors have been present have at times produced poor results, or provided services at an excessively high cost - something obviously prejudicial to the poor. It is worth recognizing, however, that the choices for African governments are frequently difficult ones. On average, privatized utilities have proved more efficient in extending coverage of services like water or electricity connections. But are host governments prepared to accept tariff increases, with all the distributional consequences that that entails, in return for higher coverage rates? For instance, a study of the options for Nairobi's water system by British company Halcrow Group in June 2001 concluded that a 40 per cent price increase would be required if any improvements to the capital's infrastructure were to be funded.

Given the tight budgetary constraints under which most Least Developed Country (LDC) governments operate, is reform of the existing public sector services feasible over the short to medium term? A recent UN report reminds us that "the growing tendency to leave even LDCs to the mercies of the capital market to build power plants and upgrade their telecommunications facilities has led to growing under-provisioning of investments in this sector in the LDCs. ...Not all LDCs can access FDI in these areas or access it with sufficient urgency to meet their immediate demand for power or water" (UN, 2000).

To achieve a better utilization of power resources, ERA 2004 recommends a number of policy guidelines:

1. Direct government control of the power sector has often produced disappointing results, although this is not always the case (see the Tunisian example above). One policy option is the transformation of power companies into independent and self- reliant corporations that can still be under government ownership. The success and efficiency of power companies will, however, depend on the extent to which they incorporate economic considerations in their operations.

2. African countries should promote energy efficiency. Energy efficiency reduces operating costs, enhances economic efficiency, and improves the productivity and international competitiveness of energy consuming companies. An energy efficient programme should include promotional and information dissemination activities to increase energy conservation awareness, and incentives to increase the ability and willingness of energy users to implement energy conservation measures.

3. Rural electrification programmes can also help promote the development of the energy sector and therefore ensure greater export diversification. African governments could promote rural electrification by playing a more aggressive and transparent role of promoting smaller village-based energy systems.

4. The increased reliance on private sector involvement in the energy sector requires good and credible regulation. Efficient regulation should prevent any abuse of monopoly power and limit price increases to levels that are compatible with profit margins. To perform effectively, it is essential that regulatory bodies be independent, and distanced from political, corporate, and other pressures.

5. Finally, the promotion of regional integration in energy services would help promote the development of the energy sector in

Africa. A study by the Southern African Development Community (SADC) and the World Bank suggested that an estimated saving of US$1.6 billion over ten years could be realized through optimal use of regional electricity resources and installation in Southern Africa. The development of regional markets in energy would require common regulations for the international exchanges. ...

Africa: Economic Report 2004

Page Editor: Ali B. Ali-Dinar, Ph.D.