Economic Lecture Series-3 - Islamic Development Bank

OUTLOOK FOR SUSTAINEDECONOMIC GROWTH IN AFRICA: THE CASE OFIDB MEMBER COUNTRIESDr. Louis A. Kasekende,Chief Economist,African Development BankIslamic Development Bank Headquarters,Jeddah, Saudi Arabia28 Shawwal 1429H (28 October 2008)

CONTENTSForeword ............................................................................................................ iiiOpening Statement....................................................................................................vOutlook for Sustained Economic Growth in Africa...............................................1I. Introduction..............................................................................................1II. Current Economic Performance...............................................................1III. Medium Term Outlook.............................................................................4IV. Risk to sustained Economic Performance................................................8V. Long-Term Challenges...........................................................................13VI. Making Growth Sustained......................................................................19VII. Conclusion..............................................................................................24General Discussion..................................................................................................25i

FOREWORDThis is the third lecture in the IDB Group Economic Lecture Series which waslaunched by the Bank in October 2008 and under which distinguished expertsand scholars are invited to the IDB Headquarters in Jeddah to share their knowledgeand perspectives on current economic issues, global development and prospects.In his lecture on the “Outlook for Sustained Economic Growth in Africa: The Caseof IDB Member Countries”, Dr. Louis A. Kasekende, Chief Economist, AfricanDevelopment Bank, analyzed key factors and constraints for sustaining Africa’seconomic growth and development. The lecture focused on four key elements: (i)the outlook for sustained growth in African IDB Africa member countries; (ii) thepotential risks to sustained growth; (iii) the major long-term challenges; and (iv) theadditional steps that need to be taken to keep Africa on an upward growth trajectory.The central message of the lecture is that for African economies to be able to sustaintheir economic growth there is need for increase in the level of investment and itsproductivity. This requires creation of the enabling environment that will attractnecessary investment and improve competitiveness. The focus of investment shouldbe on the development of infrastructure, skills, strengthening of institutions, andpromotion of regional trade and integration.It is hoped that the readers, particularly the policy-makers, will find the ideas containedin this publication useful.Dr. Lamine DoghriDirectorEconomic Policy and Statistics Departmentiii

Opening StatementbyDato Dr. Syed Jaafar Aznan,Vice President (Policy)On behalf of the Islamic Development Bank, I would like to extend a very warmwelcome to Dr. Louis A. Kasekende, Chief Economist, African Development Bankand express our sincere thanks and appreciation to him for accepting the Bank’sinvitation to come here and share his valuable thoughts with us.Dr. Kasekende has a rich and long experience at the African Development Bank(AfDB), where he is the Bank’s spokesperson on socio-economic and developmentalissues of importance for Africa. He is also a former member of the Board of ExecutiveDirector at the World Bank where he represented 22 African countries for severalyears. Thus, he has a first hand knowledge and rich practical experience of dealingwith the economic problems of the African economies.As you are aware, Africa is of great significance to the IDB as almost half of theBank’s member countries are from this region. Although growth of member countriesin Sub-Saharan Africa is projected at around 6 percent for 2008, these membercountries continue to face challenges of low levels of human development in terms ofliteracy, infant and maternal mortality, life expectancy, access to water and healthcareetc. In addition, the level of poverty in these member countries is evident from therecent IDB estimates that 17 out of 22 Sub-Saharan African member countries are noton track to achieve the MDG target of reducing by half the number of people livingbelow $1 a day.The IDB and African Development Bank share a common goal of reducing poverty intheir respective member countries. Interestingly, all IDB African member countries arealso members of the African Development Bank. Therefore, the sharing of knowledgeand experience in areas of common interest can be mutually beneficial by promotingunderstanding and paving the way for further enhancing cooperation and collaborationin achieving their common objectives particularly in the area of poverty alleviation.We are currently in the midst of the worst financial crisis since the 1930s. It has beenestimated by the IMF that the global loss from the current crisis in the financial sectoralone is approximately US$1.4 trillion. However, as far as IDB member countriesare concerned, compared to the advanced economies, they have not borne the bruntof the financial crisis. This is largely due to their limited exposure to banking andinvestments firms in Europe and the US. Nonetheless, many of our African membercountries are behind on the achievement of the IDB 1440H Vision targets and theMillennium Development Goals. Without concerted efforts at national, regional, andinternational levels, many of these LDMCs will not be able to achieve these targets.Although the exact implications of the full global financial crisis on IDB membercountries are not known fully at this stage, it is apparent that the contagion effect ofv

the crisis would have adverse impact on them, thus further reducing their abilities toachieve the MDGs and IDB 1440H Vision Targets.The food and fuel crisis have already added to the economic difficulties of thousandsof poor household in the African member countries of the Bank, especially the LeastDeveloped Member Countries. According to the World Bank estimates, almost 100million people may have been pushed below the poverty line globally as a resultof these two crises, and 44 million people added to the group of malnourished. Asignificant percentage of these affected individuals would be from Africa. This is acause for concern for both the IDB and the African Development Bank.With Dr. Kasekende’s extensive experience in the field of development economics, Iam sure that his lecture will provide useful insights into how these challenges in theglobal arena could impact on the economic performance and prospects of our Africanmember countries. I am particularly interested in listening to Dr. Kasekende’s viewson the potential risks to sustained growth and the major long-term challenges facingour member countries in Africa. We look forward to his ideas on the steps that shouldbe taken to keep Africa on an upward growth trajectory.Once more, I thank Dr. Louis Kasekende for his kind acceptance of the IDB’s invitationand agreeing to share his thoughts with us on the Outlook for Sustained EconomicGrowth in Africa.vi

OUTLOOK FOR SUSTAINED ECONOMIC GROWTH INAFRICA: THE CASE OF IDB MEMBER COUNTRIESbyDr. Louis A. KasekendeI. IntroductionOver the last fifty years, while the world has grown more prosperous, Africa hasremained poor, and by some indicators even poorer. Poverty and inequality haveremained stubbornly high, while livelihoods are less secure. As many as 292 millionpeople in Africa survive on less than one US dollar a day, about one third of thechildren who enroll in primary schools drop out before reaching grade five and over afifth of those between the ages of 15-24 cannot read and write.However, with many countries growing faster today than at the turn of the Century,Africa has the best outlook for sustaining economic growth in over three decades.This paper will discuss the prospects of sustaining Africa’s economic growth, with aspecial reference to the 27 African members of the Islamic Development Bank (IDB).The paper will deal with the following questions. What is the outlook for sustainedgrowth in African IDB Member States? What are the potential risks to sustainedgrowth? What are the major long-term challenges? And, what additional steps shouldbe taken to keep Africa on an upward growth trajectoryThe 27 African countries that are members of the IDB are diverse and cover a largearea of the continent, and stretch from Southern to Eastern, Central, West and NorthAfrica. Nine of the countries are net-oil exporters, five (Burkina Faso, Mali, Niger,Chad and Uganda) are landlocked, and six (Algeria, Egypt, Gabon, Libya, Morocco,and Tunisia) have attained middle-income status, with per capita income aboveUS$1,350. Some of the countries, such as Sierra Leone and Chad are post-conflict,while Somalia has been in conflict since 1991, and some of the countries could beclassified as fragile states. With a population of 547 million, this group is countriesaccounts for 56% of Africa’s population and 62% of Africa’s GDP. Three of Africa’slargest four economies, namely, Nigeria, Egypt, and Algeria are members of theIDB.II.Current Economic PerformanceDuring the last seven years or so, the African economy has experienced a remarkablerecovery; with more countries recording real GDP growth rates above 5% (see Figure1).For the period 2003 to 2007, real GDP growth averaged 5.6% per annum, and asmany as 25 countries recorded growth rates above 5% in 2007, and this number isexpected to increase to 31 in 2008. Growth in African IDB countries averaged 5.4%per annum between 2003 and 2007 and of this group, 10 recorded growth rates above5% in 2007.As with the rest of Africa, for African IDB member countries geology has been asignificant factor in the remarkable economic performance of the last few years, with1

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriesthe growth recorded byFigure 1: Africa: Real GDP Growthnet oil exporters higher 7than that of net oil 6importers. Between 2003 54and 2007, GDP growth3in net oil exporting2countries averages 5.5%1compared with 5.1%0for net-oil importing1999 2000 2001 2002 2003 2004 2005 2006 2007countries (see Fig I). InAll AfricaIsDB AfricaISDB Net Oil importing countriesISDBNet Oil exporting countries2007 Sudan recordedthe strongest growth of11.2%, buoyed by the oil boom and strong investment in that sector. Egypt, anotherenergy producer also posted strong economic performance over the last two years,which is set to remain robust over the medium term. In 2006 and 2007, real GDPincreased by 6.8% and 7.1% respectively. Other major natural resource rich countriesthat have benefited from high global commodity prices include Libya, which hasconsistently recorded GDP growth above 5% since 2003, Algeria, Mauritania andMorocco, all which recorded GDP growth rates above 6% in 2006 and 2007. In Nigeria,high oil prices were critical in keeping the growth robust, despite the deterioratingsecurity situation that has seen oil production decline in the Niger Delta, the mainoil producing region. In Chad, real GDP fell by 0.3% in 2007, despite the strongperformance in the non-oil sector. The oil sector contracted because of a fall in output,even though substantial investment was made to deal with premature water floodingin wells and a new oil field came into production in the second half of 2007.PercentIn the rest of the IDB African member states, which are mostly net-oil importers,growth was supported by better economic management. As a result of macroeconomicreforms and better resourced institutions, many countries are now enjoying the fruitsof macroeconomic stability (see Figure 2). A case in point is Mozambique, whereprudent fiscal and monetary policies have ushered greater macroeconomic stability,leading to an increase in large-scale investment and aid inflows. Real GDP growth rateFigure 2: Key Growth DriversKey Growth Drivers, 2007 (A)Annual ExportGrowthMacroeconomic Management (B)Fisca l Ba la nceafter grants (%GDP)FDI%GFCFAid per CapitaCurrentAccountBalance (%GDP)Debt/GDP (%)Inflation (%)IsDBAfricaIsDBAfricaSources: AfDB Statistics Department2

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriesaveraged 8% from 2000 to 2007. Other countries where growth was supported by thepay-offs from improved policies include Burkina Faso, Tunisia, Mali and Uganda.After years of stagnation, investment has begun to recover as a result improvementsin macroeconomic stability and demand for natural resources and was a key driver ofeconomic growth in 2007 (see Figure 2). For the continent as a whole, gross domesticinvestment has risen from 19.1% of GDP in 2000 to 23.1% in 2007, while in the IDBAfrican member states it increased from 21% of GDP to 24.3% over the same period.Foreign direct investment (FDI) to Africa has also rebounded, increasing from US$9.7billion in 2000 to US$ 35.5 billion in 2006 for Africa of which US$31.6 billion wentto IDB African member states. The largest increases have occurred in countries richin natural resources, such as Egypt, Nigeria, Sudan, Tunisia, Morocco and Algeria,which were among the top 10 recipients of FDI in Africa in 2006. However, countrieswith improved policies and better run institutions have also experiences higher FDIinflows. In particular, strong mergers and acquisitions (M&A) activity in banking andtelecoms industries as well as government efforts to liberalize markets and privatizestate enterprises also contributed to rising investment.A promising trend in recent years has been the growing interest of Asian investors inAfrica. According to the 2008 African Economic Outlook (AEO), Asian transnationalcorporations (TNCs) accounted for about 50% of the US$18 billion in cross-borderM&A purchases in Africa in 2006, and accounted for 134 of the total 442 green fieldinvestments undertaken in Africa, in 2006.African trade, though still very low, has increased in recent years, and was a keygrowth driver in 2007. The value of African exports increased by 7.5% in 2007compared with 2.8% in 2006. Exports from net oil importing IDB African memberstates increased faster than from net oil exporters, which may reflect growing relativeimportance of manufactured exports in total exports. Overall, the increase in Africanexports is further indication that for many countries, export destination has becomemore diversified, with Asian countries, especially China and India becoming importanttrading partners. African exports to China, though still a small proportion of totalexports, have risen from US1.7 billion in 2000 to US$7 billion in 2006, while exportsto India have increase from US$ 0.9 billion to US$11.4 billion over the same period.Percent of GDP302520151050Figure 3: High Investment and FDI FlowsShare of Gross Domestic Investment in GDP (A)1990 2000 2005 2007AfricaIsDB AfricaIsDB Net Oil exporters IsDB Net Oil importersSources: AfDB Statistics DepartmentEgyptMoroccoAlgeriaEq. GuineaCongo, Rep21.83.8Africa-ten Largest Recipients of NetFDI from DAC Donors, 2000-2006(as % of Net Africa Total) (B)6.25.85.58.37.616.142.30 10 20 30 40 503

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesFinally, ODA has played a critical role in the recovery, with total aid to Africaincreasing nearly three-fold since 2000, and IDB African member states accountingfor more than half of ODA flows to Africa. Nevertheless, most of the increase hasbeen in the form of debt relief under HIPC and MDRI. Also, current aid levels stillfalls short of Gleneagles commitments of doubling assistance to Africa by 2010III.Medium Term OutlookEconomic GrowthIn the short-term term, the growth differential between net-oil exporting andimporting countries is likely to persist. African net oil-exporting and net oil-importingcountries will exhibit real GDP growth of 6.8 and 4.9 per cent, respectively – a growthdifferential of nearly 2 per cent in 2008. The projections for 2009 are for slightlylower growth for the net oil exporters (6.2 per cent) and somewhat higher growth forthe net oil-importers (5.5 per cent).For IDB African countries, the growth rate is expected to increase to 6.6 percent and7.0 percent in 2008 and 2009 respectively, which will be above the African average.Net oil exporters such as Sudan, Libya, and Egypt will lead in terms of economicgrowth, as oil production is expected to rise in these countries.For net oil exportingcountries experiencingconflicts or whosestocks are alreadystarting to decline,growth is likely toremain sluggish overthe next few years. Forexample, in the case ofChad, a security crisisand problems in thecotton sector will slowADB MemberCountriesIsDB Africa nCountriesWest AfricaSouthern AfricaNorth AfricaEa st Af ricaCentra l AfricaFigure 4: Real GDP Growth (%)0 1 2 3 4 5 6 7 8 9 102009 2008 2007Sources: IMF, WEO, April 2008. AfDB Statistics Department.GDP growth, though it is forecast to recover from the contraction of 3% in 2006to reach 1.8% in 2008 and 2.5% in 2009. In Nigeria, the growth picture is mixed,blurred first by the continued conflict in the Delta region, which may dampen theprospects for growth. However, persistence with macroeconomic reforms and prudentmanagement of the oil windfalls should improve growth prospects. Real GDP growthin Nigeria is forecast to average 6% in 2008 and 2009.Among net oil importers, growth is forecast to remain robust in Mozambique,Morocco, Tunisia and Uganda. However, as a group, net oil importers will continueto face adjustment challenges associated with rising energy and food prices. Morevigilance, especially with regard to containing inflation is required.Growth prospects in both net-oil exporting and importing countries faces a numberof challenges. The challenge for the net oil-exporting countries and for some non-oilmineral exporters is to ensure that a large proportion of the proceeds from the minerals4

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriessector are invested in infrastructure and human capital development to support theirmedium- and long-term needs for diversification. For many of the net oil-importingcountries, especially in the second half of 2008 and in 2009, the challenge will be tocontain inflationary pressures as a result of the recent increases in the internationalprices of food and fuel, and to finance or contain the expected increases in their currentaccount deficits.Inflation and Public FinancesOver the last year the inflation rate in Africa has increased in line with global trends,largely due to the impact of increasing energy prices and higher international pricesfor food. Inflation pressures in the IDB African countries was lower than the Africanaverage at 6.4 percent and is projected to rise slightly to 6.5 percent in 2008 beforedeclining to 6.1 percent in 2009. Inflationary pressures will come from higher foodand fuel prices.Higher prices andFigure 5: Inflation (%)ADB Member Countriesincreased productionIsDB African Countriesof oil has permittedWest Africamany African net oilexportingcountries toSouthern AfricaNorth Africakeep their overall fiscalEast Africabalance (includingCentral Africagrants) surplus, and0 2 4 6 8 10in the short tem is2009 2008 2007forecast to increaseSources: IMF, WEO, April 2008. AfDB Statistics Department.from 6.7 per cent ofGDP in 2007 to 9.1 per cent of GDP in 2008, before declining slightly in 2009 as oilprices stabilize. In net-oil importing countries, the overall fiscal balance has worsenedsince 2006 from a small surplus in 2006 to a small deficit of 1.2 per cent of GDP in2007, partly reflecting good macroeconomic management and a higher level of grants,including a portion provided in the form of debt relief. The latter, especially debt reliefreceived by a number of countries in 2005 and 2005, has tended to somewhat maskssomewhat the extent of fiscal consolidation in the net oil importers. Excluding grants,the combined deficits of the net oil importers gradually declined from 4.5 per cent ofGDP in 2003 to a low of 2.5 per cent in both 2006 and 2007. This progress is expectedto be partially reversed in 2008 and 2009 with an increase in the combined deficit to3.2 per cent of GDP.Balance of PaymentsAfrica’s recorded a current account surplus of 2.9 per cent of GDP in 2007, with thenet oil-exporting countries recording a surplus of 10 per cent in 2007 (down from14 per cent in 2006); while the net oil-importing countries experienced a significantaverage current account deficit of 4.3 per cent of GDP in 2007 (up from 3.6 per centin 2006) compared with an average of 2 per cent in the period 1999-2005.5

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesAmong the net oil importers, only 10 countries out of 38 recorded an improvementof their current account balances. These include Benin, Central African Republic,Comoros, Kenya, Niger, Rwanda, São Tomé and Principe, Senegal, Tunisia, andZimbabwe. In 2008, the surplus in the current account balances of net oil-exportingcountries will increase slightly and moderate in 2009. Meanwhile the average currentaccount deficits of the net oil-importing countries in 2008 and 2009 are expected tocontinue to worsen as export prices soften while import prices of fuel and food areexpected to remain high.Africa’s overallFigure 6: Current Account Balance (% of GDP)balance of paymentsADB Member Countrieshas benefited fromIsDB African Countriesincreased foreignWest Africadirect investmentSouthern Africaflows and significantlyNorth Africareduced debt serviceEa st Af ricapayments in manyCentra l Africaheavily indebted poorcountries (HIPCs). As-10 -5 0 5 10 15 202009 2008 2007of end-2007, 19 Africancountries had reached Sources: IMF, WEO, April 2008. AfDB Statistics Department.their completion pointsand 7 additional African countries had reached the decision point under the enhancedHIPC Initiative.African IDB countries have, for the last few years recorded surpluses on their currentaccount balance, and this is forecast to continue in 2008 and 2009, and will average7.5 per cent of GDP over the two years. This overall figure, however, masks largedifferences among countries. On the one hand, net oil-exporting countries as a groupare forecast to record a current account surplus 8.9 per cent of GDP in 2008 and7.6 per cent in 2009, while the group of net oil-importing countries will experiencesignificant current account deficits forecast to average 7.9 per cent in 2008 and 2009.However, even within net oil exporters, there are wide variations across countries.While Libya and Algeria are forecast to record current account surpluses above 20%of GDP (40.6% of GDP for Libya and 23.3% for Algeria), Sudan, Chad and Cameroonare expected to record current account deficits, while Egypt will face deterioration inits current account. This will be compounded by the fact that with the depreciationof the dollar, the value of oil wealth is actually lower than observed. It is especiallyproblematic for countries importing goods and services from regions other than theUSA (example: Euro zone or Asia). This adverse effect is further compounded bythe increased specialization of oil-exporting countries. Overall, the current accountsurpluses of net oil exporters will moderate in 2009.Of the 17 net oil importers, only Guinea-Bissau will record an improvement of itscurrent account balance. In Djibouti, the current account deficit is forecast to average20.2 per cent of GDP in 2008 and 2009. Overall, the high price of oil and the rising6

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriesprices of food will maintain pressure of the current account balances of this group ofcountries.The Sub-Regional OutlookThe average growth rate for Southern Africa is projected at 6.5 per cent in 2008 and6.2 percent 2009 down from 7 per cent in 2007. While Botswana is expected to growslightly above 5.0 per cent in 2008 and 4.3 percent in 2009 down from 5.4 percent in2007, Malawi recorded 7.4 GDP growth rate and is expected to register 7.1 per cent in2008 and 6.2 percent in 2009. Projections for South Africa indicate that GDP growthwill slow to 3.8 per cent in both years due to the insufficient growth of electricityproduction, down from 5.1 percent in 2007. Also, Angola’s growth rate is projectedto slow considerably from 21.1 per cent in 2007 to 16.0 per cent in 2008 and to 13.2per cent in 2009 due to a slowing in the rate of increase of oil production. On theother hand, in Madagascar, Mauritius and Mozambique growth is expected to remainstrong.In Mozambique, public and private investment, which contributed strongly to growthin 2007, is expected to play an increasingly important role in 2008 and 2009 as aresult of continued FDI in mining and industry. Public investment in donor-supportedinfrastructure development has increased dramatically in recent years. GDP growth inMozambique is forecast to increase to 6.8% in 2008 and 7% in 209. Inflation, whichaccelerated to 9 per cent in the last quarter of 2007 due to rising food and fuel priceswill slow down in 2008 and 2009 to average 5.7% and 5.4% respectively. To put a liton inflationary pressures, the central bank continues to pursue a tight monetary policy,restraining broad money growth and reducing liquidity in the economy through theissuing of Treasury bills and the sale of foreign exchange. On the other hand, theexternal account is forecast to worsen in the short-tem, reflecting the high oil importbill and the deterioration in the performance of traditional exports, especially prawnsand cashew nuts. Imports rose because of high oil prices, and spending on consumerdurables (automobiles) and capital goods.Real GDP growth in the North African countries is expected to strengthen from5.3 per cent in 2007 to 6.4 per cent 2008 and 6.6 percent in 2009 sustained by highprices for oil and gas, and strong growth in tourism. Growth is projected to remainstrong in Egypt, Libya, and Tunisia, with moderate expansion expected in Algeria,Mauritania and Morocco. In Sudan economic growth is forecast to increase by10.7% in 2008 and 11% in 2009, buoyed by increased oil production. In Egypt, newoil and gas discoveries—numbering 39 in 2007—are expected to boost economicgrowth, with GDP forecast to increase by 6.8% in 2008 and 6.7% in 2009 1 . In Libya,where the oil sector accounts for over 75% of GDP, growth is expected to increaseby 8% in 2008 and 7.8% in 2009, driven mainly by government investment, newexplorations by foreign firms following the lifting of international sanctions, andrehabilitations of old oil fields. In addition, the non-oil sector oil sector is showing1See the 2008 African Economic Outlook (AEO), published jointly by the African Development Bank andthe OECD Development Centre7

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriessigns of recovery in response to policy reforms, especially exchange rate unificationand trade liberalization.Economic growth in the countries of West Africa is projected to accelerate from5.5 per cent in 2007 to 7.8 per cent in 2008 and to remain high at 7.6 percent in2009. An acceleration of Nigeria’s growth rate, due to the high price of oil, and alsoto increased production will propel growth in the sub-region. Growth in the WestAfrican Economic and Monetary Union (WAEMU) countries continue to be affectedby the slow recovery from the political crisis in Cote d’Ivoire. However, expansion inagricultural production in several of the countries will sustain high growth. In the restof the sub-region, growth performance in Ghana and Cape Verde will remain strong.Also, post-conflict spending on infrastructure and recovery of agricultural productionwill boost growth in Liberia and Sierra Leone.In Central Africa average GDP growth is projected to increase from 4.7 per centin 2007 to 6.2 per cent in both 2008 and 2009. Positive growth trends are, however,observed for the Democratic Republic of Congo due mainly to donor¬ supportedreconstruction efforts. The projections for Cameroon and the Republic of Congo alsoshow some strengthening of growth for 2008 and 2009.Economic growth in East Africa, which averaged 8.7 per cent in 2007, is projectedto slow to 6.5 percent in 2008 and then increase to 8.6 in 2009. Ethiopia, Sudan,Tanzania and Uganda, which were the fastest growing countries in the sub-regionin 2007, are projected to maintain or increase on their high growth rates in 2008 and2009. On the other hand, Kenya which exhibited strong growth in 2007 is projectedto slow sharply in 2008 and 2009 due to the negative impact of the recent politicalviolence on tourism and agricultural production.IV.Risk to Sustained Economic PerformanceIn the short to medium term, the growth outlook for IDB African member states facesrisks arising from inflation due high energy and food prices and the ensuing financialcrisis due to the US sub-prime crisis. In as many as 9 countries in the region, inflationhas more than doubled since December 2007 (See Fig.7). For example, in BurkinaFaso, year-on-year inflation increased from 2.2% in December 2007 to 15% in June2008, while in Egypt it increased over the same period from 6.7% to 20.2%. Theincrease in fuel and food prices and the resultant inflation now threaten weaken theprogress on fiscal consolidation and are worsen the balance of payments in fuel andfood importing countriesThe Recent Financial Turmoil and its Impact on AfricaMany argue that the current global financial crisis is likely to have a limited impact onAfrican economies because of “decoupling”. However, Africa is not entirely isolatedfrom the crisis, is likely to suffer the second round effects of the crisis. As such, theimpact of the crisis on Africa can be examined in terms of direct effects flowingdirectly from the Africa’s integration into the global economy and the indirect effectsemanating from the slow don in global economic activity. Both the direct and indirect8

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriesthe barrel of crudeoil breaking through$100 in February2008 and peakingat $147 on 11 July2008; and from July2008 when the priceof began softening,though exhibitinghigh volatility. ThePetroleum Copper Aluminiumstabilization ofthe price of oil arerelatively high levels has weakened the balance of payments accounts of oil importingcountries and put pressure on fiscal balances. The high price brings challenges to bothnet oil exporters and importers.Oil producing countries will need to manage the oil windfalls for the benefit oftheir population, future generations and cushion their economies from the Dutchdisease. Reaping the full benefits of the high price of oil will depend on their abilityto diversify their economies while adding value to crude oil exports. In that regard,they are challenged with increasing the stock of human and physical capital so as toincrease their productive capacities.Net oil importing countries on the other hand, need to find the right balance betweena tight monetary policy to contain inflation while maintaining the growth momentum.On the poverty front, a number of governments may be tempted to subsidize petroleumproducts. The permanency of high oil prices means that such subsidies would translateinto high unsustainable budget deficits. Targeted direct subsidies are the most efficientway to protect the poorest. In addition, governments must put in place renewableenergy programs to reduce their dependency on oil.Rising Food PricesFigure 8: Prices of Energy and Minerals60055050045040035030025020015010050036526 36739 36951 37165 37377 37591 37803 38018 38231 38443 38657 38869 39083 39295 39508 39722In 2007, there was a sharp rise in global food prices driven by increases in theprices of fats and oils. Among other factors such as the increased use of bio-fuels,the food crisis in Africa also reflect the decline of African productivity as a resultof an inadequate policy environment, poor incentives in the sector, weak capacity,inadequate investments, and climate change impacts, thus turning the continent into anet importer of cereals and dairy product. For example, in the case of rice production,yields in Africa went down from about 2,500 kg/ha in 2004 to 2,400 kg/ha in 2006compared with an increase from 4,100 kg/ha to 4,200 kg/ha in Asia. The loss ofproductivity in Africa has meant declining total production at a time the continentneeded food most. Also, agricultural input (energy, fertilizer, seeds, and chemicals)prices had risen beyond the vulnerable and smallholder farmers’ ability.Since May 2008, the global prices of food have softened with the food price indexfalling marginally from a peak of 180 in early June to 154 in September 2008 (see11

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesFigure 9). The cerealprice index declined byabout 13%. This trendalso holds to somedegree for non-cereals.The prices of oil andfats, for example, havefallen by more than 6%,while beef prices fell by4% in September 2008.However, accordingto the FAO, in Low-Income Food-DeficitCountries food priceshave continued toUS$ per ton12001000800600400200increase despite the fall in international prices 2 . In Africa, cereal price movementspresent a mixed picture. Imported rice prices increased in Senegal and Niger, withthe former in particular experiencing a huge jump in rice prices from just above CFA30 000 per 100kg to more than CFA 45 000 per 100kg between June and July 2008.On the other hand, in Burkina Faso imported rice prices fell from their peak in Juneto below CFA 40 000 per 100kg but remained flat between July and August whereasin Mali no fall was reported though prices have stabilized at above CFA 35 000 per100kg. On the other hand, locally produced millet prices continued to increase inBurkina Faso, Mali, Senegal and Niger.The increases in food prices have the potential to roll back progress towards povertyreduction and the attainment of MDG’s, despite the relatively high GDP growthachieved since 2002. This is because Africa already has higher levels of povertyand households spend significantly large proportions of their income on food. Forexample, cereals and tuber crops (notably cassava) constitute about 55% of thehouseholds’ food basket. It is, therefore not surprising that as a result of rising foodprices, a number of countries in the regions experienced with increasing food relatedriots/demonstrations, posing a serious threat to social and political stability on thecontinent. Rising food prices have also increased the import bill of many Africancountries, especially of cereals, estimates by the African Development Bank to reachabout US$10.5 billion in 2008, which is 49% higher than it was in 2007.In addition, by allocating more and more of their incomes to food, householdswould be forced to reduce their expenditures on other basic necessities like healthand education or cut down on food consumption. Cutting down food consumptionhas serious nutritional effects that may manifest in long-term poor health outcomes.Reductions on health expenditure may result in an increase in disease incidence whilecuts in education expenditure have long-term poverty implications as poor familiesare denied on of the most crucial weapon for fighting poverty - human capitaldevelopment.2See the August 2008,the FAO Report0Figure 9: Food Price Trends (US$ per metric ton)1980 1986 1992 1998 2004 2007Apr 2007Oct 2008Apr 2008OctBa rley Ma ize Wheat RiceDate Source: http://www.imf.org/external.np/res/commod/externaldata. csv12

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesAlso, Africa has been disproportionately affected by food price increases, mainlyas a result of its dependency on cereal imports. Breaking the cycle of dependency,therefore, is the most sustainable way of reducing its vulnerability. The wideninggap between supply and demand has not only been the result of natural phenomenabut also declining productivity in agriculture. Investments in African agriculture havebeen observed to have fallen since the beginning of the structural adjustment era.Moreover, donor support to agriculture declined from US$ 8 billion in 1980 to onlyUS$ 3.4 billion in 2005, representing a fall from 17% to 3% of Official DevelopmentAssistance (ODA) 3 . Consequently, productivity in agriculture dropped leading to anincrease in dependence on food imports.The most sustainable way of reducing Africa’s vulnerability to global food marketdynamics is by improving its food security situation. This can be achieved in two ways.First, through the elimination variability in food supply, and second, by increasingfood productivity. Both outcomes demand increased investments in agriculture. Thus,the policy position taken by the international community and national governments toaddress constraints in production is a positive development that must be followed byconcrete actions. Already, commitment to reversing food insecurity on the continenthas had some effect on market expectations. For instance, the futures market pricedecrease is a response to expected future supplies of food commodities.Equally important is the realization that support to agriculture must be consideredwithin the context of rural development; hence a multi-sectoral approach is necessary.Supportive infrastructure development in water supply and conservation, energy,roads and rail networks and information technology improve both access to marketsand widen the production technology choices available to farmers. Similarly, suchinfrastructure makes possible the adoption of new innovations in production.Effective application of the new technologies also requires improvement in the skillsof those involved in agriculture. Thus appropriate training programs would need tobe provided. Overall, anything short of a comprehensive approach to addressing foodsupply conditions is bound to fail.V. Long Term ChallengesIn addition to these short terms risks, African countries face other longer-termchallenges that threat the outlook for sustained economic growth. These includepersistent poverty and inequality, high population growth and low human capitaldevelopment, lack of competitiveness and weak institutions.Reducing Poverty and InequalityAs with the rest of the continent, poverty in IDB African member states is widespreadand pervasive. Recent estimates by the World Bank show that over the last two and ahalf decade, poverty in Africa has remained stubbornly high. There are wide regionalas well as country variations. In Sub-Saharan Africa, the number of the poor nearlydoubled from 200 million in 1981 to 380 million in 2005, while over the same period,3UND Public Information (2008) Africa Renewal Vol.22, No. 2.13

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriesglobal poverty declined from 1.9 billion to 1.5 billion. In North Africa, (including theMiddle East), poverty declined slightly from 14.9 million in 1981 to 14 million in2005. Poverty remains stubbornly high in a number of Sub-Saharan African countries,with the proportion of the poor ranging from 14.8% in Cote d’Ivoire to 88.2% inGuinea-Bissau. In North Africa, the proportion of the population subsisting on lessthan a dollar a day ranges from 6.6% in Tunisia to 20.8% in Egypt 4 .Non-income poverty in Africa is reflected in the low access to some of the mostbasic services—food, water, electricity, shelter, education and health care—by themajority of the population. While most of these indicators have improved, Africa stilllags behind other regions. Life expectancy at birth is also low, only 51years, againstthe average of 64 years for developing countries, and has declined further in severalcountries due to HIV/AIDS and other diseases. Only 67 percent of the populationhas access to health services—reflected in the high infant and maternal mortalityrates, estimated at 83 per 1,000 live births, 623 per 100,000 live births, respectively.According to the 2007/2008 Human Development Report published by the UNDP, 11of the 22 low human development countries are IDB African member states 5 . Thereare also wide regional variations. Non-income poverty indicators are much lower inthe five North African countries. For example, in terms of safe drinking water, theproportion of the population with access ranged from 72% in Libya to 98% in Egyptand Tunisia, compared with the Africa average of 62% in 2004-06. For IDB memberstates in Sub-Saharan Africa, eight were below the Africa average, namely, BurkinaFaso (61%), Chad (42%), Guinea-Bissau (59%), Mali (50%), Mauritania (53%),Mozambique (43%), Niger (46%), and Togo (52%).Inequality is also pervasive within the region. The Gini-coefficient ranges from0.34 in Egypt to 0.63 in Sierra Leone. Recent empirical evidence shows that whilegrowth is good for the poor, there can be large variations in poverty reduction for thesame growth rate, suggesting that growth in some countries is more pro-poor thanin others. Other factors such as inequality and institutions also appear to matter forpoverty reduction besides their impact on growth itself. For example, in a study onreforms and pro-poor growth in Uganda, Kappel, Lay and Sterner (2004) 6 found thatduring the period when Uganda recorded high growth rates between 1990 and 2003,the proportion of the poor declined from 56% in 1991/93 to 34% in 1999/2000, butincreased to 38% in 2002/03. However, over the whole period, inequality as measuredby the Gini coefficient increased from 0.36 in 1992/93 to 0.39 in 1999/00 and thenrapidly to 0.43 in 2002/03. Tunisia provides another example of where growth andpoverty reduction were accompanied by a fall in inequality. In a study on pro-poorgrowth in Tunisia, Ayadi, Boulila, Lahouel and Montigny (2005) report that between1980 and 2000, GDP growth in Tunisia averaged 4% per cent per annum, while the4See Human Development Report 2007/08, UNDP,5These are Senegal, Nigeria, Benin, Côte d’Ivoire, Chad, Mozambique, Mali, Niger, Guinea-Bissau, Burk -na Faso and Sierra Leone.6Kappel, Lay and Steiner (2004), “The Missing Links-Uganda’s Economic Reforms and Pro-Poor growth“African Development and Poverty Reduction: The Macro-Micro Linkage, Forum Paper, October. SomersetWest, South Africa.14

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriespoverty headcount index fell from 20% to about 4% 7 . The Gini coefficient fell duringthis period from 0.45 in 1980 to 0.41 in 2000. In addition, cross-country studies showthat in low-income countries, high inequality of income retards consumption growth(see for example, Allen and Ndikumana, 1991).The pattern of poverty in Africa is complex, displaying geographic and gendercharacteristics. Though urban poverty is rising, poverty in Africa is still largely a ruralphenomenon, and more women and children are affected by poverty. The challengefacing Africa is how to design polices that are supportive of economic growth, whileat the same time reducing poverty and inequality on the continent.Demographic Change and Human Capital DevelopmentRelated to the issue of poverty and inequality is that of demographic change andhuman capital development. The quality of life in a society is related to the size,growth and structure of the population. At 2.4 per cent, the population growth rate inAfrica remains one of the highest in the world. Population growth rates for individualcountries vary, with a few countries such as Benin, Burkina Faso, Gambia, Niger,Togo and Uganda recording population growth rates in excess of 3 per cent for theperiod 1996-2007. The population problem in these countries is also exacerbated bythe demographic structure. Roughly 40 per cent of the population is below the age of14 years, compared with 30 per cent in Asia. The youthful structure of the populationimposes heavy burdens on society in terms of higher dependency ratios.Rapid population growth slows development and sharply reduces the possibility ofraising living standards by making it difficult to sustain adequate social investmentsin health and education, especially as the school age population is growing faster thanthe overall population in many African countries. Rapid population growth also raisesconcern about the capacity of the agricultural system to meet the food needs of thegrowing population.The role of human capital has received increased attention, especially with the rise ofendogenous growth literature. In Africa, low productivity of human and social capitalhas been identified and one of the main constraints to achieving sustainable economicgrowth. Human resources constitute the basis of the wealth of nations. Human capitalinvestments contribute to development by creating a healthy and productive laborforce endowed with skills and knowledge. There has been some progress in this areain the recent past—primary education enrolment has increased from 79% in 1985 to96% in 2005-07, and the secondary school gross enrolment ratio from 24% to 44%over the same period. Primary completion rates have also increased since 2000, from49% of the relevant group to 60% in 2006. However, despite the progress made, at thesecondary and tertiary levels, enrolments are still low and there are also questions onthe quality of training and capacity building programs (see the 2008 AEO).7Ayadi, Boulila, lahouel and Montigny (2005): ”Pro-poor Growth in Tunisia”http://go.worldbank.org/6N5LSAY0P015

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesLow External CompetitivenessIn terms ofcompetitiveness, Africalags behind otherregions (see Figure10). The 2007 AfricaCompetitiveness Reportpublished jointly bythe World EconomicForum, the AfricanDevelopment Bankand the World Bankshows that in general,North Africa performsbetter than sub-SaharanAfrica, but both perform worse than most developing regions. For the continent asa whole, Tunisia is ranked as the most competitive economy in 2007, ranked 29 outof 128 countries in the world, and above China and India. South Africa ranked 46,Mauritius 28 and Egypt 65. Mozambique (rank 124) and Chad (rank 126) were rankedamong the five least competitive countries in the world. The Report concludes thatNorth African countries could enhance the competitiveness over their economiesby putting more focus on technological readiness and improving market efficiency.On the other hand, most of sub-Saharan Africa will need to focus on upgradinginfrastructure, investing in health and education, as well as technological readinessand market efficiency.Low competitivenessfurther reflects the factthat African exports arethe least diversified inthe world (see Figure11). Even in primarycommodities, Africahas lost its exportmarket shares--mainlyto Asian countries incocoa beans, coffeeand timber; to LatinAmerican countries iniron ore; and, to EasternSource: The African Competitiveness Report, 20079080706050403020100SSALa tin AmericaNorth AfricaSout Ea st AsiaEurope andCentra lAsiaChinaFigure 10: 2007 Global Competitiveness Score0 1 2 3 4 5GC ScoreFigure 11: Concentration and Diversification of Exports (2000-2004 Average)East Asia-Pa cificSouth AsiaLatinAmericaandCaribbeanMiddle Eastand NorthAfricaSubSaharianAfricaSource: J. Page (2007): Why Trade? Why Aid? Presentation at the Aid forTrade Regional Review Meeting, Tanzania, October 2007European countries in cotton. For example, in cocoa beans, Africa’s internationalmarket share fell from about 80 per cent of world cocoa exports in 1970 to about 67per cent in the 1990s. Second, African exports tend to be concentrated in one or twoproducts.180160140120100806040200Export ConcentrationIndex (0-100)left a xisShare of Top 5Products in TotalExports (%)left a xisNo. of ExportedProduct Categoriesright a xis16

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesClimate Change and other Environmental ChallengesAfrica faces a number of environmental problems characterized by rapid deforestation;land degradation; declining water resource levels and pollution of water sources; and,degradation of coastal areas. Climate Change (CC) is emerging as perhaps the mostimportant international development challenge of the 21 st century. According to theIPCC Climate Change 2007 Report, at current carbon dioxide levels, global temperatureswill increase by 1.8°C to 4°C over the Century. Africa is the most vulnerable region toclimate change and models predict further warming and changes in rainfall patterns.The continent as a whole is warmer by 0.5°C than it was 100 years ago. Africa isparticularly vulnerable to CC because of various factors, such as widespread poverty,the unsustainable use of NR, over-dependence on rain fed agriculture, and weakgovernance structures. Already, climate change is having profound and irreversibleimpacts, among which are increased frequency of natural disasters, droughts, floodsand other weather extremes that lead to loss of lives, economic disruption, socialunrest and forced migration as well as major environmental problems; rise in sealevel and flooding that threatens agriculture, human health, infrastructure particularlyin coastal cities and islands; prolonged drought periods that cause stress on waterresources and reduced food security due to diminished agricultural productivity;increase in outbreaks of vector borne diseases and other health impacts; and variousthreats to forestry, water resources, biodiversity, and other natural resources.Over and above these direct impacts, climate change has cross-cuttings impactsthat include social costs, increased conflict and obvious economic costs. Increasedaridity and prolonged drought are accelerating migration to urban areas. Climatechange is also increasing the risks of ‘resource wars’ as nations and communitiesfight for rights to key resources like water and land1. Most key economic sectorsthat include agriculture, fisheries, forestry, industry, energy and transport are verysensitive to climate change. Natural disasters destroy strategic national investmentslike infrastructure while there is lack of requisite insurance to cover the loss. It isestimated that the cost of disasters over the next 20 years will be from 6 to 10 trillionUS$ i.e. ten times predicted aid flows 8 .In Africa agriculture and natural resources are key to food security and energy is keyto economic development and MDG achievement. Improving and at least maintainingagriculture production and expanding energy access, especially to the poor, are thusdevelopment priorities for African countries. Africa has a unique energy situationcharacterized by wide regional disparities, heavy reliance on traditional energysources, and limited access to other modern energy services.Adaptation to climate change and its associated variability is a development priorityin Africa. It is possible to reduce poverty while at the same time strengthening thecapacity of those living in poverty to adapt to climate change. The best way to addresscurrent and future climate change and variability impacts on the poor is by integratingclimate risk management measures into sustainable development and povertyreduction strategies and programs. In this way African countries may “climate proof”8International Federation of Red Cross and Red Crescent Societies, World Disasters Report, 200117

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriestheir development efforts. Only a comprehensive approach, which provides optionsfor poor people to reduce their vulnerability to current and future risks, will contributetowards achieving the MDGs and ensure that sustainable progress is made beyond2015.Democracy, Institutional Capacity and GovernanceIn Africa, poor governance and political instability have partly contributed to theinability of governments to successfully implement economic reforms. Weakerprocesses for the enforceability of contracts, low protection of private property andlonger bureaucratic delays are often cited as instances of poor governance in Africa.Although armed conflicts have waned, and the political space has widened, allowinggreater participation of civil society, including trade unions, business associations,non-governmental organizations and other stakeholders in the development process,progress has been slow,and in some cases,reversals have takenplace. Data from theWorld Bank showsthis mixed picture.While Africa is nowmore politically stable,regulatory quality andrule of law worsenedbetween 2000 and 2007(see Fig 12). Some ofthe reasons includeRule Regulation PoliticalE. AsiaMENASSAE. AsiaMENASSAE. AsiaMENASSAFigure 12: Governance & Performance0 10 20 30 40 50 60 70Percentile Ranking (0-100)2007 2000Source: World Bank Governance Indicatorsa weak but pervasive and excessively interventionist state, lack of social capital,low degree of market efficiency and corruption. Policy in Africa tends to be morediscretionary and therefore, less predictable compared with other regions where ittends to be generally based on rules. This selectivity of intervention has paved theway for the power elites to appropriate huge amounts of rents. In addition, domesticerror-correction of the political system in Africa is generally weak. The associationbetween economic performance indicators such as inflation and GDP growth rates andchange of political leadership generally tends to be very small. Further, problems ofcivil conflicts, poor governance, corruption, and high ethnic fractionalization hindergrowth and capital accumulation.The Governance situation in IDB African member states has improved faster than infor the rest of Africa (see Fig 13). Country performances, however, vary. Between2000 and 2007, political stability improved in 10 of the 27 member states, includingDjibouti, Comoros, Uganda, Algeria and Mozambique. It worsened in Chad, Sudan,Côte d’Ivoire, and Mali.Throughout the post-independence period, Chad has suffered from intermittentsecurity problems. The current conflict began in 2005, and has been worsened by18

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriesthe Darfur conflict in neighbouring Sudan. Although the situation in Cote d’Ivoirehas stabilised since the signing of the peace agreement in March 2007, the date forelections have been postponed a number of times.Regulatory qualityand rule of law tendto be higher in NorthAfrica than in otherIDB member statesFigure 13: GovernancePolitica ly Stabilityin SSA. In 2007,Tunisia, Egypt andMorocco were rankedhigher with regardsregulatory quality andrule of law. However,Politica l RightsCivil Libertythese countries lagfar behind Botswana,South Africa andIsDB Africa Highest AfricaMauritius. GovernanceSource: World Bank Governance Indicatorsindicators in naturalresource rich countries,such as Sudan and Chad tend to be weaker Collier and Goderis (2007) have identifiedgovernance as an important factor in explaining the resource curse from commoditybooms, especially in the case of extractive resources. This is because in many resourcerichcountries, resource rents tend to create a democratic deficit, since by substitutingfor taxation, they gradually undermine checks and balances. Thus, resource poor postconflictcountries like Mozambique and Sierra Leone are making better progress withreforms.VI.Making SustainableTo improve the Africa’s growth prospects and accelerate the real rate of GDP growthwill require an increase in the levels and productivity of investment. Relative to otherdeveloping regions, such as East Asia and the Pacific or Latin America, the investmentclimate in Africa is weak. The 2008 Doing Business Report published by the WorldBank shows that although African countries have made significant progress, manymore still lag behind. Of the 10 top reforming countries, only two, Egypt and Ghanawere African. Also, only 9 African countries were ranked among the top 100 countrieson the ease of dong business, and the bottom 30 rankings, 25 were taken by Africancountries. Starting a business was most difficult in Guinea-Bissau, Chad, Togo andGuinea.Although indicators as those used in the Doing Business and other similar rankingsbased on extensive enterprise surveys are only indicative, and have little policy content,they point direction to what needs to be done. To create an enabling environmentthat will attract the necessary investment to accelerate and sustain economic growth,19

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesAfrican countries will need to focus on infrastructure, development of skills, strengtheninstitutions, and promote regional integration.Investing in InfrastructureThe investment climate in Africa is hampered by poor and costly infrastructure,which condemns the continent to low competitiveness in the global market. Forexample, transport costs in Africa are among the highest in the world, especiallyfor the 15 landlocked African countries, where they average 14% of the value ofexports compared with 8.6% for all developing countries. Efficient infrastructurenetwork attracts foreign direct investments and technology as well as generates newinvestments in other sectors.Africa thus needs to develop and invest in infrastructure on a sustainable basis.Infrastructure sustains good performance by enhancing economic activity and overallgrowth, for example, by reducing production and transaction costs, increasing privateinvestment, and raising agricultural and industrial productivity. Infrastructure, oncedeveloped, can remove bottlenecks in the economy that impede asset accumulationor lower asset values, impose high transaction costs and create market failures.Infrastructure generates distributional effects on growth and poverty reduction byenabling poor people’s increased participation in the growth process. For example,it increases their access to factor and product markets, enhances asset mobilizationand use, promotes their empowerment. Infrastructure also affects non-income aspectsof poverty, contributing to improvements in health, nutrition, education and socialcohesion. Indeed, infrastructure development makes valuable contributions to all theMillennium Development Goals (MDGs).Infrastructure is mainly publicly financed because infrastructure projects aregenerally national, regional, or local public goods and the projects tend to be lumpyand expensive to finance. Lumpy projects can be difficult for private investors tofinance, especially in low income countries and the returns cannot be easily captured.However, as many African governments face financing constraints, more innovativeapproaches, such as considering on a large scale, Public-Private Partnerships (PPPs)would allow commercial discipline and financing to be introduced in the delivery ofinfrastructure services, thereby improving efficiency and lowering costs. These canbe in the form of basic service contracts, concessions or asset sales.Investing in Skills Development 9Investing in skills development is crucial to building an employable competitiveworkforce. Skilled knowledgeable work force is critical to increased productivityand economic growth, which are the cornerstones for improved standards of living.But Africa lags behind in investing in technical and vocational skills development(TVSD) compared to other regions of the world.9NB: Principal reference for this note is the 2007/2008 African Economic Outlook, section titledDeveloping Technical and Vocational Skill in Africa.20

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesIn the 1960s and 1970s, TVSD was popular in African countries as a way of easing theunemployment problem. But in the 1980s, reductions in public investment in educationin general and results of rate of return studies which indicated higher returns to generaleducation compared technical and vocational education and training, adverselyaffected investments in TVSD. Similarly, in the 1990s, following the internationalconference on education for all in 1990, attention was focused on the development ofbasic education to the neglect of secondary and tertiary education, including TVSD.As a consequence, while enrolments in technical and vocational education isrelatively high in North Africa (about 23% of secondary education between 2001and 2005), in Sub-Saharan Africa enrolments in technical and vocational programs isvery low compared to other regions of the world. It averaged only 5.2% of secondaryeducation between 2001 and 2005, with falling trend since 2003, compared to 11.6%for Latin America, 9.5% for South East Asia and 18% for OECD countries. In highlygrowing countries of Asia, the figures are 19 for South Korea, 18% for China, 16 %for Indonesia, 13% for Singapore, and 18% for Thailand. And the figures are evenhigher in most OECD countries: 70% in Australia; 62% in Austria; 68% in Belgium;65% in Czech Republic; 40% in Finland; 59% in Italy; and 49% in Norway 10 . Genderinequities, with low female rates of participation, are also characteristic of AfricanTVSD systems.The expansion of basic education in the 1990s has put extreme pressures on the smallsecondary and technical and vocational education sub-sectors in African countries. Asa result of this pressure, coupled with influences of experiences from Asia and OECDcountries, the need for a holist integrated approach to the development of education,including investments in TVSD, is recognized. However, multiple constraints limit theexpansion and impact of TVSD systems in Africa. Many programs are not oriented tothe needs of the economy as well as being fragmented with little coordination betweenvarious agencies involved in the delivery of the programs; TVSD reform strategieswith sustainable financing are rare; scaling-up of successful programs is not common;enterprises offering work-place opportunities are limited; and training institutions areinadequately resourced to produce the required skilled workforce.The challenge for Africa counties is to expand the capacity of TVSD systems andto improve the quality of skills provided. A number of Africa countries are takingthis challenge and have started taking steps to institute important reforms in theireducation and training systems to promote technical and vocational skill. In Ethiopia,the government intends to expand enrolment in technical and vocational education bysix times of its present size by 2015. In Rwanda, where 36% of secondary educationenrolment is in technical and vocational education, plans are to increase the numberof technical and vocational institutions by 50% by 2015. In South Africa, aims are toreach a million students by 2015, compared to the current quarter million. In Gambiaand Ghana, where enrolment of technical and vocational education are currently 1%and 2% respectively, the governments are committed to a 50% increase in the number10Source: Africa Economic Outlook 2007/2008, page 66.21

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriesof technical and vocational institutions 11 . In addition to expanding capacities, manycountries have decided to reshape their TVSD systems to make them more efficientand effective.Lesson learned from the implementation TVSD reforms and future actions in anumber of areas. First, there is need to adopt a clear vision as political will, vision andleadership are necessary conditions for formulating and implementing TVSD policies.Second, there is need to improve forecasting and planning for skills needs. Long termplanning and setting up of clear and legal and regulatory frameworks are essential forsuccess of TVSD reforms. Many African countries lack the necessary frameworks. .Third African countries need to improve the quality of TVSD. The provision of TVSDshould be demand driven where the training provided is in line with the needs of thelabour market. Inadequate capacities for planning and designing training programs arelimitations that need to be overcome. Fourth, countries should facilitate the growth ofthe productive sector through technological learning and innovation. That is facilitatethe design of integrated programs that couple access to finance with appropriatetraining for the informal sector that allow migration to the formal sector need to befacilitated. Fifth fostering partnership with all stakeholders is critical. The state carriesthe primary responsibility for TVSD reforms, but partnership with other stakeholderssuch as employers and associations is critical to the delivery of TVSD activities.Finally, countries should ensure sustainable financing of technical and vocationalskills development TVSD systems are largely under-financed in Africa. On averageonly about 2 to 6% of education budgets are directed to TVSD in African countries.For TVSD reforms to take hold, coordinated public, private and donor support that issustainable needs to be put in place.Strengthen InstitutionsGrowth literature on Africa shows that institutional factors, which include theenforcement of property rights, political rights, characteristics of political regimes,social capital and social characteristics, such as ethnicity and religious background,as well as wrong policy choices, have significantly hampered Africa’s economicgrowth. According to Nobel Prize winner, Douglas North (1990), weak institutionsmay have a direct effect on growth because they reduce the efficiency and level ofinvestment. Where property rights are weakly defined or insecure, firms will tend touse “technologies that employ little capital and do not entail long-term agreements.” 12Institutional quality - characterized by corruption, bureaucratic quality, rule of law,property rights and contract enforcement - determines the rules of the game andincentives in the whole economy. In this context, Africa’s growth challenges have todo with lack of functioning institutions in which parliaments are subservient, the legalsystem and the law enforcement agencies are poorly resourced to function effectively,the rule of law is applied selectively, and political power is in the hands of a fewpowerful groups. Also, on average, the African region is relatively more politicallyvolatile compared with others in the developing world.11Source: Africa Economic Outlook 2007/2008, pages 69-7012Douglas C. North (1990). Institutions, Institutional Change and Economic Performance CambridgeUniversity Press, Cambridge22

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesThe main channel through which institutions affect overall economic performanceappears to be capital accumulation. The investment climate in Africa is made difficultby the presence of high administrative barriers and excessive regulations, resulting insubstantial delays and high transactions costs to firms wishing to investment. Startinga business in most African countries is still relatively costly and getting a licenceprocessed is time consuming. In this regard, poor quality of institutions behaves likea tax on investment (physical and human) which leads to unnecessary inefficienciesand inflates the costs of doing business. Therefore, policy interventions to support thedevelopment of institutions in Africa should be linked to the determinants as well asthe efficiency of investment. African governments should reform their existing legaland regulatory frameworks and ensure the involvement of business communities aswell as other key stakeholders in the reform processes. In addition it is necessaryto strengthen and reform the judicial systems, introduce economic and corporategovernance, promote transparency and accountability, consolidate property rights,mitigate risks for investors, support commercial law reform and improve security forgoods and transactions.In addition, African countries may need to consider improving remuneration andincentives in the public service as a way of reducing graft in the civil servants. Somecountries may have relatively efficient national systems but lack skills to deliverservices at sub-regional or provincial level. Therefore, it is important for Africangovernments to support intervention to acquire the necessary professional skillsto strengthen institutions at sub-regional. At National level policies that supporteducation and skills development are also positive. Openness or globalisation tends toimprove the allocation of resources which supports the strengthening of institutions.On the political side, countries with strong or stable democratic or political libertyregimes tend to have relatively stronger institutions. Other general policies that requireattention include promoting gender issues – higher women participation in the laborforce or in leadership positions tends to be good for institutionsPromoting regional trade and integrationFinally, the integration of African economies into the regional and global economyis vital to achieving sustainable economic growth and poverty reduction. For Africancountries, deeper and broader integration is crucial for building trust, enhancingeconomic growth and providing an impetus for lasting regional stability and peace.About a third of Africa’s population live in countries where the internal markets aresmaller and fragmented, and the costs of doing business and trade with the outsideworld are relatively higher. Yet, trade plays a key role in an increasingly inter-connectedand interdependent global economy. Thus, despite improved economic performanceAfrica’s share of aggregate world trade and output, which in 2005 was 2.6% and 2.1%respectively, remains far below its share of world population, and continues to decline.African countries also trade more with the rest of the world and very little with eachother. Intra-African trade is only about 10% of the continent’s total trade. The lack ofgrowth of intra-African trade signals the urgent need for finding new approaches totrade policy in Africa, including a review of Africa’s regionalism. To participate fully23

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriesin the emerging new international relations, which are increasingly structured alongregional lines, African countries need to scale up their efforts at regional integration.At the same time, there is need to restart the stalled WTO negotiations on the DohaRound, as Africa stands to lose from any lack of progress. Although the estimatedgains for Sub-Saharan Africa (SSA) from the Doha Round also vary, recent estimatesby the World Bank’s Global Monitoring Report (2006) suggest that SSA would see amodest $4.8 billion increase in merchandise trade (around 1.1 percent of the region’sGDP), with agriculture accounting for 78 percent of the total gain for SSA. Africancotton farmers are likely to boost their exports by $1.9 billion. Improved marketaccess for Africa’s exports both to the developed countries and to other developingcountries would arise from the Doha Round. All these are in addition to the gainsarising from the ‘development’ aspects of the Round, such as aid for trade and traderelatedtechnical assistance components, which would help address critical supplysideconstraints that militate against production and export diversification.VII. ConclusionAfrica’s economic performance has improved significantly since the turn of thecentury, and the outlook in the short-term, is quite robust, subject to short terms risksin the global environment. These risks include the three “Fs”, namely, current financialcrisis and the inflationary pressures due to high food and fuel prices. Longer termchallenges continue to threaten long-term growth acceleration and poverty reduction.For Africa to break from the low equilibrium growth cycle will require investmentsin infrastructure, investing in people, strengthening institutions and effective regionalintegration.24

GENERAL DISCUSSION

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member CountriesThe lecture by Dr. Louis A. Kasekende, Chief Economist, African DevelopmentBank was followed by a general discussion in which the participants showed agreat enthusiasm and asked many questions. Most of these questions were relatedto economic growth, inequality, performance of oil exporting countries vis-à-visoil importing countries, governance, investment in infrastructure, agriculture andexternal debt. Some of these questions were cross-cutting. The questions raised andtheir responses are given below:1. What is the most optimal way of having growth with less inequality?Growth with equitable distribution is a common challenge facing developing countries.The focus should not only be on growth but should also be equally on the benefitsof growth, i.e. the distributional effects. Growth should be job creating. This is achallenge in theory and in practice, especially where growth is restarting. But oncegrowth starts to pick up, the focus must come back to job creation and the equalityissue.The problem with growth experience so far is that the sectors that employ more people,for example, agriculture, have not been the major source of growth. For a numberof countries, the oil sector has been the driver of growth, and this sector typicallyemploys fewer people compared to agriculture. In countries which are classified as oilimporting countries, the source of growth is mainly from the services sectors.Under these circumstances there is need to have more re-distribution through the useof fiscal policy so that the benefits from growth could be channeled to a wider groupof people. In fact, the initial investment in primary education is an example of how toget more people participating or getting benefits of growth. But we need to do moreand some of the items that I touched on are actually what we are supposed to do.Infrastructure that I referred to is that which connects people to markets and notthat which leads to the export of the products of extractive industries. We want aninfrastructure that connects the rural areas to markets, the infrastructure that willsupport even the agriculture sector so that more people benefit from growth.Furthermore, without institutions, it would be extremely difficult to promote policiesthat address inequality because some of these institutions play the role of an agent ofrestraint. That’s why a parliament is set up as an agent of restraint on the executive.But if the parliament is not strong, the executive will come up with all sorts ofprojects, so even institutions help in addressing the distributional effects. Finally,integration will also help in addressing these distributional effects, through providinga wider market to the producers and benefit consumers, including those who are poor.Overall, distributional issues require a deliberate effort by a government. That’s whythe concept of social safety nets is coming back so that more people are involved inthe process of production.27

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countries2. Why was agriculture, which is a pro-poor sector, not emphasized in yourpresentation?Agriculture as a sector is very critical to any pro-poor strategy and it can be treatedthrough the four ‘I’s that I mentioned in my presentation i.e. infrastructure, investingin people, strengthening institutions, and effective regional integration. Alternativelyagriculture can be treated as a pillar and then we can ask what role it can play inaddressing the distributional effects. My presentation focused on those areas that willfinally help agriculture, such as infrastructure.Resource distribution is the challenge facing oil-exporting countries. The problem ishow to manage the windfall benefits from oil for the promotion of sustainable growthand equitable distribution. The only case that we know that has used extractiveindustries in poverty reduction in a sustainable way is Botswana. Recently, Nigeriahas been trying to do exactly the same i.e. using the windfall receipts through thebudget for distribution by focusing on job creating activities.Governance is also one of the biggest threats to poverty reduction in Africa. Countriescome out of war and go back into war. State building is very important in povertyalleviation and focusing on state building is also pro-poor. Similarly, skill developmenti.e. empowering the poor so that they can move from low-paying jobs also contributesto higher-paying jobs is actually pro-poor growth. In fact, there are many things thatneed to be carried out in addressing the challenge of distributional growth.3. What is the modeling framework that AfDB used to come up with its shorttermor medium-term projections that you have used in your presentation?Does your model allow you to do longer term projections as well, and can yougenerate scenarios using the assumptions you have used in your model?The model that we used at the AfDB is the one that has been developed jointly by theOECD and the African Development Bank. We are in the process of strengthening thismodel in partnership with ECA which has joined us as the third partner and we areaddressing a number of issues including coming up with longer term projections. Asof now we are mainly coming up with the projections for the next three years.Scenarios are needed whenever we are dealing with issues such as the financial crisiswhere a lot is unknown and a lot of assumptions have to be made. That is exactly whatwe shall be doing in the coming weeks.4. Why do you think that the oil exporters will do better than the oil importersin the period you are covering in your analysis?In an analysis conducted for the African Development Report covering the period 1960to 2007, Africa was classified into different groups. Countries are firstly classified asresource rich or resource poor. They are then reclassified as resource rich coastalcountries vs. resource rich land-locked countries; and resource poor coastal countriesvs. resource poor land-locked countries. We found that the resource poor countrieswhich are coastal have done better over the long period than the resource rich coastalcountries. Compare how the economy was managed during the first and the second28

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countriesoil boom in 1970s, and the after effects on a number of oil exporting countries, to theway it was managed by the resource poor but coastal countries. You will find that thevolatility in growth has been much higher in the resource rich, be it coastal or landlocked,than in the coastal resource poor. Mauritius, for instance, has enjoyed moresustained growth than Nigeria. That is one message that comes out of this analysis.But the other message is that the oil exporting countries have done a better job atmanaging windfalls this time than they did in the past.The issue of governance comes up here. How many countries have set up intergenerationalfunds? Nigeria for example, at one time used a price of US$25 per barrelfor its budget calculations which had been increased to US$46 per barrel, but that wasthe time when the price of oil was US$145 per barrel. Now Nigeria is already lookingat reducing their reference price for the budget calculations. This could not be the casein the 1970s. Thus the macroeconomic management has improved a lot even in theresource rich countries. What was done in 1970s was borrowing as opposed to fiscalconsolidation. The question that remains is whether it is sustainable. The case of Chadwas disappointing because a fund was set up and then it was abandoned. But at leastNigeria is a very good example. It used to be quoted as a poor manager of resources,but it has done very well during the current boom. Sudan and countries like EquatorialGuinea have been posting growth rates of 15% to 16%. The question is whether theyare sustainable. It will all depend on using the windfall receipts and investing them inareas that will make the growth sustainable. This takes us back to the four ‘I’s. Youmust invest in skills and infrastructure which will help sustain the growth.5. Is debt no longer a challenge in Africa? What is the impact of multilateraldebt relief initiative financing infrastructure in Africa? What is the genuineinterest of China and India in Africa?Once a country goes through the debt restructuring and the HIPC program, a fiscalspace is created. There is need to see that this space is used in a manner that supportsgrowth through, for example, infrastructure financing. But this must be responsible.Africa must not go back to the period of the 1970s when countries over borrowed andhad to go through a round of debt reduction. Although borrowing for infrastructureis supported but it must be within the framework that ensures debt sustainability.All parties must fully disclose the terms of their credit and thoroughly analyze thecapacity of the country to service the loan five years down the line so as to avoid anyproblem.India and China have extended a huge amount of loans to African countries. This willincrease the debt portfolio of economies in the future. The AfDB will analyze thecapacity of these countries to service debts. There is nothing confidential about that.The debate may be on what are the indicators of debt distress but that is something thatcan be resolved. Although it is a constraint, there is no problem with sitting around atable and analyze the issue. But what we should avoid is a situation where one of thepotential creditors provide financing that lands a country into debt distress 5-years or10-years down the line.29

Outlook for Sustained Economic Growth in Africa: The Case of IDB Member Countries6. Do you think that devaluation of the CFA franc is advisable at this stage? Whatexamples can you give us in terms of countries that have well managed theireconomies in Africa? What is your insight about the impact of investment inInfrastructure in Communication Technology (ICT) on countries who haveput some emphasis on that?The AfDB is going to conduct a joint study with the World Bank on the CFA franc.This is an issue of interest even to the AfDB, given what happened the last time thecurrency had to be devalued, what were the factors that led to the devaluation? We cango through some analysis and come to a good understanding of what should be done.With regards to examples of countries in Sub-Saharan Africa that have been able tosustain growth over a long period, Botswana comes out as a very clear case. Botswanahas implemented the right decisions for a long time. More recently countries that haveenjoyed sustainable growth for a long time include Ghana, Uganda, and Tanzania.These countries have addressed the issue of distortions in the economy and haveimproved their macroeconomic environment. In fact, last year we wanted to look atcountries over the next 10-15 years that may even become middle income countries.These are countries that are not only addressing the issue from economic side but alsofrom the political side. They are addressing issues from both sides and are makingprogress. Burkina Faso is one of the countries that is having steady growth.African Development Bank’s view on ICT is that it will help Africa leapfrog. In fact,the AfDB’s theme for African economic outlook for 2009 is ICT. Broadly, a hugeprogress and gains have been made from mobile telephones in Africa. The numbershave increased from about 2000 connections to millions, and it is not only in onecountry, but across Africa. So ICT is going to help countries, but there is need to movequickly into fiber optics. Rwanda is investing in a number of areas. These are the areaswe need to move into so that we can move large quantity of data across these lines.7. From your point of view under the perspective of African Development Bankhow much emphasis do you put on governance and what would be youradvice to an institution like Islamic Development Bank?There are times when Multilateral Development Banks get into the political issues.It is not advisable for the IDB to interfere in politics. But Multilateral DevelopmentBanks can do a lot to support institution building to strengthen governance. There isa department of governance at the African Development Bank, which is supportinginstitutions. The ADB is also supporting country assessments under NEPAD. Thereare quiet a number of other things under the PR View like what indicators should youlook at. The AfDB is supporting that process, country A can be compared to country Band that is the work that can be supported by the multilateral development banks.30