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AFRICAN DEVELOPMENT IN THE
21ST CENTURY

By

THE HON. DR. CASSIM CHILUMPHA, M.P.
MINISTER OF FINANCE OF MALAWI

at

The Public Forum
on African Development in the 21st Century
held at the United Nations University Headquarters in Tokyo

on

16 November 1998


It gives me great honour and pleasure to address this forum today on Africa's Development as well as the main challenges and opportunities facing the continent at the dawn of the 21st Century.

Before I do that, allow me, Mr. Chairman, on behalf of my fellow Africans, to express profound gratitude to you and the Government of Japan for the warm and cordial reception given to us.

The challenges facing Africa as we approach the new millennium are indeed enormous. Africa's position today is quite different from that of the past decade. For once, in a long time, there is encouraging economic progress in many countries. This reflects the implementation of sound economic policies, a move towards rules-based institutions, and participatory forms of government that foster consensus between the state and civil society.

No doubt, Africa still has a long way to go to make up for lost time and opportunities. Economic growth rates are still not high enough to make a real impact on the pervasive poverty. Investment remains subdued, limiting the efforts to diversify economic structures and accelerate growth.

Further, a number of countries have only recently emerged from civil wars that have severely hampered development efforts, while new flames of conflicts have, sadly, erupted in other parts of the continent.

Africa, therefore faces major challenges to accelerate growth, reduce poverty, build up its human resources, and create an environment that encourages the development of the private sector. At the same time, globalization has raised the stakes by offering greater opportunities for faster economic growth while significantly raising the risk of marginalization for those countries that fail to integrate into the global economy.

Moreover, the recent crisis in Asia shows that it is not enough merely to open up economies. Sound and fully transparent macroeconomic policies, solid and well-supervised financial systems, and good governance are crucial to the sustenance of economic growth.

ECONOMIC PERFORMANCE

Recent economic performance in most of Africa has been encouraging. After almost two decades of stagnation and decline, real GDP in sub-Saharan Africa is now growing at an average rate of 4-5% a year, while real per capita incomes are rising in most countries. Average inflation came down from a peak of some 45% in1994 to an estimated 13% in 1997, and only 15 sub-Saharan African countries still had double-digit inflation rates in 1997.

Internal and external financial imbalances have also been reduced. The average overall fiscal deficit (before grants) was ahlved between 1992 and 1997, to about 4% of GDP, while the average current account deficit (again, before grants) fell from 5% of GDP to 4% over the same period. These improvements have been accompanied by an upturn in investment ratios.

As exporters of predominantly primary products, African countries are more exposed to terms of trade shocks than most other countries. Their exposure to adverse terms of trade during most of the 1980's and early 1990's had a negative impact on their economic performance.

Such unfavourable terms of trade contribute, among other things, to balance of payments difficulties which in turn create an unstable environment that does not particularly encourage investment.

Many African countries have also been vulnerable to other shocks, arising mainly from natural environmental forces. Such shocks have resulted in depressed production and therefore depressed exports. This has further led to the need for increased government expenditures.

Although a number of African countries have been undertaking economic reforms to introduce macroeconomic stability, and trade and exchange rate liberalization, most of them have yet to be rewarded with any meaningful foreign direct investment.

Statistics on resource flows show that aggregate net long-term resource flows to developing countries increased from US$101.9 billion in 1990 to US$231.3 billion in 1995, and official development assistance (represented by official grants and loans) increased from US$58 billion to US$64.2 billion over the same period. Foreign Direct Investment and portfolio flows increased from US$44 billion in 1990 to US$165.1 billion in 1995, increasing its share from 43% to 72% over the same period. The share of sub-Saharan Africa in these resources was, however, merely US$0.2 billion in 1990, US$4.7 billion in 1994, and US$5.0 billion in 1995, representing 0.005% in 1990 and 0.03% in 1994 and 1995.

INVESTMENT APPEAL

Mr. Chairman, distinguished participants, perhaps noteworthy here is that sub-Saharan Africa has experienced an increase in private capital inflows since 1990. Clearly this suggests that the region has a destination appeal for private investment.

This appeal would seem to arise from:

  • Political stability which has increased investor confidence;

  • Policies which allow investors to freely move their capital as and when the need arises;

  • Privatization which has opened up the chance to invest in what were previously government-run enterprises;

  • Development of stock exchanges which provides an easy way to trade shares and offer institutional investors (pension funds, insurance companies, etc.) with interest in emerging markets, an opportunity to place their money where there is potential for its growth; and

  • A shift from controlled economic systems to open market economies.

Market size and economic growth are important determinants for investment decisions. The limited size of the typical national economy in Africa has significantly hindered the promotion of private investment. Each such economy on its own is not big enough to justify significant investment in many areas of production. For that reason, regional integration is not a matter of choice for Africa; rather, it is an economic imperative.

Consequently, the trend throughout the African continent is towards regional economic integration. This is an important development which needs to be strengthened particularly where it enhances trade liberalization on a most-favoured nation basis.

Regional integration would also provide a framework for African countries to cooperate in developing a common economic infrastructure (in such areas as transport, telecommunications, as well as banking and insurance services), which would better equip them to participate in the global economy.

THE CHALLENGES

While these trends are no doubt encouraging, there are several reasons why they are not enough and why more needs to be done. First, economic growth must increase in order to achieve a lasting reduction in poverty. Since Africa's population has been growing at about 2.8% a year over the last decade, real GDP will need to rise at least twice as fast to achieve a significant reduction in poverty and to enable us catch up with other developing countries.

Viewed from another perspective, much faster growth is required to absorb the rapidly rising labour force and materially improve living standards. There is thus a need to consistently average real GDP growth rates to some 7-8% per annum. These rates may seem too high but several countries in the continent (such as Cote d'Ivoire, Mozambique and Uganda) have already demonstrated that they are not out of reach.

We in Africa realize that private investment requires a conducive environment which offers functional infrastructure; skilled labour; an even-handed, efficient, and transparent regulatory framework, and a clear government commitment to foster private sector development.

While our reform efforts represent important steps in this right direction, their pace needs to be accelerated. Such acceleration will signal to the private sector, both at home and abroad, that African governments are indeed committed to addressing the structural shortcomings of their economies and to creating an environment conducive to productive private economic activity.

The process of trade liberalization has been launched throughout Africa. Most countries have reduced or liminated non-tariff barriers, often replacing them with tariff equivalents. Trade regimes are still significantly more restrictive and complex than in most other regions of the world. Tariff rates remain too high and too dispersed, partly because governments are very dependent on import tariffs for budgetary revenue, and partly due to the prevalence of statutory and ad hoc exemptions.

Eliminating these exemptions, preferably in the context of a comprehensive medium-term reform, would allow tariffs to be reduced at a much faster pace. That would in turn not only make domestic producers competitive, but also deepen trade links and thus help Africa to integrate more fully in the world economy and better exploit the opportunities of globalization.

In most African countries, financial intermediation is characterized by shallowness and institutional weakness, with little or no linkage between the formal and informal components. As a result, the sector is ill-equipped to effectively mobilize savings.

Despite the progress made in restructuring the financial sector in many African countries, most central banks still lack autonomy, banking institutions remain by and large, weak and inefficient, and financial sectors are thin. There is thus a need to accelerate financial sector reform. In particulary, it is important to ensure independence and accountability of central banks, with freedom from political interference.

There is also a need to complete the rehabilitation of weak commercial banks; open the banking sectors to healthy domestic and foreign competition; privatize government-owned bank; establish or strengthen the institutions of prudential regulation and supervision of banks; and apply best practices in bank management.

Furthermore, specialized financial institutions and instruments for mobilizing long-term savings (such as stock exchanges) must be developed, and innovative, efficient forms of extending credit to the rural sector must be found. The legal provision for loan recovery and contract enforcement must also be rationalized.

African governments need to move ahead decisively in restructuring and privatizing public enterprises, in order to enhance the efficiency of their operations and to expand the scope for private sector activity. Enterprises that remain in the government portfolio, however temporary, should be operated on a fully commercial basis, with market-based pricing and employment decisions, and management autonomy and accountability.

Privatization operations should be ambitious in terms of timing, but well prepared and executed in a fully transparent manner to ensure that the process does not give rise to new distortions and private monopolies.

Economic security and good governance, coupled with sound macroeconomic policies and structural reforms, should be the motto for Africa in the 21st Century. As a number of African countries have shown in recent years, this recipe for higher, sustainable growth is certainly within the capacity of most countries. Yet Africa continues to suffer from and pay a price for its poor image of famine and disease, poverty and helplessness, and ethnic strife and political instability.

The recent conflicts in a few African countries in East and West Africa have only served to reinforce the distorted perception of the continent, diluting the impact of major strides made in both economic political reforms. Unfortunately, it is these headlines that capture the world attention.

Political instability, however distant, affects the investment, especially foreign direct investment, that is sorely needed for growth throughout the region. Therefore, there is also a need to foster peace and security in Africa,, both through conflict prevention and a prompt resolution to disputes.

This will help create the overall environment within which sound economic and financial policies can have the best prospects for success. Although much more remains to be accomplished, considerable economic progress has been achieved in many African countries as mentioned at the outset. Therefore, we all need to do a better job of conveying this message to foreign investors. That way, we would help to bridge the gap between the old and the new millennium Africa.

Africa's success will depend largely on its own home-grown efforts. However, Africa's international partners, including the Government of Japan, will also have an important role to play. Industrialized countries can contribute to Africa's success by:

  • pursuing economic policies that promote world economic growth and staibility;

  • opening their markets to products in which African countries have, or can develop a comparative advantage, and phasing out distortionary protective practices;

  • strengthening their bilateral assistance to countries committed to strong reform programmes, particularly where such programmes might entail additional costs; co-operating actively in the fight against corruption in all its forms; and

  • ensuring that the multilateral institutions have the necessary resources to support adjust ment and reform programmes.

The international financial institutions, for their part, will also have to continue to support Africa's adjustment and reform efforts through appropriate policy advice, financial and technical assistance, and training. As you know, the World Bank in close collaboration with the IMF, the African Development Bank, and Africa's major bilateral partners has been very active in all of these areas.

The World Bank, together with the IMF, are implementing the debt initiative for the heavily indebted Poor Countries (the HIPC Initiative), the majority of which are in Africa. Already, four African countries (namely Burkina Faso, Cote d'Ivoire, Mozambique and Uganda) have received commitments of assistance from all creditors totalling about US$6 billion in nominal terms.

Of course, to qualify for assistance under the HIPC Initiative, eligible countries need to establish a strong track record of adjustment. I am hopeful that many more countries will doso in the period ahead, and that the list of beneficiaries will be much longer by the year 2000.

As you can see, Africa's reform agenda is full. However, if vigorously implemented, with the support of Africa's international partners, it should help achieve the desired result of higher, sustainable growth and a durable reduction in poverty. As economic and social progress takes hold throughout the continent, confidence in Africa's future will increase, and the image of Africa itself will gradually change for the better. We thus all need to work together to sustain Africa's progress.

THE CASE FOR MALAWI

Allow me to say something about my own country. As you already have heard, Mr. Chairman, I come from Malawi, which is a country situated in the South-East corner of Southern Africa. Our neighbours are Tanzania to the North and North-East, Mozambique to the East and South-West, and Zambia to the West. The country covers an area of 118,485 square kilometres of which approximately 24,208 is Lake Malawi.

Malawi has a population of 12 million people which has a growth rate of 3.1% per annum. The country is very stable and peaceful. The people are very friendly, courteous, and kind: that is why it is called the "Warm Heart of Africa." The economy of Malawi is predominantly agricultural-based. Agriculture contributes about 40% of the country's Gross Domestic Product.

Prior to 1986, the Malawi economy was very regulated. For example, there were price controls on most products, foreign exchange rationing, import restrictions, industrial licensing, official pegging of the Malawi Kwacha against other major currencies, and restrictions on repatriation of dividends. Such practices obviously restricted the growth of the private sector.

In addition, fiscal problems have been experienced which have rendered it difficult or virtually impossible for the state to provide for the basic needs of the people of Malawi, especially through the use of public enterprise. It is in this regard that the private sector should increasingly take over the provision of such basic goods and services.

However, in a bid to stimulate the economy and encourage enterprise development among the business community, a number of measures have been taken, including:

  • Deregulation of price, foreign exchange, and industrial licensing;
  • Introduction of market-based instruments for monetary policy management;
  • Efficient company registration and incorporation procedures;
  • Introduction of export and import incentives;
  • Repeal of duty on capital equipment and raw materials; and
  • Privatization of some government-owned enterprises.

Macroeconomic stability will continue to be Malawi's priority objective through low and stable inflation and interest rates. There is need also for stability of currency. Inadequate financial institutions, mostly owned by government parastatals and a few other conglomerates make access to capital difficult, especially for new firms. This true for Malawi, as it is true for many other Southern African states.

The challenge for us as we face the 21st Century is to pursue financial sector reforms to improve access and broaden the range of instruments, through for example, Stock Exchanges, Unit Trusts, and other investments.

In order to meet that challenge, a Stock Exchange was established in 1996. Regulations have also been in existence since 1990 passed under the Capital Markets Act (1990) for the creation of Unit Trusts and other collective investment schemes.

In Malawi, we realize that liberalization needs to be accompanied by a competition policy and legislation to "level the playing field;" otherwise existing conglomerates will simply use their market power to frustrate any new investors. In this connection, a Competition Bill is being prepared for presentation to Parliament as soon as possible.

We also realize that there is need to review labour legislation to ensure that it supports rather than frustrates investment. Malawi is now discussing ways of speeding up the issuance of Temporary Employment and Residence Permits as well as Business Residence Permits. There is need to review the Tax legislation continuously to ensure that it encourages investment.

An important aspect of the Investment Promotion Act was the establishment of procedures for setting up Export Processing Zones in 1995. Incentives in EPZs include no withholding tax on dividends, no value-added taxes, corporate tax rate of 15%, export tax allowance equal to 12% of export revenue for non-traditional exports.

In privatization of state-owned companies, we understand that sub-Saharan African governments need to show commitment to privatization of State-Owned Enterprises (SOEs) as part and parcel of private sector development strategies to end the domination of banking and other services by government, promote efficiency and reduce government deficits, and raise revenues to finance social programmes. This process started in 1996 with the enactment of the Public Enterprise (Privatization) Act, 1996 and the establishment of the Privatization Commission. Some ten SOEs have been privatized and many are in the process of being privatized.

Investment in human resources is also a priority for Malawi. It has been echoed time and again, that Southern Africa is overpopulated. Perhaps the concern should be that the region has too many unproductive people. To make them productive, it is necessary to invest in them through education, both technical and academic. In Malawi, we now have a free primary school system, the aim of which is to achieve a higher level of literacy and numeracy.

On regional co-operation, we understand the need to cooperate with other countries in the region in all aspects of development. Malawi is therefore a member of regional bodies such as the Organization of African Unity (OAU), the Southern African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA) and the Cross Border Initiative (CBI), just to mention a few.

We believe that problems like money laundering and crime should be tackled on a regional basis. So too is the need to co-operate in areas like infrastructure development (roads, railways, power, telecommunications) research, tourism and trade.

Promotion of small enterprises should be encouraged to inculcate and enhance entrepreneurship among the local communities. If this is done, foreign investment will not be seen as simply an enclave of foreign investors, rather, it will be seen as a complementary effort to private investment.

Land reforms should be encouraged to guarantee security of tenure and enhance enterprise development among citizens. Malawi has recently set up a commission on Land Reform to examine current practices and make proposals for land ownership. A comprehensive Trade and Industry Policy is being finalized to ensure that various strategies in the sector support rather than conflict with one another.

Corruption needs to be seriously considered if sub-Saharan is to appeal to investors. Malawi has established an Anti-corruption Bureau to deal with this problem.

In conclusion, I should emphasize the importance of foreign direct investment to Africa. It would be very discouraging for the African countries to create the necessary environment and still fail to attract interest from the industrialized countries, whether in terms of investment funds, technology transfer, or knowledge and skills transfer. What Africa is actually looking for is a regular flow of investment from our partners in the form of such countries as Japan, Korea, Malaysia, Indonesia, and other countries of South-East Asia.

Africa is a beautiful continent with a lot of untapped potential. While most of what is seen and read about on Africa in the mass media is negative, and in some cases true, there is much more positive news that goes unreported about the beautiful side of the continent with its hard-working people.

A lot of African countries are striving for prosperity and have adopted a lot of policies aimed at seeing the continent leap into the next century with stamina and enthusiasm. It is to this Africa that I invite you our colleagues to come and fill the gap in terms of investment.

I thank you for your attention.

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