Key Issues in African Development
in the 21st Century

UNU/AERC Conference on Institutions and Development in Africa
Tokyo, Japan
14-16 October 1998

1. Introduction

In looking at key issues in the future development of Africa, it is crucial, however, to situate this recent recovery in a proper historical context. As the 1998 UNCTAD Trade and Development Report points out, Africa's growth performance was on the average was quite strong for over a decade-from the mid-1960s until the first oil shock (in 1973). GDP growth in SSA averaged about 4.5 per cent per year during the period, although that was lower than in other developing regions (with the exception of South Asia). And, that growth was accompanied by encouraging trends in investment performance and export revenues. Given the experience of the last two decades or so in SSA, it can be concluded on the whole, that since the 1970s, the economy failed to systematically recover due to a combination of economic vulnerability and weak domestic policies. Economic vulnerability was and remains rooted in over-dependence on primary export commodities and the overall lack of diversification. And, as more recent studies have re-emphasized, the vulnerability is importantly also related to adverse geographic factors such as the tropical location and land-lockedness. Weak policies, on the other hand, originated substantially from what an observer has characterized as a "mistrust of market economies and unreconstructed instinct to over-intervene and over-regulate".

Many individual analysts and institutions have associated the recent recovery in Africa with the various macro economic and structural policies that have been implemented in a relatively large number of countries over the last decade or so. These policies, ranging from control of fiscal deficits to, to price and trade liberalization, and to privatization of public enterprises have been associated with improved growth and micro-financial performance. Countries that have implemented these policies more rigorously have, on the whole, registered stronger performance-although the outcome in some cases reflects special factors (such as recovery from armed conflicts and the discovery and exploitation of natural resources, like oil).

This welcome recovery of the 1990s is based to a significant extent on greater utilization of existing capacity, and is also clearly inadequate for addressing the widespread poverty in the continent. In comparison to the average annual growth rate of about four per cent, the population continues to increase at about three per cent. Again, as the 1998 UNCTAD report points out, even if the growth of the past few years could be sustained in the next decade, that would not have much of an effect on widespread poverty, and would constitute little more than the recovery of ground lost during the past twenty years. Apart from output growth, many countries in the region still have very large external imbalances which also reflect heavy dependence on external assistance. The saving-investment process in the region remains weak-given the desirable range in the rate of aggregate growth. There has not been significant improvement in the ratio of investment to GDP which on average, has remained below 17 per cent through the 1990s. This may be compared to the corresponding ratio of nearly 28 per cent for Asia (excluding Japan). Relatedly, there has not been much success in tapping into foreign capital to developing countries-which increased sharply in the latter part of the 1990s. Although there has been an increase from a small base, the share of SSA relative to other sub-regions of the developing world remains quite small.

2. Key Issues in African Development

The long-term decline between the 1970s and early 1990s is a painful reminder, however, of the ver present dangers of reversal in the on-going momentum in policy and structural reforms, and of destabilizing external shocks. The design of pro-growth and anti-poverty policies through partnerships will, therefore, be crucial in the coming decade and beyond. This no doubt represents a complex set of issues, some of which we shall be reverting to shortly. An encouraging dimension in this regard should, however, be pointed out: the human and technical capacity for managing development policies, though still inadequate given the task at hand, has improved substantially since the post-independence years of the 1960s and 1970s. There is, therefore, a stronger basis for shaping and managing the requisite policies, if other supportive elements in society are present. But, of course, the presence of these other elements, like a conducive political framework and good governance generally, cannot be simply assumed.

Important as well in looking at the possibilities for accelerated and sustained economic growth in Africa is the problem of structural vulnerability. This, as was alluded to earlier, originated from the very limited diversification in the economy and from natural disadvantages, all of which imply limited flexibility-in terms of responding to possible (adverse) external shocks to defend an underlying growth dynamic. Let it be understood, of course, that the existence of a reasonably strong domestic policy-framework and capacity would assist an economy in withstanding better the adverse of an external shock. All in all, however, SSA has not succeeded in effecting significant structural changes-both in terms of export composition (overdependence on primary commodities) and industrialization. And, the importance of this issue is not really in relation to the old dichotomy of agriculture vis-à-vis industry, but in relation the more pertinent question of the composition of national output vis-à-vis the evolution of national and global demand. For faster and sustained growth, the composition of national output has to change in ways that are consistent with the dynamic aspects of demand (national and global). Related to concerns of national output and demand, is the specific long-term problem of inadequate growth in agricultural value-added in SSA. There has been deterioration in agricultural performance, with the average annual rate of output growth dropping from about 2.5 per cent in 1965-73 to about two per cent over 1980-94. This latter growth rate is well below that of population. The trend in output growth is indeed problematic, given the pro-growth and anti-poverty strategy required for Africa. As the proportions of agriculture in GDP and of agricultural and rural population to the total are relatively large, medium to long-term aggregate growth as well as improvements in living standards would realistically have to be significantly based on better performance in agriculture.

Beyond pro-growth and poverty-reduction policies and the imperatives of effecting structural change, Africa will as well need to explicitly situate its development efforts in the evolving contexts of globalization and the new political realities. Africa will have to find ways and means of gainfully opening up and competing in the global economy, otherwise face the risk of increased marginalisation.

The foregoing considerations point to a cluster of strategic issues that would be rather key to African development in the coming decade. They may be outlined under five headings: pro-investment policies; the role of the state and governance; enhanced regional markets; greater economic openness and; diversification and agricultural growth.

2.1. Pro-Investment Policies

In the medium and long-term, the regeneration and acceleration of growth in SSA will have to depend on factors beyond greater utilization of existing capacity and related short-term measures. This will above all require the enhancement of the saving-investment process and growth in total factor productivity. Significant progress will have to be made in mobilizing greater domestic and external resources for attaining critical levels in the investment rates. Significant progress will have to be made in mobilizing greater domestic and external resources for attaining critical levels in the investment rates. The challenge is, therefore, one of systematically creating a clearly pro-investment climate from all fronts--political, administrative, and narrowly economic--for significantly raising the investment rate while improving the rates of return to all the factors of production. Progress on these fronts would importantly depend on the actual availability of resources and on incentives for private investment.

If it needs to be mentioned, there is strong empirical evidence of the close link between investment and growth in developing countries over the long run. In the case of Africa, the estimate for the elasticity of growth with respect to the investment/GDP ratio ranges from 0.3 to 0.6. The overall failure to raise the investment ratio in the 1990s has, therefore, meant depressed growth performance. The empirical evidence also indicates the specific importance of private investment. For Africa, one study has estimated the rate of return to be 50 to 60 per cent higher for private capital than for public capital.

The improvement of a pro-investment environment in the context of Africa would start by building on the gains that have been made in recent years in establishing a less distorted and more stable macroeconomic environment. The reduced domestic uncertainty resulting from this effort would need, however, to be complemented by other political and institutional requirements-pertaining to greater political stability, conducive legal structures, and effective contract-enforcement mechanisms. It should also be added that the combined macroeconomic, political and institutional measures would assist in addressing the capital flight problem. An estimate indicates that SSA is one of the regions most affected by this, with a proportion of 70 per cent of privately owned wealth (excluding land) having been held abroad in 1992. Although the problem is clearly beyond frameworks of markets and investment returns, some of the wealth may indeed respond to conducive policy and institutional changes.

Beyond the concerns of a broad framework for investment, the mobilization of resources for financing investments equally important. In the case of SSA, investment has clearly been constrained by the low domestic saving rate which, in the 1990s, has averaged about 16 per cent compared, for instance, to over 30 per cent in Asia (excluding Japan). Policy and institutional measures to increase domestic savings-especially in the recent context of declining aid flows-are, therefore, particularly important for faster growth in SSA. The principal areas for action are financial-sector reforms aimed at building efficient financial institutions and financial instruments, and the pursuit of conducive interest-rate policies. It is necessary to reverse the negative real interest-rate policies of the past which could neither assist the saving process nor the financing of investment in the long-run. In the corporate sector, a range of fiscal instruments could be used to encourage retention and reinvestment of profits.

The attraction of foreign capital--foreign direct investment (FDI) in particular--should be the next target, given the very small relative share for SSA and the sharp drop in overseas development assistance (ODA). As well known, FDI would normally bring with it the additional benefits of technology, managerial expertise, and international marketing possibilities. The factors that are critical to the attraction of FDI are similar to those relating to domestic private investment-macroeconomic and financial stability, and a conducive institutional and regulatory framework. It is important to stress in this regard that it is necessary to reduce the perceived risk of policy reversals by providing credible commitments and increasing the cost of reneging on these commitments. As well, Africa should position itself for greater competitiveness in attracting FDI through wide-ranging measures to reduce transaction costs for investors (transport, telecommunication costs, etc.) and through strategically investing in physical infrastructure and the acquisition of human skills.

A more robust pro-investment climate that requires much reduced domestic uncertainty is further impeded in many Sub-Saharan countries by the debt overhang. The excessive debt-service stands in the way of country external viability and reduces otherwise investable resources for economic and social development. For many countries of the region, there is, therefore, a pressing need to move with decisive speed to implement debt-reduction initiatives in order to assure greater external viability and enhanced domestic and foreign investment. The initiative for the Highly Indebted Poor Countries (HIPCs), developed and promoted by the Bretton Woods Institutions, has been a welcome recent step; but as has been expressed in many quarters, it requires stronger up-front action and a faster pace of implementation.

From a slightly different angle, the issue of debt-reduction may be seen from the broader perspective of concessional-resource availability for financing investment in low-income countries. And, closely related to that is the question of policy conditionality to be associated with such assistance. With respect to debt reduction, the appropriate conditionality to assist in quickly creating a pro-investment climate would be ex-ante rather than ex-post in nature-designed within a development-partnership framework and aimed at reducing domestic uncertainty as well augmenting investable resources. With respect to aid more generally, what is called for is policy conditionality based on genuine partnerships between recipients and aid donors in order to ensure domestic ownership and sustainability of the policies, and development programs. This approach would assist the formulation of credible and sound policies that are necessary for assuring that foreign assistance does result in growth benefits for recipient countries.

2. 2 The Role of the State and Governance

A sustained pro-investment climate will in turn require progressive establishment of what has been called 'developmental states'. Such states would systematically create a set of institutions which aim to promote entrepreneurship, profits and capital accumulation without compromising a wider set of development objectives beyond those narrowly prescribed by business interests. In the specific circumstances of SSA, this would additionally require capacity building in the public and private sectors, apart from the general need for resisting the capture of state agencies by special interest groups. By implication also, a developmental state would reflect critical aspects of good governance, paying attention to issues relating to social development and to matters like corruption-which adversely affects growth by reducing private investment, and worsens the (social) composition of government expenditure.

Various measures to strengthen the state and mange public resources more efficiently been have taken in many African countries. This process has been assisted by the recent domestic and international pressures for democratization. Additional impetus has come from the threat of marginalization (on the part of the ruling elites) following the rapid pace of globalization, and from a more inclusive process in national policy dialogue (partly espoused by bilateral and multilateral financing agencies). However, much more remains to be done to increase the number and 'depth' of developmental state in Africa.

Specifically on strengthening the state in a pro-investment direction, two related aspects would be especially important: the creation of a competent and independent state bureaucracy, and the building of closer ties between such a bureaucracy and the emerging private sector. The more recent efforts aimed at restoring the quality of the civil service in many countries of SSA must, therefore, continue and, where necessary, be supported in frameworks of international development-partnerships. Apart from measures required to make civil service positions competitive and attractive in terms of career, others should aim at reasonably insulating the core bureaucracy from political pressures, and at providing learning environments for the improvement of future policies.

With respect to forging government-business ties, a national government would firstly need to diffuse a sense of shared commitment to a collective project of national development, and then seek a concrete set of ties that would enable specific agencies and enterprises to conceive and implement joint projects. Policies of 'rent creation' and discipline for the private sector would be called for so as to better manage profits and investment. The underlying development principal would be to ensure that short or medium-term measures necessarily taken to initially attract or protect the private investor do not become permanent policies that would be inimical for an efficient and competitive economy in the long-run. In order to mange 'productive' links along these lines between government and enterprises, various instruments of dialogue and analyses (special councils, conferences, etc.) would to be instituted and actively managed.

Apart from an efficient state bureaucracy and its desirable relationship with private enterprise, a 'developmental state' in SSA would need to address the broader imperative for capacity-building, especially in respect of policy analysis and management. Part of the problem in the region has been that the analytical bases of development policies have been overly-donor driven. It is now broadly agreed that in order for policies to be sustained they need to be locally formulated, by and large, and, therefore, locally owned. Furthermore, the more meaningful development cooperation that is being increasingly advocated-based on partnerships rather than on 'unilateral' conditionality-similarly requires local capacity that is able to undertake both general and strategic analyses.

A major role of a state in SSA should, therefore, be the development of skilled human resources for tackling these broad and strategic tasks, strengthening key institutions, and contributing to creating an enabling regulatory and policy environment. The objective of creating such an enabling environment would as well call for capacity-building perspectives beyond immediate or utilitarian purposes. It would call for analytical and policy capacities in units independent of government and in the private sector--in order to attract broader thinking, analyses and policy dialogue. Capacity-building efforts would also need to be situated in the increasingly international contexts of globalization in such critical areas as trade and investment. Seen within this larger framework, the task of capacity-building in SSA would call for international partnerships in this area-perhaps representing a new area of emphasis (away from technical assistance) for aid in the coming decade.

2.3 Enhanced Regional Markets

In the search for strategic dimensions of a pro-investment environment and opportunities for faster growth in SSA, greater regional cooperation and integration is still being indicated by various analysts as one key area. In a historical context, there has on the whole been limited successes in achieving the immediate objectives of cooperation and integration schemes (established at various times in parts of SSA)--like raising the level of intra-regional trade-and the higher aim of raising the average rate of economic growth for the cooperating countries. In spite of the modest gains, however, there has been in recent years, a new and positive mood, strongest at the sub-regional level, toward economic cooperation and integration. This mood has culminated in the ratification of the Abuja Treaty in 1994, establishing the African Economic Community.

The new and positive mood towards economic integration in the continent should indeed be welcome as one looks ahead into the likely realities of the twenty-first century. The Africa that has severely suffered from the 'lack of growth' for so long, should seize every opportunity to expand internal markets, attract greater investment, and significantly raise the rate of economic growth or risk being increasingly marginalized in the rapidly evolving world of global competition. Regional cooperation and integration (RCI) is such one important opportunity to be seized by African countries in their quest to meaningfully participate in the global economy. In order for the renewed positive mood on RCI to endure, however, the integration process will have to deliver stronger results-in part through bringing economies much closer-than the evidence to-date indicates.

The overall weak results on the integration front point, on the whole, to the hard reality that over the years African economies have not in a significant sense succeeded in 'pulling' their economies together to achieve even some of the intermediate objectives such as greater intra-regional trading. The higher-level objective of accelerated economic growth has, partly as a reflection, remained equally elusive. Economies could, of course, have applied other mechanisms individually to attain more reasonable growth rates without relying much on formal cooperation and integration ties. This is said, for example, to be the experience of the countries in the Association of South east Asian nations (ASEAN) which individually enjoyed high rates of economic growth and, without very formal institutional support for regional integration, raised intra-bloc trade in recent years to about 20 per cent of total trade. The ASEAN countries were able to experience increases in trade shares within the bloc by relying on general pro-growth factors, like foreign capital and private entrepreneurship, assisted by some commitment to regional cooperation. In a long time frame, the majority of African countries have, by contrast, neither achieved reasonable growth rates nor made major strides on regional integration. In these unsatisfactory circumstances, therefore, it would be appropriate to step back and re-examine the potential that stronger regional cooperation and integration still presents for raising the rate of investment; encouraging market efficiency; raising intra-regional and international trade; and ultimately supporting a stronger growth dynamic (the higher objective). In this sense, RCI would be seen as an instrument that a significant potential to contribute to the desperately needed revival of growth and the reduction of poverty.

Four major areas seem, from theory and African experience, to be indicated for greater policy emphasis and action in order to realize the potential that RCI may have for raising regional investment and growth. First, greater macroeconomic and institutional coordination would facilitate market unification for the cooperating countries thereby maximizing the growth benefits of integration. Both the institutions and the relevant policy coordinating organs would have, however, to be actively governed at high policy-making levels to ensure effectiveness and continuing impact on the integration process. The second area with considerable potential is in respect of coordination of investment in infrastructure and natural resources. The potential gains would raise from unit-cost reductions that may be realized by way of scale-economies in infrastructural provision; considerable reduction in the opportunity costs of unmet demand, where regional cooperation facilitates enhanced supply of infrastructural services; trade benefits for the cooperating countries through the exchange of infrastructural services; and fron reduced uncertainties usually associated with the planning of long-term infrastructural investments (as there would be regional export/import possibilities). The third area of potential is private-sector promotion that would become more viable within larger regional markets and which, in turn, could contribute to otherwise public-sector domains like infrastructural investment. Fourth, external assistance-both bilateral and multilateral-could be aligned more closely to integration efforts for greater development impact.

2.4 Economic Openness and Competitiveness

Regional cooperation and integration would help SSA in a sustained way if the cooperation framework would be conceived within the context of what has come to be called 'open regionalism'. For part of the development problem in the region has been the relatively high barriers to foreign trade which have worked to reduce efficiency and productivity growth as well as prevented infant industries from graduating to higher levels of maturity. The appropriate approach would, therefore, be to use a regional cooperation framework to resolve some of these problems in a more viable and phased manner. Trade barriers initially should be easier to reduce among cooperating countries which are at a fairly similar stage of development, giving the group of countries the time to promote learning, and develop managerial and other capabilities, before opening up substantially to the rest of the world.

An 'open regionalism' approach would, however, caution against over-reliance on the regional market in order to avoid the well known limitations of import-substitution strategies. The regional market would, therefore, be seen in this context as a spring-board for the cooperating countries to build a stronger basis for competitiveness and exports. Development experience indicates that one key policy instrument for assisting developments in this direction is the real exchange rate. And, this is particularly important in the case of SSA where other institutional and technological capacities are still weak. The maintenance of competitive real exchange rates within cooperating countries (vis-à-vis the rest of the world) should, therefore, be one important area for enhanced macroeconomic and institutional coordination within integration schemes.

It has been observed that the use of the exchange rate and other policies to liberalize trade will be of limited benefit to Africa so long as countries lack not only the supply but also the human and institutional capacity to take advantage of new opportunities. An important aspect in enhancing Africa's competitiveness is, therefore, the building of institutional and human capacities for managing in a globalised context: the practical aspects of the international trading process; meeting of international product standards; fuller participation in the WTO framework; and so on.

2.5 Diversification and Agricultural Growth

Policies to enhance economic openness and competitiveness should assist in promoting exports, both traditional and manufactured, and growth. In particular, a competitive exchange rate would increase and protect the profitability of export production thus attracting investment into the export sector, with the additional and important effect of diversifying the structure of production--into processed, new, and manufactured products. But, it is difficult to envisage significant progress on this front without situating the whole process in the broader context of accelerating overall economic growth for a given country. What is called for in diversifying an economy and its exports is increased investment and new technologies, the same factors-beyond economic openness-that have been emphasized in accelerating overall economic growth. Indeed, it has been observed that the rapidly declining share of SSA countries in world trade (in the past two decades or so) is not so much a reflection of failure of the correspondingly small share in global output. The promotion of economic diversification and export must, therefore, be seen as part and parcel of the overall effort to raise aggregate growth through increasing investment and total factor productivity.

It is partly for this reason that discussion of diversification must inevitably relate to agriculture-which in a typical country in the region accounts for 70 per cent of total employment, 40 per cent of merchandise exports, and one third of GDP. Part of the explanation for the weak aggregate growth performance in Africa over the years is found in the historically low rate of growth of the agricultural sector that led to the loss of market shares in world exports. Better policies to promote stronger agricultural growth would thus not only lead to general economic improvements arising from trade but also create possibilities of diversification within agriculture. These policies (and related institutions) need to address the major weaknesses that have been identified with African agriculture: seriously inadequate public and private investment in the sector; very weak physical and research structure; inadequate marketing and support systems; the basic issue of price and other incentives; and so on. A stronger agricultural growth framework would also present diversification possibilities into products which have a dynamic potential because of their high unit values and high income elasticities of demand. Apart from the domestic and external trade benefits that would result, such a more diversified agriculture would make it easier to advance on the strategic objective of reducing poverty, in a more conducive context of agricultural and rural development.

Diversification efforts outside agriculture would have to be guided by fairly specific country endowment situations. Mineral exploration and production, for instance, have in recent years indicated good promise in a number of SSA countries. But significant mineral exploitation does require substantial resources and technology which imply that the promotion of foreign direct investment should be high on the development agenda for countries in position to benefit from that route. With respect to industry, possibilities for processed and manufactured exports are particularly important in moving the composition of exports towards products with higher income elasticities of demand. And in the case of SSA, most countries seem to export fewer manufactures relative to primary products than would be analytically predicted from their resource endowment. This means, among other things, that SSA could possibly increase such manufactured exports in the short-run simply from efficiency improvements. But that is only in the short-run; sustained expansion in the share of manufactured exports would require a combination of domestic private and public investment, foreign direct investment (for technology, management and marketing), and the pro-investment policies mentioned earlier.

3. Conclusion

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