December 1998

Africa faces globalization's threat and promise

Globalization can provide immense opportunities for less developed countries. These opportunities centre on access to world markets, finance and technology. By pursuing outward-oriented strategies, countries such as the Republic of Korea, Malaysia and Thailand in Asia and Mauritius in Africa have doubled their national incomes in just over 20 years. Despite the current financial turbulence, this tendency towards globalization seems likely to continue.

In contrast, de-linking from the global economy leads to marginalization and condemns countries to slow growth. This is painfully demonstrated by the past experiences of African countries. In the mid-1950s sub-Saharan Africa accounted for 3.1 per cent of global exports. By 1995 this share had fallen to 1.4 per cent. In addition, many countries in Africa attract virtually no inward investment.

What can African governments do?

Ensure stable macroeconomic foundations. Macroeconomic stability is an old lesson, but one which remains fundamentally important. Africa's growth "tragedy" is partly attributable to governments' failure to achieve stability on key macro-economic issues. Worryingly there has not been sustained improvements in these areas.

Liberalize trade, but with care. In order to participate more in international trade, African countries will need to further liberalize their trade regimes. But, more care will need to be taken regarding the sequencing, pace and phasing of trade liberalization.

Use regional dynamism as a stepping-stone. Africa's market is equivalent in economic terms to that of Belgium, yet it is fragmented into over forty different countries. The first step to promote regional dynamics is to liberalize trade and payments between neighbouring countries. Building regional infrastructure networks in roads and telecommunications would also help.

Focus on the primary sector. The strategy towards globalization should reflect the structure of African economies. While some African countries have the basic infrastructure and human capacity to embark on industrialization drives, the majority are at a pre-industrial stage. A crucial immediate task is to rebuild the primary commodity export sector.

Manage financial flows. Although few countries in Africa are facing the scale of inflows relative to the size of their economies that precipitated the Asian crisis, key lessons concern the need for caution in financial opening and the importance of developing sound financial systems.

Get the institutional foundations right. Getting the economic policies right in Africa is not enough. There is now substantial evidence that institutional failure in Africa is a critical obstacle to economic performance in general and its external performance in particular. Surveys on the obstacles to business in Africa highlight the unpredictability of changes in laws and policies, the unreliability of law enforcement and the impact of corrupt bureaucracies. Unless governments eliminate these kinds of obstacles it is unlikely that business, domestic or international, will flourish in Africa.

How can developed countries help?

Radically transform ODA. Overseas development assistance will have to be substantially transformed if it is to serve as a useful instrument for mediating Africa's future relationship with the world. Donors could help through substantial reduction in procurement restrictions and inappropriate intrusion into domestic affairs as well as in taking longer-term perspectives. They should also be more selective in concentrating their aid towards countries that demonstrate ownership and commitment.

Reduce the debt burden. The implications of the debt burden for development in Africa are far-reaching. For example, the Tanzanian government spends nine times more on debt servicing than it does on health and education. There is an overwhelming case for significant reductions in the external debt in Africa.

Guarantee open markets. One of the most effective mechanisms to help African countries integrate into the global economy would be for OECD countries to guarantee open markets for African exports. This is particularly important for key sectors such as agriculture and textiles. This is where Africa's comparative advantage lies, yet these are the most protected markets.

Strategic integration

In order to rapidly reduce poverty, it is vital that African countries actively engage the forces of globalization. In order to maximize the benefits and avoid the risks, they will have to take a strategic approach. Integration is multidimensional, involving among others the aspects of trade, investment, capital flows and technology. The optimal level of openness and optimal policy mix to achieve it will differ for each aspect depending on the development in each particular market.

Although international interaction is advancing the current situation is characterized by a "fractured globalization," with trade in particular concentrated in regional blocs. Responding to this type of globalization requires a regional and strategic rather than global and uniform approach. Finally, it is clear that benefits from globalization can be unevenly distributed at the national levels. There is a need to take measures to prevent increasing inequalities as integration proceeds.