Africa: Economic Report 2004

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

Editor's Note

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

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

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

++++++++++++++++++++++end editor's note+++++++++++++++++++++++

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

Overview

E/ECA/CM.37/6

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

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

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

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

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

Improving economic performance, but still insufficient....

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

...

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

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

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

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

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

Insufficient and inconsistent external support hinders progress....

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

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

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

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

Moving beyond primary commodity production....

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

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

Focusing on export diversification....

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

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

Contrary to some opinions, it is not true that Africa has made no
progress towards export diversification over the last two decades
- simply, the progress that has taken place has been insufficient
(see Table 1.1). A few African countries, like Uganda and Kenya,
have increased exports by diversifying into non-traditional
exports, typically, vegetables, fruits, and flowers. Such
achievements are not to be gainsaid, but particularly relevant are
the experiences of the small number of diversifiers which have
successfully promoted manufacturing exports, such as Tunisia and
Mauritius. ...

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

Confronting supply-side problems...

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

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

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

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

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

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

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

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

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

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

*************************************************************
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with
a particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.

AfricaFocus Bulletin can be reached at [email protected]. Please
write to this address to subscribe or unsubscribe to the bulletin,
or to suggest material for inclusion. For more information about
reposted material, please contact directly the original source
mentioned. For a full archive and other resources, see
http://www.africafocus.org

************************************************************