Economic Report on Africa 2007

Economic Report on

Africa 2007Accelerating Africa’s Development through Diversification

Economic Commission for Africa

African Union

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© United Nations Economic Commission for Africa, 2007Addis Ababa, Ethiopia

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ISBN13: 978-92-1-125104-3ISBN10: 92-1-125104-4Sales Number: E.07.II.K.1

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Edited, designed and printed by the ECA Publications and Conference Management Section (PCMS).Cover photos: stock.xchng vi

iiiTable of Contents

Table of ContentsAcronyms ix

Foreword xiii

Acknowledgements xv

Overview 1

Part 1: Recent Economic Trends and Prospects for 2007 13

1 Developments in the World Economy and Implications for Africa 151.1 Globaleconomicperformance 15

1.2 Macroeconomicpoliciesindevelopedcountries 18

1.3 Worldmacroeconomicimbalances 20

1.4 WorldpricesforAfricancommodities 22

1.5 GlobalizationtrendsandimplicationsforAfrica 24

1.6 Internationalmigrationandremittances 27

1.7 Conclusion 29

References 30

2 Recent Economic Performance in Africa and Prospects for 2007 312.1 Growthperformance 31

2.2 Sectoralperformance 47

2.3 Socialdevelopment 53

2.4 Growthprospectsfor2007andthemedium-termoutlook 60

2.5 Conclusion 61

References 62

Appendix 66

3 Global Development Challenges for Africa in 2006 733.1 Developmentsintradenegotiations 73

3.2 Financingdevelopment:emergingissuesandchallengesforAfrica 90

3.3 Conclusion 107

References 108

iv Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification

Part 2: Accelerating Africa’s Development Through Diversification 113

4 Diversification trends in Africa 1154.1 DiversificationtrendsinAfrica 115

4.2 DiversificationregimesinAfrica 128

4.3 Conclusion 130

References 131

5 Diversification and Growth 1335.1 DeterminantsofdiversificationinAfrica 133

5.2 Growth,productivityanddiversification 143

5.3 Conclusion 149

References 152

Appendix 153

6 The Way Forward: Policies for Achieving Diversification 1576.1 Macroeconomicpoliciesfordiversification–theneedforpragmatismoverorthodoxy 158

6.2 Tradeandsectoralpoliciesfordiversification–returningtothebasics 158

6.3 Financialsectorlinksbetweeninvestmentanddiversification 160

6.4 Industrializationpolicieskeytodeepeneddiversification 161

6.5 FinancingresearchtoincreaseTFP 162

6.6 Strengtheningofinstitutions-aprerequisiteforpositivediversificationoutcomes 163

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Boxes1.1 ChinaandIndiabecomingdriversofAfrica’sgrowththroughtradeandFDI 26

2.1 ImpactofsustainedhigheroilpricesongrowthandprogresstowardstheMDGsinlow-income,oil-importingAfricancountries 38

2.2 Acceleratinggrowththroughpolicyexperimentation 47

2.3 TheCommissiononHIV/AIDSandGovernanceinAfrica(CHGA) 59

4.1 AsuccessstoryofdiversificationinEgypt:thecaseofOrascomInternational 120

4.2 DiversificationaspartofaprivatesectordevelopmentstrategyinKenya 125

4.3 DiversificationstrategiesinTunisia 129

5.1 Conflictanddiversification:thecasesofBurundiandRwanda 141

5.2 DiversificationinEthiopia:astoryofboominghorticultureandtextileexports 151

6.1 PromotingverticaldiversificationinEthiopia:thecaseoftheleatherindustry 160

Figures1.1 GDPgrowthratesofmajorregions,2000-2007(percent) 16

1.2 GDPgrowthratesofmajoreconomies,2000-2007(percent) 17

1.3 Inflationratesinmajorregionsandeconomies,2000-2007(percent) 18

1.4 Interestratesinmajorregionsandeconomies,2000-2006(percent) 19

1.5 Centralgovernmentfiscalbalanceforselectedregionsandeconomies,2000-2007(%ofGDP) 20

1.6 Currentaccountbalanceforselectedregionsandcountries,2000-2007(%ofGDP) 21

1.7 Shareinworldtradebyregion,1990-2004(%oftotal) 24

1.8 Shareinworldtradeforselectedcountries,1990-2004(%oftotal) 25

1.9 ShareinworldFDIflowsbyregionandforselectedcountries,2000-2005(percent) 27

1.10 Workers’remittancesreceivedbyregion,1990-2004($USbillion) 28

2.1 RealGDPgrowthrateinAfrica,2004-2006(percent) 32

2.2 Subregionalgrowthperformancein2004-2006(percent) 35

2.3 RealGDPgrowthinAfricanoilvs.non-oileconomies,2004-2006(percent) 36

2.4 Growthinmineral-richcountriesvs.non-oil,non-mineral-richcountries(percent) 37

2.5 Top10andbottom5performersinAfricain2006(%annualgrowth) 39

2.6 TradebalanceinAfricabycategory(%ofGDP),1997-2006 42

2.7 SouthAfrica’sREERandthegoldprice,1980-2006 43

2.8 ProjectedrealGDPgrowthbyregionfor2007(percent) 61

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vi Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification

3.1 Africa’sshareintotalworldmerchandiseexports,1965-2005(percent) 75

3.2 Investmentandsavingsratiosforsub-SaharanAfrica,1990-2004 91

3.3 RegionaldistributionofODA(%oftotaldisbursements) 93

3.4 ODAtosub-SaharanAfrica($USmillion) 94

4.1 DiversificationindicesforAfrica 117

4.2 NormalizedHirschmanIndex:Africa,LatinAmericaandNIEsinAsia 118

4.3 NormalizedHirschmannIndex:Africa’ssubregions 119

4.4 NormalizedHirschmanIndex:Africa,MauritiusandTunisia 121

4.5 CumulativeexportfunctionsforMauritius’top10exportproducts 123

4.6 CumulativeexportfunctionsofKenya’stop10exportproducts 124

4.7 CumulativeexportfunctionforTunisia’stop10commodities 126

4.8 CumulativeexportsfunctionforNigeria’stop10commodities 127

5.1 EmpiricalrelationshipbetweendiversificationandinvestmentinAfricaneconomies 135

Tables1.1 Worldprimarycommodityprices,2000-2005(percentagechange) 23

2.1 Summaryofgrowthperformance1998-2006 33

2.2 DistributionoffiscaldeficitsinAfrica,2004-2006(numberofcountries) 40

2.3 DistributionofinflationratesinAfrica,2004-2006(numberofcountries) 41

2.4 Externalflows,domesticsavingsandinvestment,1998-2006 45

2.5 Agriculturalsectorperformancebysubregion 48

2.6 Commoditiesproductiongrowthrate,1990-2004(percent) 49

2.7 ServicesectorperformanceinmainAfricansubregions 51

2.8 StatusofMDGachievementsinAfrica 54

A2.1 TrendsinbasicindicatorsforthenaturalgassectorinAfrica 66

A2.2 TrendsinbasicindicatorsfortheoilsectorinAfrica 67

A2.3 Internationaltouristarrivals 68

A2.4 Top20tourismdestinationsinAfrica(‘000softourists) 70

A2.5 Top20tourismearnersinAfrica($USmillion) 71

3.1 Comparativemerchandiseexportperformance,WorldandAfrica,2000-2005($USbillion) 74

3.2 Sourcesofexternalfinanceinsub-SaharanAfrica1998-2005($USbillion) 95

3.3 Netinwardforeigndirectinvestmentacrossregions($USbillion) 95

3.4 ProportionofbilateralaidtoLDCsthatisuntied 101

vii

A5.1 DeterminantsofdiversificationinAfrica 153

A5.2 CorrelationbetweendiversificationanddifferenteconomicvariablesforBurkinaFaso,Kenya,Nigeria,SudanandTunisia 154

A5.3 Economicgrowthanddiversification—theTFPlink 154

A5.4 DiversificationregimesandTFPcontributiontogrowth 155

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ix

Acronyms

ABC Abstainfromsexbeforemarriage,BefaithfulwithinthemarriageanduseCondoms-approach

ACGD AfricanCentreforGenderandDevelopmentACP African,CaribbeanandPacificCountriesADF AfricanDevelopmentFundAEC AfricanEconomicCommunityAERC AfricanEconomicResearchConsortiumAfDB AfricanDevelopmentBankAGDI AfricanGenderandDevelopmentIndexAGOA AfricanGrowthandOpportunityActAIDS AcquiredImmunodeficiencySyndromeAMU ArabMaghrebUnionAMS AggregateMeasuresofSupportAPRM AfricanPeerReviewMechanismAsDB AsianDevelopmentBankATPC AfricanTradePolicyCentreAU AfricanUnionAUC AfricanUnionCommissionCEMAC CentralAfricanEconomicandMonetaryCommunityCHGA CommissiononHIV/AIDSandGovernanceinAfricaCIS CommonwealthofIndependentStatesCODESRIA CouncilfortheDevelopmentofSocialScienceResearchinAfricaCMA CommonMonetaryAreaCOMESA CommonMarketforEasternandSouthernAfricaCSO CivilSocietyOrganizationDAC DevelopmentAssistanceCommittee/OECDDRC DemocraticRepublicofCongoDfID DepartmentforInternationalDevelopment/UKDFQF DutyFree,QuotaFreeEAC EastAfricanCommunityEBA EverythingbutArmsInitiativeEBRD EuropeanBankforReconstructionandDevelopmentECOWAS EconomicCommunityofWestAfricanStatesEIU EconomistIntelligenceUnitEPA EconomicPartnershipAgreement

Acronyms

x Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification

EPZ ExportProcessingZoneESA EasternandSouthernAfricangroup/COMESAESMAP EnergySectorManagementAssistanceProgramEU EuropeanUnionFAO UnitedNationsFoodandAgricultureOrganizationFAOSTAT FAOCorporatedatabaseforsubstantivestatisticaldataFDI ForeignDirectInvestmentFONDAD ForumonDebtandDevelopmentFTA FreeTradeAgreementGATS GeneralAgreementonTradeinServicesGATT GeneralAgreementonTradeandTariffsGCF GrossCapitalFormationGDI GrossDomesticInvestmentGDP GrossDomesticProductGDS GrossDomesticSavingsGIPC GhanaInvestmentPromotionCentreGNI GrossNationalIncomeGSP GeneralSystemofPreferencesGSTP GeneralSystemofTradePreferencesHDI HumanDevelopmentIndexHIV HumanImmunodeficiencyVirusHDI HumanDevelopmentIndexHIPC HeavilyIndebtedPoorCountryIADB Inter-AmericanDevelopmentBankICT InformationandCommunicationTechnologyIDA InternationalDevelopmentAssociation/WBILEAP InternationalLawyersandEconomistsagainstPovertyILO InternationalLabourOrganization/UNIMF InternationalMonetaryFundITC InternationalTradeCentreLDC LeastDevelopedCountryMDG MillenniumDevelopmentGoalMDRI MultilateralDebtReductionInitiativeMENA MiddleEastandNorthAfricaMFA Multi-FibreAgreement(textiles)MNC MultinationalCorporationMSE MediumandSmallEnterpriseMDRI MultilateralDebtReliefInitiativeNAMA Non-AgricultureMarketAccessNEPAD NewPartnershipforAfrica’sDevelopmentNER NetEnrolmentRateNIE NewlyIndustrializedEconomyNGO Non-governmentalOrganization

xi

ODA OfficialDevelopmentAssistanceOECD OrganisationforEconomicCo-operationandDevelopmentPPP PurchasingPowerParityPTA PreferentialTradeAreaREC RegionalEconomicCommunityR&D ResearchandDevelopmentREER RealEffectiveExchangeRateRTA RegionalTradeAgreementS&D SpecialandDifferentialTreatmentSACU SouthernAfricanCustomsUnionSADC SouthernAfricanDevelopmentCommunitySAP StructuralAdjustmentProgrammeSME SmallandmediumenterpriseSPS SanitaryandPhytosanitaryMeasuresSSA Sub-SaharanAfricaTA/CB TechnicalAssistanceandCapacityBuildingTDCA SA-EUFreeTradeAgreementTFP TotalFactorProductivityTPA TradePromotionAuthorityTWN ThirdWorldNetwork UK UnitedKingdomUNAIDS UnitedNationJointProgrammeonHIV/AIDSUN-DESA UnitedNationsDepartmentofEconomicandSocialAffairsUNDP UnitedNationsDevelopmentProgrammeUNEP UnitedNationsEnvironmentalProgrammeUNHCR UnitedNationsHighCommissionerforRefugeesUNICEF UnitedNationsChildren’sFundUNCTAD UnitedNationsConferenceonTradeandDevelopmentUNSD UnitedNationsStatisticalDivisionUNU UnitedNationsUniversityUSA UnitedStatesofAmericaWAEMU WestAfricanEconomicandMonetaryUnionWCO WorldCustomsUnionWFP UnitedNationsWorldFoodProgrammeWIDER WorldInstituteforDevelopmentEconomicsResearchWTO/Tourism WorldTourismOrganizationWTO/Trade WorldTradeOrganization

Acronyms

xiii

Foreword

Nowadays, profound changes are increasingly occurring in all areas of theworldeconomy.Whiletheindustrializedandemergingeconomiesareabletocontainthemultipleexternalandinternalshocksgeneratedbythesechanges,Africaonitspartisstillstrugglingtocopewiththem.Suchasituation,oftenofindescribableimpact,keepsourcontinentinpovertyatthisbeginningofthetwenty-firstcentury.

Faced with the challenges of globalization and ever-deepening poverty, AfricanHeads of State and Government have decided in recent Summits of the AfricanUniontodotheirutmosttosecurepeaceandstabilityonthecontinent,strengthencapacitiesforgovernanceandtheruleoflaw,fightcorruption,accelerateeconomicandpoliticalintegration,maketherequiredinvestments,pursuesustainedgrowthandspeedydevelopmentoftheAfricancommonmarket.

Theoft-expressedpolicycommitmentofAfricanHeadsofStateandGovernmenttoreverseAfrica’scurrentmarginalizationintheworldeconomyandtoenableourcountriestoharnessandefficientlyexploittheirresourcesalsomeansthatwemustpooloureffortsinordertoattaintheagreedobjectives.

Inresponsetothisurgentcalltoharnessthecontinent’sresources,cooperationmustbestrengthenedamongthemajordevelopmentpractitionerswhofind,inthisrichEconomicReportonAfrica2007, jointlyproducedby theAfricanUnionCom-missionandtheUnitedNationsEconomicCommissionforAfrica,theexpressionofthecommonwillto joinourforces incontributingtothecommoneffortsfordevelopment.

This first report of its kind, comes as a sequel to the work conducted jointly in2005and2006onAssessingRegionalIntegrationinAfrica(ARIA).ItmustgainincomingyearsfromthecollaborationandinvolvementofAfrica’sotherbusinesspartners,sothattheloftyidealsofmovingourcountriesoutofunder-developmentandpovertyandofguaranteeingpeace,stabilityandsustainabledevelopment,canbeattained.

TheanalysesreportedinERA2007reviewtheworldeconomyandmapoutpros-pects for development in Africa through the institution of structural reforms todiversify and modernize the economy, enhance competitiveness, promote trade,accelerategrowthandreducepoverty.

Foreword

xiv Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification

Far from the ready-made policies that have had a disappointing track record inAfrica,thisreportlookspragmaticallyatinnovativestrategiesandbestpracticesthathaveproventheirvaluewithinandoutsideAfrica,theknow-howandskillsacquired,athowregionalresourcescanbemobilizedtoaddressthechallengesofglobalizationandemergingcommunicationtechnologiesandconstitutesarichframeofreferenceforresearchintodevelopmentpoliciesinAfrica.

Thishigh-qualityworkdonebyAfricanexpertsisrequiredreadingforalldecision-makers in our States, relaunching the policy debate and enabling the deepeningofreflexiononeconomicintegration,sustainabledevelopment,andadaptationofthestrategiesandmeasuresproposedforaddressingthespecificconditionsineachcountry.

Abdoulie Janneh Alpha Oumar Konare ExecutiveSecretary PresidentEconomicCommissionforAfrica AfricanUnionCommission

xv

Acknowledgements

ThisreportwaspreparedunderthegeneralguidanceoftheExecutiveSecretaryofthe United Nations Economic Commission for Africa (UNECA), Mr. AbdoulieJannehand theChairpersonof theAfricanUnionCommission,PresidentAlphaOumarKonaré.

ThereportteamwasledbyHakimBenHammouda,DirectorofUNECA’sTrade,Finance andEconomicDevelopmentDivision (TFED) andMaxwellM.Mkwe-zalamba,Commissioner ofEconomicAffairs of theAfricanUnionCommission,and included Stephen Karingi, Patrick Osakwe, Abdoulahi Mahamat, SusannaWolf,AdamElhiraika,RalfKrüger,BchirMohamedHedi,CheminguiMohamed,BenIdrissaOuedraogo,BerhanuHaile-Mikael,RémiLang,RobertLisinge,AbebeShimeles,KavazeuaKatjomuise,SherVerick,NassimOulmane,MustaphaSadni-Jallab,BashirCondé andLéonceNdikumana.The report team receivedvaluablecontribution fromeconomists from theAfricanUnion, includingRenéNguettiaKouassi, Abdallah Msa, Djimadoum Mandekor, and Charunbira Ndinaye. TheteamalsoappreciatestheexcellentresearchassistancefromTsedaleDemissie,Thie-koroDoumbia,andMarieAhamada.

The report benefited from in-depth reviews and suggestions provided by expertsfromvariousresearch institutionsonthecontinent,aswellas fromUNDP,UN-DESA,ILO,AfricanUnion,andfromUNECAstaffatheadquartersandatSub-regionalOffices(SROs)onboththeconceptnoteandthetextofthereport.Thegroupofexternalreviewerscomprised:

• Colleagues from research institutions: Jean-Christophe Boungou Bazika,Lawrence Bategeka, Deo Ngendakumana, Sylvain Ndo Ndong, BankoleOni,JacquesNgoieKibambe,MoustaphaKassé,TounaMama,OlusanyaAjakaiye,SnowyJoyceKhoza,JosephildaNhlapo-Hlope,AlfredG.Nhema,JoeFeerey,GebrehiwotAgeba,YoditBeyene,MulugetaTadesse,andMuluGebreeyesus,ArsèneKonanKouadio,MahmoudBenRomdhane,andBen-saidMohammed;

• ColleaguesfromtheUNDP:GilbertHoungbo,VinettaRobinson,BounaDiouf, Fidele Sarasorro,Lamin Manneh, Ngila Mwase, Sebastian Levine,AlexanderAboagye, JohnKarlsrud,Abdoulie Sireh-Jallow, andMarcellinNdong-Ta;

Acknowledgments

xvi Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification

• Colleagues from UN-DESA: RobVos, Pingfan Hong, Alex Izurieta andOumarDiallo;and

• ColleaguesfromILO:LawrenceEgulu,AzitaBerar-Awad,RiswanulIslam,MalteLuebker,DuncanCampbell,MuhammedMuqtada,andSabrinadeGobbi.

Reviewers from ECA’s SROs were SouleymaneTraore, Alfred Latigo, and PierreDemba. Internal reviewers from UNECA headquarters included Eltigani Ateem,AlexTindimubona,AmsonSibanda,HamdouWane,JosephAtta-Mensah,KasirimNwuke,RetoThoenen,VanessaSteinmayer,JulianaGonsalves,AndrewAllimadi,JosiahMaximilianJarrett,AdrianGauci,YinkaAdeyemi,KwabiaBoateng,ChantalDupasquier,KalebDemeksa,PancraceNiyimbona,DanielTanoe,DerrahiKareem,Johnson Oguntola, Abdoulaye Niang, KwadwoTutu, Houda Mejri, SouleymaneAbdallah,TackoNdiaye,BakaryDosso,JacquesMoulot,AdeyemiDipeolu,PeterGabrielRobleh,AngelicaNjuguna,AmalNagahElbeshbishi,IslamSwaleh,HodanAbdiAden,DerreseDegefa,andKwaduTatu.

Thereportbenefited fromin-depthconstructivecommentsandsuggestions fromJosephine Ouedraogo, Acting Deputy Executive Secretary, UNECA and all theDirectorsofDivisionsandSROs:UrbainZadi, JosuéDione,ThokozileRuvidzo,Aida Opoku-Mensah, Dimitri Sanga, Okey Onyejekwe, Robert Okello, YousifSuliman,KarimaBounemraBenSoltane,HalidouOuedraogo,HachimKoumare,GordonAnyango,andJenniferKargbo.

The report teamowes adebt of gratitude to the staffof theEnglish andFrenchTranslationandEditorialUnitsof thePublicationsandConferenceManagementSection(PCMS)forediting,textprocessing,proofreading,translation,designandlayout,qualitycontrol,printinganddisseminationofthereport.TheInformationandCommunicationSection(ICS)providedvaluableassistanceinqualitycontrol,mediaoutreachanddisseminationofthereport.

To conclude our acknowledgments, Thérèse Ouedraogo, AlmazTesfasion, AgareKassahun,AsnaketchAmde,SolomonWedereandBekeleDemissieprovidedexcel-lentadministrativesupportthroughouttheproductionofthereport.

�

Moderate world growth and the threat of macroeconomic imbalancesGrowth in theworld economy improved slightly in2006 relative to2005, from3.5percentto3.8percent.ItisdrivenbythestrongperformancebyAsianecono-mies,whichcontinuetopostgrowthratesabove8percent.Incontrast,growthinadvanced economies remainsmodest and is yet to reach thepre-2001 level.Keyconstraintstogrowthincludethemassiveglobalmacroeconomicimbalancesalongwithtightmacroeconomicstancesinadvancedeconomies,whichpreventdemand-ledrecovery.Highoilpricesunderminegrowthinbothadvancedanddevelopingcountriesthroughhighproductioncosts.

Developedcountries,especiallytheUnitedStates,facethechallengeofrisingcurrentaccount,government,andprivatesectordeficitswhichthreatendomesticeconomicrecoveryaswellasglobalfinancialstability.TheUScurrentaccountdeficithasrisensystematicallysincethe1990s,reaching6.6percentofGDPin2006.Meanwhile,itsbudgetbalancehasmovedfromasurplusin2000(1.9percentofGDP)toadeepeningdeficitthatstoodat2.5percentofGDPin2006.Moreover,theUSpri-vatesectorpositioncontinuestodeteriorateduetoinsufficientsavingspartlydrivenbytheeasycreditthatfuelsconsumption.

Thusfar,thewideningdeficitsintheUShavebeenfinancedbysavingsinthedevel-opingworld,especiallyAsiaandtheoil-exportingemergingeconomiesintheMiddleEast.Asia,theMiddleEast,andLatinAmericaincreasedtheircurrentaccountsur-plusessince2000.Inparticular,China’ssurplusincreasedfrom1.7percentofGDPin2000to7.2percent in2006,makingit the largestsinglefinancieroftheUSdeficit.CentralbanksindevelopingcountrieshaveaccumulatedmassiveUSdollar-denominatedreservespartlyasameansofpreventingnationalcurrencyapprecia-tion.Giventhelowworldinterestrates,thesereserveshaveearnedlowreturnstotheassetholders.LowworldinterestrateshavealsoallowedtheUStoaccumulatedebtatlowcost.

However, the willingness of central banks to continue to accumulate low-returnreservesmaybelimited.Marketswillneedtobeconvincedthatpolicymakerswillnotlettheimbalancesgooutofhand.Thiswillrequireconcertedandcoordinatedeffortsinindustrializedeconomiesandthedevelopingworldtoachieveasmooth

Overview

� Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification

correction of the imbalances. The adjustment mechanism will involve a decreaseintheUSdeficit,anincreaseininvestmentinothercountries(adeclineinsavingsinhigh-surpluscountries),aswellasaweakvalueof thedollar,whichwillallowadjustmentoftheUStradedeficitandreduceincentivesforreservesaccumulation.Mostimportantly,itiscriticaltoaccelerategrowthinadvancedeconomiesaswellasdevelopingcountries,whichwillrequirelooseningofthepolicystancetofosterdemand-ledrecovery.

Growth in Africa has increased but it is still not enough

African economies continue to sustain the growth momentum of previousyears,recordinganoverallrealGDPgrowthrateof5.7percentin2006com-paredto5.3percentin2005and5.2percentin2004.Asmanyas28countriesrecordedimprovementsingrowthin2006,relativeto2005.OnlyZimbabwerecordedanegativegrowthratein2006.Africa’sgrowthperformancein2006,asinpreviousyears,wasunderpinnedbyimprovementinmacroeconomicman-agementinmanycountries,andstrongglobaldemandforkeyAfricanexportcommodities,sustaininghighexportprices,especiallyforcrudeoil,metalsandminerals.

However,formostAfricancountries,realgrowthrateshaveremainedlowrelativeto their development goals. With only five countries recording an average realGDPgrowth rateof7per centormoreduring1998-2006, fewAfrican coun-triesarepositionedtoachievetheMillenniumDevelopmentGoals(MDGs)by2015.Meanwhile,growthperformanceexhibitssubstantialdisparitiesacrossthefivesubregions.NorthAfricarecordedthehighestaccelerationinGDPgrowth,followedbySouthernAfrica.TherewasadecelerationingrowthinWestAfricaandEastAfrica,whereasCentralAfricamaintained the samegrowth rate as in2005.Heavydependenceonprimarycommoditiesremainsacommonfeatureofproduction,exportsandgrowthinallthesubregions.Thisexposesthecontinenttoexternalshocksandmakeseconomicdiversificationatoppriorityforgrowthpoliciesonthecontinent.

Oil-exportingAfricancountriesasagroupcontributed57.5percentoftheconti-nent’s5.7percentgrowthratein2006,comparedto53.4percentin2005.Effi-cientmanagementofoilrevenuesandeconomicdiversificationareessentialforoil-exportingAfricaneconomiestoreducevulnerabilitytooilpriceshocks,ensurethatgainsfromoilrevenuearebroadlyshared,andachievesustainablegrowth.

Improvedeconomicmanagementandincreasesinnon-oilcommoditypriceshavemorethanoffsetthenegativeimpactofhighoilpricesontherealGDPofAfricanoilimporters.Thegrowthimpactofhigheroilpriceswasparticularlymoderatefornon-oilandnon-mineral-richeconomies,wheregrowthperformanceimprovedfrom4.1percentin2005to5.8percentin2006,thankstodebtreliefandincreasedaid

�Overview

flowsaswellasimprovedagriculturalproductionandhighagriculturalcommodityprices.Thegrowthrateinnon-oil,mineral-richAfricancountrieswasunchangedin2006relativeto2005,asgainsfromthehigherpricesofmineralsweredampenedbytheeffectsofrisingoilprices.

Tominimizetheeffectsofhighoilpricesoninflationandmacroeconomicstabil-ityingeneral,Africangovernmentsneedtopursueprudentpolicies,especiallybyavoidingmonetizationofdeficits.Inthemeantime,theinternationaldonorcom-munity and international financial institutions shouldprovide special support tooil-importing, low-incomeAfrican countries tomitigate the impactofhigheroilprices.Inparticular,debtreliefandadditionalnon-debt-generatingexternalfinanc-ingoffiscaldeficitsarecriticallyneededtoassistingAfricanoil-importingcountriestosustaineconomicgrowthandachievetheMDGs.

Current account balances are driven by developments in the resource sector

For the third consecutive year, Africa achieved a positive and increasing currentaccountsurplus(from2.3percentofGDPin2005to3.6percentin2006).Afri-ca’saveragebalanceofpaymentspositionreflects largelydevelopments inoil-richcountries,whichhaverecordedincreasingtradesurpluses,whiletheiroil-importingcounterparts experienced deepening trade deficits. The deterioration of the tradedeficitismorepronouncedforlandlockedcountries.

WhileexchangerateshavebeenstableformostAfricancountries,highcommoditydependenceexposesAfricaneconomiestoterms-of-tradefluctuationsandextremeexchangeratevolatility.ThemajorityofAfricancountiesaredependentonoilandmineralsoralimitedrangeofagriculturalcommoditiessuchastea,coffee,cottonand cocoa. Thus, fluctuations in commodity prices have a significant impact onexportrevenueandtheexchangerateinthesecountries.ThisforcesmanyAfricancountriestoaccumulateexcessiveforeignexchangereservesathigheconomiccost.Abetterapproachistoadoptacomprehensive(country-specific)strategyforpru-dentialregulationandcapitalcontrolsthatcanminimizeexchangerateriskwhileallowingthecountriestobenefitfromincreasedexportrevenueandforeigndirectinvestment(FDI)inflows.

African countries need a new approach to growth policy

Morethananytimebefore,itisnowunderstoodthatthegeneral,one-size-fits-allgrowthpoliciesembeddedinmacroeconomicstabilizationandsecond-generationreformprogrammeswillnothelpAfricancountries.Besidessustainingmacroeco-nomicstability,Africancountriesneedtotailortheirfiscalandmonetarypoliciestopromotingdomesticinvestment,employmentgeneration,andgrowth.Moreo-ver,itisnecessarytoidentifybindingconstraintstogrowthaswellasthesources


ofgrowthpotentialatadisaggregatedlevel,anddesignincentivemechanismstochannel resources to sectorswith thehighestpotential forgrowthandemploy-mentgeneration.

Social development: progress towards the MDGs remains below expectations

Comparedtootherregions,Africacontinuestolagbehindinallindicatorsofsocialdevelopment.Measuresofpovertyhaveremainedvirtuallyunchangedoverthepastdecades.Theaverageshareofpopulationbelowthepovertylinewas44percentin2002comparedto44.6percentin1990;thus,onecanhardlytalkofanyprogressinpovertyreduction.Sub-SaharanAfrica(SSA)alsolagsbehindinprogresstowardsuniversalprimaryeducation.Thisisdespitenotableprogressinnetenrolmentrates,whichincreasedfrom53.0percentto64.2percentinSSAfrom1990and2004,andfrom80.6percentto94.0percentinNorthernAfricaduringthesameperiod.Itiscriticaltoincreaseinvestmentineducationtomatchtheexpansionindemandsothatgainsinenrolmentsarenotachievedattheexpenseofqualityofeducation.More efforts are also needed to accelerate progress in gender equity in access toeducation.

Progressisalsomodestinthehealthsector,withSSAvisiblytrailingbehindNorthAfrica.AmajorthreattothehealthsectoristhespreadoftheHIV/AIDS.Currently,morethan25millionAfricanslivewithHIV,and2millionofthe2.8millionAIDSdeathsworldwidein2005wereinAfrica.Inthe38hardesthitAfricancountries,itisprojectedthattherewillbe19millionadditionaldeathsduetoAIDSbetween2010and2015.Thus,morebudgetaryallocationsareneededtoincreasebothpre-vention–includingthrougheducation–aswellastreatmenttocurbthespreadofthepandemic.

Africancountriesalsocontinuetofacethechallengeofotherdeadlydiseases,espe-ciallymalaria,whichremainsthenumberonekilleronthecontinent.Investmentininsecticide-treatednetshasprovedtobeasuccessfulapproachtopreventingmalaria,butmoreisstillneededtowinthewaragainstthisandotherpreventableandcurablediseasessuchastuberculosis.

Growth prospects for 2007 and the medium-term outlook

Africaisexpectedtogrowatarateof5.8percentin2007,slightlyhigherthantheraterecordedin2006(5.7percent).GlobaldemandforAfricanproducts–espe-ciallyoil,mineralsandagricultural–isexpectedtoremainupbeat,butthisiscon-tingentonsuccessfuleconomicrecoveryinmajorindustrialcountriesandcontinuedstronggrowthinemergingAsianeconomies,especiallyChina.Moreover,deliveryofthepromisedaidanddebtreliefwillallowAfricancountriestoboostexpendituresinkeysectorsincludingpublicinfrastructureandsocialservices.Furthermore,consoli-

�Overview

dationofmacroeconomicmanagementwillnotonlyreduceinflationintheshortrun,butalsoencourageprivateinvestmentandstrengthengrowth.

Factorsthatarelikelytohindergrowthin2007andsubsequentyearsincludelackofdiversificationofproductionandexportsandsubsequentinstabilityandvulner-ability to shocks, and the increasing spread of the HIV/AIDS pandemic, whichundermines laboursupplyandlabourproductivity.Inaddition, inefficientpublicinfrastructureandunreliableenergysupplyatthenationallevelaswellaspoorinte-gration of transportation and energy network at the regional level will continuetoundermineproductivityandinternationalcompetitiveness.Moreover,higheroilpricesareamajorconcernforAfricancountries,whichneedtocontinuetocontrolinflation,promotefiscal stability, improve current accountposition, and increasegrowth.

Challenges and opportunities in development financing

The past few years have witnessed encouraging developments in developmentfinancingforAfrica,whichshouldhavepositiveimpactonthecontinent’sgrowthprospectsinthecomingyears.However,muchmoreneedstobedoneinboththevolumeofexternalfinanceandtheeffectivenessintheuseoftheseresources.

External debt remains high and private capital flows insufficient

ThehopethatAfrica’sexternaldebtwillbesignificantlyreducedundertheHighlyIndebtedPoorCountriesInitiative(HIPC)andthateconomicreformswillstimu-late private capital inflows has been very slow to materialize. Although Africa’sdebt stockdeclined considerably relative toGDP, totaldebt serviceobligationsremainedunchangedin2006duetorising interestrates.Thedebtburdenseri-ouslyconstrainsspendingonpublicinvestmentandultimatelyretardsgrowthandemploymentgeneration.

Thecontinenthasbenefited fromsubstantial inflowsof externalfinancing in theformofofficialdevelopmentassistance(ODA)(includingdebtrelief ),whichshouldboosteconomicgrowthinthecomingyears.TheMultilateralDebtReliefInitia-tive(MDRI)announcedattheG-8summitinGleneaglesin2005providedmuchneededrelieffor13SSAcountries.However,thisdebtreliefpackageisnotenoughandmoreexternalfundingisneededtohelpAfricancountriesincreasegrowthratesandachieveameaningfulreductioninpoverty.GrossdomesticinvestmentremainsfarbelowthelevelconsiderednecessaryforAfricatohalfpovertyby2015.Higherexternalinflowswillbeneededtofillthechronicinvestment-savinggapinordertoboosteconomicgrowth.


There are encouraging developments in external development financing but disbursements fall short of commitments.

Recognizingtheimpactoftheirpoliciesandpracticesonaideffectiveness,donorshavecommittedthemselvestobetterharmonizetheirpoliciesandpracticesonaidto enhance the development impact of aid in recipient countries. This has beenreflectedinanumberofinternationaldeclarations,includingtheMonterreyCon-sensus,RomeDeclaration,ParisDeclarationand,recently,theG-8summitinGle-neagles.Allthesedeclarationscallforscaling-upmorefinancialresourcestodevel-opingcountriesandimprovingthedeliveryandmanagementofaidtoenhanceitsdevelopmentimpactinrecipientcountries.

Aiddisbursementsremainmuchbelowthe0.7percentODAtoGNItargetdonorshavesetthemselvestoachieve.TheaverageratioforDACmemberswas0.26percentin2004.However,ahandfulofcountrieshavemetthetarget.

Withrespecttoaideffectiveness,donorshavemadeconsiderableprogressinunty-ingaidtoAfricancountries.ThepercentageofaidfromDevelopmentAssistanceCommittee(DAC)membercountriestoLeastDevelopedCountries(LDCs)thatwasuntiedrosefrom55percentintheperiod1999-2001to68percentin2004.However, thereareconsiderablevariations inperformanceacrossDACcountries.SomecountriesincludingFinland,Ireland,Luxembourg,NorwayandtheUnitedKingdomhavesuccessfullymovedawayfromtiedtountiedaid,whileothersstillhaveveryhighratiosoftiedaidtototalaid.Similarly,DACcountrieshavemadesubstantialprogressinincreasingtheproportionofgrantsintotalODAwiththeshareofgrantsinaidrisingfrom49percentovertheperiod1980-1984to90percentinthe2002-2004period.

Donorcountrieshavealsomadeconsiderableprogressinmeetingtheircommitmentsintheareaofdebtrelief.AfricancountriesbenefitedfromtheMDRIannouncedattheG-8SummitinGleneagles.Whilethisdebtreliefisawelcomedevelopment,itis,however,notsufficienttofinanceAfrica’smyriaddevelopmentpriorities.

Domestic development financing

Aswitnessedinotherdevelopingregions,particularlyinEastAsia,themobilizationofdomestic resourcesplays akey role infinancing investments in economic andsocialinfrastructure,andhence,intacklingpoverty.

However,thelevelofsavingsinSSAhasbeenhistoricallylessthan20percentofGDP,whichisconsiderablybelowtheaverageofEastAsiaandthePacific(35percent), Latin America and the Caribbean (21 per cent) and the Middle East andNorthAfrica(26percent).Atthesametime,itispromisingthatthereareanumberofSSAcountries,whichhavemobilizeddomestic savings. In fact,five countries,Algeria,Botswana,RepublicofCongo,GabonandNigeria,havereachedasavings

�Overview

ratioofmore than30percent.Akeychallenge facing thesecountries ishowtotranslate thesehigh savings intoproductive investment, especially innon-oil andnon-mineralactivities,toachievesustainedeconomicgrowth.OtherAfricangov-ernmentsneedtofocuseffortsonmobilizingbothpublicandprivatesavings.

Asaconsequenceoflowlevelsofsavingsinadditiontolimitedprivatecapitalflows,investmentratiosinSSAcountriesarelowerthaninotherdevelopingregions.Forexample,overtheperiod2000-2004,domesticinvestmentasaproportionofGDPwas18percentinSSAcomparedto31percentinEastAsiaandthePacific.

Inresponsetothischallenge,Africangovernmentsneedtodevelopdomesticcapitalmarkets, includingbondmarketsandstockexchanges,whichcanplayanimpor-tantroleinincreasingboththequantityandproductivityofinvestment.Therearecurrently21stockexchangesinAfrica,thoughthesemarketsarestillcharacterizedbylowlevelsofliquidity,lackofintegrationwithregionalandglobalmarkets,anda range of capacity and technology constraints.The regional integrationof capi-talmarkets inAfrica offers a solution to this situation, especially for the smallereconomies.Overall,toacceleratecapitalmarketdevelopment,governmentsneedtoimprovethecapacityofallstakeholders,investininfrastructure,andpromotegoodgovernance.

Developments in trade negotiations

TradenegotiationsarerecognizedasanimportanttoolforincreasingtradeprospectsandfacilitatingAfrica’sintegrationintheworldeconomy.However,negotiationsarestillfarfromrealizingthecontinent’sexpectations.Muchwasexpectedofasuccess-fulDohaRound.Likewise,itisoftensuggestedthatEconomicPartnershipAgree-ments(EPAs)withtheEuropeanUnion(EU)wouldresultinanimprovedbusinessenvironmentinAfricancountries,allowingformoreinvestmentsandenhancingtheprospectsfordiversificationoftheireconomies.

Unfortunately,ontheWorldTradeOrganization(WTO)negotiationsfront,progresshasbeenlimitedandbelowtheexpectationsofAfricancountries.Onemainreasonfor the deadlock inWTO negotiations appears to be the disagreement with thelevelsofdemandandoffersonagriculture,acriticalareaforAfrica’sdevelopmentprospects.Thislackofprogresshasclearlybeenasetbackforthemultilateralproc-ess,prohibitingtheinternationalcommunity,andespeciallypoorercountries,fromsignificantimprovementsinthemultilateraltradingsystem.

ThelimitedprogressintheWTOnegotiationsisimpactingnegativelyonthecottoninitiative,whichwas sponsoredby someAfricancountries for the eliminationofcottonsubsidiesbythedevelopedcountries.Whilethecotton-textilesectorinAfricaholdsa tremendousopportunity fordiversification,delays infinalizing theDohaRoundishinderingtheexploitationoftheseopportunities.As itwere, theHongKongMinisterialConferenceofDecember2005reachedagreementontheelimina-


tionofcottonexportsubsidies,butagreementhasyettobereachedontheelimina-tionofdomesticcottonsubsidies.TherewasexpectationthatprogressintheWTOnegotiationswouldallowforanexpeditiousagreementoncotton.

Probablyoneofthemostsignificantdevelopmentshasbeentheevolutionofthepar-ticipationofAfricancountriesintheactualnegotiations.Africancountrieswerenotonlyengagedactivelyinthedefinitionofthemandateforthenegotiators,buthavebeenactiveateverystage,asthenegotiationshaveprogressed.Thisactiveparticipa-tionhasnottranslatedtoconcreteresultswherebyAfricanprioritiesareholisticallyaddressed.

TherehasbeengrowingconcerninAfricathatEPAs,whilerepresentingsignificantpotentialforgrowthanddevelopment,alsoposegreatchallengesintermsofadjust-mentcosts.ThestandstillinWTOnegotiationsalsocomplicatestheEPAprocess.Intheabsenceofevolutionsonrulesforpreferentialtradearrangements,importantuncertaintiesremainonthedegreeofflexibilityAfricancountrieswouldhaveonthelengthoftransitionperiodsandonthecoverageofliberalization.EPAnegotiationsareprobablythemajortaskaheadofAfricantradepolicymakers,especiallygiventheslowpaceoftheDohaRound.Theyposegreatchallengesbutalsorealopportu-nitiesintermsofdevelopmentforthecontinent.

InlightoftheslowprogressintheWTOnegotiationsandtheongoingEPAproc-ess,Africancountrieshaveanevergreaterinterestindiversifyingtheirexportmar-kets.Theyareinvolvedinanumberofregionalandfreetradeagreementsnegotia-tions.Fosteringregionalintegrationhasbeenalong-standingobjective,butAfricanregionalintegrationremainshamperedbyseveralobstaclesincludingpoliticalandsecurityfactors,andalsobypoortransportandcommunicationinfrastructure,alowdegreeofcomplementarityinthestructuresofproductionandtheoverlycomplexwebofmembershipsacrossdifferentRegionalEconomicCommunities(RECs).

Preferentialtradearrangementsareconsideredpromisingcomplementaryplatformsfordiversification.Thirty-sevenAfricancountriesareeligibletotheAfricanGrowthand Opportunity Act (AGOA), which grants African countries quasi duty-free,quota-free access to theUSmarket.Thirty-fourAfrican countries areLDCs andthereforeareeligibletotheEU’sEverything-but-Arms(EBA)scheme.Othernon-LDCAfricancountriesareeitherbeneficiariesoftheEU’sGeneralSystemofPrefer-ences(GSP)orarepartytoabilateralfreetradeagreementwithEU.

SeveralAfricancountriesorgroupingsarealsoinvolvedinbilateralortradenegotia-tionsinordertodiversifytheirexportmarketsandenhancetheirintegrationintheglobaleconomicsystem.Forexample,WestAfricanEconomicandMonetaryUnion(WAEMU)countries are currentlynegotiating free trade agreementswith severalNorth-Africancountries.TheUSandtheSouthAfricaCustomsUnion(SACU)arealsoengagedinfreetradetalks.SouthAfricaisalsodiscussingwithIndiaandMER-COSURcountriesonapotentialfreetradeagreement.Withtherecentexplosionof

�Overview

tradeflowsbetweenAfricaandChinaandIndia,severalcountriesalsoenvisagetalkswiththesetwoAsiannations.

Diversification as a key pillar in Africa’s development effortsTwodistinctperiodsstandout inAfrica’sdevelopmentstrategy.Theperiodspan-ningthe1960sandthe1970swascharacterizedbypoliciesaimedatstrengtheningeconomicautonomy. It isduring thisperiod thatdiversificationorientedpolicieswereaggressivelypursuedinmostcountries.AmajorshiftineconomicpoliciesinAfricawasoccasionedbytheeconomiccrisesoftheearly1980s.Mostofthepost-independenceeconomicpoliciesgearedtolong-termdevelopmentwerereplacedbymacroeconomicstabilizationpoliciesfocusingonshort-termgoals.Thisreorienta-tionofeconomicpolicieshasfailedtoyieldtheexpectedresults,anditisclearthatashiftinpolicyorientationisneededtoaccelerateprogresstowardstheMDGs.

Inrecentdecades,sparksofeconomicgrowthhaveoftenvanishedasquicklyastheyhavebeenignited.Thecurrentgrowthmomentumalsorestsonaveryfragilefoun-dation.Thecontinentcontinuestorelyonprimarycommoditieswhosepriceshavebeenmajorsourcesoftradeshocks.Whileeffortstowardsdiversificationhadsomepositiveresultsinthe1970sandearly1980s,thesegainswerereversedinthemid-1980sduetotheeconomiccrisesoftheperiod.Therefore,itiscriticalforAfricancountriestoembracediversificationasthecentraldevelopmentparadigm.

Diversificationexperiences inAfrica fall intofivemaincategories: countrieswithlittleeconomicdiversificationsuchasBurkinaFasoandSenegal;countriesthatmadesomeearlyprogressandthenstagnatedintheprocesssuchasKenya;thosethatman-agedtodeepentheirdiversificationprocessasexemplifiedbyTunisiaandMauri-tius;backslidersinthediversificationeffortsconsistingmainlyofoil-richcountriessuchasNigeria;andnon-starterscomprisinglargelyoftheconflictandpost-conflictcountriessuchasLiberiaandtheDemocraticRepublicofCongo.Thisdiversityofexperiencesraisesthequestionsofwhatfactorsdrivediversificationandwhatpoli-ciescanfosterdiversificationinthemedium-termandinthelong-term.

Evidence on the determinants and stages of diversification

ThediversificationprocessinAfricaishighlyinfluencedbyinvestment,percapitaincome,degreeofopennessof trade, macroeconomicpolicy stanceand institu-tional framework.Tobeginwith, investment isvital foraneconomytodiversify.TwostagesofdiversificationwithrespecttoinvestmentcanbeobservedforAfrica,withaU-shapedrelationshipbetweeninvestmentanddiversification.Unfortunately,

�0 Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification

theturningpointforAfricawasfoundtobeat12.5percentofGDP,indicatingthatifthecontinentistodeepenitsdiversificationprocess,muchhigherlevelsofinvest-menttoGDPratiosarerequired.

Asecondimportantfindinginthisreportrelatestoincomeeffectsondiversification.Likeinthecaseofinvestment,thetwostagesofdiversificationasestablishedintheliteraturewereconfirmed in thecaseofAfricancountries.Thereport alsoarguesthattradeopennessdoesnotnecessarilyleadtodeepeningofdiversification,basedonexistingliteratureandtheexperienceinopennessforAfrica.ItisevidentthatastrategictradepolicyisneededtostrengthenthisprocessinAfrica.

Rapid liberalization in Africa has put a break on the diversification process

Rapidliberalizationcouldhaveactedasaconstrainttodiversificationontheconti-nent.Theresultssuggestthatthedebateonoptimaltradepolicyishighlyrelevant.Specifically, the evidence forAfrican countries suggests that there ismerit in theargumentforpolicyspacewithrespecttotradeliberalization.Africancountriesmaywishtoadoptagradualapproachtoliberalization.Indeed,historicalevidenceindi-catesthatcountriesthatpromotediversificationfirstbeforespecializingenjoymuchhigherandmoresustainablelevelsofwelfare.

Macroeconomic stability is necessary for diversification

Industrializationhelpstodeependiversification,whichfitswellwiththeestablisheddevelopment theory that a country evolves from specialization to diversificationthroughindustrialdeepeningbeforestartingtospecializeagain.Someelementsofmacroeconomicstabilityarecriticaltodiversification.Inparticular,fiscalconserva-tismappearstobeanimportantconstrainttodiversification.

The institutional environment is critical for diversification

Goodinstitutionsprovideanenablingenvironmentfordiversification.Inparticular,goodgovernanceenableseconomiestodiversifywhileconflictstiflesdiversification.Therefore,consolidationofinstitutionalreformsbothattheaggregate(e.g.,thelegalsystem)levelandatthemicrolevel(e.g.,businessandbankingregulation)consti-tutesanimportantpartofthenationalagendatopromotediversification.

Diversification contributes to growth through productivity

Itiswellestablishedthateconomiesgrowfasterwhenthereisanincreasingshareinthecontributionofproductivitytogrowth.Indeed,theratesofeconomicgrowthamongdevelopedeconomiesaredifferentiatedmainlybytherateofgrowthofpro-ductivityratherthantherateoffactoraccumulation.GrowthinAfricaneconomies

��Overview

can,therefore,bescaledupbyenhancingdiversification,whichinturnleadstoanimprovementinproductivity.Deepeningdiversificationisasimportantaseliminat-ingconflictandinvestinginhumancapital,intermsofimprovingproductivityandbyextension,economicgrowth.

Policies to increase diversification

DiversificationpoliciesforAfricacanoperateatthreelevels:macroeconomicpoliciestosupportdiversification;tradeandsectoralpoliciestodeependiversification;andstrengtheninstitutionstoenhancediversificationefforts.

Macroeconomic policies for diversification – pragmatism rather than orthodoxy

Africancountriesneedpragmaticmacroeconomicpoliciestofosterdiversification.Whilemacroeconomicstabilityis importantforthediversification,it isalsoclearthatarigidmacroeconomicframeworkwillhinderdiversification.Macroeconomicstability achieved through conservative fiscal and monetary policies may, in fact,delay the diversification process. Flexible macroeconomic policies that especiallyallowcountriestoachievehighlevelsofpublic investmentarekeytoasuccessfuldiversificationagenda.

Trade and sectoral policies for diversification – back to the basics

Inthe1980s,thefocusineconomicmanagementshiftedtowardsmacroeconomicstabilizationpolicies.Thisledtotheneglectofsectoralpoliciesandmicroeconomicreforms,whicharecriticalforindustrializationanddiversification.Therefore,thereisneedformoreproactivemicro-leveleconomicpoliciesthatareevenlybalancedwiththemacroeconomicpolicies.Africancountriesshouldusetradepolicies inastrategicwayaimedspecificallyatdiversificationandbyextensiongrowthanddevel-opmentoutcomes.

Theevidenceinthisreportdemonstratesthatthefinancialsectorplaysacriticalroleinfinancingprivateinvestment,whichisvitalfordiversification.Thereis,therefore,aneedtoconsolidatefinancialsectorreformstoincreaseefficiencyofresourceallo-cation,whichwillhelptodeependiversification.

Withregardtoindustrialpolicies,ithelpstorecallthateconomictransformationisbothanecessaryandsufficientconditionforindustrialization.Buteconomictrans-formationcannottakeplaceunlessdiversificationtakesroot.Giventhecorrelationbetweendiversificationandeconomic transformation, industrialpolicies are, as aconsequence,partandparceloftheneweconomicpoliciesthatAfricancountriesneedtoincreaseeconomicdiversification

Theothermajorareawhereneweconomicpoliciesfordiversificationarerequiredisinresearchanddevelopment.ThemajorityofAfricancountrieshaveresortedto

�� Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification

relyingon factor accumulationas themain sourceof economicgrowth.Yet, evi-dencehasshownthattheindustrializedandnewlyindustrializedeconomies(NIEs)wereabletoachievedevelopmentleapswhendramaticchangesinproductivitytookplace.FinancingresearchanddevelopmentstandsoutasaclearwaybywhichAfri-cancountriescouldimprovethelevelofinnovationandincreasethecontributionofproductivityineconomicgrowth.Thiswouldthenenablethesecountriestoreapmaximumbenefitsfromtheirdiversificationefforts.

Strengthening of institutions is a prerequisite to diversification

Forthemacroeconomicandnewsectoralandindustrializationpoliciestoachieveoptimaldiversification results, it is important forAfricancountries to strengthentheirinstitutions.Conflictandgovernancehavesubstantialimplicationsondiversi-fication.Itisimportantthatcountriesinvestinpeace-buildingandpeace-promotinginstitutionsthatcanproactivelydealwiththreatsofconflictflare-uporresurgence.Countriesthataimtodeependiversificationwillalsoneedtoinvestinestablishingandconsolidatinginstitutionsthatenhancegoodgovernance.

Recent Economic Trends and Prospects for 2007

Part

��

�DevelopmentsintheworldeconomyhaveimportantimplicationsforAfricanecon-omiesthroughvariouschannels,includingdemandforAfricanexportcommodities,theimpactonthetradebalanceandthecostofexternalborrowing(viaworldinter-estrates).Thesedevelopmentsareinfluencedbymonetary,fiscalandtradepoliciesadoptedbymajorindustrializedcountriesaswellasbyexogenouseventssuchasoilpriceshocks.

GrowthintheworldeconomyremainsdominatedbytheAsianeconomies,whichcontinuetogrowatmorethan8percentperannum.Incontrast,growthinadvancedeconomiesremainsmodestandisyettoreachthepre-2001level.Keyconstraintstogrowthincludethemassiveglobalmacroeconomicimbalancesalongwithtightmac-roeconomic stances in advanced economies, which prevent demand-led recovery.Highoilpricesalsounderminegrowthinbothadvancedanddevelopingcountriesthroughhighproductioncosts.

SomepositivedevelopmentsintheworldeconomyarelikelytosustaingrowthinAfricancountries.Theseincludehighexportpricesforexportcommoditiesduetohigh demand especially from Asia, delivery of promised aid and debt relief, andrisinginflowsofforeigndirectinvestment(FDI)withanincreasingsharecomingfromChinaandIndia,andhigherinflowsofworkers’remittances.However,thesedevelopmentsneed tobe supportedbyadequatedomesticpro-growthpolicies tomaximizethegainsfromincreasedexternalresources.

1.1 Global economic performance

World growth is moderate and likely to slow down in �00�

In2006,worldeconomicgrowth improvedslightly to3.8percent from3.5percentin2005(figures1.1and1.2).Globally,growthrateswerehighestinSouth-eastEuropeandCommonwealthofIndependentStates(CIS)countriesaswellasinEastandSouthAsia.Growthintheleastdevelopedcountriesremainedabove6percentsince2001(UnitedNations2007andUNCTAD2006a).Highpricesforoiland

Developments in the World Economy and Implications for Africa


otherinputsandatendencytowardsmorerestrictivemonetarypoliciesinindustrialcountriescombinedwithsometurbulenceinfinancialmarketsarelikelytocontrib-utetoaslowdownin2007(UNCTAD2006a;UN-DESA2006).

Figure �.�GDP growth rates of major regions, 2000-2007 (per cent)

Source: United Nations 2007.Note: The reported estimates of growth rates for world gross product are obtained using country gross domestic product at market prices in dollars as weights. For comparison, growth rates estimated using purchasing power parity-based weights would be 5.1 per cent for 2006 and 4.5 per cent for 2007.

GrowthintheUSAslowedslightlyduringthesecondhalfof2006andmightslackenfurtherin2007butisnotlikelytogointorecession.Thedeclineinhousepricesisexpectedtoweakenconsumerspendingaswellas importdemand(UN-DESA2006;UnitedNations2007).Risingoilpricesandincreasingimbalancesalsocon-stituteimportantdownsiderisksforgrowth.

TheEuroareagrewbyamodest2.5percent in2006,thoughitwasthehighestgrowthratesince2000.Thiswasdrivenbyhigherdomesticdemand,particularlyinvestmentexpenditure,aswellasstrongexportperformance.In2007,itisexpectedthatexternaldemandwilldecline,andthatstrongercurrencieswillhamperexport-ers. Monetary and fiscal policies are also expected to tighten, which will reducegrowth.GrowthinJapanisattributabletobuoyantdomesticdemandandemploy-mentgrowth,butitisexpectedtoslowdownin2007(UN-DESA2006;UnitedNations2007).

Rising oil prices and increasing

imbalances constitute

important downside risks for growth

��Developments in the World Economy and Implications for Africa

Figure �.�GDP growth rates of major economies, 2000-2007 (per cent)

Source: United Nations 2007.

China and India are engines of trade in developing Asia

GrowthindevelopingAsiawashighin2006,drivenbyChina(10.2percent)andIndia (7.7percent),whichare theenginesof trade inmanufacturingwithin theregion.Inaddition,domesticdemandhasalsorecoveredinmostAsiancountries.Growth in theregion isexpected todecline toamore sustainableyet still strongpaceduetoaslowdowninexternaldemandforAsianproducts.Additionaldown-siderisksincludeprotectionisttradepoliciesinmajorexportdestinationcountries,furtherincreaseinthelevelandvolatilityofoilprices,theavianinfluenza,aswellaspoliticalandgeopoliticaluncertainties,especiallyintheIslamicRepublicofIran,NepalandSriLanka(UnitedNations2007;UN-DESA2006;UNCTAD2006a).

ChinaisnotonlyexperiencingrapidgrowthbutalsorapidstructuralchangedrivenbyFDIandariseincompetitiveness.Despitestronggrowthinmanufacturingwages(between12and16percentinrecentyears),unit labourcostsinmanufacturingarefallingduetogrowthoflabourproductivitybyaround20percentperannum(UNCTAD2006a).

GrowthinLatinAmericahasremainedabove4percentforthepastthreeyearsduetostrongexternalanddomesticdemand.Atthesametime,growthintheregionhasbecomemorebroad-based.However,theexternalsectorremainsvulnerableandtheregionmightsufferfromhigherinterestratesinglobalcapitalmarketsasmanycountrieshaverelativelyhighdebts,whichwillslowdowngrowthin2007andinsubsequentyears(UN-DESA2006;UnitedNations2007).

China is not only experiencing

rapid growth but also rapid

structural change


1.2 Macroeconomic policies in developed countriesDespite the recent oil price hikes, global inflation has remained low and stable(figure 1.3), partly due to restrictions to wage increases, a tight macroeconomicpolicystanceinbothadvancedanddevelopingcountries,andthesupplyofcheapmanufacturesfromChina.Ingeneral, there is littleconcernaboutoverheatinginmosteconomies.1

Figure �.�Inflation rates in major regions and economies, 2000-2007 (per cent)

Source: IMF 2006. Note: Data for Japan is missing for 2004.

Since2003,long-terminterestratesintheadvancedcountrieshaveincreasedfromanaverageof3.6percent to4.3percent inmid-2006; thenewly industrializedeconomies(NIEs)experiencedthesametrend(figure1.4).Concernsaboutexpectedhigher inflation rates led monetary authorities in the USA and in the EuropeanUnion(EU)toraiseshort-termratesasapre-emptivemeasure,resultinginhigherlong-terminterestrates.Mostdevelopingcountrieshavealsobeentighteningmone-tarypolicythroughhigherinterestratesandreserverequirements(UN-DESA2006;IMF2006).Risinginterestratesmightcontributetoretardingeconomicrecoverybydepressingdomesticdemand,especiallyprivateinvestment.

1 Overheatingmeansthataneconomyisgrowingtoofastandthatitsproductivecapacitycannotkeepupwithdemand,implyingrisinginflation.


Figure �.�Interest rates in major regions and economies, 2000-2006 (per cent)

Source: IMF 2006.

Fiscal balance improving in most regions

The fiscal balance has improved in most regions since 2003 (figure 1.5). In theadvancedeconomies,thefiscaldeficitdeclinedfrom3.1percentofGDPin2003to2.1percentin2006.FiscaldeficitshavealsodeclinedinAsiaandLatinAmerica.Thereduction in thebudgetdeficitwasparticularly strong inChina: from3percentin2002tojustover1percentin2006.Thisdevelopmentwasmainlydrivenby relatively high growth rates, which contributed to increased government rev-enues.Itwasalsotheresultofcontinuedadherencetoatightfiscalpolicystanceinbothdevelopedanddevelopingcountries.Oilandcommodityexportersindevel-oping countries have witnessed a significant improvement in their fiscal balancepositionduetohighoilprices.InsomeAsiancountries,fiscalpolicycontinuestobeexpansionaryduetoincreasedsocialanddevelopmentspending.Toensurefiscalsustainability,governmentsneedtobroadenthetaxbasesoastoincreaserevenue(UN-DESA2006;IMF2006).

Generally,thecurrenciesofmanydevelopingcountrieshaveappreciatedagainstthedollar.Energyandcommodityexportersexperienceda10-20percentexchangeratedepreciationduringthesecondquarterof2006,butthetrendtowardsappreciationhasresumedsincethen.Itisexpectedthatthedepreciationofthedollarwillcon-tinueandtheriskofasuddendepreciationduetoworseningglobalmacroeconomicimbalancespersists(UN-DESA2006).

To ensure fiscal sustainability, governments need

to broaden the tax base so as to increase revenue


Figure �.�Central government fiscal balance for selected regions and economies, 2000-2007 (% of GDP)

Source: IMF 2006.

1.3 World macroeconomic imbalances

Macroeconomic imbalances still a major concern

Wideningmacroeconomicimbalancesconstituteamajorconcernforfuturegrowthprospectsandeconomicstability.Theseimbalancescauseuncertaintyandincreasetheriskoffinancialinstability,whichhavenegativeimpactsoneconomicgrowth.Recently, equity markets and commodity and currency markets have becomemorevolatilewhileshort-termcapitaloutflowsfromsomeemergingmarketshaveincreased.Thisdevelopmenthasraisedfearsofanewglobalfinancialcrisis.How-ever,theturbulenceislimitedtoanumberofcountrieswithhighcurrentaccountdeficits.LossesinstockmarketsoccurredinEasternEuropeancountries,butalsoin South Africa, which experienced a drop in the value of the rand (UNCTAD2006a).

Imbalancesinthecurrentaccountswidenedbetween2002and2005butstabilizedin2006(figure6).Intheadvancedcountriesthedeficitwidenedfrom0.9percentofGrossDomesticProduct(GDP)in2002to1.4percentin2005and1.6percentin2006.ThiswasmainlydrivenbytheUSA,whosedeficitincreasedfrom4.5percentofGDPin2002to6.4in2005andstabilizedat6.6percentin2006.ThedeficitsofotherdevelopedcountriessuchasAustralia,SpainandtheUKhavealsoincreased.


InJapan,thecurrentaccountsurplusremainedrelativelyconstantaround3.5percentofGDPbetween2003and2006.BothAsiaandLatinAmericaincreasedtheircurrentaccountsurplusesbetween2002and2005,whichthenslightlydeclinedin2006.China’ssurplusincreasedfrom2.4percentofGDPin2002to7.2percentin2005and2006,makingitthelargestfinancieroftheUSdeficit(UN-DESA2006;IMF2006).

TherecentstabilizationinglobalimbalancesismainlydrivenbyweakerdomesticdemandintheUSA,accelerationofeconomicactivityinEurope,continuedrecov-eryinJapanandgrowingdomesticdemandindevelopingcountries.ThereductionofgrowthintheUSAtogetherwiththedepreciationoftheUSdollaroverrecentyearshascontributedtoa13percentincreaseinexportsinthefirsthalfof2006,whileimportsgrewmuchslower.Thedeclineinoilpricesinthesecondhalfof2006furtherimprovedthetradebalance(WorldBank2006b).

Figure �.�Current account balance for selected regions and countries, 2000-2007 (% of GDP)

Source: IMF 2006.

Thewideningofglobalmacroeconomicimbalanceswaspartlyduetotheincreasesinthepriceofoilandothercommodities.IntheUSA,thegrowingcurrentaccountdeficitwasassociatedwithdeteriorationoftheprivatesavingsrate,furtherthreaten-ingthesustainabilityofglobalimbalances.In2007,globalimbalancesareexpectedto stabilize further as cooling of the US housing market and slower growth areexpected to reduce imports,whiledepreciationof thedollar is expected toboostexportsandreduceimports(UN-DESA2006).


Accumulation of reserves comes at a cost

Over recent years, developing countries have pursued strategies to stabilize theirexchangeratesandaccumulatelargeforeignexchangereservestoshieldthemselvesfromfinancialcrises.However,accumulationofreservescomesatacostasitfreezesresourcesthatwouldotherwisebeinvestedinproductiveactivitiestoboostgrowth.Asaresult,developingcountriesneedtostrikeabalancebetweenthegoalsoffinan-cialstabilitythroughreservesbuildupandgrowththroughstimulationofprivateandpublicinvestment(UNCTAD2006a).

1.4 World prices for African commodities

Commodity prices on the increase

Globaldemandforoilandmineralshasgrownfastduetoglobalgrowth,especiallydrivenbyChina’shighperformance.Between2002and2005,theUNCTADpriceindexfornon-fuelcommoditiesroseby45percent,withminerals,oresandmetalspricesincreasingbyalmost100percentandcrudeoilby114percent(table1.1).As a result, commoditypriceshave remainedabove their long-term trend.Pricesofmetals,minerals andoil are expected to stabilize in2007but remain elevated(UNCTAD2006a;WorldBank2006b).

Thesepricehikeswerealsopartlydrivenbyslowsupplyreactions,especiallybot-tlenecksinrefiningandstorageofcrudepetroleum,andpoliticalinstabilityintheMiddleEast.Ingeneral,investmentsinmineralextractionshaverelativelylongges-tationperiodsandproducershavebecomemoreconservative in their investmentplans.In2005,thedepreciationofthedollaralsocontributedtotheriseincom-modityprices.Othersupply-sidefactorshavebeendisruptionsinsupplycausedbylabourdisputesandrisingproductioncostsduetohigherenergycostsandtheneedtoundertakeexplorationinareasthatarelessaccessible(UNCTAD2006a).

Tosomeextent,exportersofmineralswereabletoimprovetheirexternalaccountsandoffsetthenegativeeffectsofhighoilpricesontermsoftrade.Forexample,inZamibiatotalexportsincreasedfrom$US919millionto$US2,095millionbetween2002and2005.Thecountrydependsheavilyoncopper,whichaccountedfor57percentoftotalexportsin2005.ThesurgeincopperpriceshassignificantlycontributedtoZambia’sgrowthrateofmorethan5percentinthepastthreeyears(UNCTAD2006a;EIU2006b;IMF2006).

Accumulation of reserves freezes

resources that would otherwise

be invested in productive activities


Table �.�World primary commodity prices, 2000-2005 (percentage change)

2000 2001 2002 2003 2004 2005 2002-2005

All commodities (excluding crude petroleum)

1.7 -3.6 0.8 8.1 19.4 12.1 44.8

Crude petroleum 55.6 -13.3 2.0 15.8 30.7 41.3 113.9

Food and tropical beverages -0.1 0.4 0.4 2.3 13.2 8.8 26.0

Coffee -25.1 -29.0 4.7 8.7 19.8 43.8 87.2

Cocoa -22.1 22.7 63.3 -1.3 -11.8 -0.7 -13.5

Tea 6.8 -20.2 -9.5 8.4 2.1 9.1 20.8

Sugar 30.4 5.6 -20.3 2.9 1.1 37.9 43.6

Rice -18.2 -15.3 11.0 4.1 23.1 17.1 50.1

Agricultural raw materials 3.1 -3.9 -2.4 19.8 9.9 7.1 41.0

Hides and skins 11.2 5.5 -2.9 -16.8 -1.7 -2.1 -19.9

Cotton 11.5 -19.0 -3.6 37.2 -3.3 -11.6 17.2

Rubber 7.9 -14.1 33.1 41.7 20.3 15.2 96.3

Tropical logs 3.7 6.4 -10.5 20.1 19.2 0.3 43.6

Mineral ores and metals 12.4 -10.8 -2.7 12.4 40.7 26.2 99.6

Aluminium 13.8 -6.8 -6.5 6.0 19.8 10.6 40.6

Copper 15.3 -13.0 -1.2 14.1 61.0 28.4 135.9

Gold 0.1 -2.9 14.4 17.3 12.6 8.7 43.5

Source: UNCTAD 2006a.

Onaverage,pricesforfoodandtropicalbeveragesroseby26percentbetween2002and2005 and those for agricultural rawmaterials increasedby41per cent.Thehighestincreaseswereregisteredforrubber(96percent),coffee(87percent),rice(50percent),sugarandlogs(44percent).Thiswaspartlydrivenbysupply-sideproblemsduetoadverseweatherconditions,plantdiseasesandpests inAsiaandLatinAmerica.Thereisalsoalong-termtrendassomeagriculturalcommoditiesareincreasinglyusedassubstitutesforoil,namelyrubber,sugarandgrain.Thelattercanalsobeconvertedintobio-fuel.In2006,teapricesfurtherincreasedby14percentduetoadroughtinKenyaandcoffeepricesalsowere18percenthigherthanin2005.Theincreaseintimberpricesby14percentismainlydrivenbyhighdemandfromChina.

Thus, the trend incommoditypriceswilldependon futuregrowthof theworldeconomy,specificallyinChina,whichhasabsorbedmorethanhalfofglobalgrowthintheconsumptionofsuchcommoditiesascottonandsoybeans.Ithastobenotedthatnotallcommodityproducersbenefitedfromhigherexportearnings.Thepricesofsomeagriculturalcommoditiesdeclinedbetween2002and2005.Forexample,

Some agricultural

commodities are increasingly used

as substitutes for oil


cocoapricesdeclinedby14percentwhilethoseforhidesandskinsdeclinedby20percent(UNCTAD2006a;WorldBank2006b).

1.5 Globalization trends and implications for Africa

Trade remains uneven

Globally,exportsofgoodsandservicesaregrowingfasterthanGDP.However,notall regionsbenefitequally fromthis trend(figures1.7and1.8).TheEUshare inworldexportsremainedaround40percentbetween2001and2004,anddeclinedto38.4percentin2005.Overthe1990s,ithaddeclinedsignificantly.Incompari-son,thesharesofJapanandtheUSAdeclinedbetween2001and2005.

Figure �.�Share in world trade by region, 1990-2004 (% of total)

Source: WTO 2006.

TheshareofLatinAmericainworldexportsremainedconstantat3percent,whereasthatofAsiaincreasedfrom27percentin2001to29percentin2005.China’sshareinworldtradeincreasedfrom4.3to7.3percentinonly4years.TheshareofAfricadeclinedfrom3.1percentin1990to2.2percentin2002andincreasedagainto2.9percentin2005duetoincreasingcommodityprices.


Figure �.�Share in world trade for selected countries, 1990-2004 (% of total)

Source: WTO 2006.

Capital flows are rising

GlobalFDIflowshaveagainincreasedsubstantially,by29percentin2005,afteranincreaseof27percentin2004.TrendsfordifferentregionsarelessclearforFDIthanfortrade(figure1.9).TheEU’sshareinworldFDIinflowsincreasedto46percentin2005,thesamelevelasin2003.Incontrast,theUSAlostasignificantshare,whileJapan’sshareremainedlow.TheshareofLatinAmericahasfluctuatedaround10percentoverthepast5years,whilethatofAsiahasmorethandoubled,from10percentin2000to22percentin2005.Chinaalonenowaccountsfor8percentofworldFDIinflows,whichishalfofitsshareinworldGDP.TheshareofAfricainworldinvestmenthasalsoincreased,from0.6percentin2000to3.4percentin2005.ForbothtradeandFDI,ChinaandIndiaarebecomingmoreimportantpartnersforAfrica,asignofthegeographicdiversificationoftradeandsourceoffinanceforthecontinent(seebox1.1).

TherapidgrowthinbothtradeandFDIismainlydrivenbythedistributionofvaluechainsoverseveralcountriesaccordingtotheircomparativeadvantageinparticularstagesofproduction.Forexample,sometextilesaredesignedinEurope,whilethefabricisproducedinAsia,thecuttingandsewingdoneinMadagascar,andthefinalproductexportedtotheUSA.Thisprocessisdrivenbylowertransportandcommu-nicationcoststhatenablethespreadofdifferentproductionstagesallovertheworld.However,remotenessisbecomingabiggerobstacleastheadvantageofbeingclosetomajormarketsincreasesthechancesofbeingincludedinthesevaluechains.

The share of Africa in world

investment has also increased, from 0.6 per cent in 2000 to

3.4 per cent in 2005


Box �.�China and India becoming drivers of Africa’s growth through trade and FDI

Trade and FDI from Asia to Africa have increased substantially over the past 10 years. The China-Africa summit in November 2006 raised the profile of China-Africa relations. China now offers debt reduction and preferential trade treatment and finances large infrastructure investments in a number of African countries. It is mainly interested in natural resources, especially oil. Angola is expected to become China’s most important source of oil in 2006. As in other countries, such as Kenya, Nigeria and Zimbabwe, Chinese state-owned companies invest large amounts in infra-structure to secure licenses for minerals.

As a result, African exports to China of mainly raw materials have increased tenfold since 1995 and by more than 50 per cent in the first half of 2006 alone. Imports from China also increased by 30 per cent in the same period. As these are mainly cheap labour-intensive manu-factures, they have caused problems for local manufactures, especially textiles. Over the past few years Africa has run a significant trade surplus with China, although some countries such as Egypt and South Africa have run deficits. By contrast, Africa runs a trade deficit with India although Indian exports to Africa account for less than one third of the exports from China.

China and India are also becoming major sources of FDI to Africa. Altogether, Asian coun-tries accounted for 10 per cent of all greenfield investment in Africa in 2005. Chinese investors are planning an aluminium production plant in Egypt, upgrading of a highway in Nigeria and a copper project in Zambia. The two Asian countries are also providing aid to Africa through fund-ing of infrastructure projects and provision of training. China has promised to double its aid to Africa by 2009.

However, there are some concerns with the growing influence of India and China in Africa. For example, one complaint is that Chinese firms are not observing workers’ rights and do not protect the environment, as they face less pressure from civil society. In addition, they bring a lot of Chinese personnel, which undermines capacity building. Another is that the high demand for African commodities reduces the incentives to diversify. Sudden increases in export revenues cause exchange rate appreciation and increase the risk of currency instability due to fluctuations in commodity prices. There is also a risk for countries that have just reduced their debt burden through HIPC and the Multilateral Debt Relief Initiative (MDRI) to accumulate more debt through Chinese infrastructure and export credit loans.

Sources: EIU 2006a; OECD 2006b; UNCTAD 2006b.


Figure �.�Share in world FDI flows by region and for selected countries, 2000-2005 (per cent)

Source: UNCTAD 2006b.

1.6 International migration and remittances

Migration reduces human capital and labour productivity in developing countries

As population in advanced countries continue to age, shortage of labour in sec-tors such as health care continue to attract relatively cheap but qualified labourfromdevelopingcountries.Atthesametime,pushfactorssuchaspoverty,conflict,humanrightsviolations,politicalinstability,lackofemploymentopportunitiesandreductionsinmigrationcostscontinuetoinducemoremigrationfromtheSouth.TheUnitedNationspredictsthatthenetnumberofmigrantsfromdevelopingtodevelopedcountrieswillincreaseby2.2millionannually,from191millionor3percentoftheworldpopulationin2005(UnitedNations2004).

ThediscriminationbyOrganisationforEconomicCo-operationandDevelopment(OECD)countriesinfavourofeducatedworkerscontributestobraindrainfromdevelopingcountries,whichsubsequentlyincreasestheshortageofskilledlabourinthesecountries.Theemigrationofpeoplewithscarceskills,suchasentrepreneurs,scientists, technicians and health professionals reduces both the stock of humancapitalandtheoveralllabourproductivity.However,ifthesehighlyskilledmigrantsreturn,theybringwiththemexperience,knowledge,contacts,andcapital,which


have a positive impact on development. Thus, gains and losses from migrationdependonwhether it is temporaryorpermanent.Thereisalsogrowingevidencethatremittancesreducepoverty(UNECA2006a;UNU-WIDER2006;NiimiandÖzden2006).

Specific measures are needed to increase the development impact of remittances

AttheHigh-LevelDialogueonInternationalMigrationandDevelopmentinNewYorkinSeptember2006,itwasreaffirmedthatinternationalmigrationcouldbeapositiveforcefordevelopmentprovidedthatitissupportedbytherightsetofpoli-cies(UnitedNationsGeneralAssembly2006,para.7).Thedevelopmentpotentialofremittancescouldbeincreasedbyfacilitatingthetransferoffundsandimprovingaccess tobanking services formigrants (UnitedNationsGeneralAssembly2006,para12).Althoughmostoftheremittancesoriginatefromindustrialcountries(83per cent), a significant share of remittances is also transferred amongdevelopingcountries.Remittancesworldwidemorethandoubledbetween2000and2006,withthehighestincreasesobservedinEastAsiaandLatinAmerica(165percenteach),whilesub-SaharanAfrica(SSA)experiencedamuchlower increase–40percent(figure1.10)(WorldBank2006c).

Figure �.�0Workers’ remittances received by region, 1990-2004 ($US billion)

0

50

100

150

200

250

300

High Income OECD Sub-Saharan Africa Middle East and North Africa

Latin America and Carribbean East Asia and Pacific All developing countries World

2006200520042003200220012000

Source: World Bank 2006c.

Gains and losses from

migration depend on whether it

is temporary or permanent


Toincreasethecontributionofmigrantstodevelopmentoftheircountriesoforigin,several countries have taken measures to strengthen their ties with their nation-alsabroadandtoencouragehighlyskilledworkers inthedirectionofreturnandcircularmigration.Migrantentrepreneurscouldtransferknow-how,skills,technol-ogy, expertise and linkages to markets (United Nations General Assembly 2006,para.13).Tominimizethenegativeconsequencesofhighlyskilledemigrationfromdeveloping countries, particularly in the fields of health and education, codes ofconductgoverningrecruitmentinhealthandeducationaswellasmechanismsforcompensationneedtobediscussedbetweentheadvancedanddevelopingcountries(United Nations General Assembly 2006, para.14). These codes will need to beaccompaniedbyappropriateenforcementmechanismstoensuretheireffectiveness.

1.7 ConclusionOverall,themedium-termoutlookfortheworldeconomyremainsmodest.Inaddi-tion,globalimbalancesremainlargeandweighheavilyongrowthprospects.How-ever,thereremainsomerisksforAfricancountriesarisingfromcompetitionfromAsia and theweakeningofhousingmarkets in advancedeconomieswhichcouldreduce demand and weaken commodity prices. Thus, African countries need toobservetheseinternationaldevelopmentscarefully.Measurestoreducevulnerabilitytoexternalshocks,toincreasediversificationandtostrengthendomesticdemandarecrucialtosustainingtherecentgrowthrecoveryinAfrica.

Migrant entrepreneurs could transfer

know-how, skills, technology,

expertise and linkages to markets


ReferencesEconomistIntelligenceUnit(EIU),2006a.Country Report China.London.

_______,2006b.Country Report Zambia.London.

InternationalMonetaryFund(IMF),2006.World Economic Outlook.WashingtonD.C.

Niimi,Y.andÇ.Özden,2006.“MigrationandRemittances:CausesandLinkages”.PolicyResearchWorkingPaper4087.WashingtonDC,WorldBank.

OrganisationforEconomicCo-operationandDevelopment(OECD),2006a.Eco-nomic Outlook.Paris:OECD.

_______,2006b.“TheRiseofChinaandIndia-What’sinitforAfrica?”Develop-mentCentreStudy,Paris.

UnitedNations,2004.World Population Prospects: The 2004 Revision,NewYork:DESA,PopulationDivision.

UnitedNations,2007.World Economic Situation and Prospects 2007,NewYork.

UnitedNationsConferenceonTradeandDevelopment(UNCTAD),2006a.Trade and Development Report, Global Partnership and National Policies for Development.NewYorkandGeneva.

_______2006b.World Investment Report 2006: FDI from Developing and Transition Economies: Implications for Development. NewYorkandGeneva.

UnitedNationsDepartmentforEconomicandSocialAffairs(UN-DESA),2006.LINK Global Economic Outlook.NewYork,October.

UnitedNationsEconomicCommissionforAfrica(UNECA),2006.Economic Report on Africa 2006: Capital Flows and Development Financing in Africa,AddisAbaba.

UnitedNationsGeneralAssembly,2006.SummaryoftheHigh-levelDialogueonInternationalMigrationandDevelopment,A/61/515,NewYork.

UNU-WIDER,2006. “MobilizingTalent forGlobalDevelopment.”PolicyBriefNo.7,Helsinki.

WorldBank,2006a.World Development Indicators.WashingtonD.C.

_______,2006b.Global Economic Prospects 2007:Managing the Next Wave of Glo-balization.WashingtonD.C.

_______,2006c.Migration and Development.Brief2:RemittancesTrends2006.Development Prospects Group, Migration and Remittances Team, WashingtonDC

WorldTradeOrganization(WTO),2006.TradeStatisticsonline.Geneva.

��

�AfricancountriesstillfacethecriticalchallengeofraisingtherateofGDPgrowthandsustaininghighgrowthratesoveranextendedperiodinordertoaccelerateprogresstowardsmeetingtheMillenniumDevelopmentGoals(MDGs).Whilegrowthhasrecoveredoverthepastfewyears,veryfewcountrieshaveachievedandmaintainedthegrowthratesnecessarytoreducepoverty.Africastilltailsbehindotherregionsinmostmeasuresofhumandevelopment.ThecontinentisplaguedbyshocksfromthevagariesofinternationalmarketsandclimaticchangesaswellastheexpansionoftheHIV/AIDSpandemic.Toimprovethesituation,itisclearthatAfricancountriesneedtobecomemoreinnovativeintermsofresourcemobilizationandinthedesignofpro-growthandpro-poorpoliciestotackletheproblemsofmassunemployment,persistentpoverty,andpervasiveinequality.Suchinnovativepoliciesarecriticalforsustainingthecurrentgrowthmomentumonthecontinent.

Thischapterprovidesasurveyofrecentgrowthperformancebothatthecontinentalandsubregionallevel.Itdiscussesdevelopmentsatthesectorallevelandprogressandchallengesinhumandevelopment,closingwithabriefexpositionoftheprospectsfor2007.

2.1 Growth performance Thissectionexaminesrecenteconomicperformanceatthecontinentalandsubre-gionallevels.Itdiscussesdisparitiesingrowthperformanceandthefactorsbehindtheobserveddisparitiesacrosscountriesandsubregions.Theanalysispaysparticularattentiontostructuralfactorssuchasendowmentinnaturalresources,theroleofpoliciesandinstitutionsaswellasnon-policydriversofgrowth,includingexogenousfactorssuchasnaturalcalamities,geography,andcivilconflicts.Thediscussionhigh-lightskeyconstraintstogrowthinAfricaandstrategiestoaddresstheseconstraints.

African economies continue to sustain the growth momentum

Africaneconomiescontinuedtosustainthegrowthmomentumofpreviousyears,recordinganoverallrealGDPgrowthrateof5.7percentin2006comparedto5.3

Recent Economic Performance in Africa and Prospects for 2007


percent in2005and5.2percent in2004(figure2.1).For the secondconsecu-tiveyear,Africa’sgrowthrateremainshigher thanthatofLatinAmerica(4.8percent)butlowerthanthatofdevelopingAsia(8.7percent).Asmanyas28coun-triesrecordedimprovementsingrowthin2006relativeto2005.Onlyonecountry–Zimbabwe-recordedanegativegrowthratein2006.

Africa’s growth performance in 2006, as in previous years, was underpinned byimprovement in macroeconomic management in many countries, and by strongglobaldemandforkeyAfricanexportcommodities,resultinginhighexportprices,especiallyforcrudeoil,metalsandminerals(seechapter1).Thisexplainstheveryhighgrowthratesrecordedbyoil-richcountries(seefigure2.3).

Figure �.�Real GDP growth rate in Africa, 2004-2006 (per cent)

Source: EIU, January 2007.

However,formostAfricancountries,realgrowthratesremainlowrelativetotheirdevelopmentgoals.From1998to2006,25percentofAfricancoun-tries achieveda realGDPgrowth rateof less than3per centper annum.OnlyfivecountriesachievedanaveragerealGDPgrowthrateof7percentormoreduringthisperiod(table2.1).Atthispace,fewcountriesareposi-tionedtoachievetheMDGsby2015.Hence,thecontinentfacesthechal-lengeofincreasinggrowthratesandsustainingthesehighgrowthratesoveranextendedperiod.Besidessustainingreformstomaintainmacroeconomicstability and further improve thedomestic investment climate topromoteprivatesectoractivity,amorestrategicapproachtogrowthpolicyisneeded,toeffectivelyaddressthebindingconstraintstogrowth.

28 countries recorded

improvements in growth in 2006 relative to 2005

��Recent Economic Performance in Africa and Prospects for 2007

Table �.�Summary of growth performance 1998-2006

GDP growth rate Number of countries Share of total (%)

Less than 3% 13 25.0

Between 3% and 5% 25 48.1

Greater than 5% and less than 7% 9 17.3

7% or more 5 9.6

Total* 52 100.0

Source: EIU, January 2007.* Note: Excluding Somalia due to lack of data.

Subregional growth performance varies substantially

Growthperformanceexhibitssubstantialdisparitiesacrossthefivesubregions(seefigure2.2).1NorthAfricarecordedthehighestaccelerationinGDPgrowth,from5.2percentin2005to6.4percentin2006,followedbySouthernAfrica,from5.6to5.9.TherewasanotabledecelerationingrowthmomentuminWestAfrica,from5.4percentin2005to4.2percentin2006.Heavydependenceonprimarycom-moditiesremainsacommonfeatureofproduction,exportsandgrowthinallsubre-gions.Thisexposesthecontinenttoexternalshocksandmakeseconomicdiversifica-tionatoppriorityforgrowthpoliciesonthecontinent.

Strongergrowthperformance inNorthAfricawasmainlytheresultofhigheroilprices, especially forAlgeria,Libya,Sudan, andMauritania.Mauritania achievedthehighestincreaseinGDPgrowthrate(from5.4percentin2005to14.1percentin2006)owingtothestartofcommercialexploitationofcrudeoilin2006.Alsosteadygrowth in secondaryand tertiary sectors (especially tourism)continued tohelpeconomicperformanceinNorthAfrica.Adequatemanagementofoilrevenueisneededforthesubregiontosustainthegrowthmomentum.

GrowthinSouthernAfricaimprovedin2006largelybecauseofeconomicrecoveryinMalawiandLesothoandsustainedgoodperformanceinmostothercountriesofthesubregion.WithincreasedpublicspendingandhighFDIflows,SouthAfricamaintainedthesamegrowthrateof2005through2006althoughprivateconsump-tiondeclinedduetohigheroilprices.Notwithstandingtheslowdowninoilproduc-tion,AngolaremainsthefastestgrowingeconomyinSouthernAfrica(17.6percent)followedbyMozambique(7.9percent),Malawi(6.9percent)andZambia(6percent).Zimbabwe,thoughstillonthenegativeside(-4.4percentin2006from–7.1percentin2005),andMalawirecordedthelargestimprovementsingrowth,thankstofavourableweatherconditionsandcommoditymarkets,althoughrecoveryfromthe2005droughtisstillincomplete.GrowthinMauritiusalsoimprovedconsider-ablydespitestiffcompetitionfromAsiainthetextilemarket,thankstoincreasedinvestmentandnotablegrowthintheservicesector.GrowthinLesothopickedupin2006asaresultofincreasedinvestmentinmanufacturingandmining,resulting

1 SubregionalgrowthratesarecalculatedusingtheGDPofindividualcountriesasweights.

The continent faces the

challenge of increasing

growth rates and sustaining these

high growth rates over an extended

period


inhighertextileanddiamondexports.Swazilandcontinuedtorecordalowgrowthrate(1.2percent),owingtodroughtandadeclineinthetextileindustry.

GrowthinCentralAfricawasunderpinnedbyhigheroilprices–RepublicofCongo(7.5percent),EquatorialGuinea(5.4percent),Cameroon(3.8percent)andChad(1.0 per cent). In spite of sustained increases in oil prices, Chad and EquatorialGuineaexperiencedthegreatestdeclineinGDPgrowthin2006,followedbytheRepublicofCongo,becauseofslowdownincrudeoilproduction.OilproductiondeclinedinChadin2006becauseoftechnicalproblems.Cameroon,CentralAfri-canRepublic,andSãoToméandPríncipeweretheonlythreecountriesinthesub-regionwithhighergrowthratesin2006thanin2005,thankstotheimprovedpricesforsuchagriculturalcommoditiesascoffeeandcocoa(upto2ndQuarterof2006).

In East Africa, weather conditions as well as export commodity prices remainedlargelyfavourabledespitesporadicdroughtintheHornofAfrica.EastAfricawasthebestperformingsubregionin2004and2005butexperiencedaslightdeclineingrowthratein2006.HigheroilpriceswerethemainfactorthatpreventedthesubregionfromachievingahighergrowthrateasallthecountriesofEastAfricaareoil importers.EconomicperformanceremainedrobustinEthiopia(8.5percent),Kenya(5.5percent),Tanzania(5.8percent),andUganda(5.0percent)owingtohigher commodity prices, especially tea and coffee. The Democratic Republic ofCongo(DRC),BurundiandRwandaachievedhighergrowthratesin2006(6.4,3.8,and4.2percent,respectively),thankstogrowthinconstruction,tradeandmanufac-turing,aseconomicactivityisbenefitingfromthegradualrestorationofpeaceintheregion.TheminingsectoralsocontributedsignificantlytogrowthinDRC.

Although improving, economic performance remains low in Comoros (1.2 percent),duetolowrevenuefromvanillaexportsandadeclineinthetourismsector.Eritreaalsorecordedlowgrowth(2percent),owingtolowinvestmentandotheradverseeffectsofborderconflicts.Seychelles recordedanotable improvement ineconomicperformance(from–1.5percentin2005to1.0percentin2006)owingtoagradualrecoveryfromtheadverseeffectsofthetsunamiof2005andthedeclineintourismandtunaexportsintheprevioustwoyears.

WestAfricaexperiencedthegreatestdeclineinGDPgrowthin2006duetoadeclineingrowthinNigeriafrom(6.0percentin2005to4.2percentin2006)asaresultofsocialunrestintheNigerdelta.GrowthremainedlowinCôted’Ivoire(1.2percent)duetopoliticalinstability,whichdisruptedagricultureandindustry.Amongnon-oileconomies,growthinSenegal(4.0percent),thoughstillstrong,sloweddownbecauseofweaker industrialperformanceasaconsequenceofhighoilpricesandfailuretorenewthecountry’sfishingaccordwiththeEU.2Liberiasustaineditsstrongpost-con-flictgrowthrecovery.Gambiaachieved5.3percentgrowthratein2006comparedto

2 FailuretorenewSenegal’saccordwiththeEUonfishexports,whichranfromJuly2002toJune2006,restrictsSenegalesefishexportstoEUandresultsin$US20.2millionlossinannualfinancialpaymentstoSenegal(EIU2006).

Heavy dependence

on primary commodities

remains a common feature of production, exports

and growth in all subregions


Higher oil prices were

the main factor that prevented

East Africa from achieving a higher growth rate as all

the countries are oil importers

5percentin2005thankstogoodrainfallandincreasedtourismactivity.Growthinothercountriesinthesubregionin2006wassimilartothatof2005.

Figure �.�Subregional growth performance in 2004-2006 (per cent)

0

1

2

3

4

5

6

7

8

n2006

n2005

n2004

AfricaCentral AfricaNorth AfricaWest AfricaSouthern AfricaEast Africa

6.4

2004 2005 2006

6.15.8

5.1

5.65.9

4.8

5.4

4.2

5.2 5.2

6.4 6.3

3.6 3.7

5.2 5.3

5.7


Higher but more volatile growth in oil-rich African countries

TherecentoilboomhasattractednewforeigninvestmentsinoilexplorationandproductionandmoreAfricancountries(ChadandMauritania)havejoinedtheclubofnetoil exporters.Oil-exportingAfricancountries as agroupcontributed57.5percentofthecontinent’s5.7percentgrowthratein2006,comparedto53.4percentin2005(figure2.3).Thus,therecentincreaseinoilpriceshasincreasedthedominanceofoilproducers in thecontinent’soverall growth,overshadowing theimprovementsobservedamongnon-oilcountries(from4.6percentin2005to5.2percentin2006).


Figure �.�Real GDP growth in African oil vs. non-oil economies, 2004-2006 (per cent)


Non-oilGDPintheeightoil-exportingSSAcountriesincreasedatahigherratein2006(6.5percent)relativetooilGDP(5.6percent),butitscontributiontooverallGDPgrowthisstillsmall(IMF2006a).This,togetherwiththefactthatmanyoil-exportingAfricancountries(e.g.AngolaandEquatorialGuinea)areaccumulatinglarge,idleforeigncurrencyreserves,isamanifestationoftheneedforthesecountriesto use oil revenues more rapidly to enhance domestic investment and economicdiversification.Efficientmanagementofoilrevenuesforeconomicdiversificationisessentialforoil-exportingAfricaneconomiestoreducetheirvulnerabilitytooilpriceshocks,ensurethatgainsfromoilrevenuearebroadlyshared,andachievesustain-ablegrowth.

Inadditiontoincreasedaidflowsanddebtreduction,improvedeconomicmanage-mentandincreasesinnon-oilcommoditypriceshavemorethanoffsetthenegativeimpactofhighoilpriceson the realGDPofAfricanoil importers.Onaverage,thesecountriesmaintainedapositiveandrisingrealGDPgrowthrateduring2004-2006.Thegrowthimpactofhigheroilpriceswasparticularlymoderatefornon-oiland non-mineral-rich economies, where growth performance improved from 4.1per cent in 2005 to 5.8per cent in 2006 (figure 2.4), thanks todebt relief andincreasedaidflows,improvedagriculturalperformanceandhighagriculturalcom-modityprices.Thegrowthrateinnon-oil,mineral-richAfricancountrieswasvir-tuallyunchangedin2006relativeto2005,asthegainsfromthehigherpricesofmineralsweredampenedbytheeffectsofrisingoilprices.

GiventhatenergyandoilintensityofGDPareexpectedtoincreasewithpercapitaincomeovertime(ESMAP2005),oil-importingAfricancountriesarelikelytoface

Efficient management

of oil revenues for economic

diversification is essential for oil-

exporting African economies


largeincreasesinenergyandoildemandinthefutureastheirincomesrise.Conse-quently,thesecountriesneedtoreducetheirdependenceonoilbymakinguseofalter-nativesourcesofenergy,especiallyhydropower,andbyutilizingcost-effectivetechnol-ogies.However,alternativeenergysourcesareunlikelytohaveamajorroleinenergysupplyintheshortrunsincetheyrequirerelativelylargeinitialcapitaloutlaysandhavealonggestationperiod.Thus,intheshortrun,thesecountriesneedtoadoptstrategiestorationalizetheuseofoilandimprovetheefficiencyoftheirenergysystems.

Figure �.�Growth in mineral-rich countries vs. non-oil, non-mineral-rich countries (per cent)


Oil-importingcountrieswillsuffersevereadverseeffectsifhigheroilpricespersistin themediumterm (seebox2.1).Tominimize the effectsofhighoilpricesoninflationandmacroeconomicstabilityingeneral,governmentsshouldadoptcon-sistentandprudentpolicies,andresistthetemptationtoincreasedomesticborrow-ing tofinanceoil-price-induced increases inbudgetdeficits.Sustainedprudentialmacroeconomicandfinancialpoliciesconsolidatemacroeconomicpolicycredibility,whichiscriticalforoilimporterstoattractmoreexternalcapitalflowstoeasefinan-cialconstraints.Inthemeantime,theinternationaldonorcommunityandinterna-tionalfinancial institutions shouldprovide special support tooil-importing, low-incomeAfricancountriestomitigatetheimpactofhigheroilprices.Inparticular,debt reliefandadditionalnon-debt-generatingexternalfinancingoffiscaldeficitsarecriticallyneeded forassisting theoil-importingcountries to sustaineconomicgrowthandachievetheMDGs.Intheabsenceofsuchsupport,theeffortsofmac-roeconomicreformsoverthelasttwodecadesandtheopportunitiescreatedbytheHIPCInitiativewillbewasted.

Oil importing countries need to

adopt strategies to rationalize the use of oil and improve

the efficiency of their energy

systems


High growers vs. least performers: growth at the top and stagnation at the bottom

Comparingperformancein2006withthatofthepreviouseightyearsshowsstagna-tionatthebottomofthescale(figure2.5).Onlythreecountries(Angola,Mozam-biqueandSudan)inthetoptenperformersin2006wereamongthetoptenper-formersonthebasisofaverageannualgrowthratesduring1998-2005(UNECA2006b).Halfofthetoptenperformersareoilproducers(Angola,Libya,Maurita-nia,RepublicofCongoandSudan).Oftheremainingfivetopperformers,twoaremineral-richcountries(DRCandMozambique)andone(Liberia)isapost-conflictcountry.Highoilandmineralpriceswerethemaingrowthdriversforthebestper-formingoil-andmineral-richcountries.EthiopiacontinuestofeatureonthelistoftopperformersinAfricabecauseofgenerallygoodrainfallandhighexportpricesfor

Box �.�Impact of sustained higher oil prices on growth and progress towards the MDGs in low-income, oil-importing African countries

Sustained higher oil prices will slow down growth and progress towards the MDGs in low-income, oil-importing African countries. Oil-importing African countries are characterized by high oil-intensity of primary energy sources as well as inelastic oil demand. Higher oil prices raise production costs leading to lower output as well as tighter financial constraints. Governments are forced to decrease expenditure on infrastructure and social services in order to finance the higher oil bill. Moreover, higher oil prices fuel domestic inflation, increase fiscal deficits, and worsen the balance-of-payments position as well as the terms of trade. This can undermine economic performance directly as well as indirectly through increased uncertainty.

Although oil-importing African countries have recorded positive overall GDP growth in the past few years, they are experiencing mounting internal and external imbalances. Strong com-modity demand, good macroeconomic management, better agricultural performance, improved political governance in many countries and increased aid flows and debt relief are the key factors that helped them to maintain overall growth momentum. However, as a result of the recent hike in oil prices, the share of fuel imports in the merchandise imports of oil-importing African coun-tries rose significantly, leading to notable increases in the current account deficits. Moreover, oil-importing countries faced sustained, large terms-of-trade losses.

Mounting budget deficits and inflationary pressure in oil-importing African countries dis-proportionately affect the poor because of lower employment prospects and lack of safety nets. Budget constraints may also force governments to introduce user fees for social services and to raise the prices of public utilities such as electricity and water.

The critical challenge for oil-importing African countries is to reduce their dependence on oil by promoting alternative sources of energy. It is particularly critical for these governments to strengthen growth policies, including industrial strategies that promote diversification of pro-duction and exports. The international donor community and international financial institutions should provide special support to oil-importing African countries to mitigate the impact of higher oil prices. In particular, debt relief and additional non-debt-generating external financing are critical to allow these countries to sustain economic growth and accelerate progress towards the MDGs.

Source: UNECA 2006a.

Sustained prudential

macroeconomic and financial

policies consolidate macroeconomic policy credibility


teaandcoffee,thecountry’smainexportcommodities.Strongeconomicperform-anceinMalawi(from1.9in2005to6.9percentin2006)wastheresultofrecoveryinagriculturefromthedroughtof2005.

Fivecountries(Comoros,Côted’Ivoire,Seychelles,SwazilandandZimbabwe)havethelowestgrowthratesover1998-2006.Swaziland’sgrowthperformancehasbeenlowandcontinuouslyweakeningoverthelastfiveyearsduetoincreasingcompetitionandfallingpricesinthetextileexportmarketandthereducedsugarpriceintheEUmarket.Heavilydependentonagriculture,Comoroscontinuedtoexperiencelowgrowthduetolowrevenuefromvanillaexportsandadeclineinthetourismsector,whilepoliticalconflictandinsecuritycontinuetodeterinvestmentandplagueeconomicperform-anceinCôted’Ivoire.EconomicperformanceinZimbabweremainednegativeinthelasteightyearsowingmainlytopoliticaldifficultiesexacerbatedbyrecurrentdroughts.Foreignexchangeconstraintsandtherecentrisesinoilpricesadverselyaffectedinvest-mentandcapacityutilizationinSeychelles,leadingtonearlycompleteeconomicstag-nationinthelasteightyears.

Figure �.�Top 10 and bottom 5 performers in Africa in 2006 (% annual growth)

-5 0 5 10 15 20

Zimbabwe

Seychelles

Swaziland

Comoros

Côte d'Ivoire

Congo DR

Malawi

Congo, R.

Mozambique

Libya

Liberia

Ethiopia

Sudan

Mauritania

Angola

14.1

17.6

7.9

9.6

8.5

8.1

8.1

6.4

7.5

6.9

1.2

1.2

1.2

1

-4.4



Sustainability of macroeconomic balances remains a concern over the medium term

Overall,Africahascontinuedtomaintainapositivefiscalposition,withtheaveragebudgetbalance(excludinggrants)of0.1percentofGDPin2006comparedto0.4percentin2005.Forthe40countriesforwhichcomparabledatawereavailable,there was a slight decrease in the number of countries having budget deficits in2006relativeto2005(from33to30)despitehighergovernmentexpendituresinoil-importingcountriesduetohigheroilprices(table2.2).Significantincreasesinpublicsectorinvestmentresultedinsizeablebudgetdeficitsinsomeoil-exportingcountries–Angola(-5.0percent),Chad(-4.4percent)andEgypt(-7.9percent).

Oil as a key factor in fiscal balance improvement

Sevenofthetencountriesthathadbudgetsurplusesin2006wereoilexporters(Alge-ria,Cameroon,RepublicofCongo,EquatorialGuinea,Gabon,LibyaandSudan).Therefore,oilcontinuestobethekeyfactorbehindthepositivefiscalpositionforAfricaasawhole,whichraisesconcernoverthesustainabilityoffiscalbalanceoverthemediumterm.Officialdevelopmentassistance(ODA)isamajorsourceofbudgetsupportformanynon-oileconomies.ThedependenceofgovernmentbudgetsonoilrevenueandexternalaidconstitutesasourceofvulnerabilityforfiscalbalanceandGDPgrowth.Foroilproducers,fiscalsustainabilitywillrequireeffectivestrategiesforprudentmanagementofoilrevenuesandstrategiestoutilizetheserevenuesforenhancingeconomicdiversification.Non-oilcountriesneedtodesignmechanismsforincreasedmobilizationofrevenuefromdomesticsources.

Table �.�Distribution of fiscal deficits in Africa, 2004 -2006 (number of countries)

2004 2005 2006

Oil producers

Non-oil producers

Oil producers

Non-oil producers

Oil producers

Non-oil producers

Countries with surpluses 6 3 7 6 7 3

Less than 5 % 2 2 1 4 2 3

5 per cent to 10 % 2 1 3 1 0 0

More than 10 % 2 0 3 1 5 0

Countries with deficits 7 24 6 27 6 24

Less than 5 % 5 18 5 15 5 13

5 per cent to 10 % 2 5 1 6 0 9

More than 10 % 0 1 0 0 1 2

Total number of countries 13 27 13 33 13 27

Source: EIU, October 2006.

The dependence of government budgets on oil

revenue and external aid constitutes a source of

vulnerability


Pressure from oil prices threatens price stability

Forthesecondyear,averageconsumerpriceinflationincreasedinAfrica(from8.5percentin2005to9.9percentin2006).Inflationarypressureresultsmainlyfromhigheroil prices, and subsequent increase inproduction costs and loweroutput.Inmostcountries,foodpricesrosesignificantlyduetohighertransportationcosts.While inflationremainedcontainedand lowinmostof the52Africancountrieswith available data, the risk of higher inflation remains a concern should higherpricespersistinthenearfuture.

Despitetheincreaseintheaveragerateofinflation,thesituationhasimproved.In2006,25countriesrecordedinflationratesoflessthan5percent,comparedto21countriesin2005(table2.3).Thenumberofcountrieswithatwo-digitinflationratedroppedfrom17in2005to12in2006.Thenumberofcountriesexperiencingincreasedinflationfellfrom33in2005to24in2006.However,afewcountriesexperienceddrasticincreasesininflation.InZimbabwe,inflationincreasedto1216percentin2006comparedto237.8percentin2005,owingtoinflationaryfinanc-ing of the budget deficit and shortage of food, especially maize. In Guinea, thecountrywiththesecondhighestinflationrateinAfrica,inflationremainedhigh(27percentin2006comparedto31.4percentin2005),duetotheeffectsofhighoilpricesandimportedinflationarisingfromhighimportsofconsumergoods.

Table �.�Distribution of inflation rates in Africa, 2004-2006 (number of countries)

Range 2004 2005 2006

Less than 5 % 30 21 25

Between 5 and 10 % (10% excluded) 6 14 15

Between 10 and 20 % (20% excluded) 13 13 10

20 % and higher 3 4 2

Total number of countries 52 52 52

Source: IMF 2006b.

External balances also driven by developments in the resource sector

For the third consecutive year, Africa achieved a positive and increasing currentaccountsurplus(from2.3percentofGDPin2005to3.6percentin2006–from$18.4billionto$33.1billion),thankstohighercommodityexportrevenue,espe-ciallyfromoil.Africa’saveragebalanceofpaymentspositionlargelyreflectsdevel-opmentsinresource-richcountries.WiththeexceptionofSudan,alloil-exportingcountrieshadcurrentaccountsurpluses,whileonlytwonon-oileconomies(MoroccoandNamibia)hadcurrentaccountsurpluses.Namibiaisamineral-richcountryandMoroccohasamorediversifiedexportsectoraswellassignificantmineralwealth.

Despite the increase in the

average rate of inflation, the

situation has improved


Also,workers’remittancesandtourismreceiptsareimportantinexplainingcurrentaccountsurplusesinMoroccoinrecentyears(BankAl-Maghrib2005).Eighteenofthe39non-oileconomieswithadequatedataexperienceddeteriorationinthecur-rentaccountpositionin2006,upfrom11economiesin2005.

Oil-exporting countries have recorded increasing trade surpluses, while their oil-importingcounterpartsexperienceddeepeningtradedeficits(figure2.6).Thetradesurplusforoilexportersasagroupmorethandoubledfrom2002to2006(from16percentofGDPto37percent)whileoilimportersasagroupsawtheirtradedeficitdeterioratefrom-4percentofGDPto-11percentofGDP.Deteriorationofthetradedeficitwasevenmorepronouncedforland-lockedcountries.Thecontinuingriseinoilpricesraisesseriousconcernsaboutcurrentaccountsustainabilityamongoilimportersandtheassociatedeffectsonoveralleconomicperformanceandmac-roeconomicstability.

Figure �.�Trade balance in Africa by category (% of GDP), 1997-2006

-15

-10

-5

0

5

10

15

20

25

30

35

40

200620052004200320021997-2001

Oil-importingOil-exportingSSA Landlocked

Source: IMF 2006a.

Exchange rates and the impact of commodity booms

In2006,35AfricancurrenciesappreciatedagainsttheUSdollar,althoughtheratesofappreciationremainedmoderate(lessthan5percent).TheZambiankwachacon-tinuedtorecordthehighestrateofappreciation(23percent)forthesecondyearinarowbecauseofthehighcopperprice,andgrowinginvestorconfidence,especiallyafterthecountry’squalificationfordebtrelief(UNECA2006b).Largevolumesof

The continuing rise in oil prices

raises serious concerns about current account

sustainability among oil importers


speculativecapitalinflowstargetinggovernmentsecuritieshavealsoplayedasignifi-cantroleintheappreciationoftheZambiankwacha.

ExchangerateappreciationwasalsonotablefortheSudanesedinar(12.5percent)andtheAngolankwanza(8.5percent)owingtohigheroilrevenueandFDIflows.Ontheotherside,theZimbabweandollarhadthelargestdepreciation(87percent)followedbytheMalawiankwacha(13percent).ZimbabweandMalawiexperiencedadeclineinexportsandincreasedfoodimportsbecauseofslowrecoveryfromthedroughtof2005.

Whileexchangerateshavebeenstableformostcountries,highcommoditydepend-ence exposes African economies to terms-of-trade fluctuations and to extremeexchangeratevolatility.ThemajorityofAfricancountiesaredependentonoilandmineralsandonalimitedrangeofagriculturalcommoditiessuchastea,coffeeandcocoa.Thus,fluctuationsincommoditymarketshaveasignificantimpactontheexchangeratesinthesecountries.

ThecaseofSouthAfricaprovidesaclearillustrationofthecloserelationshipbetweencommodity(gold)priceandtherealeffectiveexchangerate(REER)(figure2.7).Indeed,evidenceconfirmsthatvariationsinthegoldpriceareamajordeterminantofchangesintheREERoftherand(Stokke2006).Theeffectsofgoldpricefluctua-tionhavecompoundedtheeffectsofotherfactors,namelytradepolicy,short-andlong-termcapitalflows,andproductivitygrowth(Aronetal.2000).

Figure �.�South Africa’s REER and the gold price, 1980-2006

Source: IMF 2006b.

High commodity

dependence exposes African

economies to terms-of-trade

fluctuations and to extreme exchange

rate volatility


ManyAfricancountrieshaveaccumulatedsubstantialforeigncurrencyreservesinrecentyears,mostlyfromhigheroilrevenuesandaidinflows.3Forexample,Algeriahad total reserves, excludinggold,of$66.1billion (the equivalentof32monthsofimports)in2006comparedto$56.3billion(34.5monthsofimports)in2005,whileMoroccohad$17.7billion(10.1monthsofimports)in2006and$16.2bil-lion(10.3monthsofimports)in2005.

Accumulationofreservesismotivatedbythedesiretohedgeagainstexternalshocks.However, excessive foreign exchange reserve hoarding takes away resources thatwouldotherwisebeusedtoboostdomesticeconomicactivity.Abetterapproachistoadoptacomprehensivestrategyforprudentialregulationandcapitalcontrolsthatcanminimizeexchangeriskswhileallowingthecountrytobenefitfromincreasedexport revenue and FDI inflows. The types of controls to implement should becountry-specific(Pollinetal.2006).Interventionswillhavetorelyonasetofindi-catorsforearlywarningsignalsthatmonitormovementsinforeignexchange,theexchangerate,thestructureofexternaldebt,andotherfinancialriskindicators.TheultimategoalistoallowAfricancountriestoutilizetheseresourcestoincreasepri-vateandpublicinvestmentsoastoaccelerategrowth.

External debt remains high and private capital flows insufficient

ThehopethatAfrica’sexternaldebtwouldbesignificantlyreducedundertheHIPCInitiative and that economic reforms would stimulate private capital inflows hasbeenveryslowtomaterialize.Africa’stotalexternaldebtstockstoodat$244billionin2006comparedwith$289billionin2005(IMF2006b).AlthoughthedebtstockdeclinedconsiderablyrelativetoGDP(from35.9percentin2005to26.2percentin2006),totaldebtserviceobligationsremainedalmostunchanged(4.2percentofGDPin2005and4.1percentin2006)becauseofhigherinterestrates.Thedebtburdenseriouslyconstrainsspendingonpublic investmentandultimatelyretardsgrowthandemploymentgeneration.4

Thecontinenthasbenefited fromsubstantial inflowsof externalfinancing in theformofODA(includingdebtrelief ),whichshouldboosteconomicgrowthinthecomingyears. TheMDRIannouncedat theG-8summit inGleneagles in2005providedmuchneeded relief for13SSA countries.However, it is clear that thisdebt-reliefpackageisnotenoughandthatmoreexternalfundingwillbeneededtohelpAfricancountries increasegrowthratesandachievemeaningfulreductioninpoverty.

3 For the49countries forwhichdatawereavailable, total reserves,excludinggold,amountedto$247.7billionin2006,upfrom$219.7billionin2005and21countries(10oilexportersand11oilimporters)had$onebillionormoreofreservesin2005.The13oil-exportingcountriesaccountedfor73percentofAfrica’sreservesin2005and2006.

4 Seesection3.2inchapter3forthediscussiononhowtoaddressthedebtproblemandhowtomobilizemoreresourcesfordevelopment.AlsoseeUNECA(2006b).

Many African countries

have accumulated substantial foreign currency reserves

in recent years, mostly from higher

oil revenues and aid inflows


Increasedexternalflowsareparticularlyimportantinviewofthefactthatbothgrossdomesticsavings(GDS)andgrossdomestic investment(GDI)rates inAfricaarestilllow(table2.4).Infacttheywerelowerin1998-2006(19.7and20.2percentofGDP,respectively)thaninthe1974-1985pre-reformera,(24.5and25.4percentofGDP,respectively).Mostimportantly,actualGDIremainsfarbelowthelevel(34.2percentofGDP)considerednecessaryforAfricatohalfpovertyby2015(UNECA1999).ThelowlevelandpoorqualityofinvestmentcontributetotheinabilityofmostAfricancountriestoachieveandsustainhighgrowthratesoverthemediumterm(BerthelemyandSoderling2001).

Table �.�External flows, domestic savings and investment, 1998-2006

Indicator Oil economies

Non-oil economies

Africa Source

ODA ($US billion, average annual)

4.5 14.4 18.9 WDI 2006

FDI ($US billion) 7.3 5.9 14.0 UNCTAD World Investment Report 2006

Remittances ($US billion) 7.6 5.2 12.8 WDI 2006

Other private flows -6.1 IMF World Economic Out-look database

Gross domestic investment (% of GDP)

22.1 a 18.4 b 20.2 c WDI 2006

Gross domestic savings (% of GDP)

24.2 d 15.1 e 19.7 f WDI 2006

Notes: FDI is for 1998-2005; other private flows are for 1998-2006; for the remaining indicators, the data are for 1998-2004. Owing to data unavailability, the following countries have been excluded: (a) Equatorial Guinea and Libya; (b) Djibouti, Lesotho, Liberia and Somalia; (c) Djibouti, Equatorial Guinea, Lesotho, Liberia, Libya and Somalia; (d) Equatorial Guinea, and Libya; (e) Djibouti, Liberia, and Somalia; (f) Djibouti, Equatorial Guinea, Liberia, Libya and Somalia.

Africa needs a new approach to growth policies

Morethananytimebefore,itisnowunderstoodthatthegeneralandone-size-fits-allgrowthpoliciesembedded inmacroeconomic stabilizationandsecond-genera-tionreformprogrammesareamongthekeyreasonsforAfrica’sslowpaceinachiev-ingandsustaininghighgrowth(Rodrik2004;Gottschalk2005).5Thesereformsarefoundedonthepremisethatmacroeconomicstability,ifachieved,willstimulategrowth.Afterdecadesofthestabilizationexperiment,itisclearthatthispremiseisnaiveatbest.

Moreover, this reform framework is too ambitious and cannot help developingcountriestodesigngrowthpoliciesthatarespecificandfeasiblegiventhescarcityof resources and the capacity constraints (McCord et al. 2005 and Zagha et al.2006).Accordingtotheseprogrammes,toachievemacroeconomicstabilityandsus-

5 PovertyReductionStrategyPapers(PRSPs)areforthemostpartbasedonageneralreformagendawithnospecificandtargetedgrowthstrategies.ForareviewofPRSPs,seeGottschalk(2005).

Low level and poor quality

of investment contribute to the inability of most

African countries to achieve and sustain

high growth rates


tainablegrowth,developingcountriesneed,amongotherthings,topromotefasterhumanandinstitutionaldevelopment,accelerateprivatization,developtheprivatesector, promote exports to enhance economic diversification, lower transactioncosts, increasecompetitiveness,managenatural resource revenues forgrowthandincreasemobilizationofdomesticandexternalresourcesfordevelopmentfinancing(UNECA1999).

Asuccessfulgrowthpolicyneedstohavespecificobjectivesandhastobebasedonanalysesthatidentifykeycountry-specificconstraintsandpriorities,andcanthere-forevaryacrosscountries(Hausmannetal.2006).Inadditiontogeneralobjectives,as those embodied in the reformagenda, growthpolicies inhigh-growingdevel-opingcountriesandnewlyindustrializedcountries,forexampleChina,IndiaandVietnam,arecharacterizedbyspecificityandpragmatism.6

Moreover,successfulgrowthstrategiesrequireboldpolicyexperimentationinboththefiscalandmonetaryareaswithinadynamicpolicyframeworkthatissensitivetocountry-specificgrowthpotentials,structuralconstraints,anddevelopmentgoals(Hausmannetal.2006).Failuretoidentifythesourcesofgrowthpotentialandthebinding constraints to growth result in ineffective growth strategies and inabilitytoachievehighgrowtheven in thepresenceofabundantresources, includingoilrevenuesandaidflows.

Whilesustainingcommitmenttopreservemacroeconomicstability,Africancoun-triesneedtotailortheirfiscalandmonetarypoliciestopromoteinvestment,employ-mentgeneration,andgrowth(Pollinetal.2006;Gottschalk2005).Forexample,intheireffortstoensuremacroeconomicstability,governmentsneedtodefineamoreflexiblerangeforthebudgetdeficitthatcanbeadjustedtostimulategrowthwith-outcreatingunsustainabledeficits(box2.2).Althoughthisrangemayvaryacrosscountries, evidence suggests that adeficitof2-3per centofGDP is sustainable,andgivesthegovernmentenoughroomtoexpandpublicinvestmentasameansofboostinggrowth(Pollinetal.2006).Moreover,whilefosteringpricestability,mon-etarypolicyneedstobebroadened(i.e.beyondinflationtargeting)tocontributetothenationalagendaofachievingandsustaininghighergrowth.Thisagendawillbeunderminedbytightandrigidtargets formonetaryandfiscalpolicy,asobservedinmanycountriesandregions,andasisthecaseofcountriesintheWestAfricanEconomicandMonetaryUnion(WAEMU)(Gottschalk2005).

6 Hausmannetal.(2004),citedbyRodrik(2004).

Growth policies in high-growing

developing countries are

characterized by specificity and

pragmatism


2.2 Sectoral performanceAfricaneconomiesareexperiencingastructuralshiftwherebytheservicesectorisbecominganimportantdriverofgrowth.In2004,theservicesectorcontributed49percentofGDPgrowthcomparedto36percentforindustry(includingminingandquarrying)and15percentforagriculture.In2004,allthreesectorscontinuedtogrow,albeitatrelativelylowrates.Theindustrialsectorhadthehighestgrowthrateat9.05percent,althoughgrowthinthemanufacturingsectorfellbyalmost3.8percentcomparedto2003.Developmentswithineachsectorandforeachsubre-gionarediscussedinmoredetailbelow.

The agriculture sector

ThecontributionofagriculturetoGDPrangesfromahighofmorethan33percentinEastAfricatolessthan8percentforSouthernAfrica.Itemployssome70percentoftheworkforceandgeneratesonaverage30percentofAfrica’sGDP.Theoverallcontributionofagriculture toGDPdeclined in2004dueto the lowper-formanceofthissectorintheNorthandWestAfricansubregions(table2.5).

Box �.� Accelerating growth through policy experimentation

While committed to maintaining long-term fiscal deficit within a certain limit, a government can increase spending on public investment/infrastructure, income transfers and social support, and employment subsidies to businesses to promote accelerated employment growth without exceeding the deficit limit. For example, a recent study suggests that South Africa can increase spending in these areas by up to R30 billion per annum without exceeding the deficit limit of 3 per cent of GDP (Pollin et al. 2006). A one per cent increase in the deficit-GDP ratio (from 2 per cent to 3 per cent, will finance about 47 per cent (R14 billion) of the increase in government expenditure. The rest can be financed through increases in personal, corporate, and the value-added taxes (R6 billion) and new revenue sources: (a) extending the Uncertified Securities Tax to cover bond trading, in addition to secondary trading of stocks; (b) enacting a mineral and petroleum royalty bill; and (c) the increase in incomes and decline in poverty that will result through the employment-targeted growth programme itself.

Meanwhile, persistent high real interest rates despite falling inflation rates have constituted a constraint to private economic activity. It has been estimated that a one percentage point decline in the prime lending rate, other things remaining the same, would lead to a 0.15 per cent rise in real GDP growth, a modest increase in inflation of 0.2 per cent and also a modest exchange rate depreciation of 0.6 per cent. Thus, easing monetary policy would boost growth with minimal and easily manageable costs in terms of inflation and exchange rate changes.

Source: Pollin et al. 2006.

African countries need to

tailor their fiscal and monetary

policies to promote investment,

employment generation, and

growth


Table �.�Agricultural sector performance by subregion

Share in GDP

2000 2001 2002 2003 2004

North Africa 15.3 16.0 15.8 16.3 15.1

West Africa 28.4 29.6 29.7 27.1 21.0

Central Africa 25.7 26.4 26.7 27.2 27.3

East Africa 35.9 35.0 32.6 32.4 33.0

Southern Africa 7.6 7.8 8.3 8.0 7.8

Source: World Bank 2006.

Africaisconsideredanetfood-importingregion,exceptforsomecountriessuchasSouthAfrica.Thelargestshareofimportedproductsconsistsoffoodproducts(cere-als,livestock,dairyproducts,andtoalesserextent,fruitsandvegetables).However,exportsofagriculturalproductsrepresentanimportantsourceofforeignexchangeearnings for severalAfrican countries.The share of agricultural products in totalmerchandiseexportsrangesfromahighofmorethan80percentforSudanandBurunditoalowoflessthan1percentforGabonandEquatorialGuinea.TheirleadingexportdestinationistheEUandthemostimportantcommoditiesexportedarefishandcrustaceans,fruitsandnuts,cotton,andvegetables.

Table 2.6 shows that commodity production in Africa registered a 1.7 per centincreasein2004andagrowthrateof3.0percentover1990-2004.Performanceforthemainagriculturalproductsexhibitshighvariationacrosssubregions(table2.6).Theyear2004was aparticularlygoodone formany important exportable com-moditiessuchascocoabeans,coffeeandcottonseeds.Insomecountries,productioncontinuestobeinfluencedbydroughtconditions.InNorthAfrica,droughtshaveadverselyaffectedtheproductionofstrategiccropssuchaswheat,oliveandcitrus.SouthernAfricancountriesalsocontinuetosufferfromperiodicdroughts,especiallySwazilandandZambia.

Africa is a net food-

importing region


Table �.�Commodities production growth rate, 1990-2004 (per cent)

Total Africa North Africa Central Africa East Africa West Africa Southern Africa

1990-2004 average

2004 1990-2004 average

2004 1990-2004 average

2004 1990-2004 average

2004 1990-2004 average

2004 1990-2004 average

2004

Commodities 3.0 1.7 3.8 1.6 2.2 -0.5 2.4 0.9 4.0 1.8 2.0 3.0

Crops 2.8 0.0 4.2 0.2 2.8 9.4 4.7 1.8 2.7 -1.7 2.1 -0.7

Oil seeds 2.8 -0.4 5.9 -12.4 2.2 3.5 1.8 3.8 2.9 0.7 3.5 6.6

Fruits and Vegetables

3.5 4.0 3.9 7.0 2.1 -5.3 1.4 0.8 5.2 3.7 3.0 9.1

Animals products

2.6 -3.0 3.8 -3.5 1.4 1.4 3.8 -2.6 2.0 -4.1 0.9 -0.6

Others 2.8 13.3 1.9 38.4 2.0 18.6 3.2 7.3 3.8 9.3 3.4 31.0

Source: FAOSTAT 2006.

The industrial sector

Theindustrialsectorrepresented35.9percentoftheAfricanGDPin2005,aslightimprovementovertheperiod2000-2004(WorldBank2006).ThisrelativelyhighcontributionoftheindustrialsectortoGDPisexplainedbytheimportanceofthenon-manufacturing industries (miningandquarrying).Themanufacturing sectoraccountedforonly12.1percentofGDP,downfromanaverageof14percentover2000-2004.TheunderdevelopmentofthemanufacturingsectorlargelyexplainsthelimitedcontributionofindustrytoGDPgrowth.

TheAfricanlabourforcewasestimatedat380millionin2005,withabout20percentintheindustrialsector.Labourstatisticsindicatethattheindustrialworkforcedidnotincreasesignificantlyduringthepastfewyearsdespiteasteadygrowthinindustrialproduction.Thisisattributedtothegrowingdominanceofcapital-inten-siveindustriesasmostofnewinvestmentsinindustrialsectorinAfricancountriesareabsorbedbytheminingandenergysector.Furthermore,labour-intensiveindus-triesinAfrica,suchastextilesandclothing,arenolongercompetitiveonbothfor-eignanddomesticmarketsaftertheadhesionofChinatoWTO.

Countrieswiththemostdiversifiedeconomiesonthecontinent(Egypt,Morocco,SouthAfricaandTunisia)continuetofocusontraditionalindustries,suchasfoodprocessingandtextiles,exceptforSouthAfrica,whichismoreindustrializedthananyotherAfrican country.Therehas been recently a gradual shift towardsmorecapital-intensiveindustriesinTunisia,suchaselectricalandelectronicsindustries,whilethetextilesandclothingsectorisexperiencingcontinueddeclineinitsimpor-tanceinallAfricaneconomies.Intheoil-producingcountries,therehasalsobeengradualproductiondevelopmentinintermediateandoil-basedindustries,particu-larlychemicals,petrochemicals,fertilizers,plastics,andenergy-intensiveindustries.

The underdevelopment

of the manufacturing sector largely

explains the limited contribution of

industry to GDP growth


Overall,Africanexportsofindustrialgoodsarestilldominatedbyminingandcrudeoil.Topromoteanddiversifytheexportofindustrialgoods,Africancountrieshavetoseekparticipationinregionalandinternationaltradeagreements.However,com-pliancewiththecommitmentsandobligationsoftheseagreementshasbeenslow.

The energy sector

In 2005, Africa’s production of crude oil averaged 8856 million barrels per day,whichwas6.1percenthigherthanthe2004average.Algeria,Angola,Libya,andNigeria are themain oil producers,with a share averaging75per cent in 2005.OtheroilproducersareCameroon,Chad,Congo,Côted’Ivoire,Egypt,EquatorialGuinea,Gabon,Mauritania,Sudan,andTunisia.

As far asnaturalgas is concerned,Africa’sproduction in2005averaged171,735millionstandardcubicmetres,whichrepresentedanincreaseof13.1percentfrom2004.ThisraisedAfrica’sshareinworldgasproductionfrom5.5percentin2004to6.1percentin2005(tableA2.1inAppendix).Algeriaaccountedfor50percentofAfrica’stotalproductionofgas,followedbyEgypt,Libya,andNigeria,togetheraccountingforabout44percent in2005.Theincrease inAfricanproductionofnaturalgasisexplainedbytwomainfactors.Thefirstisrelatedtotheaccelerationofthelevelofsubstitutionofcrudeoilbynaturalgasinthegenerationofelectricityaroundtheworld,whichincreasesthelevelofglobaldemandfornaturalgas.Thesecondreasonisthehighlevelof internationalpricesforbothoilandgas,whichincreasedthelevelofextractionofgasonthecontinent.

Attheendof2005,Africanprovenreservesofcrudeoilrepresented10.2percentoftheworld’stotal,whilereservesofnaturalgasinAfricaaccountedforonly7.9percentof theworld’s total (tableA2.2 in theAppendix).Algeria,Libya, andNigerialeadintermsofprovenreserveswithashareof76percentoftotalAfricanreserves,followedbyAngola,Egypt,GabonandSudanwithacombinedshareof18.4percent.

Africacontinuestobeanetexporterofcrudeandrefinedoilproducts.In2005,exportsofcrudeoilreached6477.6millionbarrelsperday,whichrepresentedanincreaseof1.8percent from2004.However,Africa’s share in theglobalexportsofcrudeoildeclinedslightlyfrom14.9percentin2004to14.5percentin2005.Forrefinedproducts,exportsgrewslightlyby0.8percentcomparedto2004.Thisgrowthisobservedafterthreesuccessiveyearsofdeclineinexportsofrefinedprod-uctsasaresultofthehighergrowthofdomesticdemandfortheseproductsthanforrefiningcapacity.Infact,in2005,Africanconsumptionofrefinedproductsgrewby2.8percentcomparedto2004whiletherefiningcapacitygrewbyonly0.5percentduringthesameperiod.Fivecountriesdominatethedemandforrefinedproducts:Algeria,Egypt,Nigeria,Libya,andTunisia,accountingforalmost65percentofthetotalAfricanconsumptionofrefinedproductsin2005.Overall,exportsofbothcrudeandrefinedoilproductsfromtheregiongrewby1.7percentrelativeto2004,

Africa continues to be a net

exporter of crude and refined oil

products


comparedto4.6percentfortheworld,whichshowsacontinent-widestructuralbottleneckinrefiningcapacity.

The services sector

TheshareoftheservicessectorinAfrica’sGDPin2004amountedto49.0percent,aslightdeclineonthepreviousyear(table2.7).Thetwopotentialdriversofgrowthintheservicesectoraretourismandfinancialservices,andthesecomponentsarediscussedbelow.

Table �.�Service sector performance in main African subregions

Share in GDP

2000 2001 2002 2003 2004

North Africa 46.5 47.5 47.2 46.4 45.7

West Africa 36.8 33.1 35.3 34.3 35.5

Central Africa 34.7 36.3 39.3 35.6 37.1

East Africa 47.8 48.7 50.4 50.8 50.2

South Africa 59.4 59.2 58.0 59.5 59.5


The financial sector

Whilethefinancialsectorisgenerallyconsideredanimportantfactorforgrowth,itsperformanceinthecaseofAfricancountrieshasbeenlessthansatisfactory.Financialsystemsremainlargelyunderdevelopedbothintermsofthesizeandrangeoffinan-cialinstrumentsandservicesoffered.Mostcountriesstilldonothaveafunctioningcapitalmarket.Evenwherecapitalmarketsexist,theyareveryshallowandilliquid(Ndikumana 2003). Except for South Africa, African capital markets are mainlylimited toequitymarketswithanunderdevelopedbondmarket andvirtuallynofuturesmarkets.

Despite the series of financial sector reforms that the countries have undertakensincethe1980s,financialsystemsstillexhibitsubstantialdegreesofinefficienciesintheirfunctionsofsavingsmobilizationandallocationsofresourcesintoproductiveactivities(SenbetandOtchere2006).Itisworthnotingthatfinancialsectorreformshaveresultedinagradualmovetowardsmarket-basedinterestratedeterminationandcurtailmentofthegovernment’spresenceinthefinancialsectorthroughpriva-tizationofgovernment-ownedbanks.Whilethesearewelcomedevelopments,therearemanyimportantchallengesthatAfricancountriesneedtoaddresstomakethefinancialsectorarealengineofgrowthandemploymentcreation.

The two drivers of

growth in the service sector

are tourism and financial services


One of the key manifestations of the inefficiency of financial systems in Afri-can countries is the high interest rate spread, which is a symptom of lack ofcompetition andof inefficientmanagement (resulting inhighoperating costs)inthebankingsector.Infact,contrarytoexpectations,interestratespreadshaveincreased in the post-reform era (UNECA 2006b). Another important weak-nessoffinancial systems inAfrica is thatcredit allocation tends tobeconcen-tratedintoshort-termandspeculativeactivities.Thisispartlyduetothelackofstable long-termfinancebutalso to thehigh riskaversionexhibitedbybanks.Theshortageoflong-termlendingconstitutesanimportantconstrainttoprivateinvestmentexpansion.

It isclearthatAfricancountriesneedtofindwaysof increasingaccesstofinanceespeciallyforthepurposeoflong-terminvestmentforacceleratedgrowth.Thiswillrequire achievement of higher levels of domestic savings mobilization and betterpooling of resources into long-term instruments. The development of a vibrantbondmarketandcreationandconsolidationoflong-termfinancemechanismssuchaspensionfundsconstitutekeyelementsofanationalstrategytodeepenfinancialsystemsinordertoboostdomesticinvestmentandaccelerategrowth.

The tourism sector

Manydevelopingcountriesnowregardtourismasanimportantandintegralpartoftheireconomicdevelopmentstrategies.Itisestimatedthat808milliontouriststraveledworld-widein2004andgeneratedabout$682billion.Africareceived41.3milliontouristarrivals,whichrepresentonly5.1percentofglobaltouristtrips.Intermsof receipts,Africa received3.6percent (or$25.2billion)of the$682bil-lionworldtouristreceipts.WithinAfrica,theNorthAfricasubregionregisteredthehighestmarketshareoftourismactivityonthecontinentin2004(38.2percent),followedindescendingorderbySouthernAfrica(27.5percent),EastAfrica(22.7percent),WestAfrica(9.4percent)andCentralAfrica(2.2percent)(seetablesA2.3,A2.4andA2.5).

In2006,thetopfourcountriesintermsoftourismreceiptsareSouthAfrica($6.3billion),Egypt ($6.1billion),Morocco ($3.9billion), andTunisia ($1.9billion).The seven major destination countries with over a million arrivals in 2004 wereEgypt(7.7million),SouthAfrica(6.8million),Tunisia(5.9million),Morocco(5.4million),Zimbabwe(1.8million),Algeria(1.2million)andKenya(1.1million).

Despitetourism’sgrowingimportanceasasourceofforeignexchangeearningsforAfrican countries, the industry remains underdeveloped mostly because of poortourism infrastructure (or weak capacity for accommodation), inadequate infor-mation andmarketing (measuredby internetuse) andhighhealth risks (such asmalaria).PoliticalandsocialinstabilityalsoconstitutemajordeterrentstotourisminsomeAfricancountries.Inaddition,theinsufficiencyofairtransportbetweenAfricaandtherestoftheworldandbetweenAfricancountriesthemselvescontinues

One of the key manifestations of the inefficiency

of financial systems in African countries is the high interest

rate spread


tobeacrucialconstraint to tourism.Anotherkeychallenge faced is thenegativeimageofAfricaportrayedbythemedia,oftenonthebasisofexaggeratedfactsandplainignorance.

2.3 Social developmentWhilegrowthhasrecoveredonthecontinent,thegainsintermsofsocialdevelop-mentandpovertyreductionarestilllimited.Thissub-sectionreviewstheevidenceon social development through the lenses of the MDGs. Following a discussionofprogress and challenges for the various goals, the sub-sectionprovides amoredetaileddiscussionofthechallengesposedbyHIV/AIDS.MoredetailsonprogresstowardstheMDGsinAfrica isprovidedinvariousECAdocuments, includingaforthcoming report (UNECA 2007), as well as reports by other United Nationspublications(e.g.UNDPandUNICEF2002).

Overall assessment of the MDGs

Ascanbeseenintable2.8,progresstowardstheMDGsisslow;thus,seriouschal-lengesremaininallmajorareasofsocialdevelopment.Nevertheless,onadisaggre-gatedlevel,somecountrieshavemadesignificantprogress.

Goal 1: Eradicate extreme hunger and poverty

Theshareofthepopulationlivingonlessthanonedollar(PPP)perdayremainsvirtually unchangedover the 12-year period, 1990-2002 (table 2.8).The lack ofprogressinpovertyreductioncanbeattributedtotwofactors.First,povertyratestendtofollowgrowthwithalag.Secondly,recenteconomicgrowthhasnotbeenaccompaniedbymeaningfuljobcreation(UNECA2006b).Thisisbecauseinmanycountries,growthrateshavenotbeenhighenoughtogeneratesufficientdemandforlabour.Moreover,growthremainshighlyvolatile,whichhampersjobcreationintheprivatesector.

Furthermore,theshiftofeconomicactivityawayfromagricultureintocapital-inten-sivesectorssuchasminingandoil,hasalsounderminedjobcreation.Thefactthatemploymentcreation isnot integrated intomacroeconomicpolicy frameworksasanexplicitgoalofmacroeconomicpolicyisanadditionalreasonfortheweakgainsfromrecentgrowthrecoveryintermsofjobcreation(Pollinetal.2006).Therefore,Africancountriesneedtoadoptmoreflexiblepro-growthmacroeconomic frame-works and better targeted sectoral policies in order to increase employment as ameansofacceleratingpovertyreduction.

Recent economic growth

has not been accompanied by

meaningful job creation


Table �.�Status of MDG achievements in Africa

Region 1990 2004 2015 target

MDG1: Eradicate extreme poverty and hungerIndicator: People living on less than 1$ (PPP) a day (% of population)

SSA 44.6 44* 22

NA 2.2 2.4* 1.1

MDG2: Achieve primary education Indicator: Net primary enrolment rate SSA 53.0 64.2 100

NA 80.6 94.0

Indicator : Literacy rates 15-24 year olds (% of relevant age group)

SSA 67.4 73.1 100

NA 66.3 84.3 100

MDG3: Promote gender equality and empower womenIndicator: Ratio of literate women to men of 15-24 age group

SSA 0.80 0.88 1

NA 0.73 0.91 1

MDG4: Reduce child mortality Indicator: Under 5 mortality (per 1,000 births) SSA 185 168 62

NA 88 37 29

MDG5: Improve maternal health Indicator: Proportion of deliveries attended by skilled health workers

SSA 42 46 100

NA 40 71 100

MDG6: Combat malaria, tuberculosis, HIV/AIDS and other diseasesIndicator: Adult HIV/AIDS prevalence

SSA 2.7 5.8** Stop increase

NA <0.1 0.1 ** Stop increase

Indicator: Tuberculosis prevalence (cases per 100,000 population (excluding HIV infected)

SSA 337 492 Stop increase

NA 64 52 Stop increase

MDG7: Ensure environmental sustainabilityIndicator: Proportion of land area covered by forest SSA 29.2 26.5

NA 1.3 1.5

Indicator: Access to an improved water source (% of population)

SSA 49 56 75

NA 89 91 94

Indicator: Access to improved sanitation (% of population) SSA 32 37 66

NA 65 77 83

MDG8: Develop a global partnership for developmentIndicator: Share of ODA flows (% of donor GNI) OECD 0.33 0.2 0.7

Source: UNECA 2006e, based on United Nations Database at www.mdgs.un.org/unsd. Notes: * Data for 2002, ** Data for 2005.


Goal 2: Achieve universal primary education

Comparedtootherregions,SSAlagsbehindinprogresstowardsuniversalprimaryeducation(UPE)(UnitedNations2006a).Between1990and2004,netenrolmentratesincreasedinSSAfrom53.0percentto64.2percent,andinNorthAfricafrom80.6percentto94.0percent.Eventhoughprogresshasbeenmade,effortsneedtobescaledupinmostAfricancountriestoreachUPEby2015.

SomecountrieshavemadesignificantprogressinprimaryeducationasinthecaseofEthiopia,whereenrolmentmorethandoubledfrom22percentin1990to47per cent in2004 (UnitedNations2006b)due to large-scale investments in gov-ernmentschools,whichnowservenearly90percentofstudents inprimaryandsecondaryschools(WorldBank2005).However,theincreaseinenrolmentneedstobematchedbyproportionalincreasesinteachingstaffandmaterialstoguaranteeadequatequalityofeducation.ThisistrueinEthiopiaasinotherSSAcountries.ItisestimatedthattoreachUPEinSSAthecurrentstockofteachershastoincreasebyalmost20percenteachyear(WorldBankandIMF2005).

Goal 3: Promote gender equality and empower women

Theratioofgirlstoboysingrossprimaryschoolenrolmentincreasedoverthe1991-2004 period from 0.84 to 0.89 in SSA and from 0.82 to 0.94 in North Africa.However, the ratio for secondary enrolment in SSA dropped between 1999 and2004from0.82to0.79andthatfortertiaryenrolmentfrom0.69to0.63(UnitedNations2006a).

Some countries such as Burkina Faso and Mali, have made significant progresstowards gender parity through school feeding programmes. Rwanda also madesubstantialprogress ingenderparityasa resultof itspost-conflict reconstructionprogramme,whichbenefited fromgenerousdonor support.Closemonitoringofthegendergapandabettertargetingofpolicy interventionsareneededtoaccel-erate progress towards gender equity.To fill this need for monitoring of genderequity,ECAhasdevelopedanewtool,theAfricanGenderandDevelopmentIndex(AGDI),anintegratedindexthatmeasuresintegrationofwomeninallaspectsofacountry’seconomicandpoliticallife(UNECA2006b).

Goal 4: Reduce child mortality

Substantiveprogresshasalsobeenmade,especiallyinNorthAfricancountries,inreducingchildmortalityoverthepastdecades.Between1990and2004,under-fivemortalityinthissubregionwasreducedfrom88to37deathsper1,000livebirthsandinfantmortalityfrom66to20deathsper1,000livebirths.Incontrast,progressinSSAcountrieshasbeenverymodest(UnitedNations2006a).

Some countries have

made significant progress

towards gender parity through

school feeding programmes


Goal 5: Improve maternal health

The proportion of births attended by skilled health personnel shows a massiveimprovementinNorthAfricafrom40percentto71percentoverthe1990-2004period.ForSSA,theprogresshasbeenverymodest,from42to46percentoverthesameperiod(UnitedNations2006a).ItisestimatedthatSSAneedstotripleitshealthworkforce,addingmorethanonemillionworkerstoreachthehealth-relatedMDGs(WorldBankandIMF2005).

Goal 6: Combat HIV/AIDS, malaria and other diseases

Currently,itisestimatedthatmorethan25millionAfricanslivewithHIV,and2millionoutofthe2.8millionAIDS-relateddeathsin2005wereinAfrica.Inthe38hardesthitAfricancountries,itisprojectedthattherewillbe19millionadditionaldeathsduetoAIDSbetween2010and2015.Thesecondpartofthissub-sectiondiscussesthechallengescausedbyHIV/AIDSinmoredetail.

In the fight against malaria, African countries committed themselves in 2000 todramaticallyincreasetheprovisionofinsecticide-treatednets.RemarkablesuccessintheprovisionofnetstochildrenunderfivehasbeenrecordedinsuchcountriesasEritreaandMalawi,reachingacoverageof60percentand36percent,respectively(WHOandUNICEF2006).Withrespecttotuberculosis,thesituationworsenedinSSA,withanincreaseinprevalencefrom337per100,000ofthepopulationin1990to492in2004.InNorthAfrica,tuberculosisislessofaproblemwithonly52casesoutof100,000ofthepopulationin2004.

Goal 7: Ensure environmental sustainability

Whiletotalcarbondioxideemissionincreasedbetween1990and2003from228to413millionsofmetrictonsinNorthAfricaandfrom416to530millionsofmetrictonsinSSA,otherindicatorsofenvironmentalqualityhaveimproved.Forexample,theproportionofthepopulationwithaccesstoanimprovedwatersourceincreasedfrom49percentin1990to56percentin2004inSSAandfrom89percentto91percentinNorthAfrica.Likewise,accesstoimprovedsanitationrosefrom65percentto77percentinNorthAfricaandfrom32percentto37percentinSSAoverthe1990-2004period(UnitedNations2006a).

Theruralsectorremainsespeciallymarginalizedrelativetourbanareasinaccesstodrinkingwater,withonly42percentoftheruralpopulationhavingaccesstoanimprovedwatersourcein2004ascomparedto80percentfortheurbanpopulation.Therearealsolargedisparitiesbetweencountries.In2004,Ethiopiahadthelowestcoverageintheworldofruralpopulationwithsafedrinkingwater-only11percent.Incontrast,BurundiandGambiahadacoverageof77percentinthesameyear.Therapidincreaseintheurbanpopulation,lowinvestmentinnewwatersupplysystems,

SSA needs to triple its health

workforce, adding more than one

million workers to reach the health-

related MDGs


andpoormaintenanceofexistingwaternetworksinAfricaconstitutemajorchal-lengestoadequateprovisionofdrinkingwaterinmostAfricancountries(UnitedNations2006a;WHOandUNICEF2006).

Goal 8: Develop a global partnership for development

Overthepastfewyears,Africancountrieshavedevelopedpartnershipsthatshouldimprove the continent’s access to external development finance and export mar-kets.Thesedevelopmentsarediscussedinchapter3ofthisreport(alsoseeUNECA2006b).

Special focus on HIV/AIDS

ThepatternsofspreadandlevelsofprevalenceofHIV/AIDSexhibitmarkedsub-regional variations, with the Southern and Eastern subregions being the hardesthit.TheepidemicseemstobeslowlygaininggroundinCentralAfrica,whilemostofWestandNorthAfricahas sustained fairly low levelsofprevalence (UNAIDS2006).

HIV/AIDSdoesnotaffectmenandwomenequally.InSSA,closeto60percentofthoselivingwithHIV/AIDSarewomen(box2.3).Insomeareas,uptosixtimesmorewomenthanmenareinfectedinthe15-24agegroup(WHO-AFRO2003).Lifeexpectancy,forbiologicalreasons,isgenerallyhigherforwomenthanformen.However,infourcountries–Kenya,Malawi,ZambiaandZimbabwe–thehigherprevalenceofHIV/AIDSamongwomenhasledtolifeexpectancyforwomendrop-pingbelowthatofmen(UN-DESA2005b).

GiventhedelayedimpactofHIV/AIDSandthecontinuedincreaseinprevalence,theworstisyettocome.Thepandemicisnotonlyanimmediatecrisis,butisalsoa long-term systemic challenge, with profound consequences for Africa (CHGA2004a).

One area of particular concern is the impact of HIV/AIDS on food security. Inarecentstudyoftwolocalcommunities inruralEthiopia,UNECA,UNDPandWFPfoundthateventhoughtheprogressionofthepandemicinruralEthiopiawasatanearlystage,theimpactcouldalreadybefelt(UNECA/UNDP/WFP2004).HouseholdsaffectedbyHIV/AIDShavechangedtheirspendingpatterns,spend-ingmoreonhealthandfunerals,financedprimarilybyborrowing.Inaddition,theresourcebaseofthesehouseholdshasbeenreduced,astheygaveuplandtoshare-croppingandsoldlivestock.ItwasalsoshownthattherelianceonsocialnetworksisinsufficienttocopewithHIV/AIDS.Sincemosthouseholdshavecontinuedtorelyonfarmingastheirmostimportantsourceofincomeandfood,HIV/AIDShasincreasedthefoodinsecurityofaffectedhouseholds.

Given the delayed impact of HIV/AIDS and the

continued increase in prevalence, the

worst is yet to come


Asaresultofdecadesofausteritymeasuresandcompressionofpublicexpenditure,thecapacityofAfricanhealthcaresystemshasbeencutbackwhilethedemandforserviceskeepsincreasing.HealthsystemsaresostrainedthatalargeproportionofAfricansdonotevenhaveaccesstothemostbasichealthcare.Atthesametime,thedemandforhealthcareservicesisrapidlyincreasing,andtheincreasingmorbidityasaresultofHIV/AIDSaddstotheexistingburdenonoverstretchedhealthcaresystems(Sandkjaer2006).

Policy responses to HIV/AIDS - prevention and mitigation

MostAfricancountrieshaveestablishedmechanismsforcoordinationoftheresponsetoHIV/AIDS,usuallythroughaNationalAIDSCommission.Withassistancefromnationaland internationalpartners,governmentsare focusingonhowtopreventnewinfections,whilesimultaneouslykeepingthoseinfectedhealthyforaslongaspossible.

Untilveryrecently,thecountry-levelresponsetoHIV/AIDSwaslimitedtopreven-tioninterventionsandminimalcareandsupportforthoseinfected.Today,scaled-upresources,coupledwiththedecreasingcostsoftreatmentandtheemergenceofsimplertreatmentregimes,provideanopportunitytoexpandnationalHIV/AIDStreatmentandcareresponses.Asaresult,treatmentcoverageincreasedfrom100,000people on antiretroviral treatment in December 2003, to 810,000 in December2005,oranestimated17percentofthoseinneed(WHO2006a).

In a study exploring the consequences of a prevention-centred response to HIV,a treatment-centred response, and a combined response, Salomon et al. (2005)showthatanintegratedresponseworksbest.Inthelongterm,sucharesponsealsoreducesbothdirectandindirectHIV/AIDS-associatedcostsasfewerpeoplewillbeinfected.

Anumberof lessonshavebeen learnt andarebeingapplied in the scaling-upoftreatment in Africa. With regard to prevention, traditional individual-focusedapproachesarehotlydebated.Proponentsofanapproach thatmainlycentersonindividualbehaviourchangearguethat,giventhatHIV/AIDSismainlytransmit-tedthroughunprotectedsexbetweenmenandwomen,effectiveinterventionsmustfocusonseveringthistransmissionroutebyencouragingindividualstochangetheirbehaviour,andultimatelyabstainfromsexbeforemarriage,befaithfulwithinmar-riage,andusecondoms–theso-calledABCapproach.

Othersarguethatamorecomprehensiveapproachisrequired,asindividualbehav-iourisconditionedbymanycontextualfactorswhich,unlessaddressed,makeindi-vidualsunabletochangetheirbehavioureveniftheysowish.Forexample,10-55percentofAfricanwomensurveyedstatedthattheybelievethatawifecannotaskherhusbandtouseacondomandcannotrefusesex,evenifsheknowsthathehas

A more comprehensive

approach to fighting HIV/AIDS

is required


asexuallytransmittedinfection.7Forthesewomen,HIV/AIDScanstillmeetthemintheconjugalbedroom,regardlessoftheirwillingnesstoprotectthemselves.Thus,there isapressingneedforaneffective,comprehensiveresponsetothedisease inAfrica.

TheCommissiononHIV/AIDSandGovernance inAfrica (CHGA),whichwaslaunched in 2003 by United Nations Secretary-General, Kofi Annan, aimed at

7 ThisquestionwasaskedthroughcomprehensiveDemographicandHealthSurveys.Thepercent-agesquotedrelatetosurveyscarriedoutinBenin,Botswana,BurkinaFaso,Malawi,Mali,Namibia,Tanzania,Uganda,andZambiabetween2000and2004(www.measuredhs.com).

Box �.�The Commission on HIV/AIDS and Governance in Africa (CHGA)

The lack of human and financial resources is a key constraint to providing treatment and care. The report by the Commission on HIV/AIDS and Governance in Africa (CHGA), which was launched in 2003 by United Nations Secretary-General, Kofi Annan, contains important findings on HIV/AIDS as well as key recommendations on the way forward in the fight against the pandemic.

• AIDS has many dimensions, which vary at the local, national, and regional level. The challenge of dealing with the many varied causes and consequences of the pandemic is therefore different for each government. The factors driving HIV/AIDS need to be well understood to effectively fight the disease and these factors differ from place to place;

• The vulnerability of women is an underlying factor everywhere. Several cultural norms have to be addressed in order to reduce HIV/AIDS transmission rates. The relationship between gender equality and the extreme vulnerability of women is not fully taken into account yet;

• The growing number of AIDS orphans will continue to present a challenge: Recent estimates show that of the 50 million orphans in Africa in 2010, 37 per cent will be AIDS orphans. The special needs of these orphans have to be addressed through targeted measures and programmes;

• The first priority must be to reinvigorate prevention strategies. Even after 20 years of policy responses to the pandemic, most programmes and services in Africa remain centralized in urban areas, are not gender-sensitive, lack adequate staffing and funding and are poorly targeted. A sense of urgency has to be brought back to HIV prevention, especially by increasing resources from donor nations, as well as strong commitment from national governments;

• The challenge in effectively scaling up HIV treatment and strengthening African health care systems is the lack of human and financial resources; and

• AIDS financing needs to be sustainable, coordinated and better managed. Even though funding for the global response to the pandemic is expected to rise substantially in the near future, some areas deserve further attention, especially measures to build local capacity in the health sector, which is crucial for expanding service delivery and inter-ventions in other sectors, such as education. This calls for budgetary support on the one hand and improved performance in public sector management on the other.

Source: CHGA 2007.


bringingbackasenseofurgencytoHIVprevention.Itsfinalreportcontainsimpor-tantfindingsonthispandemicandgivesusefulrecommendations(box2.3).

2.4 Growth prospects for 2007 and the medium-term outlookAfrica is expected togrowat a rateof5.8percent in2007, slightlyhigher thantheraterecordedin2006(5.7percent)(figure2.8).Positivegrowthratesarepro-jected for all subregions ledbyNorthAfrica (6.6per cent),EastAfrica (6.0percent),SouthernAfrica(5.4percent),WestAfrica(4.9percent)andCentralAfrica(3.5percent).Despitedecelerationofgrowthinmajorindustrialeconomies,globaldemandforAfricanproducts,especiallyoil,mineralsandagriculturalcommodities,isexpectedtoremainsteadyduetostronggrowth inemergingAsianeconomies,especiallyChina.Moreover,deliveryofthepromisedaidanddebtreliefwillallowAfricancountriestoboostexpenditureinkeysectorsincludinginfrastructureandsocialservices.Inaddition,consolidationofmacroeconomicmanagementwillnotonlyreduceinflationintheshortrun,butalsocontainlong-terminflationexpecta-tions,whichwillencourageprivateinvestment.

A number of factors are likely to hinder growth in 2007 and subsequent years.EconomicgrowthinmanycountrieswillbecompromisedbytheincreasingspreadoftheHIV/AIDSpandemic,whichundermineslaboursupplyandlabourproduc-tivity.Lackofdiversificationofproductionandexports constitutes an importantsourceofpotentialinstabilityandvulnerabilitytoshocksemanatingfromchangesincommoditydemandandpricesaswellasfromunpredictableweatherchanges.Inefficientpublic infrastructureandunreliableenergysupplyatthenational levelaswell aspoor integrationof transportationandenergynetworksat the regionallevel will continue to undermine productivity and international competitiveness,ultimatelyslowingeconomicgrowth(UNECA2006b).Moreover,higheroilpricesareamajorconcernforoil-importingAfricancountriesintermsofcontrollinginfla-tion,promotingfiscalstability,improvingthecurrentaccountposition,andincreas-inggrowth.

Achieving and sustaining high growth rates in Africa require a new approach togrowthpolicy.Despiteeffortsinmacroeconomicandfinancialsectorreformsoverthe past decades, the majority of African countries have been unable to achieveandsustainthegrowthratesrequiredforachievingtheMDGs.Domesticfinancingconstraintsarecompoundedbythehighexternaldebtburden,whichunderminesanygainsfrommacroeconomicreforms,especiallyintermsoftradeliberalization.Inadditiontopursuingmacroeconomicstability,itiscriticalforAfricancountriestoadoptamorestrategicapproachtogrowthpolicy,identifyingthebindinggrowthconstraintsandtheactivitiesandsectorsthatarepotentialsourcesofjobcreation

Delivery of the promised

aid and debt relief will allow African

countries to boost expenditure in key sectors including infrastructure and

social services


and growth.This strategy should also establish incentivemechanisms to channelresourcestotheseactivitiesandsectors.

2.5 ConclusionDespitenotableeconomicrecoveryinAfricasincetheturnofthe21stcentury,thecontinentstillfacesimportantchallengesinattainingitsdevelopmentgoals.Beinghighlycommoditydependent,growth remainsvolatileand too low forachievingtheMDGs,whilepressure fromoil prices threatensprice stability inoil-import-ingcountries.Macroeconomicbalancesaredrivenbydevelopmentsintheresourcesectorandcontinuetoworsenforoil-importingAfricancountries.Moreover,exter-naldebtremainshighandprivatecapitalflowsinsufficienttobridgethegapbetweendomesticsavingsandnecessaryinvestmentforAfricatomeettheMDGs.

Inordertoaccelerateandsustaingrowthoveralongperiodoftime,Africaneedstocreateapolicyspaceandembarkoninnovativegrowthstrategies.Inparticular, itshouldaddressthefactorscontributingtolowandvolatilegrowththrough:improvedmacroeconomicmanagement;increaseddomesticinvestment,whichrequiresmobi-lizationofinternalandexternalresources;improvedinfrastructure(especiallytrans-portandenergysupply),anddiversificationawayfromresourcesectors.

Growth remains volatile and too

low for achieving the MDGs, while pressure from oil prices threatens

price stability in oil-importing countries

Figure �.�Projected real GDP growth by region for 2007 (per cent)

0

1

2

3

4

5

6

7

8

Central Africa West Africa Southern Africa AfricaEast Africa North Africa

6.6

6.05.8

5.4

4.9

3.5



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Appendix

Table A�.�Trends in basic indicators for the natural gas sector in Africa

1990 2000 2001 2002 2003 2004 2005

Proven natural gas reserves (%)

Africa percentage (Share in total world) 6.5 7.7 7.5 7.9 7.8 8.0 7.9

Growth rate of African reserves 3.8 3.9 6.2 4.9 0.8 2.5 -0.4

Growth rate of the world reserves 4.7 2.1 8.3 0.5 1.4 0.3 0.3

Marketed production of natural gas (%)

Africa percentage 3.4 5.0 5.1 5.2 5.4 5.5 6.1

Growth rate of African production 13.4 5.9 3.7 3.1 8.0 4.6 13.1

Growth rate of world production 3.8 1.8 2.3 1.9 3.5 2.9 2.4

Exports of natural gas (%)


Growth rate of African exports 14.4 7.7 -2.6 1.0 8.4 2.5 20.3

Growth rate of world exports 4.8 5.7 4.3 5.8 7.8 8.9 4.8

Imports of natural gas (%)

Africa percentage 0.3 0.4 0.3 0.2 0.2

Growth rate of African imports 44.9 -8.7 -37.8 0.0

Growth rate of world imports 4.1 11.2 4.7 6.4

Source: OPEC 2006.


Table A�.�Trends in basic indicators for the oil sector in Africa

1990 2000 2001 2002 2003 2004 2005

Proven crude oil reserves (%)

Africa percentage (share in total world) 6.0 8.7 8.9 9.1 9.9 9.9 10.2

Growth rate of African reserves 4.6 3.8 5.3 10.2 1.0 3.7

Growth rate of world reserves 1.5 1.2 3.3 1.5 0.6 0.8

Production of crude oil (%)


Growth rate of African production 1.3 -2.2 -2.6 12.8 14.7 6.1

Growth rate of world production 1.1 -0.7 -2.1 5.1 4.9 1.7

Refinery capacity (%)


Growth rate of African capacity 1.4 -0.3 1.0 0.8 -1.2 0.5

Growth rate of world capacity 1.2 0.6 0.4 0.0 1.7 1.0

Output of refined products (%)


Growth rate of African output 0.9 7.4 6.0 -2.2 5.3 5.4

Growth rate of world output 1.4 0.9 1.6 1.3 2.1 3.1

Consumption of refined products (%)


Growth rate of African consumption -0.2 7.7 2.9 2.5 5.1 4.0

Growth rate of world consumption 1.2 1.1 0.6 1.8 3.8 0.9

Exports of crude oil (%)


Growth rate of African exports 1.7 0.2 -0.5 13.1 9.1 1.8

Growth rate of world exports 3.7 -1.7 -1.6 5.7 7.5 4.7

Exports of refined products (%)


Growth rate of African exports 3.5 3.5 -1.6 -6.7 -5.5 0.8

Growth rate of world exports 2.5 1.7 -0.7 5.4 4.0 4.2

Exports of crude and refined products (%)


Growth rate of African exports 2.0 0.8 -0.7 9.4 6.8 1.7

Growth rate of world exports 3.3 -0.7 -1.3 5.6 6.5 4.6

Imports of refined products (%)

Africa percentage 3.6 3.7 3.6 3.7 3.7

Growth rate of African imports 0.9 7.9 9.9 4.1

Growth rate of world imports -2.5 10.1 6.3 6.6

Source: OPEC 2006.


Table A�.�International tourist arrivals

International tourist arrivals (‘000s)

Market share in region (%)

Average annual growth (%)

1990 2000 2004 1990 2000 2004 1990-2000 2001-2004

AFRICA 17,667 33,474 41,381 100 100 100 6.4 4.4

North Africa 10,905 15,530 20,714 55.4 36.3 38.2 2 5.7

Algeria 1,137 866 1234 7.5 3.1 3.7 -2.7 9.3

Egypt 2,411 5,116 7,795 22.1 32.9 37.6 7.8 11.1

Libya 96 174 149 0.8 1.1 0.71 6.1 -3.8

Morocco 4,024 4,278 5,477 26.5 15.2 16.4 0.6 6.4

Sudan 33 38 61 0.2 0.1 0.2 1.4 12.6

Tunisia 3,204 5,058 5,998 21.1 17.9 17.9 4.7 4.4

West Africa 1,352 2,444 3,142 8.9 8.7 9.4 6.1 6.5

Benin 110 96 174 0.7 0.3 0.5 -1.4 16

Burkina Faso 74 126 222 0.5 0.4 0.7 5.5 15.2

Cape Verde 24 115 157 0.2 0.4 0.5 17 8.1

Côte d’Ivoire 196 1.3

Gambia 100 79 90 0.7 0.3 0.3 -2.3 3.3

Ghana 146 399 584 1 1.4 1.7 10.6 10

Guinea 33 45 0.1 0.1 8.1

Mali 44 86 113 0.3 0.3 0.3 7.0 6.8

Mauritania 30 0.1

Niger 21 50 0.1 0.2 9.1

Nigeria 190 813 962 1.3 2.9 2.9 15.6 4.3

Senegal 246 389 363 1.6 1.4 1.1 4.7 -1.7

Sierra Leone 98 16 44 0.6 0.1 0.1 -16.6 28.8

Togo 103 60 83 0.7 0.2 0.2 -5.3 8.5

Central Africa 365 666 729 2.4 2.4 2.2 6.2 2.3

Angola 67 51 194 0.4 0.2 0.6 -2.7 39.7

Cameroon 89 277 190 0.6 1.1 0.6 12 -9

Central Afr.Rep 11 8 0 0 -7.5

Chad 9 43 0.1 0.2 16.9

Congo, Rep. of 33 19 0.2 0.1 -5.4

DRC 55 103 30 0.4 0.4 0.1 6.5 -26.5

Gabon 109 155 0.7 0.5 3.6

Sao Tome & Principe

3 7 0 0 9


International tourist arrivals (‘000s)

Market share in region (%)

Average annual growth (%)

1990 2000 2004 1990 2000 2004 1990-2000 2001-2004

East Africa 2,842 6,600 7,597 18.7 23.4 22.7 8.8 3.6

Burundi 109 29 0.7 0.1 -12.4

Comoros 8 24 18 0.1 0.1 0.1 11.6 -6.9

Djibouti 33 20 26 0.2 0.1 0.1 -4.8 7

Eritrea 70 87 0.2 0.3 5.7

Ethiopia 79 136 210 0.5 0.5 0.6 5.6 11.5

Kenya 814 899 1199 5.4 3.2 3.6 1 7.5

Madagascar 53 160 229 0.3 0.6 0.7 11.7 9.4

Malawi 130 228 471 0.9 0.8 1.4 5.8 19.9

Mauritius 292 656 719 1.9 2.3 2.1 8.4 2.3

Mozambique 470 1.4

Réunion 200 430 430 1.3 1.5 1.3 8 0

Rwanda 104 0.4

Seychelles 104 130 121 0.7 0.5 0.4 2.3 -1.8

Tanzania 459 566 1.6 1.7 5.4

Uganda 69 193 512 0.5 0.7 1.5 10.8 27.6

Southern Africa 2,203 8,234 9,199 14.5 29.2 27.5 14.1 2.8

Botswana 543 1104 3.6 3.9 7.4

Lesotho 171 1.1

Namibia 656 2.3 -8.2

South Africa 1,029 6,001 6,815 6.8 21.3 20.4 19.3 3.2

Zambia 141 457 515 0.9 1.6 1.5 12.5 3

Zimbabwe 636 1,967 1,854 4.2 7 5.5 12 -1.5

Source: World Tourism Organization 2006.


Table A�.�Top 20 tourism destinations in Africa (‘000s of tourists)

RANKING 2000 RANKING 2002 RANKING 2003 RANKING 2004

1 South Africa 6,001 1 South Africa 6,550 1 South Africa 6,640 1 Egypt 7,795

2 Egypt 5,116 2 Tunisia 5,064 2 Egypt 5,746 2 South Africa 6,815

3 Tunisia 5,058 3 Egypt 4,906 3 Tunisia 5,114 3 Tunisia 5,998

4 Morocco 4,278 4 Morocco 4,453 4 Morocco 4,761 4 Morocco 5,477

5 Zimbabwe 1,967 5 Zimbabwe 2,041 5 Zimbabwe 2,256 5 Zimbabwe 1,854

6 Botswana 1,104 6 Botswana 1,037 6 Algeria 1,166 6 Algeria 1,234

7 Kenya 899 7 Algeria 988 7 Botswana 975 7 Kenya 1,199

8 Algeria 866 8 Nigeria 887 8 Kenya 927 8 Nigeria 962

9 Nigeria 813 9 Kenya 838 9 Nigeria 924 9 Mauritius 719

10 Mauritius 656 10 Namibia 757 10 Mauritius 702 10 Ghana 584

11 Namibia 656 11 Mauritius 682 11 Namibia 695 11 Tanzania 566

12 Tanzania 459 12 Zambia 565 12 Tanzania 552 12 Zambia 515

13 Zambia 457 13 Tanzania 550 13 Ghana 531 13 Uganda 512

14 Réunion 430 14 Mozam-bique

541 14 Swaziland 461 14 Malawi 471

15 Ghana 399 15 Ghana 483 15 Mozam-bique

441 15 Mozambique 470

16 Senegal 389 16 Senegal 427 16 Réunion 432 16 Swaziland 456

17 Swaziland 281 17 Réunion 426 17 Malawi 424 17 Réunion 430

18 Cameroon 277 18 Malawi 383 18 Zambia 413 18 Senegal 363

19 Malawi 228 19 Swaziland 256 19 Senegal 354 19 Madagascar 229

20 Uganda 193 20 Uganda 254 20 Uganda 305 20 Burkina Faso 222



Table A�.�Top 20 tourism earners in Africa ($US million)

RANKING 2004 RANKING 2003 RANKING 2002 RANKING 2000

1 South Africa 6,282 1 South Africa 5,523 1 Egypt 3,764 1 Egypt 4,345

2 Egypt 6,125 2 Egypt 4,584 2 South Africa 2,909 2 South Africa 2,675

3 Morocco 3,924 3 Morocco 3,225 3 Morocco 2,646 3 Morocco 2,039

4 Tunisia 1,970 4 Tunisia 1,582 4 Tunisia 1,523 4 Tunisia 1,683

5 Mauritius 853 5 Mauritius 696 5 Mauritius 612 5 Mauritius 542

6 Tanzania 621 6 Botswana 457 6 Tanzania 439 6 Tanzania 377

7 Botswana 549 7 Tanzania 450 7 Ghana 358 7 Ghana 335

8 Kenya 495 8 Ghana 414 8 Reunion 329 8 Reunion 296

9 Ghana 466 9 Reunion 413 9 Botswana 319 9 Kenya 283

10 Reunion 448 10 Kenya 339 10 Kenya 276 10 Botswana 222

11 Namibia 403 11 Namibia 330 11 Namibia 218 11 Uganda 165

12 Uganda 266 12 Senegal 209 12 Senegal 190 12 Namibia 160

13 Libya 218 13 Libya 205 13 Libya 181 13 Senegal 144

14 Zimbabwe 194 14 Uganda 184 14 Uganda 172 14 Seychelles 139

15 Algeria 178 15 Seychelles 171 15 Seychelles 164 15 Zimbabwe 125

16 Ethiopia 173 16 Zambia 149 16 Zambia 134 16 Madagascar 121

17 Seychelles 172 17 Mali 128 17 Algeria 110 17 Zambia 111

18 Zambia 161 18 Ethiopia 114 18 Mali 104 18 Nigeria 101

19 Mali 130 19 Algeria 112 19 Benin 93 19 Algeria 96

20 Cape Verde 109 20 Benin 106 20 Zimbabwe 76 20 Benin 77


��

�ThischapterdealswithAfrica’sglobaldevelopmentchallengesin2006.Thesechal-lengesparticularlyrelatetotradenegotiationsatthemultilateralandbilaterallevelandtofinancingdevelopment.Itisclearfromanalysisatthecontinentallevelthatresultsaremixedwhentradenegotiationsandthefinancingdevelopmentissuesareconsideredtogether.Thus,thischaptershowsthatalthoughthereisgoodnewsattheleveloffinancingdevelopmentwithprogressindebtreliefinitiatives,commit-menttoscaleupaidinordertoachievetheMDGsandagreementtoimproveaideffectiveness,tradenegotiationsarefarfromrealizingAfrica’spriorities.Inparticu-lar, at the levelofmultilateral tradenegotiations, therehasbeen limitedprogresstowardsaddressingtheprioritiesofAfricainawaythatwouldenabletradetorealizeitspotentialasakeypillarforeconomicdevelopmentofthecontinent.Inthesamevein,bilateraltradenegotiationsespeciallybetweenAfricancountriesanddevelopedcountryeconomiessuchasisthecasewiththeEUareraisingmajorchallengesgiventhecentralityofreciprocityinthesenegotiations.

3.1 Developments in trade negotiationsWorld tradeexpandedsignificantlybetween2000and2005.Totalworldexportsincreasedfrom$US6,451billionin2000to$10,393billionin2005,anincreaseof61percent.1Table3.1allowsforacomparisonofthisevolutionwithAfricanexportsoverthesameperiod.

Table3.1showsthatoverthepast6years,worldmerchandiseexportsexperiencedanaveragegrowthrateof10.4percent.Overthesameperiod,Africaperformedbetter, increasingitsexportsby16percentonaverageannually.However,break-ingdown the exportperformanceby subregion reveals that the rapid increase inexportsisparticularlyconcentratedinoil-exportingSSAcountries.2Thesecountriesachievedanaverageexportgrowthof22.4percentovertheperiod.Ontheotherhand, theaverageexportperformanceofnon-oil exportingSSAcountries isverymuchinlinewiththeworldaverage(11.2percent).

ThisseemstobefurtherproofthattherecentgainsinAfrica’sexportsisnotbasedondiversificationof the exportbasebut isbased ratheron increasedoil exports.

1 WTOonlineworldtradestatistics,indollarsatcurrentprices2 Angola,Chad,Congo,EquatorialGuinea,Gabon,NigeriaandSudan.

Global Development Challenges for Africa in 2006

The average export performance of non-oil exporting

SSA countries is very much in line

with the world average


Moreover,table3.1showsthatthevariabilityofexportsbyoilproducersishigherthanforothercountries,probablyowingtothevolatilityofoilprices.TherecentimprovementinAfrica’sexportperformancethereforeappearstobevulnerabletoshiftsininternationalcommodityprices,particularlyinchangesinoilprices.

Table �.�Comparative merchandise export performance, World and Africa, 2000-2005 ($US billion)

Region Exports 2000 2001 2002 2003 2004 2005 Yearly average 2000-2005

World Exports in cur-rent prices

6451.0 6184.0 6484.0 7752.0 9191.0 10393.0 7712.5

Growth rate (%) -4.1 4.8 16.8 21.4 13.1 10.4

Total Africa Exports in cur-rent prices

147.1 137.4 140.6 176.5 230.0 295.8 187.9

Growth rate (%) -6.6 2.3 25.5 30.3 28.6 16.0

Republic of South Africa

Exports in cur-rent prices

30.0 29.3 29.7 36.5 46.0 51.9 37.2

Growth rate (%) -2.4 1.6 22.7 26.2 12.7 12.2

North Africa Exports in cur-rent prices

52.7 48.0 48.1 60.8 79.4 106.1 65.8

Growth rate (%) -8.9 0.1 26.4 30.7 33.5 16.4

Sub-Saha-ran Africa oil- exporting countries


37.1 32.1 32.4 43.6 62.4 91.6 49.8

Growth rate (%) -8.9 0.1 26.4 30.7 33.5 22.4

Sub-Saharan Africa non-oil-exporting countries


27.2 27.7 30.1 35.5 41.9 45.9 34.7

Growth rate (%) 2.2 8.4 18.1 17.9 9.6 11.2

Sources: WTO online data, November 2006; UNECA 2006b.

Whatismore,despitearecentslightrecovery,Africa’sshareofglobalexportsofmer-chandiseremainslow.Figure3.1showstheevolutionofitsshareinglobalexportsfrom1965to2005.Itssharein2005was2.85percentonly,roughlytheequivalentofits1991valueandlessthanhalfitspeakvaluein1980(5.97percent).Forcom-parativepurposes,Africaaccountedfor14percentofworldpopulationin2005.3AtthecurrentrateofgrowthofAfricanexportsandaccordingtotheUnitedNationspopulationgrowthestimates,thecontinentwouldhavetowaituntil2045foritsshareinworldexportstomatchitsshareofworldpopulation.4Non-oil-exporting

3 UnitedNationsPopulationDivision,UN-DESA,onlinestatistics,November2006.4 ProjectionsforallAfricancountries(includingoil-producingandNorthAfricancountries),esti-

mate a continuation of the average export growth rates over the past five years and of UnitedNationsprojectionsforpopulationgrowth.

Africa’s share of global exports

of merchandise remains low

��Global Development Challenges for Africa in 2006

SSAcountriescurrentlyaccountfor8.5percentofworldpopulation.Atthecurrentrateofgrowthoftheirexportsandevenwithouttakingaccountoftheirincreasingweight in totalworldpopulation, these countrieswouldhave towaituntil2387(382years!)toseetheirexportsharematchtheirshareofworldpopulation.5

Inlightofthesituationoflowexportperformanceanddependencyonthepricesofjustafewcommodities,diversificationshouldremainapriorityobjectiveforallAfricancountries,particularlybutnotonlyforSSAcountries.

Figure �.� Africa’s share in total world merchandise exports, 1965-2005 (per cent)

Source: WTO online data, November 2006; UNECA 2006.

Investmentanddiversificationdependonanumberofinternalfactorssuchasgov-ernance, regulatory environment, productivity and comparative advantages, etc.However,externalfactorsalsohelptosettheconditionsfordiversification.Theseincludeeffectivemarketaccess,regionalintegrationandthemultilateralandotherinternationaltradeagreementsthatarecurrentlybeingnegotiated.

MuchwasexpectedofasuccessfulDohaDevelopmentRoundofWTOnegotia-tionslaunchedin2001attheFourthWTOMinisterialConferencefrom9to14November2001,inQatar.Numerousstudiessuggestedthattherewouldbesignifi-cantgainsfordevelopingcountries.Likewise,itwasoftenexpectedthatEconomicPartnership Agreements (EPAs) with the EU would result in improved businessenvironments inAfricancountries,allowingformoreinvestmentsandenhancingtheprospectsforeconomicdiversification.Thissectiontakesstockofthedevelop-mentsinthetradenegotiationsinwhichAfricancountriesareinvolved.

5 Evaluationfornon-oil-exportingSSAcountries,withouttakingaccountoftheirprojectedpopula-tiongrowth.

Investment and diversification

depend on a number of internal

factors such as governance,

regulatory environment,

productivity and comparative advantages


WTO trade negotiations evolving since �00�

The2001DohaDevelopmentRoundofWTOtradenegotiationssawupsanddownsinthedeliberationsuptoJuly2006whenprogressstalled.Talkshaveresumedsincetheninformallyandona low-keybasisbuttheprospects forabreakthroughstillappeardim.

The Doha Development Round

TheDeclarationoftheFourthMinisterialConferenceinDohaprovidedthenegoti-ationmandatefortheRound.Developingcountries,amongthemAfricancountries,considereddevelopmentdimensions tobecrucial in fulfilling theDohamandatewhichwas to reformthemultilateral trading systemand improve theirprospectsinglobaltrade.Thepro-developmentagendawasexpectedtoaddresstheskewednatureofthedivisionofglobaltradebenefits,withmostgainsgoingtothedevel-opedcountries.TheDohamandatewassupposedtoputdevelopmentatthecentreofthediscussionswithachievementofthismandatetothesatisfactionofdevelopingcountriestheyardstickwithwhichsuccesswouldbemeasured.

AfundamentalexpectationwiththeRound,therefore,wasthatitwouldcorrecttheremainingimbalancesintraderulesinfavourofdevelopingcountriesandimproverulestoprovidedevelopingcountrieswithgenuinemarketopportunities.Negotia-tionsonservicesandagriculturewereprogrammedbythe“in-builtagenda”clausesoftheMarrakeshAgreement.6ImportantlyforAfricancountriesandtheAfrican,CaribbeanandPacific(ACP)countries,theDohameetingalsosecuredawaiverforthe transitional arrangements of the Cotonou provisions for EU-ACP countries.ThewaiverpermittedthelegalapplicationoftheCotonoupreferentialtraderegime,until itsexpiryon31December2007.TheDohamandateevolvedandwasfine-tunedwiththesubsequentMinisterialConferencesinGeneva,Cancún,andHongKong,in1998,2003and2005,respectively.

The Cancún Ministerial Conference of 2003

InCancún,inSeptember2003,theFifthWTOMinisterialConferencethatwasintendedforstocktakingofpositionsagainendedinadeadlock.Themaincon-tentionscrystallizedaroundtheunresolved“Singaporeissues”:investment,com-petition, government procurement and trade facilitation. There was also deep

6 TheMarrakeshAgreementestablishingtheWorldTradeOrganization(WTO)wassignedon5April1994andenteredintoforceon1January1995.ItdevelopedoutofthegeneralAgreementonTariffsandTrade (GATT)andwasaculminationof issuesandarrangements tackledat theUruguayRoundof1986.

A fundamental expectation with the Doha Round,

therefore, was that it would correct

the remaining imbalances in trade

rules in favour of developing

countries


disagreementoverthetreatmentofcottonandotheragriculturalcommodityandsubsidyissues.7

The July Framework Agreement of the WTO General Council

It tookmemberStatesuntil July2004toachieveanysubstantialprogressontheissuesthathadstalledthenegotiationsinCancúnin2003.Afterseveralweeksofintensedeliberations,thememberStatesagreedonatextthatrepresentedsignificantprogressinclarifyingthemodalities.

TheJulyFrameworkAgreementshowedprogressonagriculture,theSingaporeissuesand,tosomeextent,onNon-AgricultureMarketAccess(NAMA).8ThetextoftheJulyFrameworkAgreementdroppedtheSingaporeissueswiththeexceptionoftradefacilitation.Withregardtoagriculture,advanceswereachievedonthethreepillarsidentified,withspecialanddifferentiatedtreatment(S&D)featuringinallaspects.Domestic supportmeasureswere tobe reducedusing a tiered formula, implyingsteeper reductions for the highest level of subsidies. On export competition, theFrameworkAgreementstipulatedreductionofexportsubsidies,withaviewtophas-ing themout, even thoughnodatewasproposed for their concrete elimination.Thechoiceofatieredformulawasalsoretainedformarketaccess.LeastDevelopedCountries (LDCs)wereexemptedfromall tariffcuts. Itwas furtherdecidedthattreatmentofcotton,oneofthecausesofcontentioninCancún,wouldbetreatedundertheagriculturenegotiations;asub-committeewascreatedtoaddressthisissue“ambitiously,expeditiouslyandspecifically”.

The text of the July package was less clear concerning the choice of a particularformulaforNAMAreductions.Negotiationshadbeendelayedbythelateprogressachievedonagriculture,withmanymembersrefusingtoinvesttoomucheffortinNAMAwhiletheoutcomeofthenegotiationsinagriculturewasstillunknown.TheJulyFrameworkalsodefinednewdeadlinesforfurtheradvancingthenegotiations.

However,mostof the interimdeadlinesweremissedandnotmuchhappened in2005.ThelittleprogressachieveduptotheSixthWTOMinisterialConferenceinHongKonginDecember2005includedasystemtoassessthead-valoremequiva-lentofnon-ad-valoremtariffs.Otherimportantissuesremainedunresolved.

7 TheSingaporeissuesemergedfromthefirstWTOMinisterialConferencein1996andcentredoninvestmentprotection,competition,policytransparencyingovernmentprocurement,andtradefacilitation.

8 The2004JulyFrameworkagreedbyWTOmemberscameundertheoverallDohaDevelopmentAgenda timeline.Memberswereasked toclarify and improveGATTArticleVonFreedomofTransit,ArticleVIIIonFeesandFormalitiesof ImportationandExportationandArticleXonPublicationandAdministrationofTradeRegulations.Thepackagealsoagreedontechnicalandcapacity-buildingassistancetodevelopingcountries,cooperationbetweencustomsandothertradefacilitationauthoritiesandcustomscomplianceissues.


Sixth WTO Ministerial Conference in Hong Kong

ThisSixthWTOMinisterialConferenceresultedintheHongKongDeclarationinDecember2005thatoutlinedfurtherprogressinthenegotiations,althoughitfailedtobridgesignificantgaps.ThemaindevelopmentsbroughtaboutbytheDeclarationincludedanenddateof2013foragriculturalexportsubsidies,andendof2006forcottonsubsidies.Precisionwasalsoaddedtothemodalitiesonagriculture,notablythenumberofbandsforthetieredformulae.Progresswasalsomadeonthedefini-tionsofsensitiveproducts,specialproductsandspecialsafeguardmechanisms.TheDeclarationchoseaSwissformulafortariffreductionunderNAMA.

WithregardtoagricultureandNAMA,theHongKongDeclarationsetoutadead-lineforestablishingmodalities,particularlyonthedepthoftariffcutsanddomesticsubsidiesreductionby30April2006,withaviewtoestablishingdetailedschedulesofcommitmentsby31July2006.Onservices,theDeclarationcalledforimprovedoffersandincludedatimelinetodoso.

AnothermajorhighlightoftheDeclarationofparticularimportanceformanyAfri-cancountrieswas thedecisiontograntduty-freeandquota-free(DFQF)marketaccesstoLDCs.Thisextendedto97percentofproductsbutnotablyexcludedsometextileandgarmentproducts.Suchmarketaccesswas tobegranted toLDCsbydevelopedcountriesandalsobydevelopingcountriesinapositiontodoso.

TheSixthMinisterialConferenceinHongKongalsoresultedinanagreementfortransparencyonrulesforregionalintegration.Finally,theHongKongDeclarationalsocalledforthecreationofataskforceonAidforTrade.DiscussionsonAidforTradehaddevelopedduringthecourseof2005inparallelwiththeWTOprocess.

The pause in the negotiations: July-November 2006

TheHongKongDeclarationhadset severaldeadlines for reachingagreementonmodalities.Thesedeadlineswereallmissedduringthefirsttrimesterof2006and,bytheendofJune2006,ameetingofMinistersandHeadsofDelegationswascalledinGeneva.Despite intensediscussionsonagricultureandNAMA,noagreementonmodalitieswasreached.TheissuewasdiscussedatseverallevelsincludingduringtheG-8meetinginJuly2006.Finally,afteranotherunfruitfulattempttobreakthedeadlockduringaG-6meeting,PascalLamy, theDirector-GeneralofWTO,on27July2006,calledforthetalkstobesuspendedas,inhisview,therewasneedforreflectionand“quietdiplomacy.”

ThedeadlockinWTOnegotiationsappearedtobeprimarilyassociatedwithdisa-greementoverthelevelsofdemandandoffersonagriculture.Inparticular,itseemedthatEUandUSAwouldnotagreeonthelevelsofnecessaryconcessionswithregardtomarketaccessagainstreductionsindomesticsupport.

Another major highlight of the

Hong Kong Declaration was the decision to

grant duty-free and quota-free market

access to LDCs


Thesuspensionofthetalkswasclearlyasetbackforthemultilateralprocess,pro-hibitingtheinternationalcommunityandespeciallypoorercountriesfromgainingsignificantimprovementsinthemultilateraltradingsystem.Thisfreezeinnegotia-tionswasallthemoreworryinginlightoftheexpirationoftheTradePromotionAuthority (TPA) or “fast-track” at the end of 2007. 9 This constitutes a de-factodeadlineforthecurrentRound.10

FromJulytoNovember2006,therewerenoofficialnegotiations.On16November2006,however,theWTODirector-Generalcalledforaninformaltradecommitteemeetingtore-launchtheconsultationprocess,asthereappearedtobeaconsensusthatWTOmemberswerekeentorevivethenegotiations.ThesectionbelowexplorestheachievementssofarintheDohaRoundfromanAfricanperspective.

Positions and prospects in WTO negotiations issue by issue

WTO negotiations have featured prominently in the headlines during the pastcoupleofyears.However, themainprotagonists,particularlyEUandUSA,havenotmanagedtobridgemajordifferencesonagriculture.This ledtothedeadlockinthenegotiationsinJuly2006,withresumptionsoftalksunderdiscussionatthemomentofwriting.Despitethelingeringandsignificantdisagreementamongthevarious parties, the negotiations have achieved some clear advances. This sectiondetailsthoseadvancesthatareofspecialinteresttoAfricancountries.Itishopedthattheywillnotbelostifthenegotiationsstallagain.

Agriculture

AgricultureisasectorofkeyinterestforAfricancountries,asitcouldbeamaincon-tributortopovertyreductionanddiversificationpolicies(UNECA2005).Agricul-turalissueshavebeenthemostcontentiousinthenegotiations.Nevertheless,someadvanceswereseenintheAfricancommonpositions,eitherintheformofagreedprinciplesorinbracketedtext.

Themainachievementsofnegotiationsunderagriculture includedfirstand fore-mostthedecisiontoabolishallexportsubsidiesby2013andbytheendof2006forcottonexporters.Asnegotiationsarestillblocked,theopportunityoftheelimina-tionofcottonexportsubsidiesbyend2006hasalreadybeenmissed.

Intermsofmarketaccess,thenegotiationsestablishedatieredformulawithfourbandsresultinginsteepercutsforhighertariffs.Therewerealsotalksoftariffcap-

9 TheTPA allows the American Administration to negotiate international trade agreements andpresenttheoutcometotheUSCongressforanacceptancevotewithoutthepossibilityofamend-ments.

10 Resumingnegotiationsafter2007wouldprobablymeanwaitingforthenextUSadministrationtoextendarenewedTPA,thetimingofwhichisunknown.

The main achievements of

negotiations under agriculture included

first and foremost the decision to

abolish all export subsidies by 2013


pings.UNECAresearchhasshownthatAfricancountriesoverallwouldreaplargerbenefitsfromasignificantreductionintariffs(UNECA2005a).Theformulaappliesdifferentsetsofcutstodevelopedanddevelopingcountries,inlinewiththepro-portionalityprinciplesoughtbyAfricancountries(AfricanUnion2005).Moreo-ver,LDCswerealsoexemptedfromreducingtariffs.ThiswouldhaveallowedmostAfricancountriestopreservesubstantialpolicyspaceinagriculture,anothermajorobjectiveoftheAfricagroup.

Theprinciplesofsensitiveproducts,alongsidespecialproductsandspecialsafeguardmechanismswerealsoagreeddespitewidedisagreementonactualfigures.Develop-ingcountries,includingthosefromAfrica,hadstronglyarguedinfavourofspecialproductsandspecialsafeguardmechanismsthatwouldbereservedfordevelopingcountriesandallowspecialtreatmentforgoodsthathavearoleinruraldevelopmentandthelivelihoodsofruralcommunities.

Advanceswerealsoachievedondomesticsubsidies.Thechoiceofatieredformulahad been retained for cutting domestic subsidies, both for the blue box and theAggregateMeasuresofSupport(AMS).Thisshouldtranslateintohigherreductionofthesubsidiesincountrieswheretheyarehigher.Furtherdisciplineswereproposedon de-minimis subsidies. A substantial reduction of domestic support measuresincludingsubsidiesintheNorthweresupposedtomatchthelong-terminterestsofmostAfricancountries(UNECA2005;Osakwe2006).

Non-Agriculture Market Access (NAMA)

Althoughtheyhadbeensomewhatdelayedduetolackofprogressonagriculture,talksonNAMAhadalsomadesomesignificantadvances.Forexample,LDCswouldbeexemptedfromtariffcuts,an importantobjective formanyAfricancountries.ThetalksalsoallowedthechoiceofaSwissformulafortariffreductions,entailinglargercutsonhighertariffsandaharmonizingeffect(UNECA2004).

TheprincipleofproportionalityintariffcutsforNAMAproductswasalsoempha-sizedintheHongKongDeclaration.Developingcountrieswerepermittedtopro-ceedtosmallertariffcutsthandevelopedcountries.However,thepreciselevelofcoef-ficientsfortheformularemainedundecided.Thelevelofthesecoefficientsiscrucialasitdeterminesthedepthofthetariffcutsandwhetherornotthecutgoesbeyondsimplyreducing“waterinthetariff”andresultsinactualreductionsinappliedrates.S&DisthereforeavailablethroughtheNAMAdifferentiatedformula.

S&DtreatmentfordevelopingcountrieswasalsoreflectedinNAMAnegotiationsthroughanotherprovisionoftheHongKongDeclaration:paragraph8,whichena-bleddevelopingcountriestoeithershieldaproportionoftheirtariffsfromtheeffectoftheformula,oralternativelytooptforaless-thanformulareductionoftariffsforalargernumberoftheirtariffs.UnderNAMA,onlythosedevelopingcountrieswithmorethan35percentofboundtarifflineshadtoapplytheformula,whichmeans

Developing countries were

permitted to proceed to

smaller tariff cuts than developed

countries


thateightAfricandevelopingcountrieshavetoapplytheformula.11Othercountrieshadtoincreasetheirbinding.

UNECA studies show that while an overly ambitious liberalization scenario inNAMAcould lead togains inwelfare forAfrica, there is alsoa riskofde-indus-trializationof thecontinent in favourof specialization inagriculturalproduction(UNECA2006b).Apartfromafewimportantproductsthatarestillprotectedbyhigh tariffs indevelopedcountries, thepotentialgains in termsofdepthof tariffreductionsappeartobegreaterinotherdevelopingmarkets(South-Southtrade).

Special and differential treatment (S&D)

Thepro-developmentagendaoftheDohaRoundhaddifferentdimensions.TheseincludedS&Dtreatment,enhancedmarketaccess,balancedrules,policyspaceandflexibilities.TheabilityoftheRoundtoensurethatthemultilateralsystemstrength-enedthedevelopmentdimensionsforthebenefitofdevelopingcountriesisofmajorinterest to African countries in the negotiations. African countries in particularadvocatedforS&Dtreatmenttobemainstreamedinallaspectsofthenegotiationsinordertoenablethemtoachievetheirlegitimatedevelopmentgoals.

SuchtreatmentrelatestothepreferentialprovisionsinthefinalagreementinfavourofdevelopingcountriesandLDCs,thetwocategoriesinwhichAfricancountriesfeature.Forinstance,throughS&Dtreatmentinagriculturenegotiations,Africancountrieswerelookingformodalitiesthatwouldallowthemtopursueagriculturalpoliciesinsupportofdevelopment,povertyreductionstrategies,foodsecurityandrurallivelihoodconcerns.

S&DtreatmentunderpinsthequestintheDohaRoundforfulloperationalizationoftheprincipleofproportionalityinthemodalities.Bytakingintoaccounttheexist-ingtariffstructureoftheAfricancountriesthetreatmentwouldhelptostrengthenthedevelopmentdimensionsof theDohaRound.With respect to the industrialtariffs,themodalitiesaimedatreducingoreliminatingtariffpeaks,hightariffs,andtariffescalationandwouldallowautonomytoAfricancountriestopursueindustrialpolicyinlinewiththeirdevelopmentstrategies.Itwouldalsoallowthemtoinitiateanddeependiversificationoftheireconomies.

Other issues

Inservices,negotiationshadbeeninitiatedpriortotheDohaRoundbytheso-called“in-builtagenda”asstipulatedbyparagraph1ofArticleXIXoftheGeneralAgree-mentonTradeandServices(GATS).NegotiationsonservicesresumedinJanuary2000,beforetheDohaMinisterialConference.NoteworthyforAfricanandother

11 These eight countries are Botswana, Egypt, Gabon, Morocco, Namibia, South Africa, Swaziland and Tunisia (UNECA 2006b).

African countries in

particular advocated for S&D

treatment to be mainstreamed in all aspects of the

negotiations


developingcountries,ArticleXIX-2ofGATSmadeS&Dtreatmentanexplicitele-mentoftheGATSnegotiations.Therefore,developingcountrieswereonlyexpectedtoundertakecommitmentsintrade-in-servicesliberalizationcompatiblewiththeirdevelopmentlevels.12

Negotiationshavebeenfollowinga“requestandoffer”approach.Deadlinesforsub-missionshavebeenmissedbutsinceMarch2003,69offershavebeenmadeand30of themsubsequently revisited.13Theseoffers coverboth sectoral andhorizontal/multisectoralproposals.AswiththenegotiationsonagricultureandNAMA,andofimportancetomanyAfricancountries,LDCsarenotexpectedtoundertakenewcommitmentsinservicesinthecurrentRound.ForotherAfricancountries,nego-tiations in services representbothopportunities and challenges (UNECA2005a,UNCTAD2005).

Trade in services has increased significantly worldwide and African countries dohavesomepotentialcomparativeadvantagesinservicesectorssuchastourismandinlabour-intensivesectorscoveredbyMode4.Moreover,theinternationalprovi-sion of business support and infrastructure services in sectors such as insurance,banking,andconsultingcangreatlyreducethecostofdoingbusinessandincreasecompetitiveness in developing countries (UNCTAD 2002). On the other hand,liberalizationmustbeplannedandsequencedcarefullyandrequiresdevelopmentofanappropriateregulatoryframework(UNCTAD2005a).

Thereisno“onesizefitsall”ininternationaltradeinservicesandthenegotiationsin services liberalization cover a very largenumber andvarietyof industries.Fordevelopingcountries,andinparticularAfricanones,theprogressinthenegotiations–ashighlightedbythesmallnumberofoffers-ishinderedbythelackofexperienceinnegotiatingtheirinterestsinservices.Africancountriesneeddevelopmentsup-portbothfortheirsupplycapacityinservicesandfortheircapacitytoparticipateeffectivelyinnegotiationsontradeinservices.Itissuggestedbyseveralobservers(forexampleSauvé,2006)thatAidforTradeprogrammesshouldbetargetedatenhanc-ingthecapacitiesofAfricancountriestorespondtosuchchallenges.

Talks on trade facilitation progressing significantly

Aconsensushasalsobeenreachedonapplicationofcertaintradefacilitationpro-visionsbydeveloping countries in exchange for systematicprovisionof technicalassistancetomeetthem.WTOhasalwaysdealtwithissuesrelatedtotradefacili-tationandWTOrules includeavarietyofprovisions thataimtoenhance trans-parencyandsetminimumproceduralstandards.AmongthemareGATTArticles

12 GATS Art XIX-2: “The process of liberalisation shall take place with due respect for national policy objec-tives and the level of development of individual Members, both overall and in individual sectors. There shall be appropriate flexibility for individual developing country Members for opening fewer sectors, liberalising fewer types of transactions, progressively extending market access in line with their development situation […]”.

13 Seven African countries have made proposals: Egypt, Gabon, Kenya, Mauritius, Morocco, South Africa and Tunisia.

There is no “one size fits all” in international trade

in services


V,VIIIandX,whichdealwithfreedomoftransitforgoods,feesandformalitiesconnectedwithimportationandexportation,andpublicationandadministrationoftraderegulations.AspartoftheDohaWorkProgramme,theGeneralCouncildecidedbyexplicit consensus tocommence trade facilitationnegotiationson thebasisofclearlydefinedmodalities.

TheTradeFacilitationNegotiatingGroupmadeconsiderableprogressbeforeWTOnegotiationsweresuspendedinJuly2006.Severalproposalshadbeentabled.How-ever,addressingtheissuesoftechnicalassistanceandcapacitybuilding(TA/CB)aswellasS&Dprovedtobeamajorchallenge.ItwasunanimouslyacknowledgedthatTA/CBfortradefacilitationshouldrespondtothespecificneedsofWTOmemberStates.However,thespecificTA/CBissuestobeaddressedwithintheWTOframe-workwereunclear.Inthisregard, itwasgenerallyagreedthatself-assessmentsontradefacilitationneedsatnationallevelwerecriticallyimportantforAfricancoun-triesbecausetheycouldfacilitateengagementwiththedonorcommunityamongother benefits. A number of tools, including those developed by WTO and theWorldCustomsOrganization(WCO)wereproposedforconductingsuchnationalassessments.TheNationalTradeFacilitationCommitteesinsomeAfricancountrieswouldprovideappropriateforumstoworkontheseassessments.

Italsoemergedduringthenegotiationsthataccesstoavailableresourcesforcapac-itybuildingfromthedonorcommunityremainedachallengetoAfricancountriesbecauseexistingprocedureswerecomplex.Toaddressthisproblem,theycontinu-ouslystressedtheneedforasimplifiedtemplateforrequestingtechnicalassistanceandcapacitybuildingfromdonors.Intermsofthescopeofnegotiations,theyhavereiteratedthebroadscopeoftradefacilitation,andarguethat,inadditiontoactivi-tiesaimedatimprovingcustomsefficiency,considerableeffortsshouldbemadeinotherareassuchastransittransportmanagement.Thiswasespeciallyimportantforthecontinent’s15land-lockedcountries.

Regarding the possible structure for a Trade Facilitation Agreement (TFA), thenotionofa“tradefacilitationladder”hasbeenemergingthatwoulddefinethelevelsoffacilitationtowhichcountrieswouldcommitthemselves.ThephilosophybehindthisnotionhasbeenthatallWTOmembersshouldberequiredtosignuptothelowestlevelofstandards,withthosecountriesthataremostable,implementingafarhigherleveloffacilitation.Itwasenvisagedthatthenegotiatorswoulddefinethenumberofstepsintheladderandtheircontent.Finally,therewasconvergenceontheviewthatthereshouldbeanadditionalfacilitativeproceduretoresolvedisputesarisingfromtradefacilitationcommitments,astakingrecoursetotheDisputeSet-tlementProceduresshouldbethelastresort

On rules for regional integration, adecisionof theNegotiatingGrouponRulesestablisheda transparencymechanismforregional tradeagreements (RTAs).ThisdecisionappliestoallRTAsprovisionallyandwillbereplacedbyapermanentmech-anismuponthecompletionof theDohaRound.Thediscussionsonestablishing

Considerable efforts should be

made in other areas such as

transit transport management


criteriaforassessingWTOcompatibilitywithRTAshavenot,however,progressedsignificantly.

OneofthemostnoteworthyachievementsforAfricaattheRoundsofarhasbeenthepropositiontograntLDCsDFQF,marketaccesstodevelopedcountriesandtodevelopingcountriesinapositiontodoso.14ThispropositionhadbeenchampionedbyEU.Unfortunately,otherdevelopedcountries,particularlytheUSA,insistedonwateringitdowntoapplyDFQFtoonly97percentofallproducts,whichallowedfortheexclusionofkeyproductssuchassometextilesandapparel.ThisdecisioncouldstillbenefitAfricanLDCsasoneofthecriticismsofpreferentialschemessuchastheEverythingbutArms(EBA)initiativeisthattheylackthelegalsecuritycon-ferredbyaWTOcommitment.

Aid for Trade talks represent significant advance

TherecentinclusionofAidforTradetalksontheagendaoftheRoundisanothersignificant advance.Aid forTrade is notpart of themainstreamundertaking, soprogressonthisissuecouldbeindependentfromtherestoftheRound.Theintro-ductionofAidforTradeunderWTOauspicescouldallowformoretransparencyandcoherenceon this issue. It is alsohoped that thiswill increaseavailabilityofresourcesforAidforTradeprogrammes,forwhichthereseemstobegreatscope.SuchprogrammescouldfacilitatetradenegotiationsthroughthereinforcingofAfri-cannegotiatingcapacities.TheyalsocontributetodevelopingcapacityforapplyingmeaningfulS&Dtreatmentsinarangeofnegotiationareas.

Improvements in Africa’s negotiating capacities

African negotiating capacities, which have proved inadequate in past negotia-tions,haveevolvedovertime.Oneofthemostsignificantdevelopmentshasbeenthe increasedparticipationofAfricancountries in theactualnegotiations. In thepastnegotiations,includingthe1986UruguayRound,Africancountriesplayedaperipheralrole.InthecurrentDohaRound,Africancountriesarenotonlyengagedactivelyinthedefinitionofthemandateforthenegotiators,buthavebeenactiveateverystageasthenegotiationshaveprogressed.Thisactiveparticipationandengage-menthavehighlightedtheprioritiesandconcernsofAfricaanditsdesiretoensurethatmultilateralismbenefitsall,especiallythroughoperationalizationofS&Dtreat-mentineveryaspect.

The visible engagement of African countries in the negotiations has been drivenmainly by more effective organization of their participation. The African UnionCommission(AUC)hasledthepoliticaleffortsandthecoordinationofthenegotia-tions.ThiscoordinationhasbeenabletomaintainastrongsolidarityamongAfrican

14 Brazil recently announced its intention of granting duty-free, quota-free (DF QF) market access to LDCs.

The introduction of Aid for Trade

under WTO auspices could allow for more

transparency and coherence


countriesdespitetheirdiversity.TheAfricanGroupinGenevaisabletoparticipatein the negotiations from a common framework on all the key issues of interest.Thus, the current commonnegotiating framework that they areusing to informtheirpositionshasbeendevelopedunderAUcoordinationandwasendorsedbytheAUSummitinBanjul,GambiainJuly2006.TheAUSummitDecisionwasbasedontheoutcomeof theConferenceofAfricanTradeMinistersheld inNairobi inApril2006.15

ThecoordinatedtechnicalsupportprovidedtoAfricannegotiatorshasbeenanotherimportant development. Many institutions have provided inputs to the politicalprocessspearheadedbyAU.ECAhasbeenplayingamajorrolethroughitsAfri-canTradePolicyCentre(ATPC)withthesupportoftheCanadaFundforAfrica.Other institutionsplayingkey roles inproviding technical support to thepoliti-calprocess includeWTO,UNDP,UNCTAD, InternationalTradeCentre (ITC)and researchnetworks such asAfricanEconomicResearchConsortium (AERC),Council fortheDevelopmentofSocialScienceResearch inAfrica(CODESRIA)andInternationalLawyersandEconomistsAgainstPoverty(ILEAP).Civilsocietyorganizations(CSOs)havealsobeenactiveinadvocatingforAfricanpriorities inthe trade negotiations. These include non-governmental organizations (NGOs)operatingregionallyandinternationally.TheThirdWorldNetwork(TWN),SouthCentre,andOXFAM,amongothers,haveplayedamajorroleinadvocatingissuesofconcerntoAfricancountries.

The EPA negotiations

The long-standing Lomé preference system between APC countries and EU wasreformedin2000withthesignatureoftheCotonouTreaty.Cotonourolledovertheexistingunilateraltradepreferencesuptotheendof2007whentheyshouldbereplacedbyaWTO-compatibletradearrangement.TheCotonoutradearrangementsarecurrentlynotcompatiblewiththeWTOrulesonpreferentialtradearrangements(Lang2006). Indeed, theyfitneither the criteria ofArticleXXIVwhich call forreciprocityandliberalizationofsubstantiallyallthetrade,northatoftheEnablingClausewhichentailsthatpreferencesareextendedtoalldevelopingcountriesorallLDCs.ACPcountriesandEUhadtoseekawaiverfromotherWTOmembersfortheCotonouAgreement, and thiswasgranted inDoha inNovember2001.Thewaiverexpiresattheendof2007.ItisexpectedthatthenegotiationsontheregimetosucceedtheCotonouarrangementswillhavebeenconcludedbythisdate.

15 The Nairobi Ministerial Declaration on Doha Work Programme was issued by the 4th Ordinary Session of the AU Conference of Ministers of Trade, held 12-14 April 2006, in Kenya. It was on update of previous Declarations including: the Cairo Declaration and Road Map on the Doha Work Programme, from the 3rd Ordinary Session of the AU Conference of Ministers of Trade, 5-9 June 2005, in Egypt, the Kigali Consensus and Declaration on the Doha Work Programme at the 2nd Ordinary Session of the AU Conference of Ministers of Trade, 27-28 May 2005, in Rwanda, and the July Framework Agreement of the WTO General Council of 1 August 2004.

The visible engagement of

African countries in the negotiations

has been driven mainly by a

more effective organization of their

participation


ACP countries and EU have opted to negotiate Economic Partnership Agree-ments(EPAs),whichwillbeFTAsbetweenACPRegionalEconomicCommuni-ties(RECs)andEU.InAfrica,EPAsarebeingnegotiatedwiththeEconomicandMonetaryCommunityofCentralAfrica(CEMAC),theEconomicCommunityofWestAfricanStates(ECOWAS),CommonMarketofEasternandSouthernAfrica(COMESA)andtheSouthernAfricanDevelopmentCommunity(SADC).

The negotiations on EPAs were launched in 2002. They revolve around marketaccess, fisheries, sanitary and phytosanitary (SPS) measures, agriculture, services,investment and competition. Negotiations have evolved differently across theregions.EachregionhassofarestablishedaroadmapwiththeEUoutliningthewayforwardforthenegotiations.Generally,therehasbeengrowingconcerninAfricathat EPAs, while representing significant potential for growth and development,alsocarrychallengingadjustmentcosts.EvidenceshowsthatEPAscouldalsotrans-late into tariff revenue losses,de-industrializationand reductions in intra-Africantrade (UNECA2004;2005).Africancountrieshavecalled forenhancedsupporttocapacitybuildingandfinancing.EUarguesthatsuchtoolsalreadyexistandthatthediscussionsconcerningtheirimprovementareindependentofEPAnegotiations.Thefocusof thenegotiations forAfricahas therefore shifted to thedevelopmentdimensionofEPAs.

ThenegotiationprocessisfurthercomplicatedbytheoverlappingmembershipsofAfrican countries in various RECs (UNECA 2006b). African countries and EUappeartobeinagreementthatEPAsshouldbeanopportunitytoenhanceregionalintegration in Africa. Impact studies on EPAs (UNECA 2004) show that thesequencingofliberalizationiskeytothedevelopmentofthecontinent.Thiswouldprobablytranslateintoaback-loadedtariffreductiononimportsfromEU,whileliberalizationwithinRECswouldbeapriority.EUhasalsoshownsignsofreadinesstoallocateadditionalresourcestoimprovementofinterregionaltradeinfrastructure,whichwouldbenefitAfricanregionalintegration.

Article37.4oftheCotonouAgreementin2001statedthatthePartieswouldcon-duct a formal and comprehensive review of the process, structure and substanceof the negotiations, in 2006.16 This review is under way at the time of writing.Preliminaryresultsseemtoindicatethat,inseveralregions,theprocessofnegotia-tionsisevolvingmoreslowlythanexpected,partlyduetodisagreementswithEUonthedevelopmentdimensionoftheEPAsbutalsobecauseofthedifficultiessomecountriesandregionsfaceinforminginternalconsensusandinformedpositionsontechnicalandsectoralissues.Theformalreviewwillidentifythenecessarymeanstoallowtimelycompletionofthenegotiationsby1January2008.Shouldthenegotia-tionsfailtoreachconclusionbyendof2007,thequestionofaWTOwaiverwillhavetobereconsidered.

16 TheCotonouAgreementguidesEU’sdevelopmentcooperationwithACPcountries.ThetreatywassignedinBenininJune2000andenteredintoforcein2002.ItaimedateradicatingpovertyandfosteringsustainabledevelopmentandatintegratingACPcountriesintotheworldeconomy.

The EU has also shown signs

of readiness to allocate additional

resources to improv the interregional

trade infrastructure


Oneof thequestions that recently gained importance in talks regardingEPAs isthepotentialalternativetotheFTAscurrentlyenvisaged.TheCotonouAgreementcalledforallalternativestobeexplored.Sofar,themainalternativesappeartobeenhancedpreferentialschemessuchastheGeneralizedSystemofPreferences(GSP)and the Everything but Arms (EBA) initiative (Bilal and Rampa 2006). Furtheranalyticalworkonthisissueiscrucial.

ThestandstillinWTOnegotiationsalsocomplicatestheEPAprocess.Intheabsenceofevolutiononrulesforpreferentialtradearrangements,majoruncertaintiesremainonthedegreeofflexibilityAfricancountrieshaveonthelengthoftransitionperiodsandonthecoverageofliberalization(Lang2006).Inthiscontext,thereisariskthatnegotiatorswillfeelconstrainedandoptforconservativeEPAprovisions,retainingfewsensitiveproductsandshorttransitionperiods.17Thiscouldtranslateintomoreacuteadjustmentcosts forAfricancountries intermsofbothde-industrializationandregionalintegration.UNECAresearchshowsthattheimpactofEPAonAfri-caneconomiescouldbepositiveonlyunderascenarioofsubstantialasymmetryinthedegreeofliberalization.Inparticular,theAfricanPartywouldhavetobeabletoretainasignificantshare(upto40percent)oftradeoutofthecoverageofliber-alization,whileEUwouldhavetobewillingtoopenitsmarketsentirelytoAfricanexports(PerezandKaringi,forthcoming).

ThebreakdowninWTOnegotiationsalsoaffectsotherissuesintheEPAnegotia-tions.Forexample,AfricancountriesareconcernedthatgainsinaccesstotheEUmarketforagriculturalproductsmaynottranslateintoincreasedexportsaslongasinternationalpricesremaindistortedbysubsidiestofarmersintheNorth.Likewise,theremaybeapotentialriskthatopeningservicemarketstoEUproducersmayonlyresultinsituationsofunhealthymonopoliesoroligopoliesintheservicemarketsofAfricancountries.Asaconsequence,AfricancountriesmayfeelboundtoextendliberalizationoftheirservicemarketstootherWTOmembers,withoutobtainingthebenefitsofreciprocalconcessionsfromthesethirdparties.

EPAnegotiationsarethemajortaskaheadofAfricantradepolicymakers,especiallysincethefreezeoftheDohaRound.Theseposegreatchallengesbutalsorealoppor-tunitiesintermsofdevelopmentforthecontinent.Inviewoftheshorttimeremain-ingforcompletionofthenegotiations,itisimportantthatallthepartiesinvolvedstepuptheirpoliticalcommitmenttosuccessfulEPAs.TheongoingcomprehensivereviewprocessshouldbeseizedasanimportantopportunitytoproposesolutionstoresolvependingissueswithinAfricaandbetweenAfricangroupingsandtheEU.

Generally,therearesomepositivedevelopmentsinthenegotiationssofar,evenifthesemaystillbetoolimitedtomakeDohaatruedevelopmentagenda.Withthesuspensionofthetalks,thereisariskthattheseadvancesmaybelostordelayedfor

17 ThetraditionalinterpretationofArticleXXIVisthatEPAsshouldcoveratleast90percentoftradebetweentheParties,andshouldcoverallsectors.Moreover,theUnderstandingonArticleXXIVstipulatesthattransitionperiodsshouldexceedtenyearsonlyinexceptionalcircumstances.

The standstill in WTO

negotiations also complicates the

EPA process


alongtime.Inthisrespect,somehavestartedtocall,albeitreluctantly,foranagree-menta-minima,whichwouldprobablymeanfewcommitmentsinagricultureandNAMAin termsofmarketaccessand subsidies reduction,but someprogressontradefacilitationandsomeadvancesonServicesandAidforTrade.18

Other developments in international trade negotiations

InlightoftherecentsuspensionoftheWTOnegotiationsandtheongoingEPAprocess,Africancountrieshaveanevergreaterinterestindiversifyingtheirexportmarkets.Theyareinvolvedinanumberofregionalandfreetradeagreementsandnegotiations.Theyarealsobenefitingfromseveralmajorpreferentialschemessuchas theUSA’sAfricanGrowthOpportunityAct (AGOA).SomeAfricancountriesarealsoengagedinbilateraltradetalkswithotherregionsoftheworld.Thissectionhighlightsthemajorrecentdevelopmentsrelatedtotheseprocesses.

African regional integration

Fostering African regional integration has been a long-standing objective of thecontinent.TheTreatyofAbujaEstablishingtheAfricanEconomicCommunityin1991,(chapter1)callsforagradualcontinentalintegrationprocesscentredontheintegrationofthefivesubregions(North,West,East,CentralandSouthern).EPAprocessesarealsoaimedatsupportingregionalintegrationinAfrica.Unfortunately,integrationremainshamperedbyseveralobstaclesincludingpoliticalandsecurityfactors,poortransportandcommunicationinfrastructure,alowdegreeofcomple-mentarityinthestructuresofproductionandtheoverlycomplexwebofmember-shipsacrossdifferentRECs.

Thislatterproblem,alsoknownasthe“spaghetti-bowl”situationisparticularlyacuteinsomesubregions.InWestAfrica,themostadvancedintegrationisbyfarthatoftheWAEMUwhileEPAnegotiationsareongoingbetweenEUandECOWAStowhich is associated Mauritania, a member of the Arab Maghreb Union (AMU).CapeVerde,amemberofECOWAS,hasrecentlyshowninterestinnegotiatingaseparateEPAwithEU(www.acp-eu-trade.org).MostbutnotalloftheCOMESAmembersarenegotiatingEPAsunderESA.EgyptandLibyaareCOMESAmembersbutarenotpartoftheEPAnegotiationprocess.However,therearelong-termplansforacustomsunionamongCOMESAcountriessothismeansthattheESAexternaltariffmayhavetobereviewedatalaterstage.

Meanwhile,Kenya,thelargesteconomyinEasternAfrica,isassociatedwithUgandaandTanzaniaintheEastAfricanCommunity(EAC)customsunion.However,whiletheformertwoarenegotiatingEPAswithESA,TanzaniaisnegotiatingitsEPAwithSADC.SADCisplanningtocreateacustomsunionby2008,implyingthatTan-

18 ThisisforexamplethecaseofPeterSutherland,aformerWTODirector-General,inhisspeechatChathamHouse,Tuesday,14November,2006.

African countries are involved in a

number of regional and free trade

agreements and negotiations


zaniawould, intheory,bepartoftwocustomsunions.Moreover,withinSADC,Southern African Customs Union (SACU) countries are associated in a customsunionwithSouthAfrica,whichhasitsowntradeagreementwithEU.SouthAfricahas,however,beenrecentlyassociatedwithSADCintheEPAnegotiations,whichshouldcontributetoharmonizationofpositions.Inthelongerterm,itseemsthattheobvioussolutiontothequestionofoverlappingmembershipisthecreationofapan-Africanfreetradeareaandthencustomsunion,whichisthestatedobjectiveoftheAbujaDeclaration.

Preferential trading schemes

Thirty-sevenAfricancountriesareeligibleunderAGOA,whichgrantsAfricancoun-triesquasiDFQFaccesstotheUSmarket.In2005,USimportsfromSSAunderAGOAtotalled$38.1billion,up44percentfromthepreviousyear,primarilyduetoanincreaseinimportsofoil.USnon-oilimportsfromAfricaactuallydeclinedby16percentto$2.9billion,mainlyduetoincreasedcompetitioninthetextileandapparelsectorinthewakeoftheterminationoftheMultifibreAgreement.Therewerealso someminoradvances in traditionalandnon-traditional sectors suchaschemicalproducts,fruits,nuts,cutflowersandfootwear.

Thirty-fourAfricancountriesareLDCsandarethereforeeligiblefortheEU’s“Eve-rythingbutArms”scheme.Othernon-LDCAfricancountriesareeitherbeneficiar-iesofEU’sGSPorarepartytoabilateralfreetradeagreementwiththeEU(TDCAandEuro-Medprocess).

Otherrecentdevelopmentswithregardtopreferentialschemesincludethepartici-pationforthefirsttimeofacustomsunion–Mercosur-intheGeneralSystemofTradePreferences(GSTP).GSTPisaSouth-Southinitiativeunderwhichdevelop-ingcountriesgranteachotherpreferentialmarketaccess.

Bilateral talks

SeveralAfricancountriesorgroupingsarealsoinvolvedinbilateraltradenegotia-tionsinordertodiversifytheirexportmarketsandenhancetheirintegrationintheglobaleconomicsystem.Forexample,WAEMUcountriesarecurrentlynegotiatingFTAswith severalNorthAfrican countries.USAandSACUare also engaged infreetradetalks.SouthAfricaisdiscussingapotentialFTAwithIndiaandMercosurcountries.WiththerecentexplosionoftradeflowsbetweenAfricaandChinaandIndia,severalcountriesarecarryingoutbilateraltradenegotiationswiththesetwoAsiannations.

With the suspension of WTO negotiations, several countries and regions haveexpressedanincreasedinterestinenhancingtheirtradearrangementsnetworks.EUhasrecentlyissuedadeclarationthatitintendstonegotiateagreementswithcoun-

Several African countries or groupings are also involved in

bilateral trade negotiations in

order to diversify their export

markets


triesinSouthandSouthEastAsia,andreviveitsnegotiationswithMercosur.TheUSAisalsocurrentlynegotiatingseveralagreementswithintheWesternhemisphereandAsia. Inthiscontext, there isariskthatAfricawill remain isolatedfromthewaveofbilateral tradeagreements,due to its lownegotiatingandmanufacturingcapacities.

Africacouldineffectremainina“spoke”situationwhilerichercountrieswithmorenegotiatingandproductioncapacitiesareabletoplacethemselvesatthecentre–orhub–ofanetworkof tradeagreements, therebyattractingmore investments. Inorder to avoid such a situation,African countriesmust -with the support of theinternationalcommunity-continuetoreinforcetheirtradecapacities,bothintermsofpolicyformulationandofnegotiationsandmarketableproducts.Theymustalsoreinforcethesecapacitiesattheregionallevelinordertoreapeconomiesofscale.

3.2 Financing development: emerging issues and challenges for Africa

Trends in financing development��

TheavailabilityoffinanceaswellasaccesstofinanceareimportantinacceleratingeconomicdevelopmentinAfricaandinincreasingthelikelihoodoftheregionmeet-ing theMDGs.Since the2000UnitedNationsMillenniumDeclaration, severalstudieshaveshownthatAfricafacesaseriousfinancinggapandthatifthisgapisnotfilled,itwillbeunabletomeetanyofthegoals(UNECA2006a).Sachsetal.(2004)provideevidencesuggestingthatSSAwouldneedapproximately$25billioninadditionalODAperyearinordertomeettheMDGs.Intheirview,theregionisinapovertytrapandsoneedsabigpushinfinancialaidinordertoachievesus-tainedgrowthandpovertyreduction.TheMarch2005ReportoftheCommissionforAfricaalsoprovidesevidenceforsimilarconclusions.

Inrecentyears,effortshavebeendirectedatfindingwaysandmeanstomobilizetheadditionalfundsneededtofillthisfinancinggapthroughmobilizationofbothdomestic andexternal resources.. In this section, trends in thevarious sourcesofdevelopmentfinanceintheregionarehighlighted.

Enhancing domestic savings mobilization can increase investment

Themobilizationofdomestic savingswill provide themuchneeded resources tofinanceinvestmentineconomicandsocialinfrastructureinAfrica.Atthemoment,investmentratiosareverylowinseveralcountries.Relativetodevelopingcountries

19 UNECA(2006a)providesadetaileddiscussiononthevolumeanddistributionofcapitalflowsinAfrica,aswellasontheirimpactondevelopment,includingemployment.

African countries must continue to

reinforce their trade capacities


inAsiaandLatinAmerica,SSAhasthelowestinvestmentratios.Forexample,overtheperiod2000-2004,domestic investmentasaproportionofGDPwas18percentinSSAand31percentinEastAsiaandthePacific.Ascanbeseenfromfigure3.2,thedomesticinvestmentratioinSSAislowbecausethedomesticsavingsratioisalsolowandtheregionhasdifficultiesattractingsustainedprivatecapitalflows.OvercomingthisinvestmentandsavingsconstraintisamajorchallengeforAfricanpolicymakersandthewayinwhichitisresolvedwilltoalargeextentdeterminetheregion’sabilitytoachievesustainedeconomicgrowthinthemediumtolongterm.

Figure �.�Investment and savings ratios for sub-Saharan Africa, 1990-2004


Historically,SSAsaveslessthan20percentofitsGDP.Overtheperiod1990-1994,theaverageratioofdomesticsavingstoGDPwas16percent.Therewasaslightimprovementinthisratioto17percentovertheperiod2000-2004.However,thisnumberisconsiderablybelowtheaverageforEastAsiaandthePacific(35percent),LatinAmericaandtheCaribbean(21percent),andMiddleEastandNorthAfrica(26percent).ConcertedeffortsmustbemadebyAfricanleaderstoincreasedomes-ticsavingsiftheregionistoexperiencesustainedgrowthandincreasedlikelihoodofcatchingupwithotherdevelopingregions.

ThelowaggregatesavingsratioobservedinSSAmasksthewidedifferencesinsav-ingspatternsacrossthecountries.Thereareseveralcountrieswithsavingsratiocom-parabletothoseinEastAsia.Forexample,overtheperiod2000-2004,fivecoun-tries,Algeria,Botswana,RepublicofCongo,GabonandNigeria,hadsavingsratiosgreaterthan30percent.Theratiosrangefrom32percentinNigeriato51percentintheRepublicofCongo.Thesecountriesareoil-andordiamond-exportingnationsthatsawanincreaseinexportrevenueduetorisesinthepricesofthesecommodities.

The mobilization of domestic

savings will provide the much needed

resources to finance investment

in economic and social infrastructure

in Africa


Asaconsequence,theymaynotbeabletosustainthecurrentincreaseindomesticsavings,especiallyifthereisadeclineintheworldpricesoftheirexports.

Despitethisuncertaintyandvulnerability,itisworthnotingthattheincreaseinsav-ingshasenabledthefivecountriestoincreasetheirinvestmentratios,althoughtheincreaseinthelatterisnotaslargeasintheformer.Thus,akeychallengeishowtotranslatetheseincreasesindomesticsavingsintoproductiveinvestment,especiallyinnon-oilandnon-mineralactivities,toensureandincreaseprospectsforsustainedeconomicgrowth.

Elevencountrieshadnegativesavingsratiosovertheperiod2000-2004.Sincesev-eraloftheseareeitherinpoliticalcrisesorarepost-conflicteconomies,itisnotsur-prisingthattheyhaddifficultiesmobilizingdomesticsavings.Forexample,LiberiaandSierraLeonearejustemergingfromverydisruptivepoliticalconflicts.However,countriessuchasLesothoandMalawihadnegativesavingsratiosalthoughtheydidnothaveanyequivalentpoliticalcrisesduringthereviewperiod.Twenty-eightcoun-triesintheregionhadpositivebutlowsavingsratios,includingSouthAfrica,whichhasadevelopedfinancialsystemandisthusexpectedtobemoreabletomobilizesustainabledomesticsavings.

Official flows increasing

Overthepastthreedecades,therehasbeenashiftinthegeographicdistributionofofficialflows.Inthe1970s,countriesinAsiaaccountedforalargeshareofODA.However,sincethe1979oilpriceshock,SSAaccountsforalargershareofODA.During1993-1994,about27percentofODAwenttoSSA,whiletheotherregionsoftheworldgotlessthan25percenteach.During2003-2004,SSAreceivedabout36 per cent of ODA (figure 3.3). This increase reflects recent efforts by OECDcountriestoscaleupthevolumeofaidtoAfricatoenhancetheprospectsformeet-ingtheMDGs.

Historically,officialflowshaveplayedanimportantroleintheeconomicdevelop-mentofcountries.Asisobviousfromfigure3.4,totalODAtoSSAhasbeenontheincreasesincethe1970s.Itreachedapeakof$19billionin1992anddeclinedformostofthe1990s.ThetrendinpercapitaODAalsofollowsasimilarpattern.Sincethe2000MillenniumDeclaration,however,ODAtoSSAhasbeenontheincreaseagain, reachingapeakof$26billion in2004.Thatsaid, it shouldbenotedthatwhenexpressedasapercentageofGDP,ODAtotheSSAin2004was5percentofGDP,whichisstillbelowthe6percentfigurerecordedin1990.

WithintheAfricanregion,thedistributionofaidflowsisunevenwithafewcountriesaccountingforasignificantpercentageoftheaidflows.In1990,thebigrecipientsoftheaidflowswere:Egypt($US5.4billion);Kenya($1.2billion);Tanzania($1.2bil-lion);Morocco($1.1billion);Ethiopia($1billion);andMozambique($1billion).TheotherAfricancountriesreceivedlessthan1billiondollarseach.Asaresultof

A key challenge is how to translate these

increases in domestic savings

into productive investment


thenewfocusandprioritiesgiventotheregionbyG-8countries,aidflowstoseveralcountrieshaveincreased.In2004,thefollowingtencountriesreceivedatleast$1billiondollarsofODA:Angola,Ethiopia,DemocraticRepublicofCongo,Egypt,Ghana,Tanzania,Madagascar,Mozambique,Uganda, andZambia. Inper capitaterms,themainrecipientsofODAintheregionin2004were:CapeVerde($282);SaoTomeandPrincipe($218);Seychelles($124);Swaziland($104);Zambia($94);andSenegal($92).

SincethelaunchoftheEnhancedHIPCinitiativein1999,therehasbeenachangeinthecompositionofSSAaidcommitments.Theshareofprojectaidintotalaidtotheregionhasdecreasedwhilethatofdebtforgivenesshasincreasedfromunder10percentin1990-1994toabout18percentovertheperiod2000-2003.Nonethe-less,projectaidstillaccountsformorethan60percentofSSAaidcommitments(Guptaetal.2006).GiventherelativelylowdomesticsavingsratiosofSSAcoun-tries,theregionwillcontinuetorelyonaccesstoODAasamajorsourceoffinanc-ingdevelopment,unlessdrastic stepsare taken toboostprivatecapitalflowsandmobilizedomesticsavings.

Figure �.�Regional distribution of ODA (% of total disbursements)


Within the African region, the

distribution of aid flows is uneven


Figure �.�ODA to sub-Saharan Africa ($US million)


Private capital flows

Private capital flows is another key source of external finance in SSA (UNECA2006a).Inthelate1990s,itwasamoreimportantsourceofexternalfinancetotheregion.In1998and1999,netprivateflowstoSSAwere13.7and16.7billiondol-larsrespectively.Overthesameperiod,netofficialflowstotheregionwere10.6and10.3billiondollarsrespectively.NetprivatecapitalflowstoSSAwerelowovertheyears2000-2002dueinparttotheimpactoftheAsianfinancialcrisesoninvestorattitudestowardsforeigninvestment.Privatecapitalflowstotheregionhasincreasedfastsince2003andtheyexceedednetofficialflowsin2005(table3.2).

AlargepartofrecentprivatecapitalflowstoSSAisintheformofequityasopposedtodebt.In2005,netequityflowsaccountedfor86percentofnetprivatecapitalflowstotheregion.Furthermore,between1998and2002,thenetdebtflowswerenegative,reflectingthefactthat,duringthisperiodseveralcountriesintheregionweremoreinterestedinservicingexistingdebtthaninaccumulatingfurtherdebt.Thedecline in thedebt-equity ratioofprivate capitalflows toSSA is awelcomedevelopmentasitshouldlimittheincidenceofdebtoverhanginseveralcountries.Itshouldalsobenotedthattherehasbeenashiftinemphasisfromshort-tomedium-and long-termdebt,whichwillhelp toavoid thematuritymismatches thathavebeenafeatureofdebtintheregion.

RecentequityflowstoSSAhavealsobeenintheformofFDIinflows(table3.2),asopposedtoportfolioequityinflowsthatarehighlyvolatileandoftenleavecountries

A large part of recent private capital flows to

SSA is in the form of equity as opposed to debt


vulnerable tosuddenreversalsand investorsentiments.TheincreasingrelianceofAfricancountriesonFDIratherthandebtshouldbeencouragedbecauseitwillhelptoavoiddebtaccumulationwiththeassociateddebtserviceburden.FDIisalsoagoodsourceoffinancingdevelopmentbecause ithasapotentially importantroletoplayinstimulatinggrowthanddevelopment.Africancountriesshouldputmoreeffectivepolicies inplace to attractFDI and increase their shareofdevelopmentfinancefromthissource.Table3.3showsthattheregioncurrentlyattractslessFDIthanmostdevelopingcountries.In2005,FDItoSSArepresentedabout7percentofFDItoalldevelopingcountries.

Table �.�Net inward foreign direct investment across regions ($US billion)

Group 1997 1998 1999 2000 2001 2002 2003 2004 2005

All developing countries 168.7 172.4 183.3 168.8 176.9 160.3 161.6 211.5 237.5

East Asia and Pacific 62.1 57.8 50.8 44.3 48.5 57.2 59.8 64.6 65.3

Europe and Central Asia 24.6 27.4 29.8 30.2 32.7 34.9 35.9 62.4 75.6

Latin America and the Carribean

66.7 74.1 88.3 79.3 71.1 48.2 41.1 60.8 61.4

Middle East and North Africa

2.1 2.7 2.4 4.1 3.4 3.7 5.6 5.3 9.1

South Asia 4.9 3.5 3.1 4.4 6.1 6.7 5.6 7.2 8.4

Sub-Saharan Africa(as % of FDI to develop-ing countries)

8.3

4.9

6.9

4.0

9

4.9

6.5

3.9

15

8.5

9.5

5.9

13.6

8.4

11.3

5.3

17.6

7.4

Angola 0.4 1.1 2.5 0.9 2.1 1.7 3.5 1.4 1.5

South Africa 3.8 0.6 1.5 1 7.3 0.7 0.8 0.6 6.3


Table �.�Sources of external finance in sub-Saharan Africa 1998-2005 ($US billion)

1998 1999 2000 2001 2002 2003 2004 2005

Net Private Flows 13.7 16.7 9.9 12.1 6.3 15.8 20.7 28.5

Net equity flows FDI inflows Portfolio equity inflows

15.56.98.7

189.09.0

10.76.54.2

1415.0-1.0

9.19.5-0.4

14.313.60.7

1811.36.7

24.717.67.2

Net debt flows Medium/long term Short term

-1.8-1.3-0.5

-1.3-0.7-0.6

-0.70.4-1.1

-20.1-2.1

-2.8-1.0-1.8

1.52.5-1.0

2.81.71.1

3.82.31.5

Net Official Flows 10.6 10.3 10.7 10.7 16.6 23.3 25.1 25.2

Bilateral aid grants(excludes technical cooperation grants)

10.1 9.9 10 10 14 22 24.2 28.4

Net debt flows 0.5 0.4 0.7 0.6 2.6 1.2 0.8 -3.2



The problem of capital flight

TheanalysisofcapitalflowstoandfromAfricarevealsacuriousparadox.Ontheonehand,Africancountrieshaveaccumulatedlargevolumesofdebt,presumablytofilltheirresourcegapandfinancetheirdevelopmentneeds.Ontheotherhand,asdiscussed in-depth inUNECA(2006a), thecontinentcontinues toexperienceheavyfinancialhaemorrhageintheformofcapitalflight,someofwhichisfinancedbyborrowedfunds.ThislossofcapitaldeprivesAfricaofasizableportionoftheveryresourcesitneedsfordevelopmentfinancing.

Remittances

Ineconomieswithverylowdomesticsavingsandpooraccesstointernationalcapitalmarkets,migrantworkers’remittancescanplayavitalroleindevelopmentfinance.Inseveralregionsoftheworld,thisisindeedgrowingatanunprecedentedrate.In2004,itaccountedfor1.5percentofGDPinSSA,1.7percentinEastAsiaandPacific,2percentinLatinAmericaandtheCaribbean,4.1percentinMiddleEastandNorthAfrica,and3.6percentinSouthAsia.In2005,thetotalvalueofremit-tancesfromallregionswas$232billionwhichismarginallybelowthetotalvalueofnetinwardFDItoalldevelopingcountries($237billion)forthesameyear.Thetruevalueofremittancesmaybelargergiventhefactthatsomeremittancesaretransmit-tedthroughinformalchannelsandsoarenotreflectedinofficialstatistics.

InSSA,remittancesarebecomingincreasinglyimportant,withremittancesin2004at about1.5per centofGDP.Although this is lower than the5per centfigurerecordedforODAinthesameyear,itisclearlynotaninsignificantsourceoffinanc-ing.UNECA(2006)discussestheadvantagesanddisadvantagesofremittancesrela-tivetootherflows.Intermsofmonetaryvalue,themagnitudeofremittancestoSSAisstillrelativelysmallcomparedtoreceiptsbyotherdevelopingregions.Estimatesavailablefor2005,suggestthatSSAreceived$8.1billioninremittancescomparedto$43billionand$42billionforEastAsiaandthePacificandLatinAmericaandtheCaribbeanrespectively.Theregionalsoreceivedlessfromthissourcethancoun-triesinSouthAsiaandMiddleEastandNorthAfrica.

Thatsaid,itshouldbenotedthatthelowfigurereportedforSSAmaybeduetothefactthatrelativetootherregions,ittransfersmoreremittancesthroughinfor-malchannels.Itisalsoduetothefactthatfinancialinstitutionsintheregionarelessdevelopedthanintheotherregionsandsoitismoredifficultandcostlytotransfersremittances.

Migrationisalsoasourceofconcernbecauseofthenegativeimpactofbraindrain,aphenomenonthatreflectsthefailureofAfricaneconomiestoabsorbhumancapital.

In SSA, remittances

are becoming increasingly

important


Inresponse,governmentsneedtodesignstrategiesnotonlytobuildhumancapitalbutalsotoretainit.20

From Monterrey to Gleneagles

Africancountriesandtheirdevelopmentpartnershaverecognizedthecrucialroleoffinanceindevelopmentandaremakingseriouseffortstomobilizebothinterna-tionalanddomesticresources.However,theyfaceseriouschallengesintheireffortstousedevelopmentfinanceasaneffectiveinstrumentfordevelopment.Thesechal-lengesinclude:

• Finding an effective and sustainable solution to the external debt crisesfacingseveralAfricancountriessoastoreleaseresourcesfordevelopmentfinance;

• Attracting sustained private capital flows, including remittances, andensuring that theyare in sectorswithhighvalue-addedandemploymentimpact;

• Improvingdomesticresourcemobilizationthroughincreasedsavings,highertaxrevenue,andreductionofcapitalflight;

• Improvingtheeffectivenessandabsorptivecapacityofforeignaid;and• Usinginternationaltradeasavehicleforresourcemobilization.

The Monterrey Consensus, adopted by Heads of State and Government at theInternationalConferenceonFinancingDevelopmentinMarch2002,wasthefirstcomprehensiveandglobalattempttoaddressthesechallenges.Itwasalsothefirsttimethatdevelopmentfinanceandrelatedissuesbecamethemainfocusininter-national financial discussions. In the Monterrey Consensus, world leaders notedwithconcernthefinancialgaptobefilledinordertoattaintheMDGs.Theycalledforanewpartnershipbetweendevelopedanddevelopingcountriesandcommittedthemselvestomobilizingdomesticfinancialresources,attractinginternationalcapi-talflows,promoting international tradeasanengine fordevelopment, increasinginternationalfinancialandtechnicalcooperationfordevelopment,sustainabledebtfinancingandexternaldebtrelief,andenhancingthecoherenceandconsistencyofinternationalmonetary,financialandtradingsystemsfordevelopment.

AlthoughtheMonterreyConsensushighlightedtheimportanceofaidharmoniza-tionforeffectivedevelopmentoutcomesinrecipientcountries,therewerenoclearguidelinesandcommitments fromdonors toensure that theobjectiveswouldbeachieved,untiltheHigh-LevelForumonHarmonizationheldinRomeinFebruary2003.IntheensuingRomeDeclarationonHarmonization,donorsacknowledgedtheneedtoreducetransactionscostsofaiddeliveryinrecipientcountries.Theyalsostressedtheneedforcountryownershipofaidprogrammesandforgoodpractices,

20 See Journal of African Economies, December 2006, Volume 15, Supplement 2, for a detailed discus-sion of this topic.

Governments need to design

strategies not only to build human

capital but also to retain it


standards andprinciples in implementingdevelopment cooperation.Against thisbackground,donorscommittedtoprovidingdevelopmentassistanceinaccordancewithpartnercountrypriorities,implementinggoodpractices,standardsandprinci-plesindevelopmentassistancedeliveryandmanagement,adaptingharmonizationeffortstothecountrycontext,andharmonizingdonorpoliciesandprocedures.

Asafollow-uptotheRomeDeclarationonHarmonization,aninternationalround-table on Managing for Development Results was held in Marrakech in Febru-ary 2004. The outcome of this meeting was the Joint Marrakech MemorandumonManagingforDevelopmentResultsendorsedbythetheAfricanDevelopmentBank (AfDB), Asian Development Bank (AsDB), Inter-American DevelopmentBank(IADB),EuropeanBankforReconstructionandDevelopment(EBRD),theWorldBank,andtheChairmanoftheDevelopmentAssistanceCommitteeoftheOrganizationforEconomicCooperationandDevelopment(DAC/OECD).IntheMemorandum,theycommittedtofosteringaglobalpartnershipandapproachonmanagingfordevelopmentresultsandaideffectiveness.

WhiletheMonterreyConsensus,theRomeDeclarationandtheMarrakechMemo-randumdefinedthemainobjectivesoftheaid-effectivenessagendaandledtoanexpansioninactivitiesaimedatimprovingtheeffectivenessofaiddelivery,theParisDeclarationonAidEffectivenessof2005representsthefirstboldattemptbydonorsanddevelopingcountriestotakemonitorableactionstoreformthewayaidisdeliv-eredandmanaged.ThelatterdeclarationwastheoutcomeoftheHigh-LevelForumonAidEffectivenessheldinParis,28February–2March2005.

The2005ParisDeclarationonAidEffectivenessfocusedonfivekeyareas,namely,ownership,harmonization,alignment,managingforresults,andmutualaccount-ability.Regardingownership,theDeclarationstressedtheneedforpartnercountriestoexerciseeffectiveleadershipovertheirdevelopmentpoliciesandcoordinatedevel-opment actions. On alignment, donors made commitments to base their overallsupportonpartnercountries’nationaldevelopmentstrategies,institutionsandpro-cedures.Theyalsomadecommitmentstoprovidereliableindicativecommitmentsofaidoveramulti-yearframeworkandtodisburseaidinatimelyandpredictablefashionaccordingtoagreedschedules.ReducingtheproportionofaidthatistiedisalsoakeyaspectofthisareaoftheDeclaration.

Intheareaofharmonization,donorscommittedtomakingtheiractionsmorehar-monized,transparentandcollectivelyeffective.Onmanagingforresults,theymadecommitments tomanage and implement aid in away that focuses on thedesiredresultsandusesinformationtoimprovedecision-making.Finally,regardingmutualaccountability, donors and developing countries made commitments to enhancemutualaccountabilityandtransparencyintheuseofdevelopmentresources,asbothpartiesareaccountablefordevelopmentoutcomes.AnimportantfeatureoftheParisDeclarationwasthatindicatorsofprogressandtargetsweresetforeachofthefiveareastoincreasetransparencyinmonitoringtheimplementationofagreedcommitments.

Donors are committed to

making their actions more harmonized,

transparent and collectively effective


TheG-8SummitinGleneaglesinJuly2005addedmomentumtothecommitmentsmadebyworldleadersinMonterreytoincreaseaidflowsandreducetheburdenofexternaldebtondevelopingcountries,toenhancetheirprospectsformeetingtheMDGs.TheDeclarationissuedalsorecognizedtheneedforsubstantialincreaseinODAtoconsolidateandbuildonrecentadvancesinAfricaandtostimulategrowthtoreduceaiddependency.Onaid,theDeclarationindicatedthatthecommitmentsofG-8countriesandotherdonorswouldincreaseODAtoalldevelopingcountriesby$50billionayearby2010comparedto2004.HalfofthisincreasewouldgotoAfrica,representingmorethanadoublingofaidtoAfricacomparedto2004.Ondebt,theG-8agreedtoaproposaltocancel100percentoftheoutstandingdebtsofeligibleHIPCcountriestotheIMF,InternationalDevelopmentAssociation(IDA)andAfricanDevelopmentFund,andtoprovideadditionalresourcestoensurethatthecapacityof the internationalfinancial institutionswasnotreduced.Theyalsore-affirmed their commitments to theParisDeclarationonAidEffectiveness andstressedtheneedfordevelopingcountriesandtheirgovernmentstotaketheleadondevelopmentandtobeaccountablefortheiractions.

Monitoring implementation of commitments

SincetheMonterreyConsensuswasadopted,effortshavebeenmadebybothdevel-opedanddevelopingcountriestoholddonorsaccountableforthepledgesandcom-mitmentsmadetodevelopingcountries.Inthissection,weexaminetheextenttowhichdonorshave livedup to theirpromises andpledges toAfrica in threekeyareas:scaling-upofaid;improvingaideffectiveness;anddebtreliefordebtcancella-tion.Duetodatalimitations,somepartsofouranalysiswillfocusoncommitmentsmadebytheG-8countries.

Compliance with regard to aid quantity

ThekeytargetthatdonorshavesetforthemselvesonaidistoattainanODAtoGNIratioof0.7percent.Sincethistargetwassetin1969,onlyafewcountrieshavemetit.In2004,theaverageratioforDACmemberswas0.26percent.Thatsaid,Denmark,Luxembourg,theNetherlands,Norway,andSwedenhavemetthetarget.CountriessuchasBelgium,France,Portugal,andSwitzerlandhavealsomadesignificantprogressalthoughtheyareyettomeetthetarget.AmongDACmembers,Japan,theUSA,andItalyhavethelowestODA/GNIratios-below0.20percentin2004.

TheG-8ResearchGroupattheUniversityofToronto,Canada,hasdevelopedaveryusefulmethodologyforassessingtheextenttowhichG-8countriescomplywiththecommitmentsmadeattheirannualsummits.Theassessmentusesathree-categoryscoringmethod:Fullornearfullcompliancewithcommitmentresultsinascoreof+1;Completeornearlycompletefailuretoimplementacommitmentresultsina

Efforts have been made by

both developed and developing

countries to hold donors accountable

for the pledges and commitments

made to developing countries


scoreof-1;andan“inabilitytocommit”or“work-in-progress”leadstoascoreof0.Aninabilitytocommitreferstofactorsoutsidetheexecutivebranchthatimpedestheimplementationofacommitmentwhile“work-in-progress”referstoaninitia-tivethathasbeenlaunchedbyagovernmentbutisnotyetnearcompletion.

Usingthisscoringmethodology,theperformanceoftheG-8countriesintermsofmeetingthecommitmentsmadetoAfricaandthedevelopingworldonscaling-upaidfallsintothecategory“work-in-progress.”ThisisbecausetheG-8countrieshaveonlymetpartofthecommitmentsmadeonscaling-upaidtodevelopingcountriesandtoAfricainparticular.OneofthereasonswhytheseG-8countriesasagrouphavenot fullycompliedwith theircommitments to scale-upaid toAfrica is thatsomeofthemhavenotmademuchprogressinfollowingthroughontheircommit-mentstodoubleODAtoAfrica.TheUSA,oneofthebigdonors,hasmadesomeprogressincomplyingwithitscommitmentsalthoughitisnotenoughtodoubleaidtoAfricaby2010.Incontrast,Canada,France,Germany,theUnitedKingdomandEUhaveallfullycompliedwiththeircommitmentsinthisareaandsohaveascoreof+1.

Compliance with regard to aid effectiveness

Thequantity of aid is importantbut theoverall effectiveness of any formof aiddependstoalargeextentonitsquality.Consequently,indiscussionsonaid,itisnowpopulartotalkaboutthequalityofaidandaideffectivenessinrecipientcountries.Therearevariousfactorsthatdeterminetheoverallqualityofaidandhenceitseffec-tiveness.Theseincludetheproportionofaidthatistied,theextenttowhichaidisintheformofgrantsorconcessionalloans,theproportionofaidthatgoestopoorasopposedtorelativelyrichcountries,thestateofgovernanceinrecipientcountries,andtheadministrativeortransactionscostsassociatedwithaid.

Table3.4presentsthepercentageofbilateralODAfromDACmembercountriestoLDCsthatisuntied.TotheextentthatmorethanhalfoftheLDCsareinAfrica,thetablecapturestheregion’sexperiencewithtiedaidaswell.ItisclearfromthetablethattherehasbeenareductioninthepercentageofaidfromDACmembercountriesthatistied.Overtheperiod1999-2001,55percentoftotalDACaidtoLDCswasuntied.In2004,thefigureroseto68percent.

Lookingat individualDACcountries,however,therearewidedifferencesinper-formance.CountriessuchasFinland,Ireland,Luxembourg,NorwayandtheUnitedKingdomhave successfullymovedaway fromtied tountiedaid.TheUSA,NewZealand,andGreecehaveaverylowratioofuntiedaidtototalaidandsoareatthebottomofthelist.Moreprogressneedstobemadebythesecountries,especiallytheUSA,iftheDACaverageistoimprovesignificantly.

The overall effectiveness of any form of aid

depends to a large extent on its quality

�0�Global Development Challenges for Africa in 2006

Table �.�Proportion of bilateral aid to LDCs that is untied

1999-2001 (average) 2004

Australia 0.42 0.91

Austria 0.34 0.68

Belgium 0.49 0.99

Canada 0.40 0.76

Denmark 0.77 0.80

Finland 0.69 1.00

France 0.54 0.85

Germany 0.43 0.66

Greece … 0.41

Ireland 1.00 1.00

Italy 0.30 0.80

Japan 0.76 0.81

Luxembourg … 1.00

Netherlands 0.86 0.96

New Zealand … 0.36

Norway 0.99 1.00

Portugal 0.42 0.99

Spain 0.25 0.95

Sweden 0.69 0.98

Switzerland 0.84 0.95

United Kingdom 0.62 1.00

United States 0.01 0.03

Total DAC 0.55 0.68

Source: OECD 2006a.

Regardingthecompositionofaid,therehasalsobeenprogressinthisarea.TheshareofgrantsintotalODAhasincreasedovertheyears.ForDACcountries,theaver-agewasroughly49percentovertheperiod1980-1984(Gupta,Pattillo,andWagh2006).Forthe2003-2004period,theaveragewas90percent.InDACcountriessuchasAustralia,Austria,Canada,Greece,Ireland,Luxembourg,Netherlands,andNewZealand,grantsrepresent100percentofODA.At60percent,JapanhasthelowestratioofgranttototalODA.AnimprovementisneededinthisareaifJapanistocatchupwiththeotherdonors.TheincreasingshareofgrantsintotalODAisawelcomedevelopmentinAfricancountries.Severalcountriesarealreadyheavilyindebtedandarelookingforwaystoreducetheirdebtburden.Reducingtheirpro-portionofloansintotalODApreventsfurtheraccumulationofdebts.

The increasing share of grants

in total ODA is a welcome

development in African countries

�0� Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification

Compliance with regard to debt relief

DebtreliefisoneareainwhichG-8countriesandotherdonorshavemadesignifi-cantprogressinmeetingtheircommitments.AtGleneagles,donorspromisedthatalldebtsowedbyeligibleHIPCtoIMF,IDA,andtheAfricanDevelopmentFundwouldbecancelled.TheG-8ResearchGrouphasalsoexaminedtheextenttowhichmembercountrieshavehonoured thecommitmentsmade inGleneaglesondebtreliefandfoundthattheyhavefullycompliedwithallcommitmentsinthisarea.

TheoutstandingperformanceoftheG-8intheareaofdebtreliefisdueinparttotheircommitmentandsupporttotheHIPCinitiativeandtotheMDRI.TheHIPCinitiativewasestablishedin1996toreducethedebtburdenofeligiblecountries.Asaresultofslowprogressinattainingthedebtreductionobjectiveoftheinitiative,anenhancedversionwaslaunchedin1999withrelativelylessrestrictiveeligibilitycriteria.AsofJuly2006,40countrieshadeitherqualifiedorwerecurrentlyunderconsiderationorwerepotentiallyeligiblefordebtreliefundertheinitiative.Ofthe40countries,19havereachedthecompletionpoint,10havereachedthedecisionpointand11arepre-decisionpointcountries.Inaddition,ofthe19countriesthathavereachedthecompletionpoint,15areinAfrica.

InadditiontosupportingdebtreliefundertheHIPCinitiative,G-8countrieswerealsobehindthelaunchingofMDRIin2005toreducethedebtburdenofeligibleHIPCcountriesandprovideadditional resources tohelp themmeet theMDGs.UndertheMDRI,theIDA,IMFandAfDBwouldprovide100percentdebtreliefoneligibledebttocountriesthathadcompletedtheHIPCprocess.AlthoughthesethreeinstitutionsareresponsiblefordeliveryofdebtreliefunderMDRI,eachinsti-tutionhasitsownguidelinesonhowitwillimplementtheagreements.Forexample,whileonlyHIPCcountriesareeligibleforMDRIprovidedbyIDAandAfDB,theIMFalsoconsidersnon-HIPCcountrieswithpercapitaincomeof$380orless.

Furthermore,forIMFandAfDB,eligibledebtisoutstandingdebtasofend-2004.ForIDA,itisoutstandingdebtasofend-2003.Asofmid-July2006,committedassistancetoAfricancountriesundertheHIPCinitiativeandassistancedeliveredorexpectedtobedeliveredunderMDRIwas$50billion(IDAandIMF2006).Ofthisamount,$34billionwascommittedundertheHIPCinitiativeand$15.9bil-lionunderMDRI.WithintheHIPCallocation,$21.6billionrepresentedassistancetothe15Africancountriesthatreachedthecompletionpointasatmid-July2006,while$12.5billionrepresentedassistanceto10Africancountriesthathavereachedthedecisionpoint.

Insummary,whiledonorshavemadesignificantprogressinmeetingcommitmentsondebtrelief,theyhavemaderelativelylesseffortinfulfillingthepledgesmadeonscaling-upaidandimprovingaideffectiveness.UrgentactionsneedtobetakenintheseareastoenableAfricancountriesobtainthepledgedresourcesneededtoattaintheMDGs.


Emerging issues on aid and debt

Inrecentyears,therehavebeendiscussionsontheimpactofnewaidanddebtinitia-tivesonrecipientcountries.ThereisnodoubtthatAfricancountriesneedmoreaidflowstoenablethemtoincreasethelikelihoodofachievingtheMDGs.However,moreaidflowswillalsoimposeseriouschallengesonAfricaneconomies,andpolicy-makersmustpreparethemselvestodealwiththesechallengesiftheyaretomaximizethebenefitsofaidandminimizethecosts.SeveralpapershavetriedtoidentifythechallengesfacingAfricancountriesasaresultofthedecisionbydonorstoscale-upaidtotheregion(BourguignonandSundberg2006;Heller2005).Thesechallengesincludehowto increasetheabsorptivecapacity foraid inrecipientcountriesandhowtoensurethataiddoesnotleadtolossofcompetitivenessthroughrealexchangerateovervaluation.Inthissection,theeconomicconsequencesofscaling-upaidanddebtrelieftoAfricancountriesareexamined.

Economic impact of aid

Theimpactofthescaling-upofaidhasbeenamajorpreoccupationofresearchersandpolicy-makersinrecentyearsasreflectedinthegrowingliteratureonthesub-ject.Severalpapershaveaddressedthemain issues includingthe“Dutchdisease”problem,theeffectongrowth,theimpactonfiscalsustainabilityandtheissueofpredictabilityofaid.

Dutch disease

TheDutchdiseaseeffectisprobablythemostwidelydiscussedpotentialadverseeffectofanincreaseinaidflows.Theideaisthatinasmallopeneconomywherepricesoftradedgoodsaredeterminedontheworldmarket,anincreaseinaidinflowsmayleadtoanincreaseinthepriceofnon-tradedgoodsresultinginarealexchangerateappreciation.Thisappreciationoftherealexchangeratewillhaveanegativeimpactonthecompetitivenessoftheeconomy.Theassumptionhereisthatalargepartoftheinflowsisspentonnon-tradedgoods.Inaddition,theDutchdiseaseeffectandtheimpactofaidflowsonrelativepricesandexchangeratesarenotautomaticanddependonseveralfactorsincludingtheshareofaidspentonproductiveinvestmentrelativetothatspentonconsumptionoffinalgoods.Iftheaidisfinancingproduc-tiveinvestment,itwillimproveproductivity,enhancegrowthandhavelessimpactonpricesandontherealexchangerate.

The evidence fromempirical studies on the impact of scaling-up aidon the realexchangerateandrelativepricesaremixed.Inarecentstudyof13Africancountriesby Chowdhury and McKinley (2006), eight countries had a positive correlationbetweennetaidinflowsandrealexchangerates,suggestingthatincreasedaidflowswereaccompaniedbydepreciation,ratherthanappreciationoftherealexchangerate.

More aid flows will also

impose serious challenges on

African economies


Infivecountries,thecorrelationwasnegative.Forthelinkbetweentheaidinflowsandtheinflation,thestudysuggestedthatthecorrelationforallthecountrieswaspositive,indicatingthatincreasingaidisassociatedwithanincreaseininflation,andthishasconsequencesforcompetitivenessoftheeconomy.ThepotentialforDutchdiseaseisarealconcernforAfricaneconomies.However,theriskcouldbemitigatedbyincreasingthelevelofaiddirectedtoproductiveinvestment,toimproveproduc-tivityandtohelptheeconomyrespondtopressurefromthedemandside.

Aid and growth

An important and compelling reason for increasing aid to Africa is to accelerategrowthand increase the likelihoodof attaining theMDGs in the region.Assess-mentsoftheperformanceofAfricancountriesshowthatitwouldbedifficultforthemtoachievetheMDGsifcurrenttrendscontinue.Highandsustainedgrowthisneededtoreducepoverty inAfricaneconomies.Thus, it is important toknowif scaling-upaidwillaccelerategrowth inAfrica.This issuehasbeendiscussedatlengthinseveralpapers(Clemensetal.2004;BurnsideandDollar2000;Easterlyetal.2003).

Therearethreemainviewsontherelationshipbetweenaidandgrowth.Thefirstisthataidhasapositiveeffectongrowth,butwithdiminishingreturnsasthevolumeof aid increases.Thechannels throughwhichaidhas apositive effectongrowthinclude:augmentingsavingsandmakingitpossibletofinanceinvestments;increas-ingworkerproductivitythroughinvestmentsinhealthoreducation;andprovidingachannel for the transferof technology fromrich topoorcountries.Thesecondviewonthelinkbetweenaidandgrowthisthataidhasnoeffectongrowth.Argu-mentsputforwardtosupportthisviewarethataidisoftenwasted,supportsbadgovernments,reducesdomesticsavings,andunderminesprivatesectorincentivesforinvestment.Inaddition,itisoftenarguedthatrecipientcountriesdonothavethecapacitytoabsorblargeamountsofaid.Thethirdviewontherelationshipbetweenthetwovariablesisthataidhasaconditionalrelationshipwithgrowth.Itworksbestincountrieswithgoodinstitutionsandpolicies.Forexample,arecentstudyonaidtoAfricancountriesshowedthatin11“goodperformancecountries”highgrowthislinkedtohighaidflows(Bourguignonetal.2005;WorldBank2005).

Aid and fiscal sustainability

Thedebateonthechallengesofincreasingaidhasraisedtheissueoffiscalsustain-ability(Heller2005).Oneofthekeyconcernshereistheimpactofincreasedaidonfiscalattitudesaswellasontheeffortsoftherecipientcountriestocollecttaxandincreasegovernmentrevenues.Thereisafearthatanincrease inaidwillnotencouragecountriestoincreasetheirfiscalrevenues.However,theseviewsarenotsupportedbythefindingsofrecentstudiesindicatingthattherelationbetweenaid

If the aid is financing

productive investment, it

will improve productivity,

enhance growth and have less

impact on prices and on the real exchange rate


andtaxcollectionisveryweak(Bourguignonetal.2005).Anothernoteableissueisthatofpublicexpendituremanagement.Ithasbeenarguedthatifhigheraidinflowsareusedtofinancelabour-intensivepublicservices(e.g.schoolsorclinics)thathavelargerecurrentcosts,thenifthereisanunexpectedfallinaidlevels,theabilityofthegovernmenttocontinuewiththeprovisionoftheseservicesmaybelimited.Conse-quently,effectivefiscalplanningiscrucialforeconomiesdependentonaidflows.

Volatility of aid

Aidrecipientshavetodealwiththeuncertaintysurroundingbothaidcommitmentsanddisbursements.Thisconcernisseriousbecauserecipientcountrieshavetofor-mulateand implementmedium-termdevelopment strategiesand it isdifficult todothiseffectivelyiftheyarenotcertainaboutthetimingandamountofaidthatwouldbeavailabletothemoverthetimehorizonconsidered.Theuncertaintysur-roundingaidisalsoaproblembecausestudieshaveshownthatitcanhavenegativeconsequencesforoutput(LensinkandMorrisey2000).Addedtothevolatilityprob-lemistheinefficiencyresultingfromconditionsandproceduresassociatedwithaiddelivery.Inseveralcountries,themultiplicityofdonorprogrammesandtheirpooralignmentwithrecipientgovernmentprioritiesoftenleadtoinefficiencies.Thisinef-ficiencycontributestotheweakimpactofaidongrowthanddevelopment.

Provision of social services

Aidisoftenusedtofinancetheprovisionofsocialservices,especiallyhealthandedu-cation.Theideaisthattheseinvestmentshaveapositiveeffectonproductivityandhenceongrowthandpovertyreduction.ThecorrelationsbetweenaidandhealthandeducationexpendituresforAfricancountriesindicatethatthereisastrong,posi-tiveandstatisticallysignificantrelationshipbetweenhealthexpenditurepercapitaandaidpercapita.Thisrelationshipholds forbothcontemporaneousand laggedaid.Thecorrelationcoefficientsare0.28and0.33forcontemporaneousandlaggedaid,respectively.Withregardtoeducation,theresultsindicatethatthereisnostatis-ticallysignificantrelationshipbetweenaidpercapitaandtheshareofeducationintotalgovernmentexpenditure.Despitetheneedtouseaidforincreasingprovisionofsocialservices,itisimportantthatthisisnotdoneinawaythatreducesinvest-mentsininfrastructurebecausethisislikelytohavealong-runnegativeimpactongrowthintheregion.

Economic impact of debt relief

DebtreliefisalsooneofthemajorcomponentsorsourcesoftheexpectedincreaseinresourcestoAfricancountriestohelpthemfinanceactivitiesandactionsneededtomeettheMDGs.Asatmid-July2006,totalHIPCinitiativeassistancecommit-

Aid volatility contributes to the

weak impact of aid on growth and

development


mentandassistancedeliveredorexpectedtobedeliveredtoAfricancountriesunderMDRIwasabout$50billion.Ifdonorsfollowthroughontheircommitments,thiswillrepresentasignificantinflowofresourcestoeligibleAfricancountries.Itwillalsopresentchallengestothesecountries,including:

• Howtomanagetheadditionalresourceflowsemanatingfromdebtreliefandensurethattheyareeffectivelyusedforpovertyreduction;

• Howtoincreasedomesticabsorptivecapacitytoabsorbtheseinflowsandensurethattheydonotresultinrealexchangerateappreciationandareduc-tioninexportcompetitiveness;and

• Howtoensure that currentdebt reliefdoesnotencourageexcessivenewborrowingandtheaccumulationoffurtherdebt.

Asindicatedearlier,oneofthemainobjectivesofdebtreliefistofreeupresourcesforfinancingsocialprogrammesthatareexpectedtohavesignificantimpactonpov-ertyreduction.Inthissection,thelinksbetweendebtreliefandsocialexpenditure,inflationandgrowthareexamined.

Debt relief and social expenditure

Oneofthecompellingargumentsfordebtreliefisthatitwillfreeupresourcesforfinancingsocialprogrammesthatarevitalforalleviatingpoverty.Thereisageneralbelief that an increase in expenditureon education andhealthwill havepositiveeffectsonproductivityandonpovertyreduction.Despite thepopularityof theseviews,itisnotclearthatanincreaseindebtreliefwillactuallyboostsocialexpendi-ture.Recentempiricalstudieshavetriedtoexaminetheextenttowhichdebtreliefleadstoanincreaseinsocialexpenditures.ChavinandKraay(2005)examinedthelinkbetweendebtreliefandsocialexpenditure.Theyfoundnoevidenceofastatisti-calrelationshipbetweendebtreliefgrantedover1989-1993andtheshareofgovern-mentexpenditureonhealthandeducationduring1994-1998.

Thatsaid, theyalsofoundthatdebtreliefovertheperiod1994-1998wasassoci-atedwithanincreaseinthesharesofeducationandhealthintotalspendingduring1999-2003,althoughtheevidenceisnotrobust.Intermsofcountry-specificevi-dence,Nannyonjo(2001)arguesthatinUganda,debtreliefhadapositiveimpactonsocialexpenditureinthelate1990s,particularlyintheeducationandhealthsec-tors.DessyandVencatachellum(2006)havealsoexaminedthisissueusingAfricandata.Theyfoundthatdebtreliefhadapositiveimpactontheshareofeducationandhealthintotalspendingovertheperiod1989-2003.

Debt relief and growth

Oneoftheconcernsaboutthehighexternaldebtofpoorcountriesisthatitstiflesgrowthandsomakesitevenmoredifficultforacountrytogenerateenoughresources

One of the main objectives

of debt relief is to free up resources

for financing social programmes that

are expected to have significant

impact on poverty reduction


torepayitsexistingstockofdebt.Highdebtcanreducegrowththroughitsnega-tiveimpactoninvestment.Itcanalsoreducegrowthbyreducingtheincentivesofgovernmentstoadoptstructuralreforms.Severalattemptshavebeenmadetoexam-inethelinkbetweendebtandgrowth.However,untilrecently,mostofthestudiesusedataforbothemergingmarketsandlow-incomecountrieswithouttakingintoaccountthefactthattheheterogeneitybetweenemergingmarketsandlow-incomecountries has implications for the relationship between debt and growth. Unlikeemergingmarkets, low-incomecountrieshaveverylimitedaccesstointernationalcapitalmarkets.Inaddition,theyhaverelativelydifferenteconomicstructuresandrelyonforeignaid.Thesedifferencessuggestthattherelationshipbetweendebtandgrowthwilldifferacrossthetwogroupsofcountries.

Inarecentstudy,Pattilloetal.(2002)foundthatexternaldebthasanegativeeffectongrowthafteracriticalthresholdfordebtisreached.Inparticular,theyfoundthatwhenthenetpresentvalueofdebtisgreaterthan160-170percentofexportsand35-40percentofGDP,externaldebtstiflesgrowth.Withregardtothelinkbetweendebtreliefandgrowth,Clementsetal.(2005)presentevidencesuggestingthatdebtreliefundertheHIPCinitiativewilladd0.8-1.1percentagepointstotheannualpercapitaGDPgrowthratesofthecountriesintheirsample.ThesefindingssupportthewidelyheldviewamongstAfricanpolicymakersthatdebtreliefwillincreasetheprospectsforgrowthanddevelopmentintheregion.

3.3 ConclusionItisexpectedthattherecentrenewedglobalattentiontotheproblemsofdevelopingcountrieswillcontributetoredressingthetrendstowardsmarginalizationofthesecountries.ThisrenewedattentioncouldhaveapositiveimpactonAfricanecono-mies,allowingthemtoconsolidatethepositivegrowthperformancerecordedoverthepastyears.ThisinterestintheproblemsofdevelopingcountrieswasexhibitedintheDohaRoundofnegotiationsinitiatedin2001,whichbroughtdevelopmentissuestothecentreofthedebateinthenegotiations.TheinterestindevelopmentwasalsoillustratedintheMonterryConsensuswithaglobalcommitmenttoincreaseaidandcanceldebtfordevelopingcountries.

Thischapterhashighlightedthesenewtrendsinglobalattentionagainsttheprob-lems of developing countries in general and African countries in particular. Thechapterhasalsounderscoredthedelaysandgapsbetweencommitmentsandtheireffectiveimplementation.

Debt relief will increase

the prospects for growth and

development in the region


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_______2005a.“L’Afriqueetlesnégociationsagricoles”.PréfacedeK.Y.Amoako,EditionsMaisonneuveetLarose.

_______2005b.The Millennium Development Goals in Africa: Progress and Chal-lenges,AddisAbaba:UNECA,September.

_______2004.“EconomicandwelfareimpactofEUAfricanEconomicPartner-shipAgreements”.ATPCpaperNo.10,AddisAbaba.Seealso similar studiesbyUNECA/ATPCforindividualcountriesandRegionalEconomicCommunities.

WorldBank,2006.World Development Indicators.WashingtonD.C.

_______2006.Global Development Finance.WashingtonD.C.,TheWorldBank.

_______,2005.“AidFinancingandAidEffectiveness”.ReporttotheDevelopmentCommitteeonAidEffectiveness.

AcceleratingAfrica’s Development Through Diversification

Part

��

�ThediversificationofAfricaneconomiesisonewaythroughwhichtherecenteco-nomicgrowthachievementscouldbesustained.Africa’seconomictransformationcanbeachieved throughbothhorizontalandverticaldiversification. Inaddition,suchdiversificationwillhelptobuildcompetitiveeconomiesthatcanproductivelybeintegratedintotheglobaleconomy.Diversificationisthereforeapre-conditionifAfricaistoregisteraccelerateddevelopment.Thescaling-upofcurrentrealgrowthtodesiredlevelsandinabroadmannercanalsobesustainedifthereisdeepeninginthediversificationofAfricaneconomies.

Therelevanceofdiversificationtoeconomicgrowthanddevelopmentisnotnew.Butdiversificationmighthavebeenabandonedatatimewhenitcouldhaveplayedamajorroleinstrengtheninggainsfromearlierreformseffortsonthecontinent.TheEconomic Report on Africa 2007presentsthethemeofdiversificationasanewpara-digmforAfrica’sdevelopment.Thereportarguesthatdiversificationisaprerequisitetoachievingpositivedevelopmentinthecontinent.Thischapterandthefollowingtwowillprovideanalyticalandempiricalevidenceoftheimportanceofdiversifica-tionasakeypillarinthecontinent’sdevelopment.

ThischapterexploresAfrica’sdiversificationtrendstoseehowAfricahasfaredinitsattempts todiversify itseconomyandtoenablestructural transformationtotakeplace.Practicalexportexperiencesofsomecountriesarealsopresented.1ThisthenleadstowhatthisReport callsthediversificationregimesthatcharacterizetheresultsofthediversificationefforts.

4.1 Diversification trends in Africa2

Diversification trends at the regional level

Figure4.1showsthreedifferentmeasuresofdiversificationforAfricaneconomiesasawhole(seeBenHammoudaetal.(2006a)fordetaileddefinitionoftheindicesof

1 Althoughthisreportfocusesondiversificationofexports,otheraspectsofdiversificationarealsocrucialforeconomicgrowth,especiallydiversificationofproductionanddiversificationofmarketsforAfricanproducts.

2 AmoreelaboratedversionofthissectionhasbeenpublishedinBenHammoundaetal.(2006b).

Diversification trends in Africa


diversification).ThreeconcisecommentsonthegeneraltrendofAfrica’sdiversifica-tionexperiencecanbemade.

First,Africaneconomiesexhibitverylowlevelsofdiversificationandbyallmeasuresandaccounts,limiteddiversificationofexportswithverylittlechangeoverthelast25yearsor so.Withinthis25-yearperiod, fourdistinctphases thatgive thehis-toricalpictureofAfrica’seconomicdiversificationeffortscanbediscerned.Thefirstphaseappearstohaveendedaround1982andwascharacterizedbyprogresswithdiversification.

DespitetheadverseeffectsoftheeconomiccrisesthatAfricaneconomieswereexpe-riencingatthistime,thediversificationeffortsduringthe1970swerebeginningtoyieldpositiveresultsintheearly1980s.However,thosepositivediversificationgainsdidnotlast.Theescalationoftheeconomiccrisesinthefirsthalfofthe1980sandthestructuraladjustmentmeasuresinstitutedtodealwiththemimpactednegatively,leadingtothesecondphaseof1982-1991.Overthesetenyears,thediversificationgainsthathadbeenachievedearlierwerereversed.

The thirddistinctphaseofAfricanefforts towarddiversification started in1992.The macroeconomic stabilization policies of the 1980s may have contributed tothis positive development. Unfortunately, the gains registered were fragile as theimprovementinthediversificationindexlastedonlyupto1998.Sincethen,inafourthphaseofthediversificationexperience,Africaneconomieshavebecomemoreconcentrated,consideringtheupwardtrendofthediversificationindexfrom1998to2002.Thistrendneedstobereversedforthecontinenttotradeitswayoutofthechallengesitcurrentlyfaces.

Second, the African diversification experience has been volatile. Considering theevidencefromdifferentmeasuresofexportdiversification,thereisnodistinctandgeneraltrenddiscernibleintheAfricanexperienceonthewhole,asaclearanddefi-nitedirectionislacking.Whatisclearthoughisthatatthecontinentallevel,therehasbeenvolatilityinthediversificationindicators.

Third,wheretherehavebeensomeimprovementsindiversification,thegainshavebeenfragile.Againstthebackdropofthevolatilitynotedabove,Africaneconomieshavebeenunabletoregisteranysustainablemovementstowardsdeepeningdiver-sification.Theperiodswhendiversificationdeepenedhaveturnedouttobequitefragileandshort-lived,anindicationthatfundamentalstosupportsuchdeepeningwerenotinplace.

African economies exhibit very low levels of

diversification with very little change

over the last 25 years

��Diversification trends in Africa

Figure �.�Diversification indices for Africa

Source: Ben Hammouda et al. 2006a.

HowdoesAfrica’sdiversificationtrendcomparewiththoseofotherregions?Figure4.2showstheresultsofdiversificationeffortsinLatinAmericaandintheAsianNIEscomparedwiththeAfricansituation.TheNIEsincludedareHongKong,Indonesia,Korea,Malaysia,Philippines,Singapore,TaiwanandThailand.Intheearly1980s,all three regions made concerted efforts towards diversification. However, in the1980s,theintensityoftheeconomiccrisesthatravagedmainlythedevelopingworldhadaveryseriousimpactondiversificationresults.

Themaindeterminingfactoroftheimpactthecriseshadonthedifferentregionsappearstobethenatureoftheirresponse.TheAsianNIEsgaveadynamicresponsefromtheearlyyearsofthecrisesbywayofacceleratedinvestmentsandintensifieddiversification.Clearpoliciesaimedat integratingtheAsianNIEs toproductionvalue chains have been documented. In Africa, it appears that the response waslessdynamicandwasmoreoneof concentrationona fewcommodities.Africancountries,forthemostpart,seemtohaveadoptedadefensivereactioninstead.Thewindfallsinsomeoftheircommoditysectorsunderpinnedthisdefensivereaction.ThisisespeciallythecasewithregardtotheoilexportsoftheCentralandWestAfri-cansubregionswheregrowingoilrevenuesdominatedandledcountriestopursueamoreconcentratedpath,insteadofusingoilrevenuestodiversifytheirexports.

Growing oil revenues led countries to

pursue a more concentrated

path, instead of using oil revenues

to diversify their exports


Figure �.�Normalized Hirschman Index: Africa, Latin America and NIEs in Asia


Diversification trends at the subregional level

Thegeneralpictureof thecontinentalperformance thatwas shown infigure4.1masksthegainsandlossesmadeatthesubregionalandcountrylevels.Figure4.3givesthesituationatthesubregionallevelanditcomparesfivesubregionsdefinedaroundsomeoftheRECs.In1980,themostdiversifiedsubregionswereCOMESAandECOWAS.TheleastdiversifiedwasCEMACwithSADCandNorthAfricainbetween.By2002, thediversificationgainsat the subregional levelhadchanged,withthemostsignificantgainsmadebySADC,whichisnowthemostdiversifiedsubregiononthecontinent.ItisfollowedbyCOMESAandNorthAfrica.CEMAChasremainedtheleastdiversifiedsubregion.

TheimprovementsinSADC’sindexofdiversification,especiallyinrecentyears,areattributedmore toSouthAfrica’sheavilydiversified economy.ThediversificationresultsinotherSADCcountriesappeartobeeasilymaskedbythedominantnatureof the South African economy. Case in point is the Angolan economy which isbecomingincreasinglyconcentratedowingtoitsrelianceonoil.However,thiscon-centrationishiddenintheoverallSADCresultsduetoSouthAfrica’sdominance.

InthecaseofNorthAfrica,thereisacleartrendtowardsdiversification.ThiscouldbeattributedtotheeffortsofEgypt,MoroccoandTunisiatodiversify,giventheirproximity to the large and lucrative European market (box 4.1). Country-levelanalysesof theNorthAfricanexperienceshowthat thesubregion’sdiversificationresultsareclosetotheoverallAfricanresults(BenHammoudaetal.2006a).Itis


noteworthy thatalthoughdiversificationofNorthAfricaneconomieswasweakerin1980,thegapbetweentheseeconomiesandthatofthewholeofAfricahasbeensignificantlydiminished.TheTunisianexperiencewitheconomicdiversificationhasplayedabigroleinachievingthesubregionaloutcomegiventhestaticperformanceofeconomiessuchasAlgeria’s,aftermakingconsiderableprogressuntil1985orso.

UnliketheexperienceinNorthAfrica,COMESAlostsomeofthediversificationedgeithadatthebeginningofthe1980s.Yet,COMESAhadagreatincentivetodiversify.UnlikeothersubregionssuchasWest,CentralandNorthAfrica,theEastAfricansubregionhasnotbeenfavouredwithdiscoveriesofnewexportcommodi-tiessuchasoil.Itfailedtopursuepoliciesthatcouldhaveledtoamoredynamicresponse to the challenges that it faced after the main economic crises. WhileCOMESAisoneofthemostdiversifiedsubregionsinAfricaandevenmorediversi-fiedthanAfricaonaverage,performanceisdrivenbyonlyafeweconomies.

KenyaandMauritiushavehadsignificantdiversificationandassuchtheyhaveout-weighed the influenceofother economies suchasBurundi’s, thathashada ten-dencytobecomemoreconcentrated.ItisimportanttonotethatSudan,whichisoneofthelargesteconomiesinCOMESA,hadmanagedtomaintainastablepathof diversification until the structural changes following the discovery of oil. Forthe leastdiversified,CEMAC, theoil factordominance throughChad,RepublicofCongo,EquatorialGuineaandGabonisamajordeterminantofthediversifica-tionexperience.Notably,theCamerooneconomyratesasmorediversifiedthanthesubregionalaverage.

Figure �.�Normalized Hirschmann Index: Africa’s subregions


COMESA is one of the

most diversified subregions in Africa


Box �.� A success story of diversification in Egypt: the case of Orascom International

Orascom International Company offers an excellent example of diversification. The company has expanded its range of activities to include mobile telephones, construction, hotels, and informa-tion technology, as described below.

Orascom Telecom: Orascom Telecom is a leading international telecommunications com-pany operating GSM networks in seven high-growth markets in the Middle East, Africa and South Asia. As of September 2006, the population under license reached 460 million with an average mobile telephone penetration of approximately 22 per cent.

Orascom Construction Industries (OCI): OCI is a leading cement producer and construction contractor active in emerging markets. As a cement producer, OCI owns and operates cement plants in Egypt and Algeria, which have a combined annual production capacity approaching 13.5 million tons. Its new investments in Pakistan, northern Iraq, Algeria and Nigeria will increase annual production capacity to 24 million tons by 2007. As a contractor, OCI provides engineer-ing, procurement and construction services on industrial, commercial and infrastructure projects for public and private customers primarily in the Middle East, North Africa and Central Asia.

Orascom Hotels and Development (OHD): OHD is the primary designer, developer, contrac-tor and marketing force behind the highly successful El Gouna (Red Sea, Egypt), Taba Heights (Sinai, Egypt), Tala Bay (Aqaba, Jordan) and The Cove (Ras El Khaimah, United Arab Emirates) projects. It is also one of the key private players in the tourism sector and the largest single hotel owner in Egypt.

Orascom Technology Systems (OTS): OTS is one of the leading Information Technology (IT) and communications solutions providers and system integrators in Egypt, with more than 400 major customers involved in a variety of businesses. Casting a wide net over the technology sector, OTS’ business activities include sales, support and services for large-scale computer systems, software, telecommunications products, internet security systems, telecommunica-tions software solutions and turnkey project management.

Source: Orascom International, Official company records.

The magnitude of the oil factor in African economies is most pronounced inECOWASwhere thedominanceof theNigerian economyhas led to lowexportdiversificationintheoverallsubregionalperformance.Fromthelate1970stotheearly1980s,thediversificationindexforECOWASwashigherthantheaggregateAfricanindex.

ECOWAS,atthebeginningoftheperiod,wasoneofthemostdiversifiedsubre-gions. However, beginning from 1986 onwards, the economies of the subregionstartedtobecomemoreconcentrated,andwithin25years,thediversificationgainsthathadalreadybeenmadewereeroded.In1986,aclearstructuralshiftoccurredinNigeriathatwasrelatedtotheoileffectandthisshiftwasstrong.Itisnotpos-sibletodiscountthepoliticalfactorsassociatedwiththeconflictsandinstabilitiesthatplayedapartinerosionofthediversificationgains.ThisisparticularlythecasewiththerecenthistoryofCôted’Ivoire,whichatonepointwasaleadingeconomyinthesubregion.Politicalinstabilityunderminesdiversificationanditcanbeenvis-agedthatinstabilityaffectssomeactivitiesmore(ordifferently)thanothers.Forthe


period1991to1998,othereconomiesinthesubregionsuchasCôted’Ivoireweremakingsubstantialprogressondiversification.Senegalalsomanagedtosafeguardthe diversification gains it had achieved. Conflicts and political instability had anegativeeffectoneffortsinothercountriestocounteracttheNigerianoileffect.

ItisapparentthatthecontinentalgainsareattributedtojustafewAfricancountries,whoseexperiencecouldbereplicatedelsewhereifthegainshadresultedinbettereconomicandsocialperformance.Thisindicatesthatcountry-levelperformanceisimportanttounderstandingwhatishappeningatthecontinentallevel(figure4.4).Atthestartoftheperiod,AfricaasawholewasmorediversifiedthanbothMauritiusandTunisia.

Figure �.�Normalized Hirschman Index: Africa, Mauritius and Tunisia


Fortheperiod1982to1991,Africa’sdiversificationgainswerebeingreversedwhilecountries such as Mauritius andTunisia were becoming more diversified econo-mies.WhatdidMauritiusandTunisiadotomaketheireconomiesovercometheconstraintsposedbytheeconomiccrisesthatsonegativelyaffectedthecontinentas awhole?Both countrieshad a stable and sustained economicpolicy aimedatvery specific outcomes, in this case, increased diversification. For the most part,subregionalanalysisofthediversificationtrendspaintsapictureofvolatilityatthecountrylevel.

For the period 1982 to 1991, Africa’s diversification

gains were being reversed with a few exceptions


Case studies on export diversification for selected African countries

Sofar,diversificationtrendsinrelationtoAfricaneconomiesindicatethatdifferentcountrieshaveachievedvaryingresults.Theoverallconclusionisthat, ingeneral,Africaneconomieshave failedtomakegainsbeyondtheir initialpositions in theearly1980s.Ithasalsobeenpointedoutthattheyreacteddefensivelytothecrisesthatbesettheminthe1980s.Theirmacroeconomicstabilizationpoliciesdidnotcreateanenvironmentconducivefordynamicresponse,asagoodnumberofcoun-triesinAsiaandLatinAmericawereabletodo.Theirdefensiveresponseasseenintheoilfactor,perpetuatedthestatusquoandworseneditinsomeinstances.EarliergainsinsuchcountriesasGabon,NigeriaandSudanwereeroded.

In this sub-section, selected resultson thedifferentoutcomesof variousnationaleconomic diversification efforts are discussed. The evidence on how some of thecountrieshave responded isbasedon thecumulative export experience function.The cumulative export experiences of the top ten commodities are employed tomakethepointthatexportdiversificationinAfricahasbeenvaried.Mostcountrieshavenotmanagedtobreakoutoftheirtraditionalexportstomoredynamicnon-traditionalsectorswithhigherexport-earningpotential.

Theinterpretationofthecumulativeexportexperiencefunctionisasfollows.3Fortwodifferentindustrieswhosecumulativeexportexperiencefunctionsareplottedtogether,theindustrywhoseexportswereconcentratedearlierwouldhaveitsfunctionsfurthertotheleft.Thesectorswhoseexportexperiencesfunctionswereconcentratedearlierare theonesnormallyreferredtoas traditional.Thosesectorswhoseexportexperi-encefunctionisconcentratedlaterinagivensampleperiodareoftenreferredtoasnon-traditionalindustries.Increasingnumbersofindustriesthatareconcentratedinlateryearsareindicativeofanationaleffortstobreakawayfromover-relianceonmoretraditionalexports.Themorethenumberofsectorswithcumulativeexportexperi-encefunctionsshiftedtotheright,themoretheindicationofsomedynamisminnewexportdevelopments.

Case 1 - Mauritius

Figure4.5presentsthecumulativeexportexperienceofMauritius,oneofthemorediversifiedAfricaneconomies.IntheMauritiuscase,themoretraditionalsectorsaresugarandhoney,knittedoutergarments;andwatchesandclocks,withthelargerpartof theexportdevelopmentoccurringearly in the22-yearperiodundercon-

3 SeeGutierrezdePineresetal.(1997)ontheconstructionandinterpretationofthecumulativeexportexperiencesfunctions.

African countries have

not managed to break out of their

traditional exports to more dynamic

non-traditional sectors with higher

export-earning potential


sideration.Ontheotherhand,Mauritiushasmanagedtodevelopnon-traditionalexport sectors. These include fish, woven cotton fabrics, knitted undergarments,andnon-knittedwomen’souterwear.Thesearesectorswhoseexportexperiencehavebeendeveloped inmore recentyears.That the last threeof the export categoriesnamedabovearerelatedtothetextilesandapparelsectorcouldalsobeanindicationofsomeverticaldiversification.

Figure �.�Cumulative export functions for Mauritius’ top 10 export products

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Watches and clocks Cotton fabrics,woven

Pearl, precious, semi-prec. stones

Fish etc prepd, prsrvd nes

Women's outwear

Men's outwearnon-knit

Under garmentsnon-knit

Outer garmentsknit nonelastic

Under garments knitted

Sugar and honey

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Case 2 – Kenya

TheKenyanexperiencedoesnotdiffermuchfromtheexperienceofMauritius(figure4.6).However,therangeofexperiencesinthedifferentsectorsaremorepronounced.Kenyaisalsooneofthemorediversifiedeconomies(box4.2).However,itisevidentthatthetoptencommoditieshavenotbrokenintotherangeofmanufacturedproductswherethereisgenerallyevidenceofmoredynamism.Themosttraditionalsectoriscoffee.Ironandsteelarealsoshowingstrongindicationsofbecomingmoretraditionalexports.Asforthenon-traditionalindustries,Kenyahasmanagedtoattainstrongrealgrowthin

Kenya has managed to attain strong real growth in recent years in

export of vegetables


recentyearsinexportofvegetablesinparticular.Veryinterestingly,exportsofpetroleumproductsindicatethatthisindustryisalsobecomingmoretraditionalinnature.4

Figure �.�Cumulative export functions of Kenya’s top 10 export products

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1.0Fish, fresh chilled, frozen

Lime, cement and building products

Iron, steel univ, plate, sheet

Other crude minerals

Fresh Vegetables simply prsrvd

Fruit preserved prepared

Crude Vegetables materials nes

Petroleum products refined

Coffee & substitutes

Tea and mate

Fish, fresh chilled, frozen

Lime, cement and building products

Iron, steel univ, plate, sheet

Other crudeminerals

Fresh Vegetables simply prsrvd

Fruit preserved prepared

Crude Vegetables materials nes

Petroleum products refined

Coffee & substitutes

Tea and mate


4 Kenyahandles a substantialportionofpetroleumproduct re-export to theneighbouring land-lockedcountriesthroughitsoilrefinerybasedinthecoastalcityofMombasa.


Box �.� Diversification as part of a private sector development strategy in Kenya

Over the past years, Kenya’s trade performance has been mixed. On the one hand, the country has increased its share of trade within the East African and COMESA regions. On the other hand, the country’s share of trade with the rest of the world is about half what it used to be in the mid-1980s, whereas the ratio of trade to GDP has dropped sharply from 71 per cent in 1995 to the current level of about 56 per cent. This declining share of trade with the rest of the world can be attributed to the country’s inability to diversify its exports away from primary products, to manu-factured and value-added goods coupled with its inability to access new markets.

In response, Kenya has developed a National Export Development Strategy to increase the competitiveness of Kenyan products in external markets, by addressing limitations caused by supply-side constraints. The strategy also addresses the issue of regional preferences, limited range of exports and concentration in traditional markets, foreign exchange risks and uncertain-ties and labour problems associated with low productivity and high costs.

The export strategy is in the context of the country’s Private Sector Development Strategy (PSDS) that outlines specific policies and strategies that need to be pursued in order to enhance private sector growth and competitiveness in the country. The overriding objective of the PSDS is to set out a roadmap that would help the country build a strong, thriving private sector over the next five years. It acknowledges the Government’s principal role of providing the necessary, ena-bling environment for the growth and the development of the private sector. Presently, Kenya’s private sector accounts for approximately 80 per cent of GDP and provides more than half of the wage employment. As of 2005, agriculture and forestry contributed 24 per cent to the GDP, while manufacturing and trade accounted for 10 per cent and 11 per cent, respectively.

There are five key goals that have been identified by the Kenya Government as having a direct bearing on the overall realisation of the PSDS.

• Goal 1: Improving Kenya’s business environment. The expected outcome under this goal is rising confidence, long term planning and investment in the private sector and a globally recognized country-investment grade rating.

• Goal 2: Accelerating institutional transformation within the public sector. The expected outcome is more efficient public institutions with a proven record of accomplishment of service delivery.

• Goal 3: Facilitating growth through greater expansion of trade. This goal’s expected outcome is sustained growth of at least 20% annually in exports.

• Goal 4: Improving the productivity of enterprises. • Goal 5: Supporting entrepreneurship and indigenous enterprise development.

The strategic policy actions and expected outcome under each of these goals mesh almost seamlessly with the policies for diversification that this report outlines, presenting Kenya as posi-tive in responding to the challenge of diversification.

Source: Government of Kenya: Ministry of Trade and Industry, 2006, Private Sector Development Strategy: 2006-2010, Nairobi.


Case 3 – Tunisia

TheTunisiandiversificationexperience indicates significanthorizontaldiversifica-tion inexports (seefigure4.7).Tunisia’s top tenproducts includegarments suchas knitted non-elastic outer garments, non-knitted men and women’s outerwear,andknittedundergarments.Theothersincludeswitchgearandelectricitydistribut-ing equipment.Theseproducts indicate greater export experience in recent yearsandare theemergingornewerproducts in theexportmix. Ontheotherhand,manufactured fertilizersand inorganicchemicalelements,oxidesandothershavenotregisteredanysignificantstructuralchangesfor24years.Itisnoteworthythatcrudepetroleum,whichisatraditionalproduct,haswitnessedadeclineinitsshareofexportsfrom50percentatthebeginningoftheperiodtoabout7percentoftotalexportsin2002.

Figure �.�Cumulative export function for Tunisia’s top 10 commodities

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Switchgear etc,parts nes

Fixed vegetableoils, soft

Inorg chem elmnt, oxides, etc

Electricitydistributing equip

Outer garmentsknit nonelastic

Under garmentsknitted

Fertilizers,manufactured

Crude petroleum Women's outwear non-knit

Men's outwearnon-knit

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The Tunisian diversification

experience indicates significant

horizontal diversification in

exports


Case 4 - Nigeria

TheNigerianexperiencedescribedinfigure4.8providesadistinctfeatureassociatedwiththeoilfactor.Nigeria’stopexportproductsincludeseedforotherfixedoils,leather,cocoa,shellfishfreshandfrozen,naturalrubberandgums,petroleumprod-ucts refined and special transactions.These traditional export products decreasedtheirshareinthecountry’stotalexportsaroundthemid-1980s,ascrudepetroleumbecamethedominantexportproductfromNigeria.Since1987,theshareofcrudepetroleumexporthasrisentoalmost95percentoftotalexports,maintainedthislevelandthenagainincreasedtoover99percentin2000.Otherproductssuchasshipsandboats,andpolymerizationproductsdonothaveasteadydirection.Theywerenotamongthetraditionalexportsbutthereareperiodswhentheirexportswereveryhigh.Finally,inthelate1990s,thesetwoproductswereactuallydominatedbyexportsofcrudepetroleum.

Figure �.�Cumulative exports function for Nigeria’s top 10 commodities

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Polymerization, etc, prdts

Seeds for other fixed oils

Shell fish fresh, frozen

Special transactions

Leather

Natural rubber, gums

Cocoa

Petroleum products, refined

Ships, boats, etc

Crude petroleum Polymerization, etc, prdts Seeds for

other fixed oils Shell fish fresh, frozen

Specialtransactions

Leather

Natural rubber, gums CocoaPetroleum products, refined

Ships, boats, etc Crude petroleum

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4.2 Diversification regimes in AfricaAnalysingthevariousdiversificationindicesandthestructureofthetoptenexportcommodities for selected countries over the last twodecades and ahalf providessomeusefulinsightswhichcanbeusedtodefinediversificationregimesthatcharac-terizeAfrica.FivediversificationregimescanbeidentifiedfromAfrica’sexperience(seeBenHammoudaetal.2006b).These regimes shouldnotbeviewedas stepsorasacontinuumthatacountrymustfollowasitmovesfromaconcentratedtoadiversifiedeconomy.Rather,theregimesarearesultofthepolicyactionsthatacountryhasset inplaceoveragivenperiodoftime.Theparticularregimethatacountryfallsintoislikelytobetheresultofamixamongthevariousdiversificationdeterminants.ThefiveregimesthatcanbeidentifiedinAfrica’sdiversificationeffortsaresummarizedbelow:

• Little economic diversification: The countries exhibiting this regimeare those that havenot achievedmuch in termsof diversification.Thesearecountrieswhich,withoutexperiencinganyconflict,havebeenunableto achieve any significantdiversificationgains.Bénin,BurkinaFaso, andMalawiexemplifycountriesthatexhibitthisregime.

• Countries that started the process but have not made any significant breakthrough:ThesecondregimethatisevidentintheAfricanexperiencecharacterizes those countries thathavenotmademajorbreakthroughs intheirdiversificationeffortsoverthelast20years.Eventhoughsuchcoun-triesareamongthemorediversifiedonthecontinent,theyhavenotman-agedtoachievedeephorizontaldiversificationthatencompasseshigh-valueexportcommodities.VerticaldiversificationmighthaveoccurredleadingtonewagriculturerelatedexportsasisthecaseinKenya.5However,theverti-caldiversificationisstillnotbasedonthehigher-valuedexportsthathavebeencharacteristicoftheAsianNIEsandLatinAmericancountries.

• Deepened diversification process:A strengtheneddiversification regimeisonethathasthepotentialtobesustainable.Thisisaregimethatischar-acterizedbybothhorizontalandverticaldiversification.ExamplesincludeMauritiusandTunisia.Tunisiahasmanagedtoachievehorizontaldiversi-ficationintohigher-valueexports(box4.3).Mauritius,ontheotherhand,has achieveddeepverticaldiversification,whichhas led tomore textiles-relatedexports.

• Backsliders in the diversification process:Thefourthregimecharacterizesthosecountriesthatstartedwellandwereregisteringpositivediversificationgainsbutlaterfellback.Itcoverscountriesthat,aftertheeconomiccrisesoftheearly1980s,concentratedonaninternalfocus.TheDutchDiseaseeffectsmighthaveplayedamajorpartinputtingthecountriesunderthis

5 Thisisverticaldiversificationatagriculture-sectorlevelbutthenewexportsarestillnotofthehigh-valuetype.


regime.Inthemajorityofthecases,exportboomsbasedonasinglecom-modityplayedapartinthediversionoffactorsofproductionawayfromothertradables,especiallytheexportables.GabonandNigeriawereunableto follow the strategy thatTunisia adopted,whereby the traditionalityofpetroleum-relatedexportscontinuedbutnewsectorswereabletoemergeandthrive.

• Conflict and post-conflict countries:Thefifthregimeinthischaracteriza-tionofAfricaneconomiesincludesconflictandpost-conflictcountries.TheDemocraticRepublicofCongo,Liberiaandcountriesinsimilarconditionsexhibitdiversificationeffortsbutconflicthasunderminedtheseefforts.

Box �.� Diversification strategies in Tunisia

Tunisian authorities are engaged in a process of restructuring the economy to transform it from an emerging to a developed one. This restructuring policy is summed up in the Directive Docu-ment for the 2007-2017 Decade. The document presents a package of social, macroeconomic and microeconomic policies that can allow the country to catch up with OECD countries by emphasizing economic transformation. The document makes three recommendations to foster economic transformation:

• The development of the agro-food industries by the diversification of their products and to create complementarities between agriculture and the agro-processing industry to limit exports of unprocessed commodities.

• The exploitation of the potential offered by existing manufacturing activities such as leather, wearing and textile sectors by introducing highly intensive technology products and the development of services related to these industries such as consulting services or information technology services.

• Taking advantage of the new technologies in order to develop financial, social and ecological services.

The government projects that the share of agriculture in the economy will decrease from 12.8 per cent in 2006 to 9.6 per cent in 2016 while that of services will increase from 56.6 per cent to 64.2 per cent over this period. The share of the textile and leather will decrease from 5.2 per cent to 3.8 per cent.

In a second step, the Quantitative Studies Institute was charged to identify sectors in which the Tunisian economy should specialize in order to realize its development objectives. The cri-terion defined by the Institute was the knowledge intensity. The Institute finds that the share of knowledge-intensive activities in the total production has increased from 10.3 per cent in 1997 to 12.4 per cent in 2004 whereas the share of other industries slightly decreased from 40.9 per cent to 39.7 per cent over the same period. This transformation has been attributed to the increase in the share of investment allocated to knowledge-intensive sectors, from 17.4 per cent in 1997 to 18.5 per cent in 2004, whereas the share of investment allocated to activities with very low intensity in knowledge declined from 28.3 per cent to 26.5 per cent. The Institute recommends increasing the budget allocated to research and development activities as a means of supporting a knowledge-based diversification strategy as a corner stone of the private sector development agenda.

Sources: Institut d’Etudes Quantitatives, 2006. Rapport Annuel sur l’Economie du Savoir. Tunis; Government of Tunisia, 2006. The Directive Document for the 2007 - 2017 Decade. Tunis.


4.3 ConclusionThe following conclusions summarize the results ofAfrica’s exportdiversificationeffortsandresults:

• The regional and subregional evidence indicates that the effort towardsdiversificationinthe1970sandearly1980shadpositiveresultsinthatformost countries, the diversification indices generally trended downwards,showingmovementstowardssomediversification.

• Thediversificationgainswerenotsustainableastheycouldnotwithstandthepressuresoftheeconomiccrisesandtheattendantadjustmentpoliciesthatneededtobeinstitutedtodealwiththem.Thegainsmadeduringthisperiodremainedlowandthediversificationresultsreflectedvolatilityandfragility.Africahasbeenunabletosustainastrongfoundationofdiversifiedeconomy.Yet,other regions suchasLatinAmericaandAsiawhichcameundersimilarpressuresmanagedtoprotectandevendeepentheirdiversifi-cationgains.

• Overall, the African economies appear to have responded differently tothechallengesposedbytheeconomiccrisesoftheearly1980sasopposedtothekindofresponsethattheAsianeconomiesadopted.However,it isimportanttopointoutthattherehavebeencleardifferencesbetweensubre-gionsandbetweencountriesinthesamesubregions.Inspiteofdifferencesamongsubregions,itisclearthatAfricaneconomieswere,onthewhole,lessdynamiccomparedtotheAsiancountriesintheirresponsetothediversifi-cationchallenges.

• FiveregimescharacterizeAfrica’sexperiencewithdiversification.ThepolicymixinthevariousAfricancountriesrangingfrommacroeconomicfactorstoinstitutionalissueshaveplayedamajorpartindeterminingthediversifica-tionregimeintowhicheachAfricancountryfalls.

Early diversification

results reflected volatility and

fragility


ReferencesBen Hammouda, H., S.N. Karingi, A.E. Njuguna and M. Sadni-Jallab, 2006a.“Diversification:towardsanewparadigmforAfrica’sdevelopment”,AfricanTradePolicyCentre,WorkinProgress,No.35,EconomicCommissionforAfrica

_______2006b.“Africa’s(mis)fortunesinglobaltradeandthecontinent’sdiversifi-cationregimes.”Journal of World Investment and Trade7(4),587-616.

Gutierrez de Pineres, S.A. and M. Ferrantino, 1997. “Export diversification andstructuraldynamicsinthegrowthprocess:thecaseofChile.”Journal of Development Economics52,375-391.

��

�ThepresentationinthepreviouschapterhaspaintedavariedpictureoftheresultsofAfrica’seffortstodiversifyitseconomies.Atthesametime,regionaldifferencesbetweenAfrica,AsiaandLatinAmericawerecompared.Thequestionthenbecomeswhysomecountriesorregionsachievedbreakthroughintheirdiversificationeffortswhileothersdidnot?Identifyingthedeterminantsofdiversificationisonepartofsolvingthispuzzle.Linkingthesepolicy instruments togrowthanddevelopmentoutcomesthroughgrowthistheotherpartofthepuzzle.Thischapterisaboutfittingbothpartsofthepuzzletogether.

IndiscussingtheempiricalevidenceondeterminantsofdiversificationforAfrica,theunderlyingmotivation is todeependiversification through theuseof appro-priatepolicies.Thepolicyoptionsopencouldbeeconomicornon-economic. Inthisregard,thepresentationemphasizesphysical,policy,macroeconomicandinsti-tutional factors that influence diversification outcomes. Those that could deependiversificationareseparatedfromthepolicyoptionswhich,ratherthandeepeningdiversification,leadtospecialization.

Thesecondpartofthechapteraddressesthesecondpartofthepuzzle.Itfocusesontheevidencethatlinksdiversificationtoeconomicgrowth.Throughtotalfactorpro-ductivity(TFP)growth,countrieswillbeabletodeepeninternationaltradecapac-ity,butalsosignificantlyreducepovertybyraisingtheireconomicgrowthrates.Thechapterconcludesbytyingnationaldiversificationregimestotheestablishedlinkbetweendiversificationandeconomicgrowth.

5.1 Determinants of diversification in AfricaDiversificationandpolicyvariablesconstituteatwo-wayprocessinthatdiversifica-tionnotonlyinfluencespolicyoutcomes,butisitselfinfluencedbypolicyvariables.Thispropositionnaturallyleadstothesearchforthoseeconomicandnon-economicpolicyactionsthatarelikelytoaffectthelevelandrateofdiversificationinacoun-try.Whatevidenceistherethat linkseconomicandnon-economicvariableswithnationalcapacitytodiversify?

Domoreinvestmentsandhigherincomedeependiversification?Doesthediversifi-cationprocessinAfricafollowthetwostagesdescribedinImbsandWacziarg(2003),suggestingthatthereisaturningpointwherediversificationdeepensasinvestment

Diversification and Growth

Diversification and policy variables

constitute a two-way process in

that diversification not only influences

policy outcomes, but is itself

influenced by policy variables


andincomeriseandeconomicspecializationsetsin?Areincreasesintradeandpro-motionofindustrialproductsalsosignificantdeterminantsofdiversification?Giventhecentralityofmacroeconomicstabilityinthepolicydiscourseoverthelastthreedecades, do macroeconomic variables such as competitive exchange rates deependiversification?Whataboutthebalanceongovernmentbudgetandinflation?

Obviously,theanswertothesequestionsdependtoalargeextentonwhetherthedeficitisdrivenbyexpenditurethathasadirectimpactontheproductivecapacityoftheeconomy.Ontheotherhand,wheredeficitsresultfromrecurrentspendingsuchasfiscalpolicytheycouldunderminethediversificationprocess.WhataretheresultsforAfricancountrieswithregardtothis?Intermsofinflation,akeyques-tioniswhetheritslevelfallswithinthatbandwhereitisnotinjurioustogrowth.Moderatebutstableinflationmightnotslowdowndiversification.Isitalsopossiblethatpoliticalviolenceandcivilconflictshaveprovedcounter-productivebyslowingdowneconomicgrowth,andtherefore impedingdiversification?Howmuchdoesgoodgovernanceandagoodinvestmentclimatehelpindeepeningdiversification?TableA5.1showsresultsobtainedfromaggregateAfricandatainseekinganswerstothesequestions(seeBenHammoudaetal.2006afordetails).Thekeyfindingsarediscussedbelow.

Investment is vital for an economy to diversify

TheinverserelationshipbetweeninvestmentandthediversificationindexshownintableA5.1indicatesthatasthelevelofinvestmentsincreases,thereisatendencyforeconomiestobecomemorediversified.Thesmallerthediversificationindexgets,themorediversifiedaneconomybecomes,andvice-versaforspecialization.Unlessacountrycommitsasufficientportionofitsnationalincometobuildingcapitalstock,itisunlikelytobeabletodiversify.InvestmentasmeasuredbygrossfixedcapitalformationturnsouttobeakeydeterminanttoAfrica’sdiversificationresults.

Inotherwords,thetotalityofpublicandprivateinvestmentsinaccumulatingcapitalstockisvitaltotheprocessofdiversification.Althoughtotalinvestmenthasaposi-tiveimpactondiversification,thisisonlypossibleifpublicinvestmentcrowdsinratherthancrowdsoutprivateinvestment.1Itisimportanttoemphasizethiscaveatbecauseitmaynotbethecaseatthecountrylevelthatpublicinvestmentcrowdsinprivateinvestment.Wherefiscalpolicyratherthanmonetarypolicyisthemajordriverofthemixbetweenpublicandprivateinvestment,theexpectedoutcomeofinvestment leading to deepening diversification may not always be guaranteed ifpublicinvestmentisnotsupportiveoftheproductivesectors.

1 Thereisabundantempiricalevidencethatpublicinvestmentshaveacrowding-ineffectonprivateinvestments.Thecrowding-outfactorisaconcernusuallywhenthereiscompetitionfordomesticcreditbetweenthepublicandprivatesectors.

��Diversification and Growth

Insufficient investments in Africa have hindered the deepening of diversification

UsingtheresultsforAfricashownintableA5.1,itispossibletocomputewhatonecouldcallaturningpointintherelationshipbetweeninvestmentanddiversification.Thisturningpointoughttooccuratthatpointofthediversificationmeasurewheretheindexislowest.Itisimportanttorecallthatthelowertheindex,thedeeperthediversification.Therefore,acountryoughttoundertakeinvestmentinsuchawaythatthisturningpointoccurswheredeepdiversificationhasbeenattained.Fromtheresultsseen,thisturningpointoccursatanindexpointthatisnotsufficientfordeepdiversificationtobeachievedandsustained.ThelowlevelofinvestmentthatAfricancountrieshaveundertakenoverthelasttwodecadesandahalfexplaintheseunsatisfactoryresults.Asfigure5.1shows,theturningpointforanaverageAfricaneconomyoccursatan investmentpointofonly12.5percentofGDP.This levelofinvestmenthasnotbeensufficienttoshifttheturningpointtoadeepenoughdiversificationlevel.

Figure �.�Empirical relationship between diversification and investment in African economies

0.05

0.10

0.15

0.20

0.25

Investment (% of GDP)

Div

ersi

ficat

ion

Ind

ex

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22


Onlyaverylowproportionofincomehasbeeninvestedtoleadtoanearlyturn-ingpoint inthetwo-stagediversificationprocess forAfricancountries.ThisearlyturningpointcoincideswiththefailuretoattaindeepdiversificationinAfrica.TheSouth-EastAsianeconomiesontheotherhand,havebeeninvestingmorethantwicetheaveragelevelofinvestmentbyAfricaneconomies.Thishasnotonlysupportedtheirgallopingeconomicgrowthratesinthe1980stothepresentbutexplainwhy

Deepening diversification may

not always be guaranteed if public

investment is not supportive of the

productive sectors


theAsianNIEsaremorediversified than those inAfrica.TheAfricaneconomiesneedto investmoreonthebasisof theseresultssothattherelationshipbetweendiversificationandinvestmentinfigure5.1couldbeshiftedbothdownwardsandtotheright,allowingtheturningpointtooccurwhendeeperdiversificationhasbeenachieved.

Whileincreasingthelevelofinvestmenthelpspromotediversification,thesectoralallocationofinvestmentisalsocrucial.Toboostdiversification,governmentsshouldthereforedesignincentivemechanismstoencourageinvestmentinnewactivities.Atthesametime,publicinvestmentininfrastructuremustreceivepriority,whichwillinturncrowdinprivateinvestment.

Faster economic growth could assist in diversification efforts

TheresultsforAfrica,shownintableA5.1,suggestfurtherthatasincomepercapitaincreases,thereisatendencyforAfricaneconomiestoexperienceimprovementintheirdiversificationprocesses.Thisisaverysignificantresultanditisinlinewithother empirical evidence, (see Imbs andWacziarg2003),which shows thatpoorcountriestendtodiversifyatfirstastheir incomesrise,beforetheylaterbegintobecomemorespecialized.AfricancountriesalsofitintothistheoryoftheU-shapedstagesofdiversification.

TheresultsintableA5.1relatedtoincomeprovidesomeevidencethatAfricancoun-trieshaveshownconsistencywiththetwostagesofdiversification.Thefirststageisoneofincreaseddiversificationandisexplainedinthesamewayportfoliotheoriesinfinanceareusedtoexplainthecharacterofinvestors,whodiversifytheirportfolioholdingsinordertominimizeriskexposure(AcemogluandZilibotti1997).Inthesameway,economiesthroughthefirststageofdiversificationwouldbeexpectedtominimizetheeffectsofpossibleshockstotheeconomybyavoidingover-relianceononeparticularsector.Forthisfirststagetobebeneficialtotheeconomyinthelongrun,itmustresultindeepdiversification.Onlyafterattainmentofdeepdiversifica-tionwouldthesecondstagethattendstowardsspecializationnotlockaneconomyintoalow-incomeequilibrium.

Unfortunately,thetransitionpointbetweenthetwostagesforAfricancountrieshasbeenatalowpercapitaincomeequilibrium.Otherstudies(e.g.ImbsandWacziarg2003)reporttheturningpointsofothercountries.ThesepointsareallhigherthantheoneestimatedforAfrica.Forexample,Singapore’soccurredat$2,500percapitaincome,whileforCyprusitoccuredat$5,800.Irelandontheotherhandexperi-encedthisturningpointatapercapitaincomeof$7,000.Allthesecountriesarenowconsidereddevelopedcountries.Indeed,formeaningfulresults,thebenchmarkpercapitaincomeisapproximately$9,000ifthetwo-stagediversificationprocessistoyieldlastingandpositivedevelopmentresults.

Poor countries tend to diversify

at first as their incomes rise,

before they later begin to

become more specialized again


ItisnotsurprisingthenthattheturningpointforAfricaatamere$1,667didnotoccuratapointwhendeepdiversificationhadbeenachieved.2IfthediversificationprocessinAfricaistoleadtosustainabledevelopment,sustainedhighlevelsofeco-nomicgrowththatshifttheU-curvedownwardsandtotherightmustbeachieved.Inmakingthisargument,itisalsorecognizedthatthecausalrelationshipbetweenpercapitaincomeanddiversificationgoesbothways.

There can be little diversification without an optimal trade policy

Thetradepolicyquestionanditsroleineconomicgrowthanddevelopmentcon-tinuestodominatemuchofthedebateinthiseraofglobalization.Thisdebatehasintensifiedsinceevidencefromvariousauthorshavequeried,forinstance,theroleoftradeliberalizationineconomicgrowthindevelopingcountries(seeRodrikandRodriguez1999).Suchdebate isrelevantforAfricabecausetheevidenceintableA5.1suggeststhattradeopennessdoesnotnecessarilyleadtodeepeningofdiversifi-cation.Isitpossiblethattradeopenness,ratherthanencouragingAfricatodiversify,actually supportsaconcentrationor specializationprocess?Asconventional tradetheorypostulates,inaworldwheretherearenobarriers,countrieswouldspecializeinthosegoodsandservicesforwhichtheyhavecomparativeadvantage.Thus,coun-trieswouldhaveexportconcentrationratherthandiversification.

Theinconclusiveresultscouldbeexplainedbytheinteractionbetweenpercapitaincomeandopennessininfluencingtheturningpointinthetwostagesofdiversi-fication.3Thelessonfromtheseresultsisthatatacertainstageinthediversificationprocess,theportfoliomotivefordiversificationceasestodominatethecomparativeadvantageconsiderations.

ThekeylessonfromtheseresultsisthattradeopennesshasaffecteddiversificationinAfricaandthereismeritinhavinganoptimaltradepolicy.Theresultssuggestthatrapidliberalizationmayactuallylimitaneconomy’scapacitytodiversify.Thisthenraises thepossibility that for strategic reasons, thespeedtowardsopennesscouldbedictatedbywhetheracountryisseekingamorediversifiedoramorespe-cializedeconomy.Thisshouldnotbesurprisingasthedecompositionofthecom-ponentsofopennessismadeupoftwoopposingeffects.First,thereareexportsthatfavourspecialization.Second,thereistheimportscompetitioncomponent,whichwouldbemoresupportiveofthediversificationprocess.Consequently,theevidenceseenforAfricancountriesindicatesthattheexportgrowtheffectleadingtospecializationmorethanoffsetsthediversificationprocessthatimportcompeti-tionwouldsupport.

2 AsImbsandWacziarg(2003)haveempiricallyshown,theturningpointalsodependsoninterac-tioneffectsofincomeandfactorssuchasopenness.

3 SeeImbsandWacziarg(2003)forfurtherdiscussionofthisinteractioneffect.

Trade openness

has affected diversification in

Africa and there is merit in having

an optimal trade policy


The development model should determine the optimal trade policy

Thetwo-stagediversificationprocessfromeconomichistoryhasbeenregisteredbothinopenandclosedeconomies.Thedifferencebetweenthetwoisthattheturningpointafterreasonableandsustainabledevelopmenthasbeenachievedoccursatamuchearlierpointforopeneconomiescomparedtothecaseforclosedeconomies.In fact, countries thatwent through aminimum level of specialization relativelyearlytendedtobesubstantiallymoreopentotrade,onaverageby15percentagepoints(ImbsandWacziarg2003).Theyshowedthattheturningpointoccurredatapercapitaincomelevelof$5,405foranaverageopennessof78percentforopeneconomieswhile itoccursmuch later in thedevelopmentprocess at aper capitaincomeof$9,161foranaverageopennessof47.4percentforclosedeconomies.Thus,dependingonwhichdevelopmentmodelacountrypursues,itcanremainlessopenandstilldiversifywiththeturningpointoccurringmuchlaterinthedevelop-ment path. Alternatively, a country could consider a much earlier diversificationturningpointmoreoptimalandassuchbecomfortablewithanaggressivetrade-opennesspolicy.

Hence, these results simplyaddweight to theargumentsmadebyproponentsofgradualismintradeliberalization,especiallyfordevelopingcountries.Proponentsofagradualapproachtotradeliberalizationpointoutthatthereareinherentconstraintsincountriesthatlimittheirabilitytobuildacompetitiveadvantagetoexportnewproductsinashortperiodoftime.Assuch,theyargueforpolicyspacethatwouldallowthemtopursuepoliciesconducivetodiversificationthroughindustrialization.This argument is even more relevant for those economies that are commodities-dependentintheirexportbase.Theseresultsreinforcetosomeextenttheargumentthatcallingforpolicyspaceisagoodapproach.Callsforsuchspacefrommultilater-allyimposedpoliciesarenotmisplacedwhenviewedinthecontextofstrategictradepolicy.

Industrialization strategies still have a place in Africa

Industrial production at the continental levelwas found to lead todeepeningofdiversification.Takingindustrialproductionasaproxyforindustrialization,thisfitswithin the established theoretical developmentprocesswhereby a countrymovesfromspecializationthroughindustrialdeepeningbeforestartingtospecializeagain.

Macroeconomic stance is crucial to diversification outcomes

AnimportantaspectofthediversificationdebateandofAfrica’sexperiencehastodowiththerolethatmacroeconomicpolicyplays.Thishasalsobeeninvestigatedat


thecontinentallevelintheresultsthatarepresentedintableA5.1.Twoimportantindicatorsofmacroeconomicstability,dependingonthemacroeconomicpolicyinoperation,areinflationandrealeffectiveexchangeratesandthesearefoundtobeamongthemostcriticaldeterminantsofdiversificationoutcomesinAfrica.

High levels of inflation damage diversification

High levelsof inflationdamagediversificationprospects and the tendencyundersuch circumstances is for increased concentration with little opening-up to newexportsectors.Thisisnotsurprising,giventhatdiversificationinitselfrequirestheemergenceandgrowthofnewindustriesorsectorswhichareabletomeetnotjustthedomesticdemandfortheirproductsbutalsothecompetitionontheinterna-tionalmarket.Ahighinflationenvironmentisnotconducivetothedevelopmentandmaturationofnewsectors,norisitsupportiveofanenvironmentthatfostersotherdeterminantsofdiversificationsothattheyhavesignificantimpact.Ordinar-ily,itisreasonabletoexpectthathighinflationcouldleadtodiversificationasaneconomydiversifies away fromsector-specific income shocks.Due to incompletemarkets,economiescanbeledtodiversifyforinsurancepurposes,andtospecializeagainasfinancialmarketsdeepen(Saint-Paul1992).

Effects of the exchange rate depend on existing export potential

The exchange rate affects diversification prospects as there is a significant relation-shipbetweenthetwo.Thepositiverelationshipbetweentheexchangerateandthediversificationindexsuggeststhatadepreciatingcurrencyisnotalwayssupportiveofdiversificationefforts.Theseresultsmightappeartobecounter-productiveinthesensethatdepreciationunderpinnedbyappropriatemacroeconomicfundamentalsshouldsupportincreasesinexistingexportsandeasepotentialexportablesintonewmarkets.Sucharesultsupposestwoelements.First, itpre-supposesthatthecountryalreadyhasthisexportpotentialandthatthedepreciationhasthepriceeffectofmakingtheexportscheaperfortheforeignmarkets.Itfurtherassumesprice-elasticexportdemand.Second,italsoassumesthatthedepreciationissupportedbysoundmacroeconomicfundamentalswiththedepreciationbeingmorethanaprocessofbuildingormain-tainingcompetitivenessintheinternationalmarketoftheeconomyinquestion.Thepositiverelationshipbetweenthetwomeansthatthedepreciationdoesnot leadtodeepeningofdiversification.Thiscouldbeinterpretedinoneoftwoways.

In the first instance, it could mean that African countries have a narrow exportpotentialbaseandthedepreciationsimplymakesthenarrowexportbasemorecon-centratedandspecialized.Thesecondexplanationcouldbethatthedepreciationissymptomaticofmacroeconomicinstabilitieswhoseconsequencescreateanenviron-ment that is not conducive for diversification. The implication of the results for

Depreciation does not lead

to deepening of diversification


inflation and the exchange rate is thatmacroeconomic stability is crucial for theemergenceofadiversifiedeconomy.

Fiscal space is critical for diversification

Thepositivebutinsignificantresultfortheimpactoffiscalbalanceondiversificationshowsthatmacrostabilityplaysaroleforthesuccessofdiversificationefforts.Atthesametime,aproactivefiscalpolicy,especiallyintermsofpromotingpublicinvest-ment,cansupportefforts towardsdiversification.Inthatrespect, theresultswithregard to fiscal balances and diversification suggest that a conservative economicpolicy,orfiscalconservatismforthatmatter,maynotbegoodforacountrythatis planning to achieve adiversified economy. It shouldbenoted that expansion-aryfiscalpoliciesareonlyasgoodfordiversificationastheabsorptivecapacityoftheeconomyandtherequisitefiscaldisciplinethatensuresthatfiscalspendingisdirectedatbuildingeconomicproductioncapacities.

The success of an expansionary fiscal policy, assuming an optimal tax regime,dependstoalargeextentonthewaythedeficitisfinanced.4Financingoptionssuchasdomesticborrowing(assuminganilliquidmoneymarket)orusingcreditfromthecentralbankarelikelytohavetheundesirableeffectofputtingpressureondomesticinterestrates.Thissituationwouldunderminetheinvestmentsthatareimportanttodiversification.Yet,wheredomesticmoneymarketsareliquidwithminimalriskofcrowdingoutprivateinvestments,publicinvestmentexpenditurecanbeexpandedthroughdomesticborrowingthatallowsforhigherfiscaldeficitswithoutanydetri-mentaleffectsontheeconomy.

It is not just a matter of policy as institutions matter in diversification efforts

Governanceisoneofthevariablesthatcapturethepartthatinstitutionsplayandit emerges as strongly significant. In fact, in absolute terms, looked at from theregionallevel,governancehasstrongermarginaleffectscomparedtoothervariablesinourinvestigations.Itishighlyprobablethatgoodgovernanceenableseconomiestodeependiversification.Asgovernancestructuresimprovesodoesthecapacityforacountrytodevelopadiversifiedexportsbase.Theinteractionofgovernanceandothervariablessuchaspercapitaincomeandinvestmentsmaydrivethediversifi-cationprocessmorethanindividualeffects.Justasopennesscaninteractwithpercapitaincometodeterminetheturningpointinthetwostagesofdiversification,itisalsopossiblethattheinteractionofgovernanceandtheothervariablesiscritical.

4 Itisenvisagedintheargumentmadeherethatacountrypursuinganexpansionaryfiscalstancehassetitstaxesatratesthathaveminimaldistortionaryeffectsontheeconomy.Thus,theextrarev-enuesforthehigherexpendituresaretobederivedfromborrowings(domesticand/orforeign).

Macro stability plays a role for the

success of diversification

efforts


Governancereliestoalargeextentonthequalityofinstitutions.Inthesamewaytheseinstitutionshavebeenfoundtobecriticaltogrowth,soistheireffectindeter-miningtheextentofdiversification.Itisnotsurprisingthatconflict,whichisassoci-atedwithdeteriorationingovernance, stiflesdiversification(box5.1).Therelation-shipbetweenconflictanddiversification,eventhoughweaklysignificant,indicatesacritical influenceondiversification.Intuitively,onewouldexpect the impactofconflictondiversificationtoimplythatescalationofconflictleadstoreducedcapac-itytodiversifyandthisiswhatthecontinentalassessmentindicates.

Box �.�Conflict and diversification: the cases of Burundi and Rwanda

The cases of Burundi and Rwanda offer a clear illustration of the various channels through which conflict undermines economic diversification. These countries have experienced several epi-sodes of civil wars, the most devastating being the 1994 genocide in Rwanda and the war that erupted after the bloody military coup of October 1993 in Burundi. These two countries illustrate the extent to which conflict not only causes an immediate collapse of the production base but also has severe long-term negative effects on the country’s diversification process.

Conflict undermines diversification through various channels. First, conflict destroys economic activity in all sectors, especially trade-oriented activities and those that are heav-ily dependent on skilled labour and technology, such as manufacturing. Both in Burundi and Rwanda, the manufacturing sector suffered large declines in the conflict years: a staggering 39.7 per cent in Rwanda in 1994 and 18 per cent in Burundi in 1993. The already narrow production base was severely eroded due to the conflicts in both countries.

Second, conflict retards the diversification process by destroying public infrastructure. During conflict, not only existing infrastructure is destroyed or not maintained, but also the capacity of the government to invest in new infrastructure is severely curtailed. Third, conflict creates a fiscal crisis both by causing government revenue to shrink and by displacing public expenditure from productive investment (including infrastructure) to military and security sec-tors. In Rwanda, government revenue as a share of GDP declined by 56.8 per cent in 1994, most of the decline coming from trade taxes, which dropped by 72 per cent (as a percentage of total trade). In Burundi, government capital expenditures declined by 9.5 per cent in 1993. The fiscal crisis of the State explains the severe shortages in public infrastructure, water, and energy supply that the countries have experienced in the post-conflict eras. These shortages constitute a severe constraint to investment in new activities.

Fourth, by increasing uncertainty, conflict causes investors and lenders to shy away from long-term activities, such as in the industrial sector, and focus on short-term and speculative activities such as commerce. In Burundi, the share of industry in total credit declined from 16 per cent in 1980-94 to 3.8 per cent in 2003-05 while that of commerce increased from 43 per cent to 72 per cent during the same period. At the same time, the share of long-term bank credit has declined systematically from 17 per cent of total credit in 1993 to a meager 2.5 per cent in 2004. The shift of resources away from long-term activities retards economic diversification, undermines post-conflict economic recovery, and makes it harder for the countries to achieve and sustain high rates of economic growth.

Sources: Ndikumana 2004; Bank of Burundi (various reports).

Good governance

enables economies to deepen

diversification


The results vary by diversification regime

Atthispoint,itisworthwhiletorecallthefivediversificationregimes:thosecoun-trieswithlittlediversification;countriesthatstartedbutgotstuckinthediversifica-tionprocess;thosewithdeepeneddiversification;backslidersindiversification;andthe conflict and post-conflict countries. This report suggests that belonging to aparticularregimehasmoretodowithpolicyandinstitutionalfactorsatthecountrylevel.Consequently,therearedifferentdeterminantswhenthediscussionisbroughttothecountrylevel(seetableA5.2forcorrelationresults).

The results for selected African countries represent the different diversificationregimes, namely, forTunisia,Kenya, Nigeria,BurkinaFaso andSudan. Tunisia,representingaregimewithdeepeneddiversification,showssignificantresultsinrela-tiontoinvestment,inflationandexchangeratewhileitisnegativelyandsignificantlyrelatedwith incomeper capita, trade and country risk.Tunisia follows themoregeneralAfricanresultswithrespecttotheinfluenceofpercapitaincome,inflation,exchangerateandcountryriskondiversification.Nonetheless,twofactors,levelofinvestmentandopenness,haveoppositedirectionsinrelationshipsfromthegeneralcontinentalevidence.

Kenyaisanexampleofacountrywherediversificationtookoffbutwasnotabletogoveryfar.Inthiscase,percapitaincomewasastrongdeterminantofdiversifica-tion.Theexchangeratewasalsosignificanttodiversificationresultsinthecountry.Thisisalsoconsistentwiththecontinentalresults.LikeTunisia,Kenya’sopennesstendedtodeependiversificationratherthanrestrainit.Investment,growthinman-ufacturingvalueadded,inflationandcountryriskhavenotplayedsignificantrolesinthediversificationoutcomesforKenya.

NigeriaisanexampleofanAfricancountrywhereoildominatesexports.Hence,Nigeriaisahighlyspecializedeconomyintermsofexportproducts.Nigeria’soilexportsaccountfor98percentofitstotalexportvalue.Theseresultsareinconsist-entwith thecontinental results, especiallywith regard to the influenceof invest-ment,income,trade,exchangerateandcountryrisk.However,thediversificationquestionisdominatedbytheoilfactorinNigeria’sexportproducts.

InthecaseofBurkinaFasoandSudan,countriesrepresentingtheregimesoflimiteddiversificationandofconflict,respectively,therelationshipsshownbythecorrela-tionsdonotindicateanyplausibleeconomicinferencesandthedataplotshavenoclearpatterns.Inbothcases,noclearrelationshipbetweenthedifferenteconomicvariablesanddiversificationallowedreasonableconclusionstobedrawnregardingcountriesintheseregimes.

In Kenya, per capita

income was a strong determinant

of diversification


5.2 Growth, productivity and diversificationThereisabundantliteraturethatsuggeststhatthereisatwo-wayrelationshipbetweenexportsandgrowth.However,animportantaspectofthisevidenceisthatitisnotjustthelevelofexportsthatleadstogrowthbutalsothelevelofdiversifiedexportsorproducts.Therearetwoimportantchannelsofhowdiversificationmayinfluencegrowthorincome.First,diversificationmaybeconsideredasaninput(aproduc-tionfactor)thatincreasestheproductivityoftheotherfactorsofproduction(Romer1990).Thesecondrouteisthatdiversificationmayincreaseincomebyexpandingthepossibilitiestospreadinvestmentrisksoverawiderportfolioofeconomicsectors(AcemogluandZilibotti1997).Thisargumentsuggeststhatdiversificationispivotaltosustaininghigheconomicgrowthratesandtoreducinggrowthvolatility.

Intheremainderofthischapter,therelationshipsbetweeneconomicgrowth,pro-ductivityanddiversificationinAfricathatformthesecondpieceofthepuzzlemen-tionedintheintroductionarediscussed.First,thesourcesofgrowthinAfricaareexamined. Some growth accounting exercise results are discussed to indicate therelativecontributionofcapital,labourandTFPintheeconomicgrowthofAfricancountries.Then,thereisactualdiscussionoftherelationshipbetweentheTFPanddiversification,onthebasisofthefirstroutesuggested,thatdiversificationcontrib-utestoeconomicgrowth.

Is it factor accumulation or total factor productivity that drives growth in Africa?

To investigate the link between growth and diversification, it was important tofirstquantify thecontributionofTFPtoeconomicgrowth.This sectionanalysesthesourcesofgrowthforAfricancountriesusingthestandardgrowthaccountingmethod,makingitpossibletodisaggregatethesharesofgrowthcontributedbyTFP,capitaland labour.Growth inoutput is thesumof thegrowth incapital, labourandTFP.Capitalaccumulationisanessentialelementinthegrowthprocess,asitenlargestheeconomy’scapacitytoproduce.Increasesinlabourorlabourforcehavetraditionallybeenconsideredapositivefactorinstimulatingeconomicgrowth.

Technical progress throughTFP is also important and is the main factor in thegrowthprocess.Advances intechnologycontinuetostimulategrowthintherichindustrialcountries,especiallyastheirpopulationgrowthratesareclosetoreplace-ment levels. In Africa on the other hand, there is accumulating evidence that itisfactoraccumulationthatdriveseconomicgrowth,withbelow-averagecontribu-tionbyTFPgrowth.DiversificationisexpectedtohaveapositivecontributiontoTFPgrowth,andbyextension,toeconomicgrowth.Thisreporthasidentifiedthedeterminantsofdiversificationandsuggeststhatitmaybepossibletoinfluencethe

Diversification may increase

income by expanding the possibilities to

spread investment risks over a

wider portfolio of economic sectors


rateatwhichTFPcontributestodiversificationandgrowth,byinfluencingthesedeterminants.

Beforedecomposingthecontributionofcapital,labourandTFPtogrowth,itwasnecessarytofindoutthehistoricalsharesofcapitalandlabourinAfrica’soutput.AsinotherstudiesonAfrica,theshareofcapitalwasfoundtobe0.39andthatoflabourtobe0.61.EstimationofthesesharesallowsustoseethegrowththatisnotaccountedforbylabourorcapitalbutbyTFP.

Some results were derived from the growth accounting for individual countriesforfive-yearaveragesfrom1981to2000(seeBenHammoudaetal.2006a).TheresultsconfirmedthateconomicgrowthinAfricaisdrivenbyaccumulationofthefactorsofproduction.TheaveragecontributionofTFPtogrowth isnegative forthe majority of African countries, with the exception of a few countries such asBotswana,BurkinaFaso,CapeVerde,Chad,EquatorialGuinea,Ethiopia,Gabon,Guinea-Bissau, Malawi, Mauritius, Mozambique, Senegal, Swaziland, Uganda,ZambiaandZimbabwe.

Another importantresult isthat inthemajorityofcountries, thecontributionofTFPgrowthtogrowthwaspositive inthe1980s,especially fortheperiod1981-1985.Bytheearly1990s,mostofthemexperiencednegativecontributionsfromTFP.EvenforacountrysuchasBotswana,thefirsthalfofthe1990ssawanegativeTFPcontribution.TherewasthereforeareversalinthesourcesofgrowthacrossthecontinentinthattheTFPcontributiondeclinedsignificantlyfromthesecondhalfofthe1980s.Inagoodproportionofthecountries,TFPcontributedat least30percentofthegrowth,andinsomecases,morethanhalfofthetotalgrowth.Thisclearlychangedespeciallyatthebeginningofthe1990sandtoasignificantextentinthesecondhalfofthe1980s.Thus,inBotswana,exceptfortheperiod1991-1995,TFPcontributedmorethanone-thirdofthegrowth.ForBurkinaFaso,in1981-1985 and 1991-1995, TFP contributed half of the growth. Another importantobservationworthpointingoutisthattheperiod1996-2000witnessedareturntopositivecontributiontogrowthbyTFP,althoughlowerthanitscontributioninthe1981-1985period.

HowcanoneexplainthetransitionofTFPcontributiontoeconomicgrowthfrompositive to negative? As indicated, it was in the late 1980s and early 1990s thatthe transition to negativeTFP contribution occurred.To understand the causesof this transition, it isworthrecalling that the stylized factsofAfricaneconomicdiversificationindicatethatthediversificationeffortsofthe1970syieldedfavourableresults as Africa entered the 1980s. The favourable though fragile results of thediversificationeffortsintheearly1980scorrelatedwiththefavourablegrowthresultsofthesameperiod.Thus,thepositiveandsignificantcontributionofTFPintheearly1980s explains thebetterdiversification results at the time.However, thesegainscouldnotbesustainedinthelateryearsofthe1980s.Twoexplanationscometomind.Firstisthedirectimpactoftheeconomiccrisesoftheearly1980sitself

Economic growth in Africa

is driven by accumulation

of the factors of production


andsecondisthefactthattheadjustmentmeasuresaddressingthesecriseshadsomeconstrainingconsequences.

The adjustment measures instituted to deal with the economic crises requiredstringent macroeconomic policies, which took the form of fiscal and monetaryconservativeness.Thismeant,onthefiscalfront,thatcountrieshadtomakehardchoices,suchascuttingdevelopmentexpenditureandcurtailingtherateofgrowthofprivate sectorcredit.Reduceddevelopment spendingby thepublic sectorandweakprivatesectorinvestmentmighthaveledtotheweakenedTFPcontributiontogrowth.

Thetightmacroeconomicpoliciesreducedtheflexibilitytopursuediversification-enhancingprogrammes.Thismayhavecontributedtothetransitionfrompositiveto negative TFP contribution to growth. In the next section, the link betweendiversificationandgrowththroughtheTFPisexploredanddiscussedfurther.ThesignificanceofthistransmissionmechanismisthatitcanvalidatethepropositionthatthehardmacroeconomicchoicesthatcountrieshadtomaketodealwiththeeconomiccrisesinvariablyaffectedtheroleofTFPinAfrica’sgrowth,byunderminingthediversificationeffortsatthetime.

Economic growth and diversification: exploration of the TFP link in Africa

In this section, the linkbetweenTFPanddiversification is explored further.Themotivationisthepropositionthatdiversificationcouldinfluenceeconomicgrowththroughoneoftwolinksifnotbothatthesametime.Theselinkshighlightedear-lierareviaincreasingriskorbyriskminimizationthroughspreadingofinvestmentportfolios.ThefocusofthissectionisontheTFPlink,whilerecognizingthatthestandardneoclassicalgrowthmodelanditscompetingendogenousgrowthmodelareoneand the same, to someextent, in that the latter attempts todisaggregatethepotentialcomponentsofTFP.Riskminimizationanditsinfluenceongrowth,leadingtodiversifiedexports,couldreasonablybecapturedthroughtheinfluenceonTFP.

Whetherthereisasignificantlinkbetweendiversificationandthefactorsorvari-ables that affectTFPhad tobe investigated.Thevariables thatwere investigatedincludeddiversification,humancapital,andselectedpolicyandinstitutionalvaria-blessuchasopenness,financialdevelopmentandconflict.Thelevelofdiversificationwasexpectedtohaveasignificantinfluenceontheproductivityofcapitalandlabourinaneconomy.Asforhumancapital,intheliteratureonendogenousgrowth,itisassumedtobedifferentfromotherformsofcapital.Asaresult,thelevelofinvest-mentinhumancapitalinacountryisexpectedtohaveabearingontheproductiv-ityofbothlabourandcapitalintheeconomy.Thelevelofenrolmentinsecondaryschoolscanbeusedtomeasurehumancapital.

Adjustment measures in the

1980s had some constraining

consequences for diversification


OpennessisthoughttohaveaninfluenceonTFPthroughexternaleffectssuchasexposuretoforeigncompetition,transferoftechnology,economiesofscale,andalsotosomeextent,anincreasedspeedofconvergencetowardsrichercountries.Ashasbeendiscussedsofar,itisobviousthatthelevelofopennessdependsonthekindoftradepolicyacountrypursues.Differentcountriesapplydifferentweightstothesignificanceoftradeliberalizationinpromotinggrowth.

Financialdevelopmentmayinfluencegrowthpositivelyintwoways.First,amoredevelopedfinancialstructureallowsforbettermobilizationofsavingsandthussup-portsmoreinvestment.Second,withinamoredevelopedfinancialsector,availableinformationoninvestmentprojectsistreatedmoreefficientlytoboostinvestmentsinproductivesectors.ThelackofaccesstocredithasbeenidentifiedasoneoftheimpedimentstoinvestmentandgrowthinAfrica.Theargumentsinfavouroffinan-cialmarketsliberalizationaremainlybasedonthepremisethatthebindingcapitalconstrainttoAfricaneconomiescanbeundonebyliberalizingnotjustthemoneymarketsbut also thefinancialmarkets, in abroad sense.Thus, the full potentialofthebanking, insurance,developmentfinance,stockandbondmarketsneedtobeunleashedbydismantlingtherestrictivecontrolsthathamperdevelopmentanddeepeningofthefinancialsector.Itwasinstructivetofindoutthatfinancialdeepen-inghasasignificantinfluenceonTFPinthecaseofAfricancountries.

EconomicgrowthinAfricahasbeenvariouslylinkedtothepresenceorabsenceofconflict.Significantworkhasbeenundertakenon the economicsof conflict andpost-conflictcountries.Indeed,inrecenttimes,moststudieshavebeenconsideredincompleteiftheyfailtotakeaccountofconflict.Weakgrowthcanbeattributedtothepresenceofconflictinacountry.Conflictcaninfluencethisgrowthperformanceeitherdirectlyorindirectly.Inthemoredirectroute,adverseeffectsonpopulations(henceonthelabourforce)andcapitaldestructionunderminetheobvioussourcesofgrowththroughfactoraccumulation.Inthemoreindirectroute,conflictaffectsTFP,leadingtoitsdeclineandinabilitytocontributetogrowth.

Whatdid the investigationof these factors indeterminingTFP inAfrica reveal?Essentially, that an increasing level of diversification leads to higherTFP. It wasalsofoundthatasaneconomymovesfromahighlevelofspecializationtobecom-ingmorediversifiedthetotalproductivityofbothlabourandcapitalrises.Diver-sificationwasfoundtodrivegrowthsignificantlyintermsofTFP.Inotherwords,a significant linkbetweendiversificationandgrowthdoes indeedexist inAfricaneconomiesviatheTFP.TableA5.3showstheresultsofthedifferentspecificationsthatwereusedtoexaminethislink.

Diversification-deepening policies raise growth and TFP

Whatthendotheseresultsimply?Theymeanthatpursuingdiversification-deepen-ingpoliciescouldhelpaccelerategrowth.Importantpolicyimplicationsofthislinkarisewithrespecttothedeterminantsofdiversificationthatwerediscussedearlierin

Financial deepening has a

significant influence on TFP in the case

of African countries


thechapter.Inthatdiscussion,itwasnotedthatkeydeterminantsofdiversificationwerepercapitaincome,investment,tradeandindustrialpolicies,macroeconomicstabilityespeciallythefiscalpolicystance,andinstitutionalvariablessuchasgovern-anceandconflict.ThesignificanceoftheresultsintableA5.3isthattheysuggestthat even forAfricaneconomies, if capital and labourarebinding, countries canunlockgrowthpotentialbypursuingdiversification-enhancingpolicies.Sincediver-sificationraisesTFP,thenAfricancountriescancapitalizeonthepotentialofTFPasasourceofeconomicgrowth.

Whilethemainobjectivehereistoestablishthesignificanceoftheempiricallinkbetween diversification and growth via TFP, further discussion of the results isrequired. Building human capital matters. Thus, while economic policies can beoriented todeepeningdiversification throughthedeterminantsalreadydiscussed,socialpolicythatdictateshigherinvestmentsinhumancapitalalsohastobedefined.DiversificationandhumancapitalorientationsineconomicandsocialpolicieswouldcomplementeachotherbyenhancingTFPandbyextension,economicgrowth.

ConflicthasanegativeandsignificantinfluenceonTFP.Itwassuggestedabovethatconflictcouldaffecteconomicgrowtheitherdirectlythroughdestructionofthefac-torsofproduction,orindirectlythroughtheircombinedproductivity.TheresultsintableA5.3implythattheindirectlinkthroughTFPisalsosignificant.PoliciesaimedatenhancinggrowthbydeepeningdiversificationthatwouldbetransmittedthroughTFPcouldeasilybecomeneutralizedbythepresenceofconflict.

Openness andfinancial deepeningdidnot emerge as significantdeterminants ofTFPintheanalysis.Doesthismeanthatthetradeliberalizationthathasledtosub-stantialopennessintheAfricaneconomieshasfailedtocatalysetechnologicalspillo-verswhichcouldhaveledtoincreasesinthecontributionofTFPtogrowth?Theseresults pointing to the possibility that openness in Africa, especially in terms ofimports,haveresultedmainlyinnon-technology-enhancingimports.Theimportscompression that the liberalization aimed at addressing was undone, leading tothe importationoffinalconsumptiongoods rather thancapitaland intermediateimportswithaccompanyingtechnologiesthatcouldhaveledtopositiveandsignifi-cantinfluenceontheTFP.

Financialdeepeninghasalsofailedtocatalyseanincrease inTFP.Thesamelogicas inthecaseofopennesscouldbeattributedtotheresultswithregardtofinan-cialdeepening.First,itisimportanttonotethat,insomecountries,asthemoneymarketsareliberalized,theinterestratespreadremainedsignificantlyhigh,mean-ingthattheintermediationroleofcommercialbanksinchannellingsavingstotheprivatesectorforinvestmentsthatwouldraiseTFPfailedtomaterialize.Inthesamevein, investment opportunities in the majority of African countries are thin andtheprivatesectorcreditgrowthwitnessedasthefinancialsectorwasliberalizedhasbeendirectedatpersonalconsumptionandtoshort-termactivitiesratherthantoinvestmentsbyprivatefirmsinrenewingtheirtechnologiesinresearchanddevelop-

Since diversification

raises TFP, then African countries can capitalize on

the potential of TFP as a source of economic growth


ment.Justaspersonalconsumptionratherthanprivateinvestmentdominatedcreditexpansiontotheprivatesector,creditexpansiontothepublicsectorfinancednetmaterialconsumptionbygovernmentintheformofsalariesforinstance,ratherthanpublicinvestmentsthatwouldhavehadapositiveimpactonTFP.

Africa’s diversification regimes revisited: A further link to productivity

So,thereisalinkbetweengrowthanddiversificationviatheTFPasthetransmis-sionpathinAfrica.HowdoesthislinkrelatetothediversificationregimesthathavebeenseentocharacterizeAfricaneconomies?IsthereaclearcorrelationbetweenthediversificationregimesandtheTFPcontributiontogrowth?Toanswertheseques-tions,analysisofthesourcesofgrowthofafewAfricancountriesisrelatedtothedifferentdiversificationregimes.

Thefirstdiversificationregimewasdescribedasthosecountrieswithlittleeconomicdiversification.ThestudyfoundthatmanyAfricancountriesbelongtothisregime,includingBenin,BurkinaFaso,andMalawi.ItcanbeobservedfromtableA5.4thatthesecountrieshavepositivegrowthonaveragefortheperiod1981-2000.Benin,BurkinaFasoandMalawihaveaverageannualgrowthratesof3.8percent,3.7percentand3.0percent,respectively.Themainsourceofgrowthisthefactoraccumu-lationratherthantheTFP.However,itisinterestingtonotethatthecontributionofproductivitytogrowthinthesecountriesispositiveinalmostallbutoneperiod,eventhoughtheyhavenotdiversifiedmuch.However,eventhoughgrowthinthesecountrieswaspositiveoverthe20-yearperiodunderobservation,theirgrowthrateswerenotonthelevelatwhichtheireconomiescouldtakeoff,ascomparedtothehighgrowth-performingeconomiesoftheNIEsinEastAsia.

Thesecondregimecomprisedthosecountriesthatstartedtheprocessofdiversifica-tionbutdidnotmakeanysignificantbreakthroughs.FromtableA5.4,theexamplesofthesecountriesareKenya,SenegalandZimbabwe.Itmaybeobservedthatallthreecountrieshaveshownaslowing-downtrendinproductionduringtheperiod1981-2000,exceptforSenegal,whichrecoveredduring1996-2000.However,thegrowthtrendsarepositivedespitethesetbacks.Kenyagrewatanannualaverageof2.9percent;Senegalat3.3percentwhileZimbabwewasgrowingat3.1percent.Again,themainsourceofgrowthwasfactoraccumulationratherthanTFP.Itisnoted,however,thattheaverageTFPcontributiontogrowthinSenegalandZim-babweispositive.Themainquestionis,coulditbethatthesecountriesexperiencedslackeningofgrowthbecausetheyfailedtodeepentheirdiversificationprocessandhaveremainedatthesamelevelforalongtime?

Thethirdregimeisthatofcountrieswithadeepeneddiversificationprocess.Coun-triessuchasMauritius,Morocco,SouthAfricaandTunisiaexemplifythisregime.Tunisiahasmanagedtoachievehorizontaldiversificationintohigher-valueexports.Mauritius,ontheotherhand,hasachieveddeepverticaldiversification,whichhas

Tunisia has managed to

achieve horizontal diversification

into higher-value exports


ledtomoretextiles-relatedexports.Thecountriesinthisregimearecharacterizedbyrelativelyhighgrowth,exceptSouthAfrica,whosegrowthhassincepickedupwiththedawnofanewpoliticaldispensation.MauritiusandTunisiainparticularhaveregisteredgrowthratesof5.5percentand4percentperannumonaverage,respectively,fortheperiod1981-2000.Inboththesecountries,itmaybeobservedthat the contribution of capital is much higher than the contribution of labour.Moreover,inMauritius,theTFPcontributiontoeconomicgrowthispositivewithanannualaverageof2percent,arelativelyhighfigureforanAfricancountry.5

Thefourthregimeiscomposedofcountriesthatregisteredearlypositivediversifica-tiongainsbutlatertendedtospecializeinafewproducts.CountriessuchasGabonandNigeriaexemplifythisregime.Thesecountriesarebothrichinoil;hence,thisproductdominatestheirexports.Asfortheirgrowthperformance,theGDPgrowthratesofbothcountries,althoughmostlypositive,werecharacterizedbyfluctuationsovertheperiod1981-2000.Onaverage,Nigeriaisgrowingat2percentperannumwhileGabonisgrowingat2.3percentperannum.Aswithmostof theAfricaneconomies,theireconomiesarealso labour-intensivewithaminimalTFPcontri-bution.Nigeria’sTFPcontributiontogrowth,onaverage,isevennegativefortheperiodunderstudy.TheeconomicgrowthofcountriesinthisregimeisrelativelylowcomparedtosuchcountriesinthethirdregimeasMauritiusandTunisia.

The fifth group comprises those countries within the conflict and post-conflictregime.Thecountriesthatbelongtothisregimeareneitherdiversifiednorhighlyspecialized.ExamplesareDRCandLiberia.Economicgrowthinthesecountrieswas stunted by wars and conflicts and can therefore be expected to be negative.Consequently,thecontributionofTFPtotheireconomicgrowthisalsonegative.Thesecountriesdependagreatdealontheirlabourforceforproductionasthecon-tributionofcapitaltogrowthisalsodeteriorating.

5.3 ConclusionThischapterhasshownthatthereareclearandmeasurabledeterminantsofdiver-sification inAfrica at thecontinental, subregional andcountry level.Despite theinadequacyofAfricandata,itmaybesaidthat,atleastatthecontinentallevel,thediversificationprocessishighlyinfluencedbyinvestment,percapitaincome,levelofopenness,macroeconomicpolicystances,governance,andconflict.Highlevelsofinvestmentandrisingpercapitaincomesarenecessaryfordeepeningdiversification.However,boththesedeterminantshaveaU-shapedrelationshipwithdiversification,indicatingthattherearetwostagestothepattern.Initially, increasinginvestmentandpercapitaincomeleadtodiversificationandafteragivenlevel,aturningpointisreachedwherefurtherincreasesleadtospecialization.

5 ThehighestcontributionofTFPtogrowthinthedatasetisinUgandawith3.36percent,fol-lowedbyBotswanawith2.2percentandthenMauritius.

The diversification

process is highly influenced by

investment, per capita income,

level of openness, macroeconomic

policy stances, governance, and

conflict


Another important conclusion from our discussion is that trade liberalization inAfricacouldhaveledtomorespecializationratherthantodiversification.Thespe-cializationforcesthatledAfricancountriestooptimizetheircomparativeadvantagesastheybecamemoreopenhave,onaverage,overshadowedtheimportantmotiva-tionfordiversification,whichistoshieldtheeconomyfromshocks.

Anothersignificantconclusionfromtheregionalresultsisthatmacroeconomicsta-bilitymattersfordiversification.Highinflationandunstableexchangeratesunder-minediversification.Onthefiscalside,conservativefiscalpolicyclearlyemergedascounteringdiversification forces.Besidesmacroeconomicpolicy stances, conflictsunderminediversificationwhilegoodgovernancepromotesdiversification.

Another issue thathasbeendiscussed in this chapter is that related to the linkbetweendiversificationandeconomicgrowth.Theanalyseshaveshownthatdeep-eningdiversification leads to improvements inTFP,amongotherdeterminants.ThesignificanceofthelinkbetweendiversificationandeconomicgrowthinthecaseofAfricaneconomiescannotbegainsaid.ItmeansthatAfricancountriescanscaleupeconomicgrowthandraisetheirTFPbypursuingpoliciesthatenhancediversification.

Giventhecleardeterminantsofdiversification,thekeyconclusionisthatpursuingeconomic andnon-economicpolicies that lead to exportdiversification cango alongwaytoovercomingthegrowthconstraintsemanatingfromfactoraccumula-tion(box5.2).Africancountriesshouldaimatraisingtheirlevelsofinvestments,improvinggovernance,eliminatingconflicts,adoptingnon-conservativefiscalpoli-ciesandensuringmacroeconomicstability inadditiontopursuing industrialandtradepoliciesthatfostereconomicdiversification.Theoverallresultsofsuchpoliciesareenhancedexportdiversificationand,eventually,increasedcontributionofTFPtoeconomicgrowth.

Pursuing policies that

lead to export diversification can

go a long way to overcoming growth

constraints


Box �.�Diversification in Ethiopia: a story of booming horticulture and textile exports

Ethiopia, like most low-income countries in SSA, has relied on traditional exports such as coffee, oil-seeds, hides and skin, pulses and other export crops to earn foreign exchange. For instance, during the period 1980-1990, the share of traditional exports in total exports was close to 95 per cent. This has begun to change in recent years, however. The share of non-traditional exports, such as flowers, textile and garments, honey, and natural rubbers have begun to play an impor-tant role as sources of foreign exchange and employment generation in Ethiopia. In the late 2000, the share of non-traditional exports reached a record level of about 11 per cent, more than double what it was in the 1990s.

This dramatic increase in non-traditional exports is partly explainable by the overall policy stance and stable macroeconomic environment that characterized the Ethiopian economy over the last decade and half. Since 1994, Ethiopia embarked on an Economic Reform Programme designed to achieve macroeconomic stability and long-term growth through its Export-led Indus-trialization Programme, which emphasized export diversification and import substitution. Greater accord was given to the private sector to lead the country’s industrialization effort. This has led to significant changes in the structure of the Ethiopian economy in recent periods. Exports as a percentage of GDP almost doubled from 9 per cent in 1994 to 19 per cent in 2004. In addition, the country’s position in attracting FDI improved greatly during the decade, from a paltry 0.3 per cent of GDP in 1994 to 7 per cent in 2004.

An important element of the surge in private investment and non-traditional exports is the incentive package that the Government introduced to foreign as well as national investors in the export sector. From the point of entry up to exit investors receive preferential treatment in accessing suitable sites, basic infrastructure, duty-free privileges for importation of key capital goods and raw-materials, credit facilities and repatriation of profits and a number of other sup-ports necessary for the creation of a secure environment for private businesses. It is expected that these measures will contribute to developing an industrial base that paves the way for sub-stantial economic transformation and sustainable growth.

Source: The Ethiopian Customs Authority. Various official documents.


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Ben Hammouda, H., S.N. Karingi, A.E. Njuguna and M. Sadni-Jallab, 2006a. “Diversification: towards a new paradigm for Africa’s development”, African Trade Policy Centre, Work in Progress, No. 35, Economic Commission for Africa

_______2006b. “Africa’s (mis)fortunes in global trade and the continent’s diversification regimes”, Journal of World Investment and Trade, 7(4), 587-616

Gutierrez de Pineres, S.A. and M. Ferrantino, 1997. “Export diversification and structural dynamics in the growth process: the case of Chile.” Journal of Development Economics 52, 375-391.

Imbs, J. and R. Wacziarg, 2003, “Stages of Diversification.” The American Economic Review 93(1), 63 – 86.

Ndikumana, L., 2004. “Fiscal Policy Conflict and Reconstruction in Burundi and Rwanda.” In Addison, T. and A. Roe (eds.). Fiscal Policy for Development: Poverty, Reconstruction and Growth. New York: Palgrave MacMillan, 274-302.

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Appendix

Table A�.�Determinants of diversification in Africa

Variable Coefficient value

Constant Constant 0.241(0.185)

Physical variables Gross fixed capital formation (% of GDP) -0.025***(0.007)

Gross fixed capital formation (quadratic) 0.001***(0.005)

GDP per capita (US$ 1995) -0.0002***(0.000)

GDP per capita (quadratic) 0.00000006***(0.000)

Policy variables Trade openness ((X+M) as % of GDP) 0.003***(0.007)

Industrial production -0.001***(0.0001)

Macro stability Inflation (%) 0.004***(0.0001)

Exchange rate (real effective exchange rate) 0.002***(0.0001)

Fiscal balance (% of GDP) 0.006(0.170)

Institutional variables Governance -0.249***(0.000)

Conflict 0.120*(0.090)

Model diagnostics R-squared (weighted)Number of observations

0.8852


Notes: The figures in parentheses are p-values. Results are based on a panel of 18 African countries.

*** Significant at 1%; ** Significant at 5 %; *Significant at 10 %


Table A�.�Correlation between diversification and different economic variables for Burkina Faso, Kenya, Nigeria, Sudan and Tunisia

Variables Tunisia Kenya Nigeria Burkina Faso Sudan

Diversification

Investment 0.433** 0.166 0.702*** 0.295 --

Income -0.468** -0.586*** 0.720*** 0.496** 0.644**

Trade -0.632*** -0.613*** -0.801*** -0.384* 0.399**

Industrialization 0.053 0.212 0.097 -0.173 -0.267

Inflation 0.518** -0.235 0.114 -0.088 -0.476**

Exchange rate 0.977*** 0.482** -0.929*** -- -0.403**

Country risk -0.634*** -0.271 0.756*** 0.532*** 0.773***


Notes: Numbers are Pearson Correlation Coefficient; ***Significant at 1% level; **Significant at 5% level; *Signifi-cant at 10% level.

Table A�.�Economic growth and diversification—the TFP link

Endogenous variable: TFP Model I Model II Model III

Constant 23.497***(0.000)

21.324***(0.000)

18.887***(0.000)

Diversification -3.256*(0.073)

-1.916*(0.080)

-1.119(0.233)

Human capital 0.071*(0.062)

0.057(0.278)

0.026(0.409)

Openness (X/GDP) -0.012(0.184)

-0.010(0.296)

--

Financial deepening (DCP/GDP) -- 0.051(0.117)

0.076**(0.015)

Financial deepening ((DCP+DCG))/GDP -0.008(0.425)

-- --

Conflict -1.056**(0.049)

-1.041*(0.067)

-1.155**(0.054)

R-squared (adjusted)Number of cross-sectionsNumber of observationsDurbin-Watson stat

0.992698

1.71

0.992698

1.68

0.99281051.47


Notes: The figures in parentheses are p-values.

*** Significanct at 1%; ** Significant at 5 %; *Significant at 10 %


Table A�.� Diversification regimes and TFP contribution to growth

Countries Growth in GDP Contribution of Labour

Contribution of Capital

Contribution of TFP

Regime 1: Little economic diversification

Benin1981-19851986-19901991-19951996-2000

4.660.894.255.34

1.441.551.761.72

2.731.862.362.81

0.50-2.520.130.81

Burkina Faso1981-19851986-19901991-19951996-2000

4.182.643.844.32

1.191.121.141.21

0.580.770.731.80

2.410.751.971.31

Malawi1981-19851986-19901991-19951996-2000

2.172.323.523.92

1.821.830.781.28

0.21-0.02-0.07-0.92

0.140.512.813.56

Regime 2: Early Diversification but no major breakthrough

Kenya1981-19851986-19901991-19951996-2000

2.535.641.611.79

2.312.102.141.90

0.861.070.861.01

-0.642.47-1.39-1.11

Senegal1981-19851986-19901991-19951996-2000

3.233.221.535.30

1.561.561.551.50

-0.010.280.711.59

1.681.37-0.742.21

Zimbabwe1981-19851986-19901991-19951996-2000

4.364.601.392.07

2.552.341.331.18

-0.070.671.790.27

1.881.59-1.730.62

Regime 3: Deepened diversification process

Mauritius1981-19851986-19901991-19951996-2000

4.337.395.135.27

1.511.311.081.01

1.092.663.052.55

1.733.420.991.70

South Africa

1981-19851986-19901991-19951996-2000

0.911.810.892.65

1.741.621.441.63

1.420.300.180.70

-2.25-0.11-0.730.32

Tunisia*1981-19901991-1997

3.724.30

1.281.36

2.482.12

-0.040.82


Countries Growth in GDP Contribution of Labour

Contribution of Capital

Contribution of TFP

Regime 4:Backsliders in the diversification process

Gabon1981-19851986-19901991-19951996-2000

2.561.733.131.76

1.461.501.491.10

1.330.060.090.69

-0.240.161.55-0.02

Nigeria1981-19851986-19901991-19951996-2000

-2.755.422.502.84

1.701.551.661.64

2.830.851.590.14

-7.293.02-0.751.05

Regime 5: Conflict and post-conflict countries

Congo, D.R.1981-19851986-19901991-19951996-2000

1.860.01-7.12-3.93

1.461.572.050.80

1.630.71-1.83-1.89

-1.22-2.27-7.33-2.85

Liberia1981-19851986-19901991-19951996-2000

-1.88-1.79-1.51-1.53

1.701.591.451.30

-0.28-1.24-1.72-1.98

-3.30-2.15-1.24-0.85


��

�Two key reasons emerge from the evidence and discussions in the previous twochaptersofthisreport,astowhydiversificationshouldbecomeacentralpillarinAfrica’sdevelopmentefforts.First,diversificationisimportanttostrengthengrowthinAfricabecausefromthesecondhalfofthe1980s,Africa’sgrowthhasbeenmostlyaccountedforbyfactoraccumulation.Beyondacertainpoint,factoraccumulationbecomesbindingundercertaindemographicandphysicalconditions,makingothersourcesofgrowthcritical.Consequently,thepositivecontributionofdiversificationtoTFPiscentraltoanyeffortstoachievehigherandsustainablegrowthinAfrica.

ThesecondreasonisthatAfricahasfailedtoreapbenefitsoptimallyfrompreferen-tialtradearrangementsandfromglobalization.Thereis,therefore,aneedforanewparadigmondiversification,toenableAfricancountriestobenefitfrompreferencesandtradeliberalization.Ascitedearlier,Africahasbeenunabletobenefitfullyfrompreferencesattheinternationalandregionallevel.Itisalsoevidentthatwhileotherdevelopingregionshaveincreasedtheirshareinglobaltrade,Africahasseenitssharedeclineevenasglobaltrade liberalizationhasprogressed.ThefailuretomaximizegainsfrompreferenceutilizationandtradeliberalizationassumesspecialsignificancegiventhelikelihoodthatthefuturegainsthatmayaccruetoAfricancountriesfromcurrenttradeliberalizationeffortswillbemarginal.

Essentially,withthecurrenteconomicstructures,Africancountrieswillnotbeabletomaximizegainsfromtradeliberalization,andriskperpetuatingthehistoricalfail-uretosecurebenefitsfromglobaltradereforms.Apartfromthesuboptimalnatureoftheexpectedgainsfromtradeliberalization,itisalsopossiblethatAfricawillbemarginalizedfurtherandanysuchgainswillbeunevenlydistributedamongdevel-opingcountries.Therefore,thereisastrongcaseforanewdiversificationparadigminordertohelpAfricancountriessecurebenefitsfrompreferentialschemessuchasAGOA,EBA,DFQFmarketaccesspromisedtoLDCsintheDohaRound,andthesubsequenttradeliberalizationinagriculture,NAMAandservicesundertheWTOandEPAagenda.

Severalkeypoliciesandrecommendationsarepresentedinthischapter.Thesepoli-ciesconstitutetheelementsofanewdiversificationparadigmthatwillenableAfri-cancountriestobenefitfrompreferencesandfromongoingliberalizationeffortsatbilateral,regional,andmultilaterallevels.Therecommendeddiversificationpoliciesincludemacroeconomic,trade,sectoral,industrial,andfinancialdevelopmentpoli-cies,inadditiontostrategiesthatwillstrengtheninstitutions.

The Way Forward: Policies for Achieving Diversification

With the current economic

structures, African countries will not

be able to maximize gains from trade

liberalization


6.1 Macroeconomic policies for diversification – the need for pragmatism over orthodoxyOnekeyrecommendationhastodowiththeneedforpragmaticmacroeconomicpoliciesifAfricaneconomiesaretobeabletodiversify.Whilemacroeconomicsta-bilityisimportantforthediversificationofaneconomytotakeroot,notallcom-ponentsofthemacroeconomicframeworkneedtoberigid.Stabilityalonethroughconservativefiscalandmonetarypoliciesisnotenoughtoensurethedeepeningofdiversification.Whilecontributingtostability,aconservativefiscalpolicymayenduplimitingthenecessaryfiscalspaceneededtoboostinvestment.Suchconstrainedfiscal space, as the empirical results suggest, undermines diversification efforts.Therefore,giventhatdiversificationofAfricaneconomiesisnecessaryforhighandsustainedgrowth,pragmatismindesigningmacroeconomicpoliciesbecomesimper-ative.

Foroptimalresults,Africancountriesshouldrealizethatwhilemacroeconomicsta-bilityisimportant,someoftheelementsofthemacroeconomicframeworkunder-pinningthediversificationandgrowthstrategyneedtobesufficientlyflexible.Thisrequiresadeparturefromtypicalmacroeconomicframeworks,whicharenarrowlyfocusedonmacroeconomicstability.Flexiblefiscalspacecanbeintegratedwithintheframework,andthisinturnenablesacountrytoboostinvestments,whichhasbeenshowntobeakeydeterminantofdiversification.

6.2 Trade and sectoral policies for diversification – returning to the basicsAnotherkeyrecommendationrelatestotheroleofeconomicpoliciesaimedatdiver-sification.Inthe1980s,therewassignificantmarginalizationofeconomicpoliciesasthefocusineconomicmanagementshiftedtowardsmacroeconomicpolicies.Thisledtotheneglectofsector-orientedpolicies,placingneededmicroeconomicsectoralreformsattheperiphery. Thismarginalizationplayedapart inextinguishingthegainsthatAfricancountrieswerestartingtomakeindeepeningdiversificationinthelate1970s.Nonetheless,itisimportanttonotethattheshiftinfavourofmacroeco-nomicpolicieswasfoundedonlegitimateconcerns,namelytheneedtoaddresstheeconomiccrisesoftheearly1980s.Adoseofpragmatismwouldhaverecognizedtheexistenceofvalidjustificationsfortheobjectivesunderpinningtheeconomicpoli-ciesatthetimeandpreventedtheradicalshiftthatcurtailedtheprogressthatmanyAfricancountriesweremakingindiversifyingandtransformingtheireconomies.

Sufficeittoaddthat,inmostcases,economicmanagementconcentratedonmacr-oeconomicissuesattheexpenseofsectoralissuesandthisledtostagnationinorthe

A conservative fiscal policy may

end up limiting the necessary fiscal

space needed to boost investment

��The Way Forward: Policies for Achieving Diversification

weakeningofdiversificationefforts.Inafewcases,dependenceonoilledtoreversalofdiversificationgains.Yet,thenumberofcountrieswherereversalindiversificationgainsoccurredduetothediscoveryandsubsequentrelianceonoilarefew,comparedto the number of countries that witnessed poor diversification as a result of themarginalizationofeconomicpolicies.Moreproactivemacroeconomicpoliciesareneeded.Giventhedeterminantsofdiversificationasestablishedinthisstudy,proac-tiveeconomicpoliciesontrade,finance,industryandresearcharecrucial.

Indesigningsuchproactivetradepolicies,Africanexperiencesaccumulatedtodateareimportant.Specialcareshouldbetakentoavoidthetwoextremesthathavebothfailedtoenabletradepoliciestoachievetheirexpectedoutcomes.Ontheonehand,tradepoliciesinsupportofdiversificationshouldnotfocusonprotectingdomesticmarkets.Suchpolicieshavebeentriedinthepastandcausedconsider-abledistortionsinAfricaneconomies,leadingtomisallocationofresourcesandtoweakgrowthandproductivity.Ontheotherhand,tradepoliciesfordiversificationshouldnotbetheorthodoxliberaltradepoliciesthataimatuncontrolledopeningupofAfricaneconomiestoexternalmarkets.Africancountriesshouldusetradepolicies ina strategicwayaimedat specificdiversificationand,byextension,atspecificgrowthanddevelopmentoutcomes(box6.1).Suchstrategictradepoliciesshouldbeproactive,dynamic,adaptableanddifferentiatedbetweensectorsandbetweenthevarioussegmentsofagivensectorinordertoenablediversificationtocontributeeffectivelytodevelopmentefforts.Furthermore,gradualismisahall-markofsuchstrategictradepolicies.

Althoughopennesshasnotnecessarilyledtodiversification,opennesscanhaveanindirectinfluenceontheimpactofotherdiversificationdeterminants,suchaspercapitaincome,throughinteractioneffects.Resultsshowthat,inadirectway,open-nesscanleadtospecializationratherthandiversification.Itisalsoproventhatopen-nesshasindirecteffectsondiversificationthroughinteractioneffects.Strategictradepolicymakingshoulddiscouragethosepoliciesthathavemutuallyexclusiveoptionsin terms of liberalization and protection. The Asian experience is an example ofhow a strategic tradepolicy cannotbe limited to a choicebetween liberalizationandprotection.Rather,astrategictradepolicyisonethatcanbeusedinadynamicandadaptablewaytosupportspecificdevelopmentchoices.Therefore,inordertorealizethebenefitsofdiversification,countriesinAfricashouldusetradepoliciesasdynamicinstrumentstowardschosendiversificationends.

Forproactiveanddynamictradepoliciestohelpcountriesachievetheirdiversifica-tionchoices,somefeaturesareessential.First,itisimportantthattradepoliciesaredynamicand,asaresult,developovertime.Second,suchpoliciesarelikelyto-varyfromsectortosectorandevenrequiredifferentiationnotonlyamongsectorsbutalsowithinthesamesector.Therefore,achievingverticaldiversificationinonesectorcallsfortradepoliciesthatdifferfromthoseforachievingthesameverticaldiversifi-cationobjectiveinanothersector.

Economic management

concentrated on macroeconomic

issues at the expense of sectoral issues and this led

to stagnation in or the weakening of diversification

efforts


6.3 Financial sector links between investment and diversificationWithregardtofinancialsectorpolicies,thestartingpointistheclearlinkbetweeninvestmentanddiversification.Thecontributionofprivateinvestmenttodesirablediversificationoutcomescannotbegainsaid.Inthatrespect,thefinancialsectorandits role in financing private sector contribution to diversification is very critical.Hitherto,theAfricanexperiencewithfinancialsectorreformshasbeenalmostsimi-lartothetradeliberalizationresults.However,thefailureoffinancialsectorliber-alizationtoachievetheresultsexpectedcanbeexplainedfromtwoangles.Ontheonehandisthefailureofliberalizationinachievinganefficientfinancialsectorabletoplayitsexpectedintermediationroleforbothshort-andlong-termcredit,inanoptimalway.Ontheotherhand,comesthefailuretoachievereductionsininterestratesaswasexpected,giventhatinterestcostsareamajorcostofdoingbusinessformanyprivatesectorfirms.Thesetwopointsareelaboratedhereinordertopointtotheneedforarethinkofthefinancialsectorarchitecture,intermsofbothpolicyandinstitutionalframeworkssothatproactivefinancialsectorpoliciescancontributetothedeepeningofdiversificationefforts.

African countries should

use trade policies in a strategic way aimed at specific

diversification

Box �.�Promoting vertical diversification in Ethiopia: the case of the leather industry

Ethiopia, like other commodity-dependent economies, is extremely vulnerable to abrupt varia-tions in export earnings due to volatile terms of trade for its major export products. Recognizing this, the Government is making considerable efforts to diversify the economy, through introduc-ing new products (horizontal diversification) and/or diversifying out of traditional products by moving towards the high end of the production chain (vertical diversification). The latter strategy has been used successfully in the leather industry. Given its large livestock population, Ethiopia has been traditionally one of the major exporters of hides and skins in Africa.

The leather industry developed in the early 1970s on the basis of import-substituting indus-trialization. However, the industry was marred by inefficiencies and lack of competitiveness. By early 1990s, only 45 per cent of total leather exports was in processed form with the remaining 55 per cent in raw form. In recent years, considerable efforts have been expended to make the industry more competitive and increase value addition. This is bearing fruits. Twenty new tanner-ies and leather-processing industries have been setup in recent years and, as a result, the value-added of leather-exports has increased to 95 per cent. More importantly, these firms combined have generated more than 6,000 jobs. After temporary set-backs due to cheap Chinese shoe imports, more than 30 new shoe-manufacturing industries are operational currently, employing more than 9000 workers. The Government envisages that by 2010 all leather exports will be in processed form, contributing between 8 to 10 per cent of total foreign exchange earnings.

A good macroeconomic environment, favourable investment climate, development of the domestic financial sector, trade policy and appropriate exchange rate policies are considered critical in the promotion of economic diversification, both horizontal and vertical.

Source: Federal Democratic Republic of Ethiopia: Ministry of Industry and Trade.


With regard to the institutional structureof the sector,financial liberalization inAfricafailedtoachievethedesiredoutcomesasacatalystforfinancialsectordeepen-ing.Thekeyreasonnotedisthatinthesamewaythattradepolicieswereneverseenaspartofanintegratedfinancialsector,financialsectorliberalizationtendedtotreatthesectorinacompartmentalizedmanner.Thiswasdonetotheextentthattherewasunbalancedfocusonsomecomponentssuchascommercialbanking,neglectingthesignificanceofotherdimensionssuchasdevelopmentfinanceinstitutionsand/orothercomponentsthatarekeytocapitalmarketsdeepening.Theresultswerethatthefinancial sectorswerenot integrated, and focusedon short-termcredit issuesratherthanondevelopmentfinanceandcapitalmarketsdevelopment,whichwouldbemorerelevanttodiversificationefforts.Inthisrespect,giventheimportanceofthefinancialsectorindiversification,itisimportantthatAfricancountriesseekaproactivefinancialsectorpolicythataimsatintegrateddevelopmentofthewholesectorthatcaneffectivelyandefficientlymobilizethesustainable,long-termcapi-talnecessaryforfinancingdiversificationprogrammes,andbyextension,long-termdevelopment.

Thesignificanceofproactivefinancialsectorpoliciescomparedtowhathasbeenthepracticecanbefoundintheresultsthatwereachievedinthepastwithinterestrateregimes.InmanyAfricancountries,financialsectorliberalizationbecamecharacter-izedbywideinterestratespreads.Thus,insteadofliberalizationresultinginmoreefficientfinancial sectors, the resultswere interest rate regimeswhere the lendingratesroseandremainedhighoverlongperiodsoftime,whilethedepositratesfell,and,inmanycases,werenegativeinrealterms.Thisdiscouragedtheprivatesectorfrom undertaking productive investments, such as those required for deepeningdiversification.

Additionally,theinabilityoftheprivatesectorinAfricatoaccesscheapcreditmeantthatitwasnotpossibletoundertakeinitiativesthatwouldleadtobothhorizontalandverticaldiversification.Thehighinterestratesafterliberalizationalsohadthenegativeeffectofraisingtheinterestcostsofservicingexistingdebt.Thisresultedinreducedprofitabilityformostfirms.Giventhatretainedearningsalsoformasig-nificantcomponentoffinancingdiversificationeffortsintheprivatesectorinmostAfricaneconomies,financialsectorliberalizationhadtheindirecteffectoflimitingthesediversificationefforts.

6.4 Industrialization policies key to deepened diversificationWithregardtoindustrialpolicies,ithelpstorecallthateconomictransformationisbothanecessaryandsufficientconditionforindustrialization.However,economictransformationcannotoccurintheabsenceofdiversification.Giventhecorrelation

Proactive financial sector

policies can contribute to

the deepening of diversification

efforts


between diversification and economic transformation, industrial policies are partandparceloftheneweconomicpoliciesfordiversificationthatAfricaneeds.Thisisparticularlythecasegiventhatithasalsobeenestablishedinthisreportthatindus-trialpolicyiscriticaltotheabilityofacountrytodeependiversification.Therefore,asinthecaseoftradepolicies,thereisneedformoreproactiveindustrialpolicies.This calls for strategicuseof industrialpolicies to targetdiversification efforts inthosesectorsthatarealignedtotheoverallindustrializationstrategy.

Thereismuchtobesaidaboutthewayforwardindesigningproactiveindustrialpolicies.OnecanrecallthatimportsubstitutionstrategiesenabledAfricatoachievehighlevelsofeconomicdevelopmentinthelate1960sandintheearly1970s,thesameperiodwhendiversificationgainswereevidentacrossmanyAfricancountries.However,theseindustrialstrategiesfailedasearlyasthe1980s,duetoreasonssuchas lackof internal structuringof the industriesconcerned,weaknesses in internalmarketsandtheirinabilitytoprovidesignificantmarketsfornewindustries,reducedavailabilityoffinancingtodevelopingcountries,and-lowproductivityofnewenter-prises.Theresponsetothefailureofthisdomestic-marketorientationinthedevel-opmentmodelviareorientationtowardsexternalmarketsdidnotyieldtheexpectedresultsinAfrica.Inasimilarfashionakintotheroleofstrategictradepolicies,itisalsonecessaryforAfricancountriestohavemorestrategicanddynamicindustrialpoliciesthatarebasedonwellthoughtoutchoicesfordiversificationand,byexten-sion,economictransformationpaths.

Such policies should include adoption of sector-by-sector, bottom-up strategies,fromdownstreamtoupstream,inordertodeepenhorizontaldiversificationinsec-torsrangingfromintermediategoodsuptocapitalgoods.Applyingthisstrategytodiversificationmightmakeitpossibleforcountriestodevelopverticaldiversificationpathsbybuildingconnectionsbetweeninternalmarketsandexports.Downstreamindustrialsegmentswouldbeexportorientedwhiletheintermediatesectorswouldbeorientedtowardsinternalmarkets.Eventually,themultipleoptimaofcompara-tive advantages would evolve and export competitiveness would gradually reachintermediateandcapitalgoodssectors.

6.5 Financing research to increase TFP Theothermajorareainwhichneweconomicpoliciesfordiversificationarerequiredisinresearch.ThemajorityofAfricancountries,sincethedemiseofdiversificationgain resorted to relying on factor accumulation as the main source of economicgrowth.Yet,historicalandempiricalevidencehasshownthattheindustrializedandNIEswereabletoachievedevelopmentleapswhendramaticchangesinTFPtookplace.Asthisreporthasshown,alinkexistsbetweeneconomicgrowthanddiversifi-cationthroughTFP.However,improvementsinTFParealmostalwaysamanifesta-tionofinnovationinagiveneconomy.Financingresearchanddevelopmentstands

Industrial policies are part

and parcel of the new economic

policies for diversification that

Africa needs


outasaclearwayinwhichAfricancountriescouldimprovethelevelofinnovationandhenceraisethelevelofTFPcontributiontoeconomicgrowth.Thiswouldthenenablethesecountriestoreapmaximumbenefitsfromtheirdiversificationefforts.

6.6 Strengthening of institutions - a prerequisite for positive diversification outcomesFornewmacroeconomicandeconomicpoliciestoachieveoptimaldiversificationresults,itisimportantforcountriestostrengthentheirinstitutions.Asthisreporthasshown,conflictandgovernancehaveverysubstantialimplicationsfordiversifi-cation.Conflictalwaysunderminesdiversification,whilegoodgovernance(broadlydefined)isempiricallyshowntoleadtodesirablediversificationresults.Thepolicyrecommendationthatflowsfromtheseresultsisthatitisimportantthatcountriesinvestinpeace-buildingandpeace-promotinginstitutionsthatcanproactivelydealwiththreatsofconflictflare-uporresurgence.

Whereconflictexists,beitatthenationalleveloracrossbordersbetweencountriesinagiven subregion, it is important tohaveeffective institutions toaddresspre-ventionor resolution.Havingconflictpreventionand resolutionas akey featureof institutionswithin theRECs isoneway inwhichdiversificationefforts couldbedeepened.Countries that aim todeependiversification alsoneed to invest ingoodgovernancestructuresandinstitutions.Governanceinstitutionsthathavetobestrengthenedshouldcutacrosstheruleoflawandpublicorder–includingajudi-ciarythateffectivelydealswithcommercialdisputes,aswellastaxadministrationinstitutionsthatestablishapredictableinvestmentclimate.

Industrial policies should

include adoption of sector-by-

sector, bottom-up strategies,

from downstream to upstream, in

order to deepen horizontal

diversification

Economic Report on Africa 2007

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Transcript of Economic Report on Africa 2007