Economic Development in Africa – Opportunities and Challenges

Elisabeth Tankeu, Commissioner for Trade and Industry, African Union, Addis Abeba

Introduction

The current development situation of Africa is paradoxical. Although it is arguably the richest continent in terms of   natural resources, Africa remains the poorest and the least developed region of the world. The numerous problems accounting for this paradox can be resolved and Africa can emerge as a   major global partner and actor and become a continent of opportunities. With an abundance of natural resources, a young and growing population, and a large potential market, Africa is the last global frontier that will follow the current emerging powers of China, India and South America. Concerted efforts on the part of African countries and international community can accelerate the process of Africa becoming global power and a continent of possibilities.

What is needed to maintain the economic growth that Africa has experienced over the last years?

Recent years have witnessed a significant improvement in the economic growth performance of Africa. The continent achieved an average growth rate of 5.2, 5.7 and 5.8 per cent in 2005, 2006 and 2007 respectively. Compared with a growth rate of 0.3 per cent during 1990-2002, real per capita income in Africa increased at the rate of 3 per cent over the period 2003-2007. Although the economic growth over the last few years has been impressive, it is still below the rate of 7 per cent per annum that is required for Africa to achieve the Millennium Development Goals (MDGs). If the continent is to achieve these goals and meet the challenges of development in 21st century, the current rate of economic growth must not only be maintained but also enhanced.

To answer the question on what is needed to maintain the economic growth of recent years, it is important to put the growth experience in proper perspective. The improvement in Africa’s growth performance has been due to a number of factors; internal and external. Internally, most African countries have created a conducive domestic environment for growth through the adoption and implementation of economic policy reforms and improvement of   macroeconomic management. Privatization, greater fiscal discipline, and more realistic exchange rates have all contributed to macroeconomic stability that is essential for growth. On the political front, the increasing adherence by many African countries to the principles of   democracy, rule of law, and good governance have engendered greater stability and reduced the incidence of conflicts. This has been an important factor in improved growth performance.

Africa’s internal growth generating factors have been reinforced by recent major developments in the global economy, especially the increased demand for commodities and the resultant upsurge in commodity prices. The rapid growth of the economies of the emerging powers of the South (China, India, Brazil, etc) has intensified global competition for Africa’s natural resources. In the process, resource-rich countries on the continent have benefited from the commodity boom, which has become a major source of their recent economic growth.

Maintenance and enhancement of Africa’s recent economic growth requires the sustenance, broadening and deepening of political and economic reforms. Such reforms are necessary for the continent to effectively mobilize domestic resources and attract its fair share of global foreign investment and capital flows. Beyond the commodity boom, African countries can sustain economic growth by prudently managing and investing their windfalls from the surge in commodity prices in the building of infrastructure and human capital and in the diversification of their economies. The efforts of Africa in this regard will need to be supported by the international community, especially the developed countries of the North.

How can economic growth be translated into sustainable poverty reduction and equitable social development, benefiting the population at large?

Although Africa’s economic growth in recent years has been impressive, it has not translated into any meaningful reduction of poverty. Economic growth on the continent has not been pro-poor. As indicated in the recent Report on the Millennium Development Goals, poverty in Africa is increasing and the continent is not on track towards meeting the MDGs. A major challenge facing African countries therefore is how to promote equity with growth and improve the quality of their economic growth by making it pro-poor, and ensure that growth is broadly shared in terms of generating decent employment, poverty reduction and attainment of the MDGs.

Translating economic growth into sustainable poverty reduction requires the diversification of the sources of the growth and the adoption of policy measures to ensure that the poor partake in the benefits of economic growth. Poverty in Africa is heavily concentrated in rural areas and among disadvantaged groups, especially women, youth and informal sector operators. Empowerment of people at the grassroots level and disadvantaged groups to enhance their capacity for productive employment and decent income is critical to the attainment of sustainable economic growth and poverty reduction. There is need to mainstream gender in the conception, design and implementation of policies and programmes and to provide special interventions for the reductions of major gender disparities.

The development of cottage industries and micro-enterprises, based on the utilization of available resources in the immediate neighbourhood and the level of technology that is appropriate to the level of education and skills of the disadvantage groups can enhance job creation, economic growth and poverty eradication. Access to essential production inputs (micro finance, land, skills and extension services), enhancement of rural infrastructure, the elimination of laws and cultural practices that discriminate against women and girls, are also some of the ways that the disadvantaged groups can be integrated into the economic growth process for the attainment of sustainable poverty reduction.

As indicated earlier, in many of African natural resource rich countries, the   improvement in growth performance has been due largely to the commodity boom. The upsurge of commodity prices has put relatively high amounts of financial resources at the disposal of the countries. Prudent and efficient management of these resources can contribute to the enhancement of growth and the reduction of poverty. Sustaining the growth process requires that great attention be paid to policy reforms, the building of infrastructure, and human and institutional capacity. Reduction of poverty entails putting more emphasis in monetary and fiscal policy, especially public expenditure on meeting the basic needs of the poor.  Measures such as the provision of free or subsidized basic health and education, rural water supply, school meals, subsidized fertilizers and other farm inputs, micro-finance, etc. can make a significant contribution to the promotion of sustainable economic growth and the distribution of the benefits of economic growth to the population at large.

One major effect of the Structural Adjustment Programmes (SAPs) that most African countries had to adopt under the influence, if not the pressure, of the Bretton Woods Institutions has been the significant reduction in the role and the intervention of governments in the economy. In the process, the allocation of resources and determination of prices have been left increasingly to market forces and to the detriment of poor and vulnerable segments in society. While a lean and efficient government is desirable, this should not be at the expense of the need for government to intervene and achieve an equitable and more inclusive distribution of the benefits of economic growth. Too much reliance on market forces cannot guarantee this.

What are the main challenges with regards to promoting the interests and possibilities of African business?

Over the last two decades, there has been a significant change in the perception of the role of African business in economic growth. In almost all African countries, the private sector is now seen as a key engine and prime mover of economic growth. Public-private sector partnership is growing on the continent. The increased recognition of the importance of the private sector as an engine of growth notwithstanding, the sector is still confronted with a number of challenges which limit its possibilities. In some countries, conflicts and political instability constitute major constraints on the operations and growth of business. Restrictive business laws and regulations, excessive bureaucracy (e.g. the high numbers of procedures and days involved in establishment of business), and inefficiency and corruption in   public administration are other limiting factors. One of the major challenges to the development and operation of African business is the inadequacy of physical, institutional and technological infrastructure, which increases the cost of doing business. Financial and capital markets and essential business skills are still relatively undeveloped. National markets are generally not large enough for the exploitation of economies of scale while the progress towards the development of regional markets and the opening of markets of the developed countries for African products has been limited.

Although there are still major challenges with regards to the promotion of business in Africa, there has been a significant improvement in the continent’s business environment in recent years. Legal and regulatory frameworks, governance and accountability, rule of law, policy reforms, and incentives and support for business have been enhanced in most African countries. These efforts and the improvement in Africa’s economic outlook and prospects, based on the continent’s natural resources potential and the buoyant global demand for commodities, are bound to expand the scope of opportunities for African business.

What can African countries and organizations do to reshape the regulatory environment, creating a more investment friendly climate?

African countries and organizations are already doing a lot to create a conducive environment for domestic and foreign investment. What is required on their part is the deepening of efforts in this regard. Organizations such as the African Union and the Regional Economic Communities (RECs) have put in place mechanisms for the prevention and resolution of conflicts within and between Member States. The African Peer Review Mechanism (APRM), which is the flagship of AU’s New Partnership for Africa’s Development Programme (NEPAD) is aimed at enhancing good political and economic governance in Africa.

The increasing adherence of African countries to the principles of democracy, rule of law, respect for human rights, transparency and   accountability, has contributed to the reduction of conflicts, enhancement of political stability, and reduction of political risks for investors on the continent. Economic policy reforms, including privatization and the strengthening of public-private sector partnerships, are also creating opportunities for private investment in Africa. With regard to investment regulatory framework, several aspects of this are being reshaped to improve environment for investment. For example, many African countries have simplified investment procedures by creating one-stop shop investment centers for the completion of registration and establishment of business. This has reduced the length of time as well as the cost of business establishment. Restrictions on the repatriation of profits and the use of non-indigenous manpower are being eliminated or reduced. Also, in many African countries where foreign ownership of business was limited to that of minority share holding, changes in policy have been introduced to permit complete or majority ownership of business by foreigners.

Although Africa’s business environment is becoming more conducive as result of the above measures, there are some areas where much still needs to be done to improve investment friendliness. Poor infrastructure imposes high operational risks and costs on investors. Elimination of infrastructure deficiencies is necessary for making the African environment more investment friendly. Also critical are the strengthening and improvement of the administrative, judicial and financial systems. As part of the strategy for creating a more investment friendly climate, African organizations, especially the RECs, are building Free Trade Areas (FTAs) by eliminating tariff and non-tariff barriers to intra-regional trade. They will also need to set up Customs Unions and adopt Common External Tariffs (CETs) to facilitate trade with other partners. 

What can the international community do in this regard?

A positive economic outlook, and good prospects for sustainable economic growth, rising incomes, and poverty alleviation are powerful incentives for the growth of investment in any country or region. The international community can contribute to making Africa a more favourable environment for investment and business by supporting the continent’s efforts to achieve sustainable economic growth and attain the MDGs. In particular, the international community needs to deliver on its commitments to Africa in three critical areas: official development assistance (ODA), debt, and trade. From the 1970s when the international community set 0.70 per cent of GNP as the target of ODA from the developed to the developing countries, to the Monterrey Consensus, the World Summit Outcome, the Paris Declaration, and to as recently as 2005 when the G8 group of developed industrial countries at Gleneagles to significantly increase its assistance to Africa, the experience of Africa with international commitments has been of disappointment, one of considerable gap between commitments and implementation. The international community needs to close this gap. Debt relief through reduction or elimination of the burden of external debt is an important channel through which the international community can assist Africa to improve its environment for growth and investment. With a debt overhang of about $300 billion, the economic growth prospects and the capacity of the continent, especially the heavily indebted countries to attract investment are constraint.

The removal of the imbalances in the multilateral trading system, such as trade distorting agricultural subsidies, tariff peaks and escalation by developed countries, that hinder the trade performance of African countries, constitutes an important means through which international community can contribute to the promotion of economic growth in Africa. Greater access of African products to the global market will attract investment into local processing and value addition to continents abundant natural resources. It is in this regard that the successful completion of the Doha Round of the WTO negotiations is of critical importance to Africa.

For the inflows of foreign investment into Africa to serve as effective instruments for development and poverty reduction, there must be a proper balance between the rights of foreign investors and the rights of governments and citizens. The policy space and flexibility required by developing countries and recognized by all WTO members will help African governments pursue policies that are critical to national development and interests.

Africa is indeed a continent of opportunities. The international community can help the continent to harness the opportunities by meeting its commitments. The international media can also contribute by promoting Africa as a region of opportunities for investment rather than focusing excessively on negative developments such as conflicts, political instability, natural and man made disasters.

 

Sist oppdatert: 22.10.2008
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