Chapter

Chairmen’s Concluding Remarks

Author(s):
Claire Liuksila
Published Date:
December 1995
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Author(s)
Jack Boorman and Haruhiko Kuroda 

First of all, I would like to thank all of the participants in this seminar for their thoughtful, pragmatic remarks. Although we all come from different backgrounds, I believe a consensus has emerged from our discussions. This consensus is that to reduce poverty in Africa one must press ahead with a development agenda that focuses, within a sound macroeconomic framework, on investment in basic infrastructure, health, and education, and promotes diversified development. Within this broad perspective, our discussions focused intensively on how to foster the development of the private sector.

The highly successful experience of the East Asian economies over the past 20 years—founded on outward-oriented, market-based policies—suggests that the rest of the world, Africa included, may have something to learn from these countries. A number of participants from Asian countries have shared with others their firsthand experiences of what have been the key elements of the so-called East Asian “miracle.” While the precise ingredients differed from country to country, the main elements included:

  • Macroeconomic and structural policies that enabled the private sector to play a leading role in the growth process.

  • High degree of financial resource mobilization. This means both high domestic savings and high foreign investment and other foreign resource flows.

  • Ensuring that foreign aid gets used effectively.

  • Sound management of external debt.

Several speakers felt that such a strategy would prepare Africa to take advantage of the opportunities provided by regional integration, expanding markets in other parts of the world, and the growing openness in the international trading environment. Some speakers felt that with such a strategy, Africa could move from its predominant agriculture base to a more diversified productive structure.

Putting the private sector at the center of the development process requires, among other factors, a stable macroeconomic and political environment. Entrepreneurs need to feel confident that the new enabling environment in which they do business is irreversible. Macro-economic stability is essential. This helps establish credibility and confidence in the government’s policies. A number of speakers emphasized the importance of making sure that exchange rates are consistent with economic fundamentals.

We also need structural reforms that facilitate private sector activity. This includes regulatory reform, trade reform, and a rethinking of the role of the public sector. Many speakers have signaled the need for tax reform to eliminate the drag on productive activity of inefficient or excessively high taxes, and restructuring public expenditure—away from unproductive areas toward areas that support and reduce the costs of private sector activity, such as infrastructure. As the East Asian experience has shown, health and education expenditures are very important. All of these show that we need a good, determined government supported by an efficient and disciplined civil service in order to bring about strong private sector development.

Rethinking the role of the public sector also means taking the public sector out of activities that could be more efficiently handled by the private sector. This is a budget issue as well as a growth issue. Losses generated by public enterprises in some African countries are larger than expenditures on health and education. Not only is this a poor allocation of scarce resources, it sends the wrong signals to investors about government priorities.

Several speakers suggested that the government had a legitimate role in intervening to promote technological capacity building, provide specialized training facilities, foster institution and infrastructure building, and efficient information transmission. Some even argued for an export-oriented industrial policy. In any case, this intervention should be efficiently managed and of temporary duration.

Speakers have also emphasized the importance of mobilizing a high level of financial resources and encouraging domestic and foreign investment. Raising the level of domestic savings requires a multi-pronged effort. Raising the savings of the public sector is an important first and immediate step that governments can take. Restructuring or privatizing public enterprises could play an important role in raising public savings.

Many African countries have already liberalized considerably their financial sectors by freeing interest rates, and ending directed lending and credit subsidies. But again, we must remember that in a good number of countries, the public sector—including public enterprises—absorbs the lion’s share of credit. Many speakers have emphasized the need to break the link between public sector financial institutions and loss-making public enterprises. Emphasis was put on restructuring weak financial institutions and on strengthening prudential guidelines and bank supervision.

Some speakers suggested that governments should take the initiative to develop suitable institutional vehicles for mobilizing household savings such as postal savings systems and compulsory pension funds.

To discourage individuals from placing financial resources abroad, speakers stressed the need to tackle inflation, raise real interest rates above those prevailing abroad, and rely on assuring the convertibility and transferability of the currency.

Parallel with the effort to raise domestic savings, African countries should begin to create a climate attractive to foreign investment. This does not mean rushing forward with investment incentives, but rather, countries need to have a fully fleshed-out, consistent set of policies in place that will make the foreign investor choose their country over other possible investment locations. Countries need to provide a productive, cooperative labor force, and a business climate free of unnecessary regulations and restrictions that raise the cost of doing business. Some speakers suggested that governments needed to play a supportive role to indigenous domestic investors. Speakers emphasized the need to develop domestic entrepreneurship and to facilitate the transition from involvement in pure trade and commercial activities to manufacturing. As regards the latter, some participants suggested that joint ventures could play a useful role.

Foreign aid and external debt are the two remaining elements of foreign resource mobilization. As aid budgets in industrial countries shrink, recipient countries must use the aid they receive more effectively, but donors too must improve the way they handle aid. Donors need to pay more attention to achieving an appropriate mix of aid tailored to the needs of the recipient country.

Aid effectiveness means that, more than ever, sound macroeconomic and structural policies need to be in place to maximize the benefits from foreign assistance. Without an appropriate policy framework, aid is not likely to be used effectively. And, at the individual project level, projects need to be well designed so that they help lay the foundation for long-term growth. Transparency and accountability in aid transactions are also very important.

As a number of our colleagues from Africa have emphasized, from the donor side, coordination is very important. This is key to ensuring that there is no overlap of activities and overfunding of certain expenditures, as well as no inconsistency in conditionality. One promising form of coordination is the broader sector investment approach.

A number of speakers have encouraged countries to develop integrated medium-term scenarios for the government budget, in addition to the balance of payments, in order to give a coherent view of domestic resource mobilization efforts, external financing needs, and progress toward reducing dependence on foreign aid.

Our last session of the seminar stressed the need for sound debt management practices. We know that many African countries have heavy debt and debt service burdens. Mechanisms are now in place which, if implemented with sufficient flexibility, could bring debt service profiles to levels that can be sustained with continued sound policies. Attention must then shift from the “debt crisis” to the need for governments to manage debt effectively so as to maximize the development value of external borrowing and prevent the re-emergence of debt servicing problems. Since governments’ capacity to service debt except on highly concessional terms will remain limited, it will be of critical importance to complement prudent debt management with policies aimed at attracting non-debt creating flows, particularly in the form of foreign direct investment.

Given the broadening of the debtor and creditor base, and the variety of instruments in terms of maturity and conditions, a comprehensive debt management strategy is essential. Such a debt management strategy should be forward-looking, well coordinated at all levels of governmental agencies, subject to close reporting and monitoring within an appropriate regulatory framework, and include full consideration of the approaches needed to manage risks. Speakers also stressed the importance of transparent and comprehensive accounting frameworks and statistical databases.

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