- Laura Wallace
- Published Date:
- January 1999
My background is that of a general development economist, not necessarily an expert on sub-Saharan African economies. So I would like to focus on several points that Robert Sharer made that had to do with the process of structural change and structural adjustment.
At the beginning of his paper, Robert Sharer mentions information technology. I realize that information technology is a very powerful technological advance and a very powerful policy measure for accelerating growth in every economy. Indeed, the World Bank would like to be a knowledge bank. But my first point is that we should be very careful to keep in mind the equity and income distribution aspect among countries and within a country—that is, the dangerous aspects of furthering inequality by utilizing information technology.
My second point is rather controversial—I would like to draw a comparison between the growth potentials of Asian and African countries. Over the past few years, Africa’s growth performance has been higher than that of East Asia, but I think that over the medium and long term, East Asia’s potential growth is higher than that of Africa. In other words, it is important to understand the performance of policy reforms in African countries. Here, I am sure that some participants will have a different view of the growth potential of the two areas.
The third point centers on foreign direct investment. In his presentation, Sharer highlighted the sharp increase in net private capital flows to developing countries since the end of the 1980s. Ten or 15 years ago, net foreign capital inflows to African and Asian countries were at about the same level. But since the mid-1980s, private capital inflows, especially foreign direct investment, to East Asian countries, have increased sharply, unlike in Africa. Indeed, this is one of the most important components to understanding the high growth that these Asian countries eventually attained. Right now, however, in the face of the economic crisis, private investors are waiting to see if East Asia’s growth potential will recover or not.
I am aware that the rate of return of foreign direct investment in Africa is not that low compared with the rate of return in East Asia. But what is needed to spur a real increase in foreign direct investment is political stability and investor confidence in the region. Such credibility or confidence of private investors is vital, not only for Africa, but for East Asia as well.
The next point relates to Sharer’s comment on the design and the pace of sequencing of policy reforms in Africa. I am very happy that IMF economists are pointing out the importance of this topic. In the past, say, 10 years ago, I do not think that there was any concept of sequencing in IMF economics. I do not know if I am correct or not, but from the perspective of an outside economist, IMF economists seemed very naive.
My last point is on the “good practice” countries. Sharer highlighted two country cases, Uganda and Ghana. I realize that many IMF and World Bank documents say that Ghana is a very successful country in terms of reforms. I also realize that among sub-Saharan African countries, Ghana may be one of the most successful countries since the mid-1980s. But I am afraid that private investment in Ghana is not very active. I am also afraid that in Africa, even in the “good practice” countries, we do not see private investment tending to increase sharply. By contrast, the dynamism of private investment in East Asian countries is impressive. We observe sharp increases of private investment in many of these countries and this matters because private initiative is essential for accelerating economic growth.
Now let us move to the rent-seeking versus profit-seeking behavior of private companies. Sharer pointed out the inefficiency of rent-seeking behavior. I completely agree. But how do you change the mentality of private companies to seek profits instead of rents? A competitive environment is critical for accelerating economic growth.
Take the example of Japan in the late 1950s and 1960s. In an effort to catch up, the Japanese government protected private manufacturing industries. But even in the protected market—including in the oligopolistic industries such as the petrochemical, passenger car, and steel industries—there was fierce competition among the private companies. Their behavior was not rent-seeking, but profit-seeking. So why, in the 1950s and 1960s, in a protected market, did Japanese manufacturers compete fiercely with each other? Let me give you one anecdote on trade liberalization.
In June 1960, the Japanese government announced a comprehensive schedule of trade liberalizations—specifying a set pace for various categories—and did not diverge from this announced schedule. In other words, it is very important to prepare for future competition with foreign companies. Japanese manufacturing industries are now very competitive, but in the 1950s, they knew that they were very weak and that it was very difficult to compete with manufacturing companies in the United States, Germany, the United Kingdom, France, and some other developed countries. The Japanese people—not only manufacturers but also politicians, technocrats, academicians, and journalists—all wanted to become a rich country, an advanced country, and in this connection, some wanted to join the Organization for Economic Cooperation and Development (OECD). Japan did join the OECD in 1964, but in order to do so, we had to liberalize trade and foreign direct investment. Therefore, the potential pressure of competition with foreign companies is a key element toward understanding the fierce competition among Japanese manufacturers even in the protected market. One other fact that we should not lose sight of is that the most important point of industrial policy is not the subsidies, or the directed credit, or the tax exemptions, but the design of policies in close communication with the private sector. And that implies a key role for government in ensuring a competitive economic environment.
In this connection, I expect some African countries would like to become so-called newly industrialized countries. Thirty to 35 years ago, the income levels of Korea and some other Asian countries were lower than that of some African countries, but they made every effort to enhance productivity—both labor and total factor productivity—to prepare for the future competition with foreign countries. Such a way of thinking is vital if Africa hopes to realize its growth potential.
The remarks made so far in this seminar are important for all African countries—and especially for West Africa’s private sector. But there are a number of problems with the approach being adopted, whether it be that of the academic, the decision maker, the partner in development, or the entrepreneur in the private sector.
If we take the case of trade liberalization in West Africa, for example, and compare it with what has been done in other parts of the world, we quickly realize that a country’s level of development plays a critical role in its policy choices. Indeed, trade liberalization or market liberalization typically corresponds to a given level of economic development in the country seeking to liberalize.
So we must ask ourselves what is the level of economic development that West Africa has currently reached, as it is at this level that Africa must weigh whether or not to pursue economic liberalization. While the rate of growth has been encouraging in countries like Ghana and a few others in the West African CFA-franc zone, growth has largely reflected the automatic effects of the 1994 devaluation.
Indeed, Mali’s case is a good example, with a growth rate of about 6 percent that is attributable chiefly to the key role of cotton in our economy. Indeed, not only is more than 98 percent of the cotton produced in Mali exported, and therefore sold for foreign exchange, but the Compagnie Malienne des Textiles is also the largest taxpayer in the country. This high-profile role of the Compagnie Malienne des Textiles in Mali’s public finances is dependant largely on the foreign currency price of cotton, as well as on an adequate rainfall, which is an act of God—for without rain, there is no cotton. It is, therefore, important for countries such as Mali, Chad, and Senegal to weigh what trade liberalization would really contribute to their economic development.
According to the private sector, the sustainable development of our countries is linked not only to the soundness of our economies but also to the role of the private sector. So if we would like the private sector to be a driving force in our economies, we have to define the strategy to be followed and thus the priority decisions. It strikes me that, in light of our increasingly globalized world, a key question for West Africa should be whether further trade liberalization—and please note that our trade relations are among the most liberal—should be given a high priority? This needs to be asked since despite all the development that has taken place so far, the well-being of our people has not kept pace.
In an effort to answer that question, I would like to suggest that trade and business should be liberalized under the aegis of a strong state. A strong state is one that knows how to enforce the laws passed by its Parliament, a democratic state in which personal freedoms are exercised entirely without bias, and one in which the administration is efficient not only in its traditional tasks of planning, promoting, and monitoring but also in its enforcement of the law. In most of our states today, the administration is weak, inefficient, and corrupt, with ridiculously low wages and a barely controlled rate of inflation.
Ultimately, we will need to create a modern development administration that is bold, has a strategic action plan, and is capable of both designing and executing all of the current programs that are now going unmanaged. A development administration is one that is actually aware that it provides services. After all, what is it that treasury collectors, government physicians, police officers, or even magistrates do? They render public services that citizens remunerate through the payment of taxes.
As for trade liberalization, that is now unavoidable in West Africa. Indeed, the Economic Community of West African States (ECOWAS) is a good example of subregional cooperation that holds the potential to help our economies strengthen each other, drawing on the size of the market that each member country represents. But the reality is that beyond the political discourse, the signed agreements are difficult to implement because the member states lack the political will needed to move toward a true trade liberalization zone.
The West African Economic and Monetary Union, a subregional grouping within the Economic Community of West African States, is also finding it difficult to get over the last hurdle in the liberalization of its zone—despite a common currency, a common central bank, and common institutions. Indeed, there are still tariff and non-tariff barriers at several points along most of the common borders between the states.
Solutions must also be found for the problem of integrating subregional free trade areas within the context of regional or zonal adjustment programs, unlike what is currently seen in the programs of individual countries, with performance indicators such as customs services or tax collection.
Taking our countries individually, if Côte d’Ivoire is doing a little better than the others it is primarily because of its good policy on infrastructure. Indeed, it is essential to understand that development is linked to both human and physical infrastructures. The development of these infrastructures is a task that, up until a few years ago, still depended solely on the government. But there can be no productive private sector in an environment without good infrastructures, as Vina-Seeburn Dabeesingh reminded us earlier.
To sum up my remarks, we should focus on three priority areas:
There needs to be human and physical capacity building, aimed at greater efficiency in the public and private sectors. In the past, cheap labor used to be a justification for investment choice but this proved wrong, insofar as the workforce was unskilled, untrained, and thus incapable of getting the work done.
The private sector needs to be better organized to play its role in lobbying and participating in public affairs. It should not wait for the administration to do everything for it. The West African Enterprise Network has been active in the West African region for the past four years, making concrete proposals, organizing meetings with the authorities, and holding training seminars for parliamentarians.
Bilateral and multilateral development institutions should include civil society in the search for solutions to development problems. This seminar should serve as an example in this regard, because all participants in the development of our countries are here today.
Lastly, I would like to thank the Ministry of Finance of Japan and the IMF for having afforded the private sector an opportunity to share its views.