9 Panel Discussion
- Laura Wallace
- Published Date:
- January 1999
In the past, for most of the countries in Africa, globalization was something we read about, not something that we participated in. Historically, the integration of firms into interdependent manufacturing processes, the ever-extending reach of world financial markets, and the near-instantaneous flow of information around the globe has passed Africa by, and for good reasons. Much of our industry was rudimentary, many of our financial markets were closed and insular, and our communications systems functioned poorly.
Moreover, the macroeconomic environment in many countries, Mozambique included, was so poor that it made little sense for local entrepreneurs to try to participate in global commerce, except as sellers of raw materials or as purchasers of consumer goods. Worse yet, the macroeconomic environment made many investments by foreigners too risky to seriously contemplate.
Today this is changing. Countries throughout Africa are successfully adopting policies that are more business-friendly and that help to promote macroeconomic stability. Mozambique is a good example of this. Until recently, vast expanses of the economy were controlled by state-owned enterprises. But through a massive privatization effort that will be completed soon, we have sharply reduced the role of the state in the economy. In addition, we have begun to adopt a more outward orientation in our policies. Tariffs have been lowered and laws have been passed that ensure that export-oriented investment projects can obtain all of their inputs at world prices. As a result, we are beginning to see increased interest by investors in Mozambique. For instance, work has just begun on a $1.3 billion aluminum smelter to be built near Maputo. Other large investments are in various states of preparation.
At the same time, we have taken significant steps to promote macroeconomic stability, by among other actions, tightening monetary policy. This was possible owing to the privatization of the state banks, which slowed leakages into the economy. In addition, fiscal policy has been tightened to ensure that the government is not a source of macroeconomic instability.
These policy changes were painful, but they have been successful. Only three years ago, inflation was averaging over 50 percent a year. While growth had begun, it was only because our economy had been driven so far down by war and drought that when peace and the rains came there had to be an expansion. But today inflation is in the low single digits, real growth of GDP is consistently in the range of 7–8 percent. Our exchange rate has stabilized, having been little changed against the dollar for the past few years and having appreciated against the rand. This has given our entrepreneurs a solid base that will allow them to participate in global commerce and made Mozambique a more favorable location for foreign investment.
It would be easy to say that the focus of Mozambique’s reform should be to liberalize the economy while adopting an outward-looking policy orientation. But these steps are not enough. I would like to focus on three additional areas that are often overlooked.
First, while we all understand the importance of allowing markets to function and of minimizing the government’s interference in most areas, it is often the case that more liberal policies in one area increase the importance of a strong policy response elsewhere. The trick in government is to know when liberalization requires new and different regulation. This is well illustrated in the banking sector. In Mozambique, we have taken steps to open up the banking sector to greater competition and to allow banks greater freedom of operation. One important lesson of the recent Asian experience has been that strong banking and financial market supervision is crucial to the long-term health of the economy. We are working to develop our capacity in bank supervision and maintain this as a priority in terms of applying scarce resources within the central bank.
The Asian crisis has also shown us that the developed countries must take greater responsibility for managing their lenders. Financial flows among the developed countries have become so large that even small diversions of those funds to individual developing country markets can create severe macroeconomic consequences and create inappropriate incentives for companies. The efforts by the G-7 and other countries to find ways to better manage such flows will be crucial to the long-term stability of financial systems around the world.
The second issue that I would like to highlight is the need to undertake institutional reform. The importance of this issue became painfully apparent to me when I read the 1998 African Competitiveness Report of the World Economic Forum. This report ranks countries according to their performance on a number of indicators that have been correlated with increased growth in the past.
This report was a bit of a wake-up call for Mozambique. We have been quite proud of our reform efforts so far, believing that these would be enough to enable us to compete on a regional and world basis. And indeed, the World Economic Forum judged us as one of the most improved countries in Africa—a country in which the business community was the most optimistic. But also we were in the lower quarter of the African countries scored in terms of current competitiveness. This was a bit of a shock. We knew that, given the history of war and poverty in our country, we would not be on the top of the rankings but we did not expect to be ranked as poorly as we were.
Why did we do so poorly? It was not because of the normal objective measures. Our tariff rates are reasonably low, our tax rates are normal to low for the region, and our exchange rate policy is viewed favorably. Where we continuously got in trouble was in terms of policy implementation and public administration. Time and again, when businessmen were asked about the economy, they would indicate that regulations were poorly drafted, public administration was poor, and unwritten barriers to business activity were a significant burden.
This is an area of reform that needs serious work in Mozambique—and I expect many other countries in Africa and beyond. Moreover, this is an area that cannot be fixed by ministerial decrees or new laws. Instead, it will take a concerted effort over a period of years to improve the operation of the public service and to mold the laws and regulations into shapes that can be implemented with our own public service.
The third issue that we face is how to ensure that the benefits of globalization are broadly shared. While financial globalization creates work for bankers and other skilled workers, we must not lose sight of the need to create jobs for the large number of low-skilled workers in many African countries. This means adopting labor laws and standards that protect workers while encouraging greater employment. Moreover, particularly in a country like Mozambique, it is necessary to encourage geographical diversity of development and our regulations should take this into account.
Ladies and gentlemen, it is clear now that the effects of globalization are beginning to sweep through Africa. It is up to our governments to decide how we will respond. The reforms that have been implemented in many African countries over the past decades have positioned us to take advantage of change in world trade and finance.
But clearly more must be done. As I have noted, liberalization does not mean libertarianism. We must learn to identify those areas where it is vital for the government to play a role and then play that role well. We must also redouble our efforts at institutional reform. Unfortunately, gains in this area are likely to be slow. It is easy to change the law. It is hard to change someone’s habits and way of doing business, but it can be done. And to the country that does it the best will go the rewards. This should be sufficient incentive for all of us.
I am pleased to be here at this seminar on Africa. For many years I have been teaching about East Asian economies at a university in the United States, with my attention focused on the industrialized world. This is evidenced by my having been to Paris at least seven times, but until 1997 I had never been to Africa. My trip to Africa was as an evaluator of the IMF’s concessional ESAF program, and as it turned out, it was a trip that changed my whole perspective. Instead of only looking across the Pacific from the United States to East Asia, I learned about the perspective from the other end of the world, indeed from the birthplace of the human race.
I—usually, an ivory tower economist—have long recognized the limitations of economics. Over time, I have become skeptical of the ability of economics to solve real-world problems, because economics is such a technical and abstract science. I thought the trip to Africa would make me even more skeptical about the relevance of economics. Instead, my confidence in economics was restored somewhat, as I came across many questions that could be studied, if not completely solved, by applying current economic theory.
I would like to share with you now a few impressions from my ESAF trip, keeping in mind that African economies should be understood in and of themselves and, at the same time, in contrast to Asian economies—Motomichi Ikawa stated this clearly in his opening remarks. But also keep in mind that African economies are affected by policy decisions in other regions as well. For example, as Kwesi Botchwey mentioned, CFA franc countries must soon decide whether they should fix their currencies to the euro, making them a satellite of the new European Community instead of France. Today, I would like to focus on three problems: the problem of intertemporal choice, the problem of intermediation, and the problem of political economy.
Problem of Intertemporal Choice
Let us start with the elementary macroeconomic identity that exports (X) minus imports (M) essentially equals savings (S) minus investment (I). In other words, the current account of the balance of payments is the difference between exports (X) and imports (M), but it is also (almost equally) the difference between savings (S) and investment (I). This second interpretation is often neglected, even though it is well known that this interpretation means that the balance of payments is a dynamic concept, describing the process of capital accumulation. Or to put it another way, this concept is forward-looking, implying that the current account is a result of intertemporal choice.
This insight, however, is often neglected in many IMF operations. Indeed, ESAF documents seldom refer to intertemporal substitution, even though intertemporal choice is discussed in the IMF’s own Research Department. The IMF’s Policy Development and Review Department, not long ago, conducted its own internal review of ESAF. The term “intertemporal choice,” however, was not mentioned even once. Intertemporal choice was, of course, taken into account implicitly in the discussion of saving-investment behavior, but it was hardly treated explicitly to such an extent that the dynamic behavior of a nation was properly analyzed.
You might ask how can the actual ESAF operation reflect the intertemporal framework? Let us return to the S-I balance. In Asia, both savings and investment had been high for the past few decades, of course, until the recent financial crisis. In fact, investment was extremely high during the real estate boom. But investors and lenders both made mistakes, generating extraordinary investment that was reckless. This left a heavy burden of debt and created opportunities for speculative attacks in Asia.
In Africa, by contrast, investment is low—whereas savings are extremely low. Here again, the current account is in deficit. In other words, in both Asia and Africa, nations are striving to live beyond their means. In both regions, international debt is growing. The difference is that in Asia, high investment generated economic growth, which was vital, as only with an increase in long-term growth could countries afford to pay off the debt. High investment countries—that is, assuming the investment is productive—have reason to hope that the investment will promote growth, but low investment countries have poor growth prospects. This is the problem for Africa.
Problem of Intermediation
Second, my comments concern the intermediation process between savings and investment. Financial intermediation functions need to be improved at every stage of the intermediation process. For example, in Malawi, when inflation was down to a single-digit figure, the discount rate was 23 percent. Admittedly, there were all sorts of information costs, transaction costs, and agency costs—the latter refers to the cost generated between the principal and the agent because they neither share the identical information nor identical motivation. I wonder, however, if a real interest rate of around 15 percent was a healthy rate at which investment for growth could take place.
In fact, the functioning of financial intermediation may easily be left in a vacuum without proper attention. Intermediation by the informal sector can be promoted—and indeed is promoted—by institutions like Grameen Bank in Bangladesh, and many nonprofit organizations. And the IMF monitors the central bank and large commercial or industrial banks. But in between, there are many other financial institutions, and the intermediation that they carry out is left unmonitored.
Problem of Political Economy
Third, I would like to comment on the political economy aspect of IMF operations. Recipient countries believe that they should recover—that is, take back—governance of economic policy from international organizations. IMF staff members, however, worry that if this happens, discipline will be lost. “There is a trade-off,” they even say. But in my mind, the recovery of governance, in general, should mean the attainment of discipline as well. More autonomy should not mean a lack of discipline. Let me explain.
In general, when two countries or a government and an international institution negotiate on economic matters, this will take place as a two-level game. The lower level is the game of domestic politics, and the upper level is that of international negotiation. In other words, an international negotiation is superimposed on the domestic economic conflicts—which may include conflicts between various (particularly unsuccessful) pressure groups, often featuring the government bureaucracy as one of the pressure groups. Indeed, we saw this two-level game in Indonesia, when former President Suharto refused to liquidate his family businesses.
So when the IMF (or another international institution) advises local governments, the entry of the IMF changes the delicate balance between internal groups. But I have heard from many policymakers that their objectives are helped by outside pressures from the Bretton Woods organizations—a phenomenon that we call gaiatsu in Japanese. Some policymakers benefit from pressure by the IMF, and the IMF occasionally takes advantage of this effect. Indeed, resistance by certain domestic participants can be mitigated by the outside intervention. Thus, rather than emphasizing the recovery of governance from the IMF, I would take this multilevel game view and emphasize that conditionality and other tough medicine may work as an appropriate precondition for improved economic policymaking. If the interventions are too strong, however, then the negotiation itself might break up, and domestic politics might be upset by political upheaval. For this reason, political reform is also necessary, but difficult to realize—much like putting a bell on the cat. In Aesop’s Fables, mice wanted to put a bell on the cat, but they do not know how.
A related problem is how we can introduce a good motivation mechanism into the system and the IMF in particular. According to the framework of the liberal political economy that is based on rational choice, the IMF could be formulated as an entity that is self-motivated, and not necessarily motivated for the overall benefit of the world. Thus, an important question to ask is how can we design an incentive system that serves both the goodwill (and not too selfish intentions) of its Executive Board members and donors without overstretching the IMF’s bureaucratic instincts?
How Costly is ESAF?
Finally, a look at the relative costs and benefits of ESAF operations might help. I tried to estimate in Table 1 the total cost of ESAF for five ESAF-supported countries (four in Africa, one in Asia). The cost figure is made up of two components: the financial cost of concessional loans, which was about 38 percent of the loans made; and the average administrative cost, which the IMF estimates was about $1.7 million in 1996. Using this administrative cost of 1996 (somewhat overestimated for the earlier years) and the peak year of ESAF operations in a given country, I found that the total cost ranged from $11.8 million for Malawi to $103.3 million for Bangladesh, and the costs relative to GDP ranged from an average .44 percent in Bangladesh to .91 percent in Côte d’Ivoire. (If we take the full ESAF period for these countries—not just the peak year—then the percentages will be one-third to one-half of the figure in the table).
How about the benefits side? This is much harder to estimate, but even so, one can infer the necessary amount of the benefits as a ratio to the GDP for the ESAF to economically break even. Thus, if one year of economic growth in Bangladesh was facilitated by more than a .44 percent increase relative to GDP because of ESAF, the cost-benefit ratio would be more than unity and clearly favorable. We tried to do this calculation with the ESAF-supported programs, but in the end, we did not publish these results with tentative estimates of benefits as part of our evaluation,1 partly because ESAF’s benefit is ambiguous and partly because growth accounting can be tricky—that is, the outcome depends on how long one assumes the duration of the effect of ESAF to be.2
Incidently, I hear PDR staff claim that they do not engage in counter-factual experiments, although sometimes they do use graphs to show that ESAF helped real economic growth compared with the case without the program.3
My impression is that the comparison of this cost figure at the peak year with the growth performance of the succeeding year would give an unfavorable evaluation of ESAF. By contrast, the comparison of the average cost figure for all the ESAF years with the accumulated growth performance of the subsequent few years would give a much more favorable evaluation of it.
Another important message from the table is that these cost figures are relatively modest, ranging at most to several hundred million dollars. I would like to stress the contrast of these modest figures to the very large amount of funds that the IMF and cooperating countries have been extending to the Asian crisis countries. Comparatively as well as absolutely, Africa is entitled to attract more care and attention.
Being from Asia, I must start my comments with an apology. I apologize to everybody because we have created a crisis in Asia and are not setting a very good example for Africa. And since I come from the Philippines, I must double up my apology because in the mid-1980s the Philippines was in crisis, and in the mid-1990s we are once again sharing the crisis with our Southeast Asian neighbors. Having established my Asian credentials by providing multiple apologies at the start of my intervention, I would now like to get to the main points.
In reflecting upon the financial crisis that has affected Southeast Asia and Korea, and on the debt crisis of the past 10–15 years, the first point that comes up is the absolute importance of macroeconomic fundamentals. Of these, there are at least three: a strong fiscal position, low inflation, and flexible exchange rates.
The first two have been strongly emphasized by the IMF. Indeed, the IMF has been very doctrinaire about making sure that our fiscal position is strong. In other words, get fiscal deficit ratios down or, if possible, go into a surplus. An essential part of the doctrine has been that a strong fiscal position assures low inflation rates.
But the Asian crisis has shown that the third macroeconomic fundamental is as crucial as the first two. It may not have been given enough emphasis in the past. However, in a world that is globalized, where economies are more open and interdependent, it is crucial to keep exchange rates realistic. A base for some of the problems South East Asia faced this past year has been the disregard for China’s depreciation of the yuan in 1994 and for Japan’s gradual depreciation of the Japanese yen since 1995. Most South East Asian economies insisted on pegging their exchange rates to a single anchor, the U. S. dollar. Unfortunately, the dollar kept on strengthening, and this created a lot of problems and brought in a lot of pressures.
So lesson number one from the Asian crisis is the continuing importance of low fiscal deficits and low inflation. These two macroeconomic fundamentals are absolutely necessary. However, they may not be sufficient. The Asian crisis also highlights that we cannot disregard the importance of keeping exchange rates realistic.
A second point is the imperative for keeping banking systems strong. A crisis is not likely to occur where the banking system remains very strong. On the contrary, where the banking system is weakened through various types of practices—such as crony capitalism, unrealistic exchange rates, and lack of transparency—there a crisis looms. Shake that structure a bit by an exogenous macroeconomic event or by some shock to the system, and it can unravel fast. Before anyone can bat an eyelash, the banking system or the financial system can get into a very serious crisis. And this can be a very expensive proposition.
In the Philippines in the mid-1980s, we spent probably 15 percent of GDP trying to clean up our banking system. Fortunately, as we go into this crisis now, our banking system is much stronger, but I suspect that the Thai crisis and the Indonesian crisis may be equally expensive, if not more, simply because they have allowed their banking system to weaken over many years.
So the second lesson from the current crisis is that banking and finance being at the very core of the economy must be taken care of very prudently. Take good care of them and you will take care of the guts of the economy.
But for banking and finance to be well taken care of, you need to make sure that the central bank has enough autonomy. It should not be subjected to political pressure, or you will end up with the crony capitalism evident in East Asia today. And you will end up with a very expensive bill that any minister of finance will cringe at paying, simply because it drags the system down for a very long time.
The central bank, as the depository of the Holy Grail of any economy, has to be treated with respect and reverence. You cannot afford to bankrupt it or to prostitute it. Therefore, you have got to take very good care of it, because in the final analysis, what is absolutely necessary is the confidence that the local population and the international community have in the local banking system.
The third lesson is the need to strike precisely in a period of crisis. It is the time to move forward with reforms. Do not succumb to the danger of thinking that in a period of crisis you have to slow down and step back from reform. In our experience in the Philippines, crisis is an opportunity one has to take advantage of to introduce reforms. Trade liberalization, privatization, institution building, and other reforms can and should be speeded up at a time of crisis. It is a window of opportunity that may not remain open for a long time. The Deputy Prime Minister of Thailand recently stated that ASEAN, in the midst of the crisis in December of 1997, decided to move ahead with trade liberalization rather than step back. This is one lesson we can share with you.
Finally, even as we stress strong macroeconomic fundamentals, strong banking systems, and a strong commitment to reforms, we should also keep a broad perspective. Yes, there is a need for savings, but also for appropriate investments. Of even greater importance is the need for prudence and measure in everything.
In East Asia today, the problem is not overconsumption. It is overinvestment. It is not the lack of private sector initiative. It is greed and imprudence of the private sector. The debt problem of East Asia today is not public sector debt. It is private sector debt. The problem is not from opening up, but from the lack of prudential norms in strong institutions that must be in place as economies open up. The problem is not from overregulation, but from a relative lack of prudential regulations. Without proper controls in place, we can have a problem not only with our current account but also with our capital account. That is what we are faced with today.
In sum, all the macroeconomic fundamentals are absolutely necessary. But beyond the fundamentals, beyond reforms, there is also a need for building up civil society—that is what we are finding in Indonesia today—and for promoting the value of citizenship and the spirit of civic responsibility. While we take care of economics and finance, we cannot disregard the politics, the social aspects, and indeed the broader aspects of society.
We cannot set aside the requirements of good politics, as we concentrate on meeting the demands of good economics and finance. These have to go together—the political reforms with the economic reforms—they need to be put in place as quickly as possible.
In considering how growth in Africa can best be achieved, the challenge for policy makers is to identify the key reform priorities. This involves adopting a global approach and designing an economic policy framework that envisages growth to be export led and based on the development of the private sector. To achieve that kind of growth on the ground, market-based economic policies would have to play a critical role.
How do you implement these policies successfully and in an orderly fashion? In order to ensure orderly and sustainable growth, it is extremely important to put in place a proper regulatory environment and also, as Jesus Estanislao mentioned, sound macroeconomic policies.
Moreover, for the reform effort to be credible and successful, one would need to move forward simultaneously in several of the key reform areas because of their complementarity and mutually reinforcing nature. The reform areas discussed in this seminar—namely, regulatory reform, financial sector reforms, the strengthening of the role of government, especially in the areas of public expenditure management and social development, and trade liberalization—are complementary. Progress in any one area will enhance the gains made in the other areas. Therefore, in my mind, the issue really is, What is the set of reform priorities? And not, What is the hierarchy among them?
Viewed from this perspective, the task of identifying reform priorities in Africa can be distinguished clearly from that of their sequencing, which is one of the qualities or properties of an efficient reform process. Once a set of priorities has been established in the reform process, its quality and efficiency will depend on four properties: whether or not it is properly sequenced; whether it has been developed with the participation of, and in consultation with, the private sector; whether it reflects ownership by government and civil society; and whether its goals are transparent and implementation predictable.
Set of Reform Priorities
Let me now turn to four questions related to the selection of specific reform priorities.
First, why do we need regulatory reforms? The reason is that an appropriate regulatory framework promotes the smooth and proper functioning of markets. It is complementary to the other reforms—such as trade and financial sector liberalization—that are required to establish a market-oriented economic environment. To foster such an environment, regulations must have the desirable properties of transparency and predictability. They have to be evenhanded and provide a level playing field for all economic agents, that is, they should not be applied in a discretionary and arbitrary manner but uniformly in practice. And they should require accountability.
One area where a proper environment of prudential regulation and supervision is essential is financial intermediation. The establishment of accounting standards and the publication of audited accounts by enterprises are critically important for the growth of sound bank lending practices. The development of an appropriate legal framework, including laws relating to foreclosure procedures, property rights, transfer of land titles, bankruptcy procedures, and contract enforcement, is also fundamental to the growth of the private sector and financial intermediation. Indeed, it is the lack of progress in these legal and regulatory areas that explains two concerns expressed by earlier speakers—namely, that bank credit to the private sector has remained inadequate in Africa; and that investment rates have responded only weakly to financial sector reforms.
Second, why should financial sector reforms be given a high priority? The answer lies in recognizing the vital role of banks in any economy. Banks in Africa, as elsewhere, select projects and activities to finance. In the process, they make it possible for large projects to benefit from a pooling of resources from small savers, and they also pool the risks in various projects by financing a mix of projects. In making loans, banks need to take into account intertemporal considerations, such as the future repayment capacity of their customers. All of these are ambitious—but necessary—tasks for banks in Africa to perform.
The banking system will be able to perform these functions more efficiently if reforms are implemented to restructure and privatize weak state-owned banks; ensure adequate prudential regulation and supervision of banks; promote the entry of adequately capitalized new banks; eliminate direct credit controls; develop bill markets and liberalize interest rates; and establish efficient payments systems.
One indication of the importance of banking institutions is the function of bank lending as an intermediate input for most productive activities, including investment. Unless the banking system intermediates efficiently, providing an input for either investment or production activities would be very costly. It is, therefore, important to undertake the reforms needed to ensure the efficient functioning of the financial markets. There is ample evidence in Africa that markets in the financial sector do function well once they are reformed. One can see the evidence in treasury bill markets and in the exchange markets (under the flexible exchange rate systems).
Financial sector reforms must also address the problem of missing markets. For example, however much one may try, urban banks will most likely not provide microfinance. They will not reach out to the small farmers in the distant farms, because of the high cost of doing so. The same shortcoming sometimes applies to long-term finance activities. In these situations, the government does have a role to play, and the issue is, what is the most efficient institutional framework to address such problems?
Third, why should rethinking the role of government be given a top priority? Governments will need to continue to play an important role in African economies for several reasons. There are some things that cannot be left to the markets. Formation of human capital cannot be bank financed or financed by private markets, because neither banks nor the private sector will find the collateral for it, nor will they look at the expected future earnings from such investment. The spillover benefits (or positive externalities) to the economy of government efforts to promote basic education, health, roads, law and order, and sound macroeconomic policies are well recognized; therefore, these tasks should be in the hands of government. Even in the area of technology development, where the risks associated with uncertain earnings prospects are high, the positive externalities are potentially large. In this context, I agree with Kwesi Botchwey that the importance of tertiary education cannot be neglected; of course, the other strong vehicle is foreign direct investment.
As the role of government will remain important, a key issue is, how can the government be made to function better or more efficiently? The answer lies in improving the quality of institutions in economic management and other complementary areas, and in establishing appropriate rules and safeguards. An independent judiciary, institutional checks and balances, and an effective office of the auditor general are some of the necessary ingredients of a strategy of institutional development. Effective civil service reform is also vital, so that the government is better equipped to implement the reforms and deliver the essential public services.
Fourth, why should trade liberalization take on so much importance? Given the need for integration into the global economy, the rationale for liberalizing foreign trade is well understood, and the debate in this area is generally focused on how best to achieve it. One approach that is gaining ground is to preannounce a timetable of trade reforms in the context of adjustment efforts and regional integration initiatives, and to adhere to it. This approach would allow firms the time to adjust their production and related activities so as to function more competitively over time.
As regards liberalizing trade through regional integration, it is important to note that the costs of moving in this direction are sometimes exaggerated. If there is little regional trade in Africa, as some speakers have argued, then there can be little risk of loss of fiscal revenues from regional trade liberalization; also, there is likely to be little employment loss associated with it. That, of course, is an assessment of the static costs of such initiatives. One must also consider the positive dynamic benefits from free cross-border trade in a region. It would inject a greater measure of competition among established import substitution firms in the region. Also, regional trade liberalization, combined with the harmonization of the national regulatory environments, the tax systems, and the investment codes, would provide investors with larger markets and more level playing fields for their production and investment activities. Regional initiatives offer opportunities for infrastructure cooperation and development, for financial sector integration, and, most important, for progress toward multilateral liberalization. The latter opportunity is all the more important, particularly in areas of zero or low regional trade, where trade liberalization basically entails multilateral liberalization.
Lastly, an issue that deserves more attention is the costs of granting special trade and other tax incentives to foreign private investors. Proponents of such incentives need to weigh the costs of discriminating against domestic investors. Moreover, one must also consider the justification for relying on tax incentives. Given that, in most African countries, the thrust of structural tax reforms is to move from trade taxes to domestic taxes and to simplify and rationalize the tax structure, there would appear to be little justification for introducing a discriminatory structure of trade and other taxes and giving tax concessions. Such actions weaken the domestic tax base, which is supposed to make up for the loss associated with trade tax reforms.
In sum, achieving the objectives of rapid economic growth and substantial poverty reduction in Africa will require the implementation of market-oriented policies aimed at both promoting the development of the private sector and accelerating Africa’s integration into the global economy. Such a growth strategy will need to be underpinned by an integrated and mutually reinforcing set of macroeconomic polices and structural reforms. These should foster economic liberalization through reforms of the legal and regulatory environment; the financial sector; the foreign investment, trade, and exchange regulations; and the role of government—including by improving tax systems to make them nondistortionary and nondiscriminatory, and restructuring public expenditure to give priority to the social sectors.
Finally, the benefits of such a reform strategy could be substantially enhanced by regional initiatives. These should aim at promoting macroeconomic stability; the harmonization of regulatory systems; cross-border trade, investment, and financial flows; infrastructure cooperation; and progress toward opening up the region to the global economy.
While this seminar is on the challenges of globalization in Africa, I would like to focus mainly on those issues that I believe need to be given priority if Africa is to achieve sustainable economic growth. These include the need to educate all stakeholders in the reform process, and the need to more aggressively implement both political and economic reforms.
Educating the Stakeholders
Historically, information on Africa has been available to only a few selected individuals, mainly the elite and those who controlled the organs of government. This could be information on a wide range of issues—particularly political, social, and economic. I believe the objective of withholding this information was to ensure that the few who dominated key sectors in the public and private domains—whether they were academicians, politicians, or the elite—continued to benefit from their privileged positions at the exclusion of the majority.
But the implementation of economic reform affects all, be they the elite who control information, or the ordinary individuals who have to bear the greater brunt of the sacrifice in the short term so that the long-term benefits of reforms can be realized. Thus, for reforms to be successful, it is vital that informed debates and discussions be expanded to a broader society, so that the benefits are fully understood and ownership of the reforms is accepted by all stakeholders.
African countries, in collaboration with the IMF and the World Bank, should embark on a massive education of all stakeholders to explain the rationale behind the implementation of the various economic reforms. The media fraternity can play an important part in this process. But to do this successfully, it should be among the first to be educated. Otherwise, the media can easily become a bottleneck to the economic reform effort.
Kenya has recently implemented a series of economic and financial reforms aimed at creating and maintaining a vibrant market-driven economy. Initially, there was resistance to the reforms as they were considered to be policies of the IMF, forcefully imposed upon Kenya. But gradually, the government, by forging a partnership with the private sector and other stakeholders, has encouraged a broader participation in the dialogue. We have done this by organizing various fora where the economic policy issues are discussed candidly. In addition, official publications by governmental institutions have been instrumental in explaining to the general public the various economic initiatives.
For economic reforms to be successful, they must be accompanied by political reforms, which include a multiparty democracy, good governance, a free media, and respect for human rights. Despite a long record of involvement in Africa’s development efforts, the IMF has tended to ignore the importance of political reforms in ensuring that the economic reforms are sustained. The IMF continues to emphasize the need for macroeconomic stability and related structural reforms. But this inevitably leads to only partial success of the reform efforts, as corruption and lack of accountability in the management of resources continue to result in inefficiency and misuse of public funds. It is thus opportune for the IMF to become actively involved in political reforms to complement the successful implementation of economic reforms. In recognition of the importance of political reforms, the majority of African countries are currently deepening the democratic process, thereby encouraging quality leadership.
Until the 1990s, economic management in Africa was characterized by government domination of production, trade, prices, and all areas of economic activity. These inappropriate economic policies and programs led to overexpansion of the public sector, erosion of incentives of industry and agriculture, and overprotection of industry.
A number of African countries—including Kenya—have begun implementing economic reform programs to reverse the socioeconomic decline that has beset the continent since the 1970s. To fully integrate itself into the world economy, Africa should continue with the reform process by doing the following:
Speeding up removal of remaining economic controls. Africa has fairly well succeeded in liberalizing domestic prices and the trade system, thereby giving a free hand to the market mechanism in allocating resources. There is, however, a need to speed up the trade liberalization process and eliminate all non-tariff barriers to trade. The tariff system should also be streamlined by further reducing import and export duties and tariff bands. This will enhance the efficiency of domestic industries and increase their competitiveness in the international market place.
Accelerating the privatization of state enterprises. Privatization was initiated to reduce the government’s presence in economic activity and increase the scope for private-sector-led sustainable growth. Substantial progress has been made in privatizing small- and medium-sized enterprises, but progress has been very slow in privatizing large, and what the government considers to be, strategic enterprises.
Implementing civil service reforms. Many African countries have undertaken civil service reforms with the aim of creating a lean and efficient public service. This has included steps to downsize the civil service, mainly by cutting costs through a reduction of the wage bill. Reforms should continue if governments hope to boost the morale of those remaining in the civil service. This can be done by restructuring remunerations in line with those in the private sector.
Encouraging formation of regional trading blocs. Recently, there have been initiatives towards regional economic integration in Africa so that individual African countries can benefit fully from increased intra-African trade. While earlier efforts were constrained by the duplication of regional programs, Africa is now determined to develop more efficient and comprehensive programs and projects on regional economic cooperation.
Undertaking concerted efforts to fight corruption. In many countries, corruption continues to be a threat to the efficient delivery of services both in the public and private sectors. The major challenge for African governments is to design systems that remove opportunities for individuals to engage in and benefit from corrupt activities.
Increasing the autonomy of central banks. In recent years, there has been a greater interest in enhancing the independence of African central banks in the formulation of monetary policy. This is consistent with the global trend and argument that for a central bank to achieve and maintain price and financial stability, its policymaking machinery should be free of government influence.
Africa has learned over the past four decades that the heavy hand of government retards growth, and as a result, the continent—for many years now—has been pursuing both political and economic reforms. These are aimed at encouraging broader participation in public policy issues and facilitating the role of the private sector in economic growth. Africa’s economic prospects have never been brighter, as both domestic and foreign investors take advantage of the positive developments in political and economic conditions.
International Monetary Fund, External Evaluation of the ESAF: Report by a Group of Independent Experts (Washington, 1998).
In general, if the effect of the ESAF is taken to continue for a single year, the ratios can become unfavorable, except for Bangladesh. But if the benefit of the ESAF is taken to continue for more than a year, the benefit of the ESAF will exceed the cost.
See International Monetary Fund, The ESAF at Ten Years, IMF Occasional Paper No. 156 (Washington, 1997), p. 25. The internal review of the ESAF program gives some suggestive evidence (Figure 16, “Explaining Increases in Growth Since the Early 1980s”) for the role of the ESAF in growth. If the total increase is attributable to the program, there is no room for dispute. However, if only a part of the improvement is attributable to the ESAF, the cost-benefit ratio cannot be definitively evaluated. Note that for Africa, even the total benefit is limited.