Chapter

Chapter 8 Issues in Competitiveness in Sub-Saharan Africa

Author(s):
International Monetary Fund
Published Date:
August 2001
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This very useful conference has brought to the fore a number of issues of critical importance to Africa. This chapter puts these issues in the context of recent economic and financial developments in the region and examines the policy implications.

The recent economic recovery in sub-Saharan Africa has renewed optimism in the region’s growth and development prospects. Real GDP growth has averaged about 4 per cent annually during the past four years. Inflation has come down significantly, from a peak of about 47 per cent in 1994 to 14 per cent in 1997. The fiscal deficit for the region as a whole, excluding grants, has declined from 7.2 per cent of GDP in 1994 to 4.5 per cent in 1997, and the current-account deficit, again excluding grants, has fallen from 5.4 per cent of GDP to 3.8 per cent1.

The optimism also reflects improvement in the macroeconomic indicators that has resulted mainly from a re-orientation of economic policies2. African governments have made considerable strides in removing price controls and liberalising their trade and exchange systems. They have made a start in dismantling inefficient public enterprises and encouraging a larger role for the private sector. Structural adjustment programmes supported by the IMF and World Bank have often provided the context for implementing these policies.

Yet the path ahead for sub-Saharan Africa remains full of pitfalls. These countries continue to have lower investment and saving rates than other developing countries, and many of them continue to depend heavily on external assistance. Despite the recent move towards more liberalised trade regimes, the region has not yet reversed the decline in its share of world trade observed during the past three decades. It accounted for 3.8 per cent of world exports in 1960, but only 2.1 per cent in 1985 and 1.3 per cent in 19953. Moreover, sub-Saharan Africa depends heavily on exports of primary commodities, making it particularly vulnerable to external shocks. Weak export performance reduces the ability to import foreign capital goods, which, by reducing future production capacity, constrains both exports and growth. Finally, the recent crisis in East Asia has not only depressed the world economic environment facing the African countries but also pointed to the importance of putting the fundamentals—macroeconomic, structural, and institutional—on a solid footing to ensure that high growth rates become sustainable and economies less vulnerable.

Enhancing sub-Saharan Africa’s competitiveness, particularly that of the manufacturing sector, will therefore be a key element in ensuring sustained economic growth. The studies presented at this conference should be instrumental in pointing to policies that the region’s countries need to implement to strengthen their competitiveness. Such policies will not only ensure sustained economic growth and a continual improvement in living standards but also speed the convergence of the region’s macroeconomic indicators with those of the industrial countries.

The papers, as well as the IMF’s experience in assisting these countries in their structural adjustment efforts, point to seven key areas where more progress is needed to promote productivity and competitiveness in manufacturing:

  • Exchange-rate policy should allow nominal exchange rates to adjust as conditions change, to avoid the emergence of disequilibria. Mwega and Ndung’u confirm the importance of choosing the appropriate exchange-rate regime for Kenya and Cameroon. Elbadawi shows that to become successful exporters of manufactures the sub-Saharan African countries must maintain real exchange rate-based competitiveness on a sustained basis. Regardless of whether a flexible or fixed exchange rate is selected, sound monetary and fiscal policies should be pursued to avoid pressures on the external sector. Sievers points to the many factors beyond the exchange rate that affect competitiveness.

  • — The pace of trade liberalisation needs to be stepped up. Bigsten et al. and Hakura and Jaumotte show that increased openness to trade enhances the efficiency and competitiveness of domestic producers. Their analyses suggest that, given the sub-Saharan African countries’ technological backwardness, increases in openness to trade are associated with large efficiency gains. Although these countries have begun to liberalise their trade, their trade regimes remain significantly more restrictive and complex than those in most other regions of the world. The design of trade reform should therefore include simpler and more transparent tariff structures, reductions in average tariff rates to 10 per cent or less and the elimination of non-tariff barriers.

  • Structural reform should accelerate and deepen. This will encourage diversification and reduce vulnerability to external shocks. Several papers underscored its importance, showing that sub-Saharan Africa would benefit from policies aimed at enhancing human capital accumulation and investment in infrastructure. They would include redefining the role of government, away from direct involvement in production and towards the provision of essential public services. The composition of government expenditures needs more attention, to increase the share of outlays on basic health care, primary education, vocational training and infrastructure. Improving infrastructure could also help to facilitate transportation and telecommunications, which would allow these countries to enlarge their markets and take advantage of economies of scale. A more ambitious pursuit of privatisation programmes would also widen the scope for the private sector. Overall, a more competitive environment should contribute to productivity growth and to strengthening the ability of sub-Saharan African countries to compete in international markets.

  • Enhancing economic security will also be important. Both private domestic and foreign investors in Africa perceive high risks because of poor contract enforcement and the limited effectiveness of judicial systems and other public services. Several papers, particularly that of Sievers, underscore this. Bold action is needed to improve the transparency, predictability and impartiality of regulatory and legal systems.

  • Strengthening governance and transparency will generate increased confidence and contribute to greater resource efficiency. Eliminating unproductive government spending and ensuring full transparency and accountability in the management of public resources will be critical. Governments must conduct their operations irreproachably and shun all forms of corruption, nepotism and cronyism. As Elbadawi illustrates, transaction costs, including those arising from corruption as well as inadequate transportation and telecommunications systems, present major impediments to the growth of manufactured exports. Policies aimed at reducing these costs generate a high payoff in increased capacity to produce and export manufactures. Sievers also points to the risks arising from the perception of corruption by foreign investors.

  • — There is a need to strengthen financial sectors. In many sub-Saharan African countries, the weakness of financial sectors throws up an obstacle to mobilising savings to finance productive manufacturing. These countries need to deepen and broaden their financial markets, establish independent and efficient banking-supervision agencies, open their banking sectors to both domestic and foreign competition, privatise government-owned banks and apply best practices in bank management. They must broaden the institutional framework of the financial system for improved intermediation by developing stock exchanges and innovative, efficient ways to extend credit to small investors, including farmers. The legal provisions for loan recovery and contract enforcement must also be rationalised and fully observed, an important factor in ensuring the availability of supplier credit, which will lead to large productivity gains.

  • — Although this conference has focused on a number of key, specific policy areas, one should keep in mind that these policies need to be implemented within comprehensive and consistent economic reform programmes. The discussions at the conference have made it clear that improving competitiveness does not relate to one policy action only. Some speakers have made a strong case for avoiding the overvaluation of exchange rates. Others provide strong arguments for promoting more liberalised trade regimes and other policies to enhance productivity. In assisting member countries, the IMF has found that single policies by themselves are not sufficient to promote competitiveness; policies should be viewed as mutually reinforcing. Cameroon illustrates this well: both productivity increases and the depreciation of the real effective exchange rate have had a positive and significant influence on its exports. Elbadawi emphasises the importance and the complementarity of policies for lowering transaction costs as well as for appropriate exchange rates to enhance export performance.

To conclude, sub-Saharan Africa has an important challenge ahead, to continue to pursue policies that will enhance the competitiveness of its manufacturing sectors. The reform efforts under way constitute important steps in the right direction, but, as the conference papers suggest, they need to be accelerated, broadened and sustained. As evidenced by the work of the Harvard Institute for International Development, ongoing policy efforts in Africa receive careful monitoring and evaluation, and investment decisions take them into consideration. Despite evident progress, the improvements in the macroeconomic indicators observed in recent years must not give rise to complacency among policymakers in the region. The economic situation remains fragile. Policymakers need to remain strongly committed to the requisite reforms.

Notes

IMF African Department Database, September 1998, and IMF (1998), World Economic Outlook, September.

S. Fischer, E. Hernández-Catá and M. Khan (1998), “Africa: Is This the Turning Point?”, IMF Paper on Policy Analysis and Assessment No. 98/6, Washington, D.C.

World Bank (various years), World Development Report, Oxford University Press, New York.

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