Abstract

At the dawn of the twenty-first century, Africa is at a crossroads. It must quickly select the path it wishes to follow. Either the continent takes its destiny squarely into its own hands, or it leaves the shaping of its future to chance or to special interests. Africa does indeed have a choice. On one hand, it can allow the forces of implosion and ethnic warfare to become the masters of its fate, to the advantage of a few potentates lacking in vision or warlords with transient alliances. Thus, history would repeat itself, with all the suffering that this entails, and this old continent will be at the mercy of all types of corruption. Africa would be stripped of the wealth of its soil and the promise of its youth and left marginalized, adrift in the wake of history.

Introduction

At the dawn of the twenty-first century, Africa is at a crossroads. It must quickly select the path it wishes to follow. Either the continent takes its destiny squarely into its own hands, or it leaves the shaping of its future to chance or to special interests. Africa does indeed have a choice. On one hand, it can allow the forces of implosion and ethnic warfare to become the masters of its fate, to the advantage of a few potentates lacking in vision or warlords with transient alliances. Thus, history would repeat itself, with all the suffering that this entails, and this old continent will be at the mercy of all types of corruption. Africa would be stripped of the wealth of its soil and the promise of its youth and left marginalized, adrift in the wake of history.

But Africa could just as well opt for another course. It can say “no” to marginalization and fully integrate itself into the great global village that the world has become in this Internet era. It can become one with the world so that its youth can build a future brimming with hope, grounding its action so that each and every man and woman participates in developing the nation, ensuring both transparency in the management of public affairs and a sense of a common destiny. These are the foundations of a stable, inclusive, and predictable environment. Africa has to choose between all the models of development that have been implemented in the rest of the world, including those in Asia, with all their strength and caveats.

In this paper, I will first show that the economic landscape in Africa has changed dramatically in the past several years and that the seeds for a better future are germinating. Indeed, since the early 1990s, many countries in sub-Saharan Africa have been implementing sound macroeconomic policies and structural reforms to raise real per capita incomes, reduce inflation, and narrow financial imbalances. But despite these improvements, poverty remains widespread, private investment is subdued, and most African countries continue to depend heavily on external assistance. Moreover, macroeconomic imbalances are still sizable, and most countries remain highly vulnerable to changes in external conditions.1

There is today a widespread consensus—both within Africa and among its international partners—that intensified efforts are required to increase growth by fostering private investment through more open markets and trade and by ensuring a more secure environment. In the second part of the paper, I will review the content of such “second-generation reforms,” which encompass not only economic, but also political and judicial dimensions. I will conclude with the main challenges facing Africa in an increasingly globalized world.

Africa’s Economic Recovery

Sub-Saharan Africa has made substantial progress toward macroeconomic stability during the current decade. The most encouraging aspect of this turnaround is that it has been underpinned by determined efforts by an increasing number of African countries to implement sound financial policies and market-friendly structural reforms. These efforts have often been undertaken with the support of the International Monetary Fund (IMF) through its technical assistance and financial assistance under the Enhanced Structural Adjustment Facility (ESAF). This facility is specially tailored to the needs of low-income countries and is highly concessional, carrying an interest rate of 0.5 percent a year for loans that are repaid in 10 equal semiannual installments, beginning 5½ years and ending 10 years after the date of each disbursement. This economic “renaissance” can be illustrated with the help of a few key indicators.

After years of stagnation, average real economic growth in sub-Saharan Africa has increased from about 1 percent in 1992 to about 5 percent in 1997 (see Table 1), and this positive trend is expected to continue. The strengthening of growth has been increasingly broadly based across countries. While in 1992 only 18 of the 47 countries in the region recorded growth of 3 percent or more, by 1997 the number had increased to 32. After five consecutive years of decline, real per capita gross domestic product (GDP) has started to rise—some 40 out of 47 countries are now showing a rise in their per capita incomes. This improvement has been accompanied by a welcome upturn in the ratio of gross capital formation to GDP from an average of more than 16 percent in 1992 to about 19 percent in 1997, and in domestic savings from less than 8 percent to about 13 percent over the same period.

Table 1.

Sub-Saharan Africa: Selected Economic and Financial Indicators, 1992–97

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Source: IMF, World Economic Outlook, October 1997 (Washington).Note: Excluding Nigeria and South Africa due to their large relative size.

There has also been some success in bringing down inflation. Many countries have already achieved single-digit inflation rates, and for the region as a whole, average inflation (as measured by the consumer price index) is estimated to have declined from a peak of 60 percent in 1994 to 22 percent in 1997.

Overall, countries have also reduced their internal and external imbalances. The region’s external current account deficit, including grants, has fallen from an average of about 8 percent of GDP in 1992 to an estimated 6 percent in 1997, while the overall fiscal deficit has been cut from about 9 percent of GDP to about 4 percent over the same period. Moreover, the IMF and the World Bank have recently begun implementing the framework for action to tackle the external debt burden of heavily indebted poor countries (HIPCs), including their large multilateral debt. So far, six countries, four of which are in Africa—Burkina Faso, Côte d’Ivoire, Mozambique, and Uganda—have been considered eligible under the HIPC Initiative.

African governments have also made considerable strides in opening their economies to world trade. A good indicator of this is that 31 sub-Saharan African countries, almost all of them since 1992, have accepted the obligations of Article VIII of the IMF’s Articles of Agreement, an agreement not to impose restrictions on payments and transfers for current transactions. Most countries have moved ahead with trade and exchange liberalization, eliminating multiple exchange rate practices and nontariff barriers, and also lowering the degree of tariff protection. Consequently, the number of countries in sub-Saharan Africa with “restrictive” regimes governing external current account transactions, that is, goods and services, has declined substantially with the great majority (about 40) implementing “substantially liberal” trade regimes.

Finally, the restructuring of many African economies is gaining momentum. Throughout the continent, government intervention in economic activity is on the wane. Administrative price controls are being removed and agricultural marketing has been widely liberalized. The process of restructuring and privatizing state enterprises has been under way for some time in most countries, though with varying speed and degree of success. Labor markets are also progressively being liberalized. Fiscal reform is gaining ground: African countries are taking steps to rationalize their tax systems, to reduce exemptions, and to enhance administrative efficiency. At the same time, they are reorienting expenditures away from wasteful outlays and toward improved public investment and spending on key social services, particularly health care and primary education. On the monetary front, most countries have made progress in establishing market-determined interest rates, eliminating selective credit controls, and gradually introducing indirect instruments of monetary policy. Greater attention is also being paid to rehabilitating weak banks and promoting healthy and competitive banking sectors. In most countries, these measures, together with a lower rate of inflation, have resulted in an increase in money demand and in financial savings. However, a lot remains to be done to further improve financial intermediation and reduce the size of the nonmonetized economy.

The Need for Faster Growth

The recent achievements in Africa are undoubtedly encouraging, but are they sufficient to make a real dent in poverty?

The World Bank has produced some estimates of poverty elasticities. The poverty elasticity2 varies according to the degree of inequality, which is measured by the Gini coefficient.3 A study by the World Bank shows that “countries with Gini coefficients greater than 0.5 (such as Kenya, Senegal, and Tanzania) have an elasticity of only –0.5, implying that growth in excess of 8 percent is needed to reduce the number of poor. Even with Gini coefficients below 0.4 (for example, Uganda), the poverty elasticity reaches only –1.5. Thus, with population growth of 3 percent, a rate of economic growth of 5 percent is needed to reduce poverty.” (See Table 2.)

Table 2.

Required Growth Rate for the Number of Poor to Decrease

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Source: World Bank.

Interestingly enough, an IMF staff paper argues for the need for higher savings and investment levels commensurate with trends in the labor force.4 It concludes that the average investment/GDP ratio—which averaged about 18 percent during 1986-93—would have to increase to 25-30 percent to keep annual employment growth of 3.3 percent in line with the labor force; such an increase in investment corresponds implicitly to a rate of economic growth of the order of 6-7 percent. It is interesting to consider what it would take for African countries to attain one-half of today’s real per capita income levels in industrial countries within a generation. The answer is that it would take sustained real per capita growth at an annual average rate of 8 to 9 percent.

The remarkable fact about such numbers is not that they are high, but that they fall within a range that an increasing number of policymakers would consider feasible. This, in itself, indicates the extent of the accomplishments of the past decade. However, if such growth rates are to be sustained, Africa urgently needs to become a better place to save and invest, first and foremost for Africans themselves, but also for foreign investors.

Toward Economic Security

When I took office as Prime Minister of Côte d’Ivoire, one of my first actions was to refurbish and re-equip the offices of the Supreme Court. I took this action at the time to underscore my commitment to uphold the rule of law; I refer to it today because I strongly believe in the need for widely sharing such a commitment at this juncture in Africa’s economic history. Indeed, the basic objective of the “second-generation” of reforms before us, in the words of IMF Managing Director Michel Camdessus, is to expand the scope for private investment by promoting greater openness in domestic and external trade and to create a more secure environment. Meanwhile, it is essential that the focus be maintained on consolidating and extending the progress made in maintaining macroeconomic stability. Let me detail this agenda before I turn to the instruments that can be used to advance it.

1. Appropriate regulations and their even-handed implementation are necessary to support free trade, which is critical for a better allocation of resources and to the spread of know-how and innovation. This requires the following actions:

Redefining the Role of Government

A redefinition of the role of the government away from direct involvement in production and toward the provision of essential public services is critical. While containing total government spending within available resources, countries need to place increased emphasis on the composition of expenditure, with a view to expanding the share of outlays devoted to activities that promote growth—such as education, including that of women, health care, and basic infrastructure. There is also an increasing need to focus on the quality of the tax system and give particular attention to avoiding distortions, fostering adequate incentives to save and invest, and promoting a predictable and credible fiscal environment. At the same time, the regulatory framework should be substantially liberalized.

More Rapid and Transparent Privatization

A more rapid and transparent privatization process is needed to create a scope for the private sector. In an increasing number of sub-Saharan countries, privatization of public enterprises has become a key instrument for promoting private sector development. The experience suggests that well-defined privatization programs help governments reduce the budgetary burden of subsidies and transfers to parastatals, as well as alleviate pressures on domestic banks from nonperforming loans to public enterprises. As the operations of public enterprises are commercialized and their management and ownership privatized, the scope for private production widens, a more competitive environment emerges in domestic markets, and productivity rises.

In supporting these efforts, a comprehensive privatization strategy comprising the following elements should be implemented:

  • To prepare for privatization, public enterprises need to be operated on commercial principles that ensure that output prices cover costs and that managers are granted an appropriate measure of autonomy. Moreover, they have to adhere to the market discipline of hard budget constraints and well-defined performance contracts.

  • Privatization should promote competitive markets by unbundling large public sector monopolies and increasing the number of financially viable and competing enterprises.

  • Privatization should cover not only management responsibilities but also ownership, and should involve local as well as foreign investors. This is important for realizing efficiency gains and obtaining access to appropriate managerial and technical know-how as well as to financing.

  • The establishment of an appropriate legal framework, along with effective regulatory policies and institutions, is essential to promote a transparent and predictable environment for investors, reduce the fear of expropriation, and foster healthy competition.

Financial Sector Reform

Financial sector reform that would strengthen savings mobilization and intermediation and promote soundness of the banking system is vital, as the Asian crisis has amply demonstrated. In many sub-Saharan African countries, the financial sector remains weak, and hence is an obstacle to mobilizing savings, financing productive activities, and attracting and retaining private capital flows from abroad. In particular, progress in restructuring state-owned banks and strengthening the institutional environment has been slow, often because of a failure to enforce existing prudential regulations. In part, this reflects a lack of government political commitment.

Therefore, these countries will have to move decisively with structural reforms designed to deepen and broaden their financial markets; establish independent and efficient banking supervision agencies, taking advantage of available technical assistance where necessary; open their banking sectors to healthy international competition; apply best practices in bank management, particularly through privatization; address the problems of distressed banks; strengthen loan recovery; and improve the legal framework for banking activities and contract enforcement. At the same time, there is a need to develop institutions and instruments dedicated to long-term savings mobilization—stock exchanges, pension funds, insurance, and other contractual savings systems. There is also a need to explore how domestic financing facilities can be made accessible to small investors, including farmers. The sequencing of reforms—which would also have to include promoting a strong judicial system and appropriate accounting standards—is important. The IMF, in close collaboration with the World Bank and other interested parties, will continue to provide assistance in these areas through policy advice and technical assistance.

A Faster Pace of Trade Liberalization

Africa needs a faster pace of trade liberalization that would enhance the efficiency and competitiveness of domestic producers and help it integrate more fully into the world economy to better exploit the opportunities of globalization. The promotion of free trade is an important element in the IMF’s work and complementary to that of the World Bank and the World Trade Organization (WTO). The industrial countries could also make an important contribution to the integration of African countries into the world economy by reducing or eliminating the barriers that limit the access of African producers to their markets.

Notwithstanding the progress made since the mid-1980s, trade regimes in sub-Saharan Africa remain complex and restrictive compared with most other countries in the world, partly because of the reliance on trade taxes as a major source of government revenue. Moreover, the aggregate supply response has not always materialized, owing to the adverse effects of tariff reductions on formerly protected firms. Widespread exemptions have compromised the anticipated revenue neutrality of tariff reductions and might have also distorted the structure of trade.

In the design of trade reform, all significant nontariff barriers should be eliminated since they are less transparent and involve more serious distortions than tariffs. Regarding tariffs, the first stage of reforms should include the elimination of statutory and discretionary exemptions, the amalgamation of various import duties and charges into the basic tariff, and the lowering of rates to a range of 0 to 30 percent, with an average tariff of not more than 15 percent. Some sub-Saharan African countries have already reached this stage, and a number of others are close to it.5 These countries can be encouraged to proceed to the second stage, which should aim at further reducing tariffs to a range of 0 to 20 percent, with an average tariff of about 10 percent, preferably within a period of at most three years. Export taxes should be substantially reduced, if not eliminated, and replaced with domestic taxes that do not discriminate against trade.

The benefit of trade liberalization would be enhanced if the process is supported by a properly sequenced and paced liberalization of capital flows in order to create a scope for increased contribution of foreign direct and portfolio investment. Moreover, trade liberalization and tariff reform should be well publicized and undertaken as part of a comprehensive medium-term tax reform program. In addition, one should carefully weigh the relative merits, in the African context, of a uniform versus moderately dispersed tariff structure. The uniform structure is conceptually clear, simple, and efficient, but if its implementation is not properly sequenced, it could result in a large and abrupt decline in effective protection, as well as in an increase in unemployment.

2. Ensuring economic security is critical for eliciting the participation of each and every individual in developing the nation. The steps to be taken to establish a secure economic environment are numerous:

Enhancing the Regulatory and Legal Systems

The transparency, predictability, and impartiality of the regulatory and legal systems must be guaranteed. This goes well beyond the respect of private property rights and the enforcement of commercial contracts. It also involves the elimination of arbitrariness, special privileges, and ad-hoc exemptions, even where these are intended to encourage investment.

Achieving Good Governance

Achieving good governance is very important. It means that national authorities spare no effort in tackling corruption and inefficiency, and in enhancing accountability. It also means reducing the scope for distortionary rent-seeking activities, eliminating wasteful or unproductive uses of public funds, and providing the necessary domestic security.

In July 1997 the Executive Board of the IMF, recognizing the importance of good governance for macroeconomic stability and sustainable growth, adopted guidelines to provide greater attention to these issues while limiting the IMF’s involvement to the economic aspects of governance. The IMF’s contribution focuses primarily on improving the management of public resources, in particular, through greater transparency and accountability, and supporting a liberal and stable economic and regulatory environment.

In the IMF’s policy dialogue with African countries, high priority is therefore being given to the economic aspects of governance. This involves the provision of technical assistance, especially in the areas of tax reform and administration, budgetary procedures, and government financial management; improvement in these areas will reduce opportunities for bribery, corruption, and fraudulent activity. Substantial emphasis is also being given to improving the legal and judicial system to ensure respect for a fair and transparent system of property rights. In this area, the IMF draws primarily on the knowledge of other institutions, in particular, the World Bank.

Defining Property Rights

Well-defined property rights are a key element of economic security for small landholders and informal entrepreneurs; they are also a key requirement for the deepening of the financial system. Meeting this need requires imagination and a close coordination with stakeholders. Simply dumping the legal instruments of advanced economies on countries with diverse cultural and administrative backgrounds will not work.

3. A variety of instruments is available to support free trade and advance economic security. I will mention three:

Fiscal Management and Civil Service Reform

A capable and efficient civil service is a key ingredient to sound public administration. However, in many countries, limited skills, overstaffing, and deteriorating remuneration in real terms have contributed to low morale, weak incentives to improve performance, and illicit activities in the civil service. For many African countries, a key step will be overhauling their civil service. After all, a lean, efficient, highly qualified, and well-paid civil service lies at the heart of good governance. The civil service reform agenda is itself a complex one; it is important that tax administration and the accounting office be strengthened at an early stage, both for equity and efficiency reasons.

The substantial progress in reducing internal and external imbalances is partly a result of fiscal consolidation. However, fiscal consolidation has come primarily from public expenditure compression. In many countries, the revenue base remains inadequate. Revenue efforts should focus on broadening the tax base and strengthening tax administration—there is little room for higher rates. It is important to articulate a comprehensive medium-term approach to tax reform that would optimize the composition of revenue and take into account the impact of tax structure on investment incentives and income distribution. Given the dependence on trade taxes, tariff reductions should be coupled with measures to minimize the risk of higher fiscal deficits. Expenditure levels will continue to be constrained by available resources, and hence the efficiency of outlays remains the key to fiscal adjustment in the short term. As mentioned above, the composition of expenditure will need to continue to improve through the reduction of unproductive expenditures—including military expenditures—and through an increase in the share of education and health expenditure, as well as that of infrastructure.

Forging a Partnership with Civil Society

Forging a partnership with civil society to build a consensus on reforms, and to provide checks and balances, is essential. To succeed, African governments need to encourage actively the participation of all the segments of civil society in economic policy debates. As evidence increasingly shows, adjustment efforts work best when reforms enjoy the broad support of the population, especially the intended beneficiaries. With this in mind, policymakers need to do a much better job of explaining the short-term costs, as well as the medium- and long-term benefits, of policy options.

Regional Integration

With closer economic integration, each African country has an interest in ensuring that appropriate policies are followed in its partner countries. This could be achieved by increased coordination of national policies within a regional context. Throughout the continent, African governments are coming together to coordinate their policies, and virtually all countries are now members of regional organizations. Efficient regional cooperation allows the economies of Africa to overcome the disadvantage of their relative small size and, by providing access to larger markets, to realize economies of scale.6 The obligations of membership in some of these organizations also make it easier for each individual country to achieve further progress in regulatory and judicial reform (as is the case in the CFA7 franc zone), to rationalize payments facilities and to relax restrictions on capital transactions and investment flows (as in the Cross-Border Initiative), and to develop a mutual economic infrastructure (as in the Southern African Development Community). Enhancing trade links among African countries naturally also strengthens their ability to participate in trade on a global scale and could lead toward further progress toward nondiscriminatory multilateral trade liberalization.

The challenge of the future will be to ensure that these regional organizations are perceived as effective vehicles for the integration of African countries into the world economy, providing mutual support to their members in their reform efforts. Such organizations should not be considered as defensive mechanisms, intended to ward off the “negative” aspects of globalization. Common regional objectives should seek to push through reforms in the areas of legal and regulatory frameworks, financial sector restructuring, labor and investment code reform, and exchange and trade liberalization that seek to attain international standards as quickly as possible. The pace of progress should be what is feasible, not what is comfortable for the slowest member.

Conclusion

Economic security, good governance, and a better dialogue with civil society to build a social consensus for reforms should be the key concerns of African policymakers in the future, in addition to sound macroeconomic policies and bold structural reforms.

As I consider Africa’s agenda for the twenty-first century, I am struck above all by its hopeful character. All items converge on the single objective of building institutions to release and support the initiative of each and every African. But I am also all too aware that African news headlines often tell a different tale, one of terrifying ethnic strife, cynical corruption, and widespread misery and disease. How can this hopeful agenda be reconciled with these stark realities? The answer lies in the power of human creativity, once it is released in a secure environment.

An African renaissance is unfolding before our eyes. Most countries, through most of their independence years, have been ruled by autocratic leaders; autocratic because, whether enlightened or not, they stood above the law. Today, the rule of law is asserting itself. It is doing so through the tenacious labors of a multitude of civil servants, of media personnel, and ordinary citizens, with the support of many local communities, and local and foreign nongovernmental organizations. There is unfolding before us an immense and multifarious struggle between the established autocratic domination and burgeoning rules-based institutions.

More than ever before, Africans are demanding accountability and honesty from their leaders, freedom from repressive governance, and the right to participate in influencing and formulating public policy. The growing demands for more participatory systems of political representation are overdue and will enable African governments to build a popular consensus behind their economic and social policies. Governments can benefit from public participation in assessing the causes of existing problems, in identifying and debating alternative solutions, and in implementing appropriate strategies. Public support is more likely to be strong if there is widespread confidence that policies are applied uniformly and equitably and that there is an avoidance of hidden subsidies, for example, or special treatment of vested interest groups.

Ethnic strife and widespread misery can only be resolved under the rule of law. The fuel of ethnic strife is an autocratic system of government. It takes a rules-based system to give each and every citizen equal rights under the law, which is the foundation of peace. The same is true in the economic field: an autocratic government causes permanent exposure to whimsical and predatory taxation. Initiative, investment, and savings cannot flourish outside the security of the rule of law.

A new partnership is needed to support sustainable growth and development in Africa. International support should be—and is—focused on those African countries that have the will to break clearly with the past, and which are ready to implement far-reaching economic and political reforms. Support of corrupt governments, dictatorships, or warlords is both counterproductive and morally untenable. It is in the interest of the international community to have democracies spread and market economies develop in Africa.

Let there be no mistake: the fight for economic security is political in nature. It is a fight for the substance of power. A new basis of power exists in Africa today in all the men and women who are struggling to establish a new order. In their hopes lies my hope for a more humane Africa.

Article by Alassane D. Ouattara, published in The Brown Journal of World Affairs. Vol. V, No. I (1998). Reproduced with the permission of The Brown Journal of World Affairs. This article drew in part on Mr. Ouattara’s recent speeches addressing a number of special issues facing Africa.

1

It is important to note that averages conceal large differences in performance among countries.

2

The need for high growth is calculated on the basis of a poverty elasticity, which measures the percent change in poverty measures for a 1 percentage point increase in growth. The higher the poverty elasticity, the lower the actual growth rate needed to reduce the number of poor.

3

World Bank, World Development Indicators 1997 (Washington).

4

Pierre Dhonte, “Three Propositions on African Economic Growth,” IMF Paper on Policy Analysis and Assessment 95/9 (Washington: IMF, 1995).

5

The first group includes Kenya, Uganda, and Zambia; the second, Comoros, Madagascar. Malawi, and Tanzania.

6

About 20 African countries have fewer than 10 million inhabitants, and 14 countries are landlocked.

7

The 14 African countries of the CFA franc zone currently consist of two separate groups of sub-Saharan countries. The first group includes the eight members of the West African Economic and Monetary Union (WAEMU)—Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. The WAEMU was established on January 10, 1994, and supplemented the WAMU (West African Monetary Union), which has been in existence since November 14, 1973. The WAEMU treaty was ratified and became effective on August 1, 1994. The second group includes the six members of the Central African Economic and Monetary Union (CAEMC)—Cameroon, the Central African Republic (C.A.R.), Chad, the Congo, Equatorial Guinea, and Gabon. The CAEMC was established on March 16, 1994, together with two supporting conventions (CAMU—the Central African Monetary Union—and CAEU—the Central African Economic Union) as well as the CAECU (the Central African Economic and Customs Union). The CAEMC has not yet been ratified.

The two groups maintain the same currency: the CFA franc, which stands for Communauié Financière Africaine in the WAEMU and for Coopération Financière en Afrique Centrale in the CAEMC.