2005: The Year of Africa’s Economic Turnaround?

Image: Flickr, Biblioteca Nacional de España
Image: Flickr, Biblioteca Nacional de España

AFTER years of stagnation, the continental economy shows signs of accelerating change, according to a variety of recently published research.

The International Monetary Fund estimated that 30 African economies grew faster than 4% last year and the continent as a whole is expected to grow at a rate of 5.4% in 2005. That average is not just a statistical quirk influenced by the big economies. Five of the world’s 10 fastest growing economies are in Africa, and an estimated 26 countries on the continent will exceed 5% growth in 2005, the IMF projects.

Is Africa on the cusp of a sustained economic turnaround?

Long ravaged by hyper-inflation and wild changes in foreign exchange rates, the continent has achieved unprecedented macro-economic stability that is contributing to the best economic growth rates seen in decades. Across Africa, inflation is expected to average 9.9% in 2005, compared with 41% in 1994. Underpinning this are sound fiscal balances (budget deficits before borrowing), which have improved from 5.2% of GDP in 1994 to an expected 0.9% in 2005.

One factor behind the present boom is China’s rapid economic growth (expected to top 8% this year, according to the Economist Intelligence Unit), which has given the Asian giant a voracious appetite for many of Africa’s natural resources. That has created supply shortages that are driving up prices for oil, gas, iron, copper, cobalt, and many other natural resources. And it has brought significant new investments to Africa.

But China is not the only reason for Africa’s improved economic performance. Evidence suggests that the continent is finally beginning to reap the benefits of years of often painful reforms. The Heritage Foundation, a Washington-based policy institute, measures change through its annual Index of Economic Freedom. In its 2005 report, Heritage noted that ‘no region has made greater strides in economic freedom than sub-Saharan Africa.’

The index rates 161 countries against a number of variables grouped into categories such as trade and monetary policy, fiscal burden of government, state intervention in the economy, foreign investment, property rights, regulation, banking and finance, wages and prices. Africa’s score is encouraging because, as studies by the foundation and others have found, improvement in these variables tends to translate into tangible benefits.

‘Not only is a higher level of economic freedom clearly associated with a higher level of per capita gross domestic product, but GDP growth rates also increase as a country’s economic freedom improves,’ the 2005 index states..

But the continent’s gains depart from a relatively low position, Heritage notes, ‘and sub-Saharan Africa remains the world’s least free region.’ To illustrate the point, consider Chad and Lesotho. Representing the median among all African states, the two countries appear in the lowest-third of the total index, ranking 102nd and 103rd, respectively, among nations worldwide.

Other factors also temper the current positive indicators. This is not the first time that a number of African countries have recorded significant political or economic progress prompting optimistic expectations of an economic ‘turning point.’

In the mid 1990s, for example, Côte d’Ivoire, Senegal and Cameroon chalked up growth rates of 5% to 6% (rates not seen since the 1960s), and Niger, Chad, Mali and even Mauritania had growth of the order of 3% to 4% per annum. Those levels of performance reflected fortuitous circumstances, such as high commodity prices, but were also the result of a decade of economic restructuring – not least a decision by Francophone countries to devalue their currency.

Interviewed at the time, Jeffrey Herbst, professor of African studies at Princeton University, observed that the performance was ‘still very fragile, so it’s hard to proclaim this is a turning point from which there’ll be no backsliding.’

As the current political and economic collapse in Côte d’Ivoire makes clear, Herbst’s sense of caution in the mid-1990s proved prescient. Although democracy has advanced considerably across Africa in the past decade and the continent has developed new tools to mediate conflict, economic stability remains elusive. In many cases, poverty is deepening, while education and health care are worsening.

Sub-Saharan Africa is the only major underdeveloped region whose per capita income has declined since 1980, according to the Brookings Institution in the US. Average life expectancy has declined dramatically due to HIV/AIDS, and child mortality is 17% higher than other regions, according to Jeffrey Sachs of Columbia University.

As South African Finance Minister Trevor Manuel put it recently, ‘deep and grinding poverty remains a daily reality notwithstanding the focus on macro-economic policy, which is necessary but remains insufficient.’

Learning from Asia

What does the continent need to do to hold onto growth where it is taking place and jumpstart it elsewhere?

A study conducted by Sachs on behalf of the UN and released last month proposes more than doubling the level of aid for a ‘big push’ to lift Africa out of its poverty trap. Without such assistance, the report found, Africa has ‘no hope’ of ever achieving the United Nations Millennium Development Goals, which call for halving poverty by 2015.

But India and China, two of the world’s fastest growing developing economies, offer cautionary tales for African nations seeking quick fixes.

‘We must make money,’ the market reformist Chinese Premier Deng Xiaoping said in 1978. In the mid-1980s, India’s prime minister, Rajiv Gandhi, also saw the need to unleash business and consumerism. Both countries began deep and often unpopular reforms around 1980 and began to realise sustained rapid growth only much later. A key step in the development of both China and India was opening up their economies to foreign investment and competition, which allowed business to operate with far less interference and intrusive regulation.

‘It’s remarkable what’s possible if conditions are right,’ wrote Rajiv Bakshi, chairman of Pepsico India, in The Economic Times of New Delhi. ‘The most important ingredient to keep the momentum going is to believe in ourselves and display the political will and leadership to reach our goals. What propels the feel-good factor is real performance on many fronts – an economy that is getting free of government micro-management, [and has] low interest rates, modest inflation, a confident and educated middle class, and a raring to go industry that is prepared to take on the world.’

In China, meanwhile, growth is not a consequence of economic and political freedom. The country’s vast potential market brought more foreign direct investment to China than any other region in 2004. Net FDI flows to sub-Saharan Africa in 2003 were $8 billion – compared with $39 billion to Latin America and the Caribbean, $14 billion to Central and Eastern Europe, and $89 billion to Asia and the Pacific, according to the UN Economic Commission for Africa’s 2005 African Governance Report.

Driven by the high command of the state, China has been able to guarantee political stability and give foreign investors the kind of assurance they want – tax incentives, security of tenure and currency stability (pegged to the US dollar) – says Iraj Abedian, CEO of the Johannesburg-based economic policy consultants the Pan African Group.

By contrast, many African states are not able to provide political stability. Abedian says Africa also needs to modernise its institutions, improve governance, upgrade physical and financial infrastructure and streamline regulatory regimes.

The Investment Beauty Contest

Transport, telecommunications, banking, finance and electricity costs in much of Africa are significantly higher than in other parts of the world. Customs clearances and investment licenses are slow and commercial courts, debt collection and dispute resolution systems are significantly more complex in Africa.

Global investors do not ask whether Africa is good enough to do business, but whether it is the most profitable location for limited investment funds. In effect, Africa is in a global beauty contest in which it is still far from the most attractive contestant. Aside from natural resource investments, which must go where the resources are located, Africa consistently loses out in the competition to lure manufacturing investment.

Herbst argues that investors are influenced by reputations built up over the long term. ‘When you go to your headquarters in Denver or Houston and say there’s this new project in Vietnam we are interested in, the corporate board will say, “We’ve not been there before but it’s in Asia, so it must work out.” If you say there’s this interesting project in Cameroon, for example, they get very queasy, even if the project itself makes sense. My friends in multinational companies say they pitch projects to their boards all the time which they think make economic sense, are profitable, but the boards are still very wary of going into Africa because it’s just not something they are used to. I think the investment will come if the policies and projects are there, but it’s only natural that they have a comfort level.’

The pattern of foreign investment behaviour in South Africa after 1994 provides the best example of what African countries can expect if they develop and sustain sound economic policies, Herbst argues. Interested foreign companies start by putting a toe in the water – establishing a physical presence, opening an office, getting to understand the circumstances, getting to know the people, establishing franchise and licensing agreements. Then, ‘after five or 10 years, if they’re happy with the situation, they put in real money.’

Enabling the Environment

African governments have eliminated some of the worst distortions caused by fluctuating exchange rates, inconsistent or high taxation and rapid inflation. But a variety of studies and surveys conclude that doing business on the continent remains risky.

‘African countries must reform their administrative and legal procedures for doing business and enforcing contracts to make their private sectors more efficient,’ according to the ECA report.

In Mozambique, the study notes, it takes 14 procedures and 153 days to start a business, and 18 procedures and 540 days to enforce a contract. In Chad, the figures are 19 procedures and 75 days and 526 days. In Botswana it takes 11 procedures and 108 days to start a business and 26 procedures and 154 days to enforce a contract. In Australia by contrast, you can start a new business in two days.

The bottleneck most frequently identified is access to reliable, inexpensive financing. ‘Few firms in Africa have access to banks loans and overdrafts … for their investment and working capital needs,’ the ECA found. Where bank loans are available, interest rates are high and larger collateral, including personal assets, are required. One reason for this is the lack of freehold title in much of Africa, which means that land cannot be used as a guarantee against loans.

‘Suppliers’ credit could play a potentially major role in facilitating business operations, but is not popular because of poor information and difficulties in contract enforcement,’ states the report. Further, in all but a few countries in eastern and southern Africa and Nigeria, the commercial banks do not meet the needs of small and medium enterprises – the engines of economic growth.

The ECA identifies a range of priority areas for action in building capable and accountable states, including: strengthened capacity of parliaments; deeper legal and judicial reforms; improved public sector management; improved public service delivery; protection of property rights and better enforcement of contracts; improved communications technology; and more effective strategies for confronting the HIV/AIDS epidemic.

Prospects for accelerated economic growth this year are encouraging, but putting Africa on a path toward prosperity will depend on comprehensive reforms and – vitally – persistence.

‘Good governance and sustainable development are indivisible,’ UN Secretary-General Kofi Annan noted in the ECA report. ‘That is the lesson of all our efforts and experiences, from Africa to Asia to Latin America. Without good governance – without the rule of law, predictable administration, legitimate power and responsive regulation – no amount of charity will set us on the path to prosperity’.