THE DEVELOPING WORLD

Spring 2006

by Kamran Kousari

European public opinion seems increasingly sceptical about giving aid to Africa, because corruption and inefficiency make it seem like pouring money into a black hole. Kamran Kousari, UNCTAD’s Special Coordinator for Africa, explains why Africa’s woes stem from much more than that

Africa’s lack of development lies at the centre of international concern; it is the only continent in which poverty has increased in the past decade, along with HIV/AIDS, malaria, malnutrition and lack of access to clean water, medication and healthcare. Life expectancy in much of Africa has dropped to an all-time low, and it is no secret that sub-Saharan Africa will be unable to achieve the Millennium Development Goals, not just by 2015 but even by 2050.

For many outside observers, much of this state of affairs is Africa’s own doing and can be explained by civil strife, war, bad governance and corruption. From an economic perspective, others attribute it to causes such as a lack of openness to trade and investment, lack of clarity in land ownership, too much state intervention in national economies and a widespread reluctance to espouse market-friendly policies and principles.

But a more nuanced analysis of the African problematique paints a rather different picture, and in this context history really does matter. Most African countries gained independence from their colonial powers in the late 1950s and early 1960s. It was evident that these post-independence governments would need to step in and take over the management of the economy because by and large the colonial powers had not created the right conditions for an indigenous entrepreneurial class to emerge. Thus the role of the state in economic management was essential for maintaining a viable economy, and many governments opted for import substitution and infant industry protection, which had also been the policy choices of early industrializers in Asia and Latin America. During the post-independence period, Africa’s growth performance and development indicators were equivalent, and in certain cases superior, to those of other developing regions.

Three major factors were decisive in Africa’s subsequent downturn. The first was that Africa’s growth was largely the result of a commodity prices boom of the 1960s and 1970s. While primary commodity prices suffered wide fluctuations, even in those years, a secular decline in the prices of commodities began in the late 1970s and early 1980s as the result of world-wide recession. Prices did not recover until fairly recently, and even then have not returned to the levels of the 1970s. Excessive reliance on primary commodity exports meant that the terms of trade losses suffered by African countries created balance of payments problems that could only be addressed through borrowing or by more substantial flows of aid to the continent, thus creating the conditions for the debt trap in which many African countries now find themselves. UNCTAD’s calculations based on average price indices of 1980 for commodities of export interest to Africa show that had prices stayed at the same level, incomes in Africa would today be at least 50% higher.

The second factor has been time constraints. Even assuming that African countries were all able to build viable institutions of governance, create a new entrepreneurial class and develop a diversified economic base, the time they had at their disposal was a mere 15-20 years until they were hit by the major downturn in the world economy. Africa’s window of opportunity was not wide enough for a new managerial generation to become educated and take control of the institutions of public and private governance. Infrastructure bottlenecks also meant that African countries were very much tied to trade patterns that had existed throughout the years of colonial rule, so there was little chance to create the type of regional trade dynamics that the East Asian economies were able to develop. The “Transport and Communications Decade for Africa” that the UN launched was meant to address the difficulties of intra-African movement of goods and persons, as transport costs to and from Africa are a prohibitive 30% higher than for other continents. But the lack of an entrepreneurial class generally meant that the kind of private/public partnerships that fuelled the successful transformation of East Asian economies were not possible. And with the downturn in commodity prices, investment in state-owned enterprises came to a halt, thereby rendering them inefficient and uncompetitive.

In addition to all this, from the 1980s onward macroeconomic policies were being increasingly shaped by the multilateral financial institutions, in the context of structural adjustment policies and conditionalities attached both to lending and aid. These policies called for trade liberalisation, privatisation of state-owned enterprises and de-regulation. Asian countries had liberalised once they had their institutions in place, and even then did so gradually as they became more competitive in international markets. African countries, by contrast, were told to liberalise in order to become competitive, a difference that the proponents of unilateral liberalisation have chosen to ignore.

The third factor has been slow and erratic growth, rising levels of unemployment and poverty and weak institutions of governance that have been the result of state withdrawal, de-industrialisation and increasing shifts into the informal economy. These have become the main features of most African economies in the past quarter of a century. Recent growth performances in resource-rich countries have been primarily due either to higher primary commodity prices, thanks to rising demand from China and India, or to substantial injections of official development assistance in those sub-Saharan countries that have become showcases for neo-liberal policies.

The uncomfortable fact remains that commodity price booms have historically been much shorter-lived than the low periods. To break the vicious circle of poverty and underdevelopment, Africa needs to grow at an average rate of at least 7-8% yearly. This requires a major increase in investment in human and physical infrastructure and productive capacity through vertical and horizontal diversification. The current rate of investment in African economies is far below the average for other developing regions, amounting as it does to some 18% of GDP and reflecting, too, low levels of domestic savings that are less than 15% of GDP. These figures are, of course, typical of poor countries and there is an urgent need for much higher levels of capital inflows. UNCTAD, in its 2000 study “Capital Flows and Growth in Africa”, suggested that aid to Africa has to be doubled and maintained at that level for at least a decade so as to create sufficient investment and decrease aid dependence in the longer term. Africa’s investment gap has not been filled by foreign direct investment despite every effort to attract inward investment. The exception is the mining and extractive sector, but owing to its capital intensive and enclave nature, this sort of investment has not been able to generate the usual positive benefits of job creation, technology transfer and linkages with the rest of the economy. In comparison to other developing regions, the extractive industries in Africa have not generated enough tax revenue for host countries to invest in infrastructure or the diversification of the economy. Instead, African governments have been in a race to the bottom offering major tax incentives to attract scarce foreign investment to their countries.

The international community now recognises that aid to Africa should be doubled and that the debts of the poorest countries should be written off. It is worth pointing out that per capita aid to South Korea and Taiwan topped $600 and $400 respectively for more than 20 years, while to sub-Saharan Africa it averages only $32 per capita. Although of critical importance, financial flows are not enough on their own to set Africa onto a sustained growth path. African countries require policy space to devise macro- and microeconomic policies adapted to their individual needs and requirements. Hence the need for a major overhaul of conditionality attached to lending and aid. African countries also need strategic industrial policies and a more balanced integration into the world economy unhampered by international rules and disciplines, using the flexibilities provided under existing arrangements as well as special and differential treatment. It should go almost without saying that they also need access to the markets of industrialised countries and a major reduction of agricultural subsidies in the North.

Whether Africa’s development woes are home grown or externally induced raises issues that cannot easily be disentangled. One needs to distinguish between causality and correlation. The era of colonial rule meant a distorted insertion in the world economy and a political map that reflected the interests of the colonial powers rather than the indigenous and ethnic configuration of the continent. This was followed by the Cold War years, which for Africa were marked by the support of client states and their strongman regimes. Meanwhile, Africa’s extreme poverty has meant repeated internal strife over access to natural resources, with these conflicts at times buoyed by international interests.

Good governance, the rule of law and democratic institutions are the result of successful development policies, not their precursors. Many African countries are now experiencing the fundamentals of democratic change, and as with other fledgling democracies there will be hiccups. And in a number of countries, the fight against corruption has started in earnest. Developed partners must play their share in this process, and every effort must be made to ensure that the democratic processes under way are not tantamount to “voiceless democracies” in which economic policies are ultimately dictated by outsiders.