CAN AFRICA CLAIM T H E 2 1 ST C E N T U RY ? Can Africa Claim the st 21 Century? Can Africa Claim the st 21 Century? The World Bank Washington, D.C. Copyright © 2000 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing April 2000 The World Bank holds the copyright on this report on behalf of all the institutions that contributed to its development––the African Development Bank, African Economic Research Consortium, Global Coalition for Africa, United Nations Economic Commission for Africa, and World Bank. Although the collaborating institutions endorse the main messages of the report, it does not necessarily reflect the official views of these institutions or of their boards of directors or affiliated institutions. ISBN: 0-8213-4495-1 Cover designed by Drew Fasick Photo credits for cover: World Bank Photo Library Library of Congress Cataloging-in-Publication (CIP) Data has been requested. To order: The World Bank P.O Box 960 Herndon, VA 20172-0960 USA Tel: 703 661-1580 or 1-800-645-7247 Fax: 703 661-1501 E-mail: books@worldbank.org Web: www.worldbank.org/publications Text printed on paper that conforms to the American National Standard for Permanence of Paper for Printed Library Materials, Z39.48-1984 Contents Foreword x Acknowledgments xii Summary 1 1. Can Africa Claim the 21st Century? 7 The Challenge of African Development 7 Africa’s Growth Crisis: A Retrospective 18 Where Is Africa Now? Reforms and Their Legacy 28 Toward An Agenda for the Future 38 2. Improving Governance, Managing Conflict, and Rebuilding States 48 Characteristics of a Well-Functioning State 50 African Governance since Independence 51 Civil Conflict 57 Restructuring and Reforming Africa’s Institutions of Governance 64 3. Addressing Poverty and Inequality 83 Dimensions of Poverty 84 Inequality and Its Implications 92 Security 97 Strategies for Reducing Poverty in Africa 99 4. Investing in People 103 Africa’s Human Development Crisis 104 Why the Human Development Crisis? 111 Tools for Investing in Africa’s People 120 v C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? 5. Lowering Infrastructure, Information, and Finance Barriers 132 Catching Up on Infrastructure 134 Exploiting Information and Communications Technology 153 Developing a Robust Financial Sector 160 6. Spurring Agricultural and Rural Development 170 Explaining the Poor Performance of African Agriculture 171 Assessing the Impact of Agricultural Policy Reforms 181 Exploiting the Synergy between Price and Nonprice Factors 187 A Business Plan for Agriculture in the 21st Century 192 7. Diversifying Exports, Reorienting Trade Policy, and Pursuing Regional Integration 208 Why Should Africa Diversify? 210 The Debate on Africa’s Diversification Potential 212 A Business Plan for Export Diversification 219 8. Reducing Aid Dependence and Debt and Strengthening Partnerships 235 The Context and Profile of Aid 238 Influences on and Outcomes of Aid 241 Forging a New Strategic Partnership 247 Away from Aid Dependence 255 References 259 Boxes 1.1 Gender and Growth: Africa’s Missed Potential 24 1.2 Industrial Productivity in Tanzania 26 1.3 Privatization in Côte d’Ivoire 32 1.4 The East Asian Crisis and Africa 34 2.1 Four Types of African Leadership 58 2.2 Costs of Conflict in Africa 59 2.3 Reversing a Spiral of Decline in Mozambique 61 2.4 The Contribution of Debt Relief in Uganda’s Repatriation of Flight Capital 64 2.5 Can Stable Development States Emerge in Ethnically Diverse Africa? 65 2.6 The Electoral Commission of Ghana 69 2.7 Kenya’s Office of Controller and Auditor-General 71 2.8 Toward Transparent Funding: Uganda’s Education Reforms 76 2.9 Decentralization in South Africa 77 vi CONTENTS 2.10 Different Routes to Better Government in Ghana and Guinea 79 2.11 The Organization pour l’Harmonisation en Afrique du Droit des Affaires 80 3.1 Voices of Africa’s Poor 85 3.2 Inequality in South Africa 94 3.3 Winners and Losers from Reform and Recovery in Ghana and Uganda 95 4.1 Waste in the Drug Supply System 115 4.2 Senegal Confronts AIDS 117 4.3 The Successful International Partnership against Onchocerciasis 121 4.4 Uganda’s Commitment to Basic Education 123 4.5 Improving Nutrition in Madagascar 125 4.6 Elements of Successful HIV/AIDS Programs 127 4.7 Chad’s Health and Safe Motherhood Project 128 5.1 The Gender Impact of Infrastructure Provision 140 5.2 Harnessing the Potential of Telecommunications 147 5.3 Private Involvement in Maritime Transport in Côte d’Ivoire 148 5.4 Privatization Based on Capital Markets 168 6.1 Centuries of Extraction from African Agriculture 174 6.2 OECD Subsidies to Agriculture—Equal to Africa’s GDP 177 6.3 Do African Farmers Respond to Price Incentives? 179 6.4 The 2KR Aid Program 188 6.5 Problems with Public Investment in African Agriculture 190 6.6 Developing Uganda’s Framework for Modernizing Agriculture 195 6.7 Ensuring Gender Equality in Access to Productive Assets and Services 196 6.8 Do Indigenous Land Rights Constrain Agricultural Investment and Productivity? 197 6.9 Poorly Developed Financial Systems and Limited Credit Systems 198 6.10 How Should Agriculture Be Taxed? 200 6.11 Regional Vigilance against Livestock Disease 204 7.1 Gains from Exporting in Africa 211 7.2 Challenges for Competitive Industrialization in Low-income Africa 212 7.3 Chances and Challenges for Tourism 216 7.4 Are the Geese Flying in Africa? 217 7.5 Why the Cost of Doing Business Is High in Africa 224 7.6 Why Risks Are Perceived As Being High 225 7.7 Listening to Business 226 7.8 Progress and Challenges for Africa’s Subregional Groups 228 7.9 The Cross-Border Initiative’s “Integration by Emergence” 230 8.1 Changing Thinking on Aid 239 8.2 Public Goods and Development Assistance 246 8.3 The Comprehensive Development Framework and Poverty Reduction Strategies 248 8.4 The Enhanced Heavily Indebted Poor Countries Initiative 250 8.5 The Common Pool Approach to Donor Coordination and Ownership 254 8.6 Conditionality Revisited: A New Approach in Burkina Faso 256 vii C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figures 1.1 Change in GDP Per Capita, 1970–97 9 1.2 Growth, Exports, Investment, and Investment Productivity in Africa, 1964–67 20 1.3 Africa’s Share in World Exports by Product, 1970–93 21 1.4 Africa’s Terms of Trade by Country Group, 1965–97 22 1.5 Fiscal Deficits in Special Program of Assistance Countries, 1984–98 29 1.6 Growth in Output, Investment, and Exports in Africa, 1981–98 33 1.7 Africa’s Annual Growth, Investment, Exports, and Deficits by Country Group, 1995–98 36 1.8 Africa’s Circles of Cumulative Causation 39 1.9 Political Rights, Civil Liberties, and Economic Management in Africa by Country Group, 1990–99 40 3.1 Under-5 Mortality by GNP Per Capita and Region, 1995 87 3.2 Changes in Headcount Ratios and Per Capita Consumption in Selected Countries and Periods 92 3.3 How African Poverty Responds to Changes in Income and Inequality 101 4.1 Fertility Rates by Education Level and Region, 1960–2015 104 4.2 Gross Enrollment Rates by Region, 1980 and 1995 105 4.3 Mean Scores of Primary Students on Three Dimensions of Reading Comprehension in Four African Countries, 1998 107 4.4 Variations in the Burden of Disease by Region, 1998 108 4.5 Burden of Infectious Diseases in Africa, 1998 108 4.6 Estimated Life Expectancy at Birth in Selected African Countries, 1955–2000 109 5.1 Road Density and Road Length Per Capita in Africa, Asia, and Latin America, 1997 136 6.1 Africa’s Share of World Trade for Its Main Export Crops, 1970 and 1997 173 6.2 Levels of Centralized Rural Service Delivery in Various Parts of the Developing World, 1990s 176 6.3 Changes in Real Producer Prices of African Agricultural Exports, 1981–97 183 7.1 Simulated Annual Values of Industrial and Processed Exports by a Median Africa Country 218 7.2 Aspects of Africa’s Geography 219 8.1 Per Capita Transfers of Official Development Assistance to Africa, 1970–98 236 8.2 Actual Aid, Poverty-Reducing Aid, and Policy Ratings 243 viii CONTENTS Tables 1.1 Population, Income, and Economic Indicators by Region 8 1.2 Indicators of a Demographic Transition in Africa by Income Group 16 1.3 Human, Natural, and Physical Capital Indicators by Region 17 1.4 Cumulative Terms of Trade Effects and Financing Flows in Africa, 1970–97 22 1.5 Public Finance, External Support, Economic Management, Political Participation, and Risk Ranking Indicators by Region 30 3.1 Nutrition Measures for Children in Eight African Countries 88 3.2 Net Enrollments in 16 African Countries by Region, Consumption Quintile, and Gender, 1990s 89 3.3 Poverty in 21 African Countries Using National Poverty Lines, 1990s 90 3.4 Consumption Poverty in Various African Countries 91 3.5 Income Inequality by Region 93 3.6. Benefit Incidence of Public Health Spending in Various African Countries 96 3.7 Events Causing Hardship in Ethiopia, 1975–95 97 3.8 Movements In and Out of Poverty in Rural Ethiopia, 1989 and 1995 97 4.1 Gross Enrollment Rates in Africa, 1960–97 106 4.2 Public Spending on Education in Africa, Asia, and Latin America, 1975 and 1993 113 4.3 Spending on Health in Africa, Asia, and Latin America and the Caribbean, 1990s 114 4.4 Education Unit Costs in Africa, Asia, and Latin America, 1975–93 115 5.1 Infrastructure Indicators by Region 135 5.2 Private Investment in Infrastructure in Various Countries, 1995 146 5.3 Selected Forms of Private Participation in Africa’s Railways, Airports, and Seaports 148 5.4 Inflation, Interest Rate Spreads, and Real Interest Rates in Africa and Asia, 1980–97 163 6.1 Agricultural Indicators for Africa, Asia, and Latin America 172 6.2 Internal Rates of Return on Agricultural Research and Extension Spending by Region 191 6.3 Africa’s Share of and Change in World Trade for Its Main Export Crops, 1970–97 192 7.1 Nontraditional Exports from Selected African Countries, 1994–98 215 ix Foreword T Our central message is: HIS REPORT IS THE PRODUCT OF A COLLABORATIVE EFFORT THAT Yes, Africa can claim the began in October 1998, when representatives of several institu- new century tions—including the African Development Bank, African Economic Research Consortium, Global Coalition for Africa, United Nations Economic Commission for Africa, and World Bank—met to ini- tiate a study on Sub-Saharan Africa’s prospects for economic and social development in the 21st century. The question of whether Sub-Saharan Africa (Africa) can claim the st 21 century is complex and provocative. This report does not pretend to address all the issues facing Africa or to offer definitive solutions to all the challenges in the region’s future. Our central message is: Yes, Africa can claim the new century. But this is a qualified yes, conditional on Africa’s ability—aided by its development partners—to overcome the develop- ment traps that kept it confined to a vicious cycle of underdevelopment, conflict, and untold human suffering for most of the 20th century. The new century provides unique opportunities for Africa, and three emerging positive factors. The first is increasing political participation in Africa, opening the way to greater accountability and a new development discourse. Second, the end of the Cold War can help change Africa from a strategic and ideological battleground to a new business address for trade and development. Third, globalization and information and com- munications technology offer enormous opportunities for Africa to leapfrog stages of development. This report proposes strategies for ushering in self-reinforcing processes of economic, political, and social development. Progress is cru- cial on four fronts: s Improving governance and resolving conflict. s Investing in people. s Increasing competitiveness and diversifying economies. s Reducing aid dependence and strengthening partnerships. Africa is a diverse region. Some countries are caught in poverty and conflict—and where nation-building is failing, the prospects are cloudy. x FOREWORD Other countries, having implemented significant macroeconomic reforms, are ready to move forward with more comprehensive programs. Yet others are still grappling with basic reforms. There is no simple for- mula, but in facing enormous challenges, countries can draw on many positive examples. All countries, however, must commit to a coherent and comprehensive vision of development and nation-building. Any “business plan” for putting in place this vision of development All countries must should be conceived, owned, and implemented by accountable govern- commit to a coherent and ments, anchored in broad national consensus and supported by Africa’s comprehensive vision of development partners. Claiming the future involves enormous chal- development and nation- lenges—not least of which is resolving the problems of the past. Much of building Africa’s recent economic history can be seen as a process of marginaliza- tion—first of people, then of governments. Reversing this process requires better accountability, balanced by economic empowerment of civic society—including women and the poor—and firms relative to gov- ernments, and of aid recipients relative to donors. Without this shift in power and accountability, it will be difficult to offer the incentives Africa needs to accelerate development and break free of poverty. Members of the Steering Committee Ali A.G. Ali, United Nations Economic Commission for Africa Tesfaye Dinka, Global Coalition for Africa Ibrahim Ahmed Elbadawi, World Bank Augustin Fosu, African Economic Research Consortium Alan Gelb, World Bank Kupukile Mlambo, African Development Bank xi Acknowledgments T HIS REPORT IS THE JOINT PRODUCT OF FIVE COLLABORATING institutions, represented by a Steering Committee coordinated by Alan Gelb (World Bank) and composed of Ali A.G. Ali (United Nations Economic Commission for Africa), Tesfaye Dinka (Global Coalition for Africa), Ibrahim Ahmed Elbadawi (World Bank), Augustin Fosu (African Economic Research Consortium), and Kupukile Mlambo (African Development Bank). Under the supervision of the Steering Committee, the report was put together by a team headed by Alan Gelb and composed of Ali A.G. Ali, Tesfaye Dinka, Ibrahim Elbadawi, Charles Soludo, and Gene Tidrick. Ibrahim Elbadawi, assisted by John Randa and Charles Soludo, coordinated the project and acted as a secretary to the Steering Committee. Further support to the Steering Committee was provided by its associate members: Paul Collier, Guy Darlan, Beno Ndulu, Tchetche N’guessan (who also represented Centre Ivoirien de Recherches Economiques et Sociales), Waheed Oshikoya, Ademola Oyejide, Delphine Rwegasira, Neeta Sirur, Charles Soludo, and Gene Tidrick. Lishan Adam, Melvin Ayogu, Hans Binswanger, Nicholas Burnett, Michael Chege, Lionel Demery, Carol Lancaster, Brian Levy, Aileen Marshall, Robert Townsend, and Tshikala Bulalu Tsibaka con- tributed to the chapters. Robert Calderisi, Christopher Delgado, Stephen Gelb, Gerry Helleiner, Benno Ndulu, Stephen O’Connel, Dani Rodrik, Elwaleed Taha, and Kerfalla Yansane provided detailed reviews of the manuscript. Meta de Coquereaumont, Paul Holtz, Molly Lohman, and Bruce Ross-Larson, of Communications Development Incorporated, edited the report and over- saw its layout and production. The report was laid out by Alan Thompson. Alex Bangirana, Nancy Lammers, and Randi Park, of the World Bank’s Office of the Publisher, coordinated the cover design and printing. As inputs to the chapters, 15 background papers were prepared and presented at a July 1999 research workshop in Abidjan, Côte d’Ivoire, hosted by the African Development Bank. The papers were written by Lishan Adam, Ali A.G. Ali, Ernest Aryeetey, Jean-Paul Azam, Hans Binswanger, Nicholas Burnett, Michael Chege, Paul Collier, Lionel Demery, Lual Deng, Stephen Devereux, Augustin Fosu, Alan Gelb, xii ACKNOWLEDGMENTS Martin Greeley, Afeikhena Jerome, Carol Lancaster, Brian Levy, Taye Mengistae, Kupukile Mlambo, Njuguna Ndung’u, Waheed Oshikoya, Ademola Oyejide, Catherine Pattillo, Lemma Senbet, Robert Townsend, Tshikala Bulalu Tshibaka, and Howard White. Useful comments were provided by Shimeles Abebe, Regina O. Adutwum, Nick Amin, Alexander Amuah, Patrick Asea, Melvin Ayougu, M.J. Balogun, Tesfaye Dinka, Josue Dione, Abdul-Ganiyu Garba, Abdalla Hamdock, Jeffrey Herbst, Gerard Kambou, Louis Austin Kasekende, Kamran Kousari, Patience Bongiwe Kunene, Tundu Antiphas Lissu, Hailu Mekonnen, Sipho S. Moyo, Keith Muhakanizi, Harris Mule, Andrew K. Mullei, Tchetche N’guessan, Delphin Rwegasira, Affiong Southey, John Strauss, Gabre Michael Woldu, and Kelly Zidana. The first draft of the report was discussed in December 1999 at two workshops hosted by the African Economic Research Consortium in Nairobi, Kenya. The first workshop solicited views from African stake- holders (practitioners and policymakers); the second gathered comments from researchers. Useful discussions and able moderation at the meetings were contributed by Oladipupo O. Adamolekun, Degefe Befekado, Abdallah Bujra, Micha Cheserem, Getachew Demeke, Kammogne Fokam, Rachel Gesami, Alan Hisrch, Mwangi Kimenyi, Nguyuru Lipumba, Nehemia Ng’eno, Germano Mwabu, Dominique Njinkeu, Benson Obonyo, Abena Oduro, Hezron Nyangito, Brian de Silva, and Albert Tavodjre. Sections of the report were also discussed in Addis Ababa, Ethiopia, at seminars with the United Nations Economic Commission for Africa and the Organization of African Unity, and in Johannesburg, South Africa, as part of a conference organized by the Trade and Industrial Policy Secretariat. The final dissemination of the report occurred at the May 2000 annual meeting of the African Development Bank in Addis Ababa. Catherine Gwin, Kim Jaycox, Massoud Karshenas, Nicholas Minot, Machiko Nissanke, Howard Pack, Jim Tybout, Adrian Wood, and William Zartman led discussions at an Africa seminar series—organized by Shantanaya Devarajan and Ibrahim Elbadawi—in support of the pro- ject during its early stages. Other colleagues in the collaborating institu- tions contributed to these discussions and provided input. Many other colleagues, not mentioned here, have made valuable contributions and given support and encouragement. Claudia Carter, assisted by Jocelyn A. Schwartz and Choye Yee, pro- vided logistical support and assisted with the management of the project. John Randa and Satya Yalamanchili provided research support. xiii C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? The Steering Committee would also like to acknowledge the generous support of the Swiss and Dutch governments, and of the Canadian International Development Agency, which translated the study into French. The responsibility for this report remains with the Steering Committee of this project. Although the collaborating institutions endorse the main messages of the report, it does not necessarily reflect the official views of these institutions or of their boards of directors or affili- ated institutions. xiv Summary D ESPITE GAINS IN THE SECOND HALF OF THE 1990S, Sub-Saharan Major changes are Africa (Africa) enters the 21st century with many of the world’s needed if Africans—and poorest countries. Average income per capita is lower than at their children—are to the end of the 1960s. Incomes, assets, and access to essential services are claim the 21st century unequally distributed. And the region contains a growing share of the world’s absolute poor, who have little power to influence the allocation of resources. Moreover, many development problems have become largely confined to Africa. They include lagging primary school enrollments, high child mortality, and endemic diseases—including malaria and HIV/AIDS—that impose costs on Africa at least twice those in any other developing region. One African in five lives in countries severely disrupted by conflict. Making matters worse, Africa’s place in the global economy has been eroded, with declining export shares in traditional primary products, lit- tle diversification into new lines of business, and massive capital flight and loss of skills to other regions. Now the region stands in danger of being excluded from the information revolution. Many countries have made important economic reforms, improving macroeconomic management, liberalizing markets and trade, and widen- ing the space for private sector activity. Where these reforms have been sustained—and underpinned by civil peace—they have raised growth and incomes and reduced poverty. Even as parts of the region are mak- ing headlines with wars and natural disasters, other parts are making headway with rising interest from domestic and foreign businesses and higher investment. But the response has not been sufficient to overcome years of falling income or to reverse other adverse legacies from the long period of eco- nomic decline—including deteriorated capacity, weakened institutions, 1 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? and inadequate infrastructure. Major changes are needed if Africans— and their children—are to claim the 21st century. With the region’s rapidly growing population, 5 percent annual growth is needed simply to keep the number of poor from rising. Halving severe poverty by 2015 will require annual growth of more than 7 percent, along with a more equitable distribution of income. Improving governance Moreover, Africa will not be able to sustain rapid growth without and resolving conflict is investing in its people. Many lack the health, education, and access to perhaps the most basic inputs needed to contribute to—and benefit from—high growth. requirement for faster Women are one of Africa’s hidden growth reserves, providing most of the development region’s labor, but their productivity is hampered by widespread inequal- ity in education and access. Thus gender equality can be a potent force for accelerated poverty reduction. And HIV/AIDS looms as a new men- ace, threatening to cut life expectancy by 20 years and undermine sav- ings, growth, and the social fabric in many countries. Africa thus faces an immense, multifaceted development challenge. But the new century offers a window of opportunity to reverse the marginal- ization of Africa’s people—and of Africa’s governments, relative to donors, in the development agenda. Political participation has increased sharply in the past decade, paving the way for more accountable government, and there is greater consensus on the need to move away from the failed mod- els of the past. With the end of the Cold War, Africa is no longer an ide- ological and strategic battleground where “trusted allies” receive foreign assistance regardless of their record on governance and development. Globalization and new technology, especially information technology, offer great potential for Africa, historically a sparsely populated, isolated region. Though these factors also pose risks, including that of being left further behind, these are far outweighed by the potential benefits. Making these benefits materialize will require a “business plan” con- ceived and owned by Africans, and supported by donors through coor- dinated, long-term partnerships. African countries differ widely, so there is no universal formula for success. But many countries face similar issues, and can draw on positive African examples of how to address them. Improving governance and resolving conflict is perhaps the most basic requirement for faster development. Widespread civil conflicts impose enormous costs, including on neighboring countries. Contrary to popu- lar belief, Africa’s conflicts do not stem from ethnic diversity. Rather, in a pattern found around the world, conflicts are driven by poverty, under- development, and lack of economic diversification, as well as by political 2 SUMMARY systems that marginalize large parts of the population. But conflicts per- petuate poverty, creating a vicious circle that can be reversed only through special development efforts—including long-run peacebuilding and political reforms. With success in these areas, countries can grow rapidly, and flight capital can return. Countries that have made the greatest gains in political participation are also those with better economic management. Again, this conforms Investing in people is also to a global pattern that suggests multiethnic states can grow as fast as essential for accelerated homogeneous ones—if they sustain participatory political systems. Many poverty reduction countries need to develop political models that facilitate consensus build- ing and include marginalized groups. Development programs need to be win-win, improving the manage- ment and distribution of economic resources and contributing to more effective states. Programs should empower citizens to hold governments accountable, enable governments to respond to new demands, and enforce compliance with the economic and political rules of the game. Development efforts are starting to move in this direction, with greater beneficiary involvement in the delivery of services and more emphasis on results. But far more needs to be done to strengthen Africa’s institutions— including ensuring that representative institutions, such as parliaments, play their proper role in economic and budgetary oversight. Investing in people is also essential for accelerated poverty reduction. Many countries are caught in a trap of high fertility and mortality, low edu- cation (especially of women—less than one-quarter of poor rural girls attend primary school), high dependency ratios, and low savings. In addi- tion, greater political commitment is urgently needed to fight HIV/AIDS. While the resources available for education and health are inadequate in some countries, many need to translate their existing commitment to human development into effective programs for delivering essential ser- vices and increasing gender equality. Africa has some of the world’s strongest communities, yet services are usually provided through weak, centralized institutions that are seen as remote and ineffective by those they are supposed to serve. Deconcentrated service delivery through local communities, supported by capacity building at local levels and effective governance to ensure transparency and empower recipients, could have a major impact. With effective regional cooperation and donor support through coordinated, long-term partnerships—including for interna- tional public goods such as new vaccines—Africa could solve its human development crisis in one generation. 3 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Increasing competitiveness and diversifying economies must be a third area of focus if Africa is to claim the new century. Job creation is slow not because of labor market rigidities (though there are exceptions) but because of the high perceived risks and costs of doing business in Africa. These need to be lowered by locking in reforms and delivering business services more efficiently—with less corruption, better infrastructure and Increasing financial services, and increased access to the information economy. competitiveness and Africa trails the world on every dimension of these essentials. Lowering diversifying economies these barriers requires new approaches, including more participation by must be a third area of the private sector and by local communities, a more regional approach focus if Africa is to claim to overcome the problems posed by small African economies, and a cen- the new century tral government shift to regulating and facilitating services rather than providing them. Though Africa’s agriculture has responded to limited reforms, it remains backward and undercapitalized, the result of centuries of extrac- tive policies. Recapitalizing the sector will require maintaining and improving price incentives (including by encouraging competitive input markets), channeling more public spending and foreign aid to rural com- munities (including for local infrastructure), and tapping into the savings potential of farmers. These changes are also needed to create incentives to reverse severe environmental degradation. Public-private partnerships can make a contribution, including in agricultural research and extension, where a regional approach would also help. And wider access to OECD markets for agricultural products would make a big difference—at some $300 billion, subsidies to OECD agriculture are equal to Africa’s GDP. Since the late 1960s Africa’s loss of world trade has cost it almost $70 billion a year, reflecting a failure to diversify into new, dynamic products as well as a falling market share for traditional goods. Africa’s trade reforms have mostly been negotiated with donors as part of adjustment programs. Reforms still need to be embedded in a development strategy that is export oriented, anchored on competitive and stable real exchange rates, and enables exporters to access imported inputs at world prices. Governments need to increase consultations with business, working to develop world-class service standards. Here again a regional approach is vital, not only to encourage intra-African trade flows but perhaps more important, to provide a wider platform to encourage investment. And African countries need to work together to participate in the global nego- tiations that shape the world trading system. The capacity requirements for this are too great for small, poor countries. 4 SUMMARY Reducing aid dependence and strengthening partnerships will have to be a fourth component of Africa’s development strategy. Africa is the world’s most aid-dependent and indebted region. Concessional assistance is essen- tial if Africa is to grow rapidly while also increasing consumption to reduce poverty. Excluding private inflows, the savings gap for a typical country is about 17 percent of GDP, and other regions show that private flows can- not be sustained at more than 5 percent of GDP without risk of crisis. But Reducing aid dependence aid, particularly when delivered in a weak institutional environment by and strengthening large numbers of donors with fragmented projects and requirements, can partnerships will have to weaken institutional capacity and undermine accountability. be a fourth component of High debt and debt service add to the problem, deterring private Africa’s development investment and absorbing core budget resources, making governments strategy ever more “cash poor” but “project rich,” with a development agenda increasingly perceived as being shaped by donors. Lack of selectivity com- pounds the problem, channeling a lot of aid to countries with poor devel- opment policies. And with few exceptions, aid has largely been confined to national boundaries rather than used to stimulate regional and inter- national public goods. These problems are widely recognized, and a consensus has emerged that the primary goal of aid should be to reduce poverty. But paradoxi- cally, aid transfers are declining just when many of the problems are being addressed. Africa enters the new century in the midst of intense debate on aid, including what could be a watershed change in its relationship with the World Bank and International Monetary Fund, as well as impor- tant changes in development cooperation with the European Union and an enhanced program of debt relief. New aid relationships are being implemented in a number of countries—relationships that emphasize a holistic, country-driven approach supported by donors on the basis of long-term partnerships, and with greater beneficiary participation and empowerment over the use of resources. The change is in the right direction, but there is a long way to go. In a typical poor country aid transfers might equal 10 percent of GDP, yet the poorest fifth of the population disposes of only about 4 percent of GDP. It remains to be seen how well partnerships can resolve the tensions between the objectives of recipients and individual donors, and how far the behavior of donors will change to facilitate African ownership of its development agenda. It also remains to be seen how far partnerships can extend beyond assistance, to include enhanced opening of world markets to African products and services. 5 CHAPTER 1 Can Africa Claim the 21st Century? S UB-SAHARAN AFRICA (AFRICA) ENTERED THE 20TH CENTURY Africa’s diverse a poor, mostly colonialized region. As it enters the 21st, a lot economies reveal has changed. Education has spread, and life expectancy has opportunities—and increased. Many countries have seen gains in civil liberties and challenges political participation. Since the mid-1990s there have been signs that better economic management has started to pay off in many countries, with rising incomes and exports and, in some cases, decreases in severe poverty. Even as part of the region is making headlines with crises and conflicts, other countries are making headway with steady growth, rising investment, increasing exports, and growing private activity. Africa’s countries are diverse in many ways, including history and culture, incomes, natural endowments, and human resources. And in considering Africa’s potential, it is worth remembering that the region contains Botswana, one of the world’s fastest-growing economies in recent decades. The Challenge of African Development S TILL, AFRICA FACES ENORMOUS DEVELOPMENT CHALLENGES. EX- cluding South Africa, the region’s average income per capita averaged just $315 in 1997 when converted at market exchange rates (table 1.1). When expressed in terms of purchasing power parity (PPP)—which takes into account the higher costs and prices in Africa—real income aver- aged one-third less than in South Asia, making Africa the poorest region in the world. The region’s total income is not much more than Belgium’s, and is divided among 48 countries with median GDP of just over $2 billion— about the output of a town of 60,000 in a rich country. 7 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Unlike other developing regions, Africa’s average output per capita in constant prices was lower at the end of the 1990s than 30 years before— and in some countries had fallen by more than 50 percent (figure 1.1). In real terms fiscal resources per capita were smaller for many countries than in the late 1960s. Africa’s share of world trade has plummeted since the 1960s: it now accounts for less than 2 percent of world trade. Three Africa’s share of world decades ago, African countries were specialized in primary products and trade has plummeted highly trade dependent. But Africa missed out on industrial expansion and since the 1960s now risks being excluded from the global information revolution. In con- trast to other regions that have diversified, most countries in Africa are still Table 1.1 Population, Income, and Economic Indicators by Region Africa excluding South East Latin Indicator South Africa Africa Asia Asia America Population Population (millions), 1997 575 612 1,281 1,751 494 Population growth (percent), 1997 2.9 2.9 1.8 1.2 1.6 Dependency ratio (workers age 15–64 per dependent) 1.1 1.1 1.4 2.0 1.7 Urban population share (percent), 1997 31.1 31.7 26.6 32.2 73.7 Urban population growth (percent), 1997 5.2 4.9 3.3 3.7 2.2 Income GNP per capita (dollars, at market exchange rates), 1997 315 510 380 970 3,940 PPP GNP per capita, 1997 1,045 1,460 1,590 3,170 6,730 Gini index, latest year available 45.9 46.5 31.2 40.6 51.0 Economy GDP per capita, 1970a 525 546 239 157 1,216 GDP per capita, 1997a 336 525 449 715 1,890 Investment per capita, 1970a 80 130 48 37 367 Investment per capita, 1997a 73 92 105 252 504 Exports per capita, 1970a 105 175 14 23 209 Exports per capita, 1997a 105 163 51 199 601 Savings/GDP (percent), 1970 18.1 20.7 17.2 22.3 27.1 Savings/GDP (percent), 1997 16.3 16.6 20.0 37.5 24.0 Exports/GDP (percent), 1970 36.4 32.1 5.9 14.6 17.2 Exports/GDP (percent), 1997 33.0 31.0 11.4 27.8 31.8 Genuine domestic savings/GDP (percent), 1997 2.8 3.4 7.1 29.7 12.1 Incremental output-capital ratio (percent), 1970–97 12 10 23 23 14 Note: PPP stands for purchasing power parity. a. 1987 dollars. Source: World Bank data. 8 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 1.1 Change in GDP Per Capita, 1970–97 Botswana East Asia Mauritius Lesotho South Asia Swaziland Latin America Congo, Rep. Kenya A few countries have Gabon Burkina Faso gained, but many have Sudan Malawi lost Cameroon Zimbabwe Gambia, The Benin Mali Nigeria Africa South Africa Senegal Burundi Togo Côte d'Ivoire Rwanda Ghana Chad Mauritania Central African Republic Zambia Madagascar Sierra Leone Niger Congo, Dem. Rep. –100 0 100 200 300 400 500 Percent Note: Measured in constant local currency. Regional estimates are weighted by population. Source: World Bank data. largely primary exporters. They are also aid dependent and deeply indebted. Net transfers from foreign assistance average 9 percent of GDP for a typical poor country—equivalent to almost half of public spending and far higher than for typical countries in other regions. By the end of 1997 foreign debt represented a burden of more than 80 percent of GDP in net present value terms. Africa is the only major region to see investment and savings per capita decline after 1970. Averaging about 13 percent of GDP in the 1990s, the savings rate of the typical African country has been the lowest in the world. Rapid population growth and environmental degradation com- pound the low savings. Estimates of genuine domestic savings (Hamilton and Clemens 1999), which capture the effects of resource depletion, are just 3 percent for Africa (see table 1.1). This is far below the genuine sav- ings rates for other regions, though they too suffer from severe environ- 9 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? mental degradation and resource overuse. And it is far below what is needed to sustain a major long-term boost in economic performance. Africa’s development challenges go deeper than low income, falling trade shares, low savings, and slow growth. They also include high inequality, uneven access to resources, social exclusion, and insecurity. Income inequality is as high as in Latin America, making Africa’s poor Because of high income the poorest of the poor. More than 40 percent of its 600 million people inequality, Africa’s poor live below the internationally recognized poverty line of $1 a day, with are the poorest of the incomes averaging just $0.65 a day in purchasing power parity terms. world’s poor The number of poor people has grown relentlessly, causing Africa’s share of the world’s absolute poor to increase from 25 to 30 percent in the 1990s. Many people lack the capabilities—including health status, education, and access to basic infrastructure—needed to benefit from and contribute to economic growth. Health and life expectancy indicators are adverse, even taking into account low incomes: in many countries 200 of every 1,000 children die before the age of 5. Large parts of the population are locked in a dynastic form of poverty, progressively less able to escape because children lack the basic capabilities to participate in a productive economy—and so to contribute to growth. Despite recent gains, more than 250 million of Africa’s people lack access to safe water. More than 200 million have no access to health services. In the only region where nutrition has not been improving, more than 2 million children a year die before their first birth- day. More than 140 million youth are illiterate, and less than one-quarter of poor, rural females attend primary school. Disparities in social spending between poor African countries and rich industrial countries are massive. Education spending in poor African countries averages less than $50 a year—compared with more than $11,000 in France and the United States. Many Africans are excluded from basic services—and from the power to influence the allocation of resources. Malaria typifies the tendency of many formerly global problems of basic development to have become mainly African. At the turn of the 20th century, Africa saw 223 deaths a year from malaria per 100,000 people, only slightly more than other developing regions. By 1970 the rate had fallen to 107 in Africa, compared with only 7 in other regions. But while the decline has continued elsewhere, the death rate has soared again in Africa to 165 per 100,000. Social upheaval and civil wars, a breakdown of health services in many countries, and growing resistance to anti- malarial drugs are to blame (The Washington Post, 20 October 1999). 10 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Then there is the HIV/AIDS pandemic. With 70 percent of the world’s cases in Africa, AIDS has already had an enormous impact on life expectancy in the countries most affected. It is projected to reduce life expectancy by up to 20 years from today’s modest levels—more than eras- ing the gains since the 1950s. AIDS orphans already make up 11 percent of the population in the most afflicted countries. This could rise to more than 16 percent in the next 25 years, with disastrous implications for tra- Without action, Africa’s ditional social structures. The ultimate economic impact of AIDS, not problems will only worsen yet fully known, promises to be devastating. Unless action is taken, the scale of these problems will only increase. Population growth continues to be faster than in other regions, so pri- mary school cohorts will continue to grow rather than shrink as in most parts of the world. For every potential worker between 15 and 64, Africa now has almost one dependent, almost all of them young (see table 1.1). Even with a progressive demographic transition, Africa’s dependency rates will fall only gradually through the next century. These aren’t the only hurdles. The spread of conflict threatens economic and social progress. At least one African in five lives in a country severely dis- rupted by an ongoing war. Governance issues loom large in explaining the eco- nomic record of African countries. If present trends continue, few countries are likely to achieve the International Development Goals for 2015 endorsed by the international development community—goals covering poverty reduc- tion, health, education, gender equality, and environmental preservation (OECD 1996). Indeed, economic performance will have to improve just to keep the number of absolute poor from increasing. Africa Can Claim the Century—with Determined Leadership In view of all this, what does “claiming the century” actually mean? Is it a credible objective for Africans—and for their children? Economists (and social scientists more broadly) are not known for their ability to pre- dict short-term developments, let alone provide a vision of societies one hundred years into the future. A more modest approach would be to ask how, over the next few decades, Africa can reverse years of social and eco- nomic marginalization in an increasingly dynamic and competitive world, and so be well placed, after the early decades of the century, to take advantage of the rest. As described below, simply preventing an increase in the number of absolute poor over the next 15 years will require annual growth rates in 11 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? excess of 5 percent, almost twice those of the dismal decades after 1973. And reaching the International Development Goal of halving the inci- dence of severe poverty by 2015 will require annual growth of 7 percent or more—and a better distribution of income. If Africa’s terms of trade continue to deteriorate as they have for many countries since the late 1960s, the growth requirement for reducing poverty will be even higher. Africa has enormous Is the goal of reducing poverty impossible? Not at all. Africa is not unexploited potential and doomed by its poverty or its poor development record. In the 1960s and hidden growth reserves early 1970s many prominent economists considered Asian countries, with their vast, poverty-stricken populations and limited resources, to be caught in a low-level development trap. It was inconceivable in the early 1960s that the Republic of Korea would emerge as an industrial power. The passing of time has shown how wrong such views were. The perfor- mance of other regions, the findings of cross-country studies, and the achievements of a number of African countries suggest that reversing the increase in poverty is possible. Trends in Africa will need to change radically for a catchup process to materialize. This will require determined leadership within Africa. It will require better governance—developing stable and representative consti- tutional arrangements, implementing the rule of law, managing resources transparently, and delivering services effectively to communities and firms. It will require greater investment in Africa’s people, as well as mea- sures that encourage private investment in infrastructure and production. It will not happen without an increase in investment and efficiency. And it will require better support—and perhaps more support—from the international development community. In facing these challenges, Africa has enormous unexploited poten- tial—in resource-based sectors and in processing and manufacturing. It also has hidden growth reserves in its people—including the potential of its women, who now provide more than half of the region’s labor but lack equal access to education and factors of production. African economies can perform far better. The region has great scope for more effective use of its resources—public and private, financial and human— and much scope for improving the delivery of the essential services needed to upgrade the capabilities and health of its people and increase their opportunities. Even with better prioritization, the range of urgent challenges will strain Africa’s limited capacity to make and implement policies and to nurture strong institutions. But the sheer number of challenges is not insurmount- 12 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? able. Development processes are cumulative, with success in one area open- ing up opportunities in others. Like other developing regions, Africa can benefit from “virtuous circles” involving different aspects of development. It will not be easy. Required is a major effort by Africans and their development partners to reverse the economic marginalization and exclusion of recent decades. That will take more than changing the allo- cation of resources. It will require greater economic empowerment and Reform will need to build greater responsibility—a shift in the power of decisionmaking on allo- on the democratization cating and managing resources so that excluded groups can take more that has marked the responsibility and be held accountable for their use. Moreover, this region since the early deeper reform agenda will need to build on the democratization that has 1990s marked the region since the early 1990s—in a way that strengthens the formation of effective and representative states. Economic empower- ment is critical for four groups: s Civil society. For economic empowerment to keep pace with increased political participation, governments need to include civil society in ways that surmount the problems associated with Africa’s highly multiethnic states. Instruments of accountability need to be institutionalized. This process—an essential part of the formation of states able to provide for sustainable development—is gathering momentum in some of the region’s more advanced reformers. s The poor and the excluded. Deep deprivation and systemic exclusion, including gender discrimination, require strategic and proactive reme- dies, often at the community level. If pervasive inequalities are not addressed—in incomes and in access to human development services and essential infrastructure—growth will not be sustainable and will not reduce poverty. s Producers. Many African governments still have an uneasy relationship with business, which suffers under poor services and regulations that raise costs, contribute to perceptions of high risk, and discourage investment. An essential part of empowering civil society must be to involve producers—in agriculture and other sectors—to foster higher productivity and more effective competition in global markets. Without strong producers, it will be impossible to reverse past trends and shift from aid dependence to trade dependence. s Governments. Building on the movement toward participatory gov- ernment in the 1990s, African states need to be strengthened and given the power and accountability for development outcomes. This will 13 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? require a fundamental change from Africa’s donors because Africa’s governments are one of the excluded groups: with high aid depen- dence, in many countries development policy is seen as being the pre- rogative of donors rather than governments. Africa’s interests also need to be articulated more effectively in global forums, especially those dealing with trade and investment. The many positive examples of African Within Africa there has been increasing research, analysis, and rethink- development show how ing on these issues. Consensus has emerged on the failures of past poli- some countries are cies, though there is still debate on how best to move forward and a sense approaching common that the region still needs to find its place in the world economy. Africa issues has been experiencing its own Renaissance, in the true sense of a rebirth of thought on governance and development policies, particularly in the context of an increasingly globalized and competitive world. This is not surprising: some 70 percent of today’s Africans were born after the end of colonialism, and that proportion is rising rapidly. Donors have also been reevaluating their role, especially since the end of the Cold War reduced the imperative to fund loyal allies rather than support effective development states. Donors have entered the new cen- tury in the midst of a feverish debate on how to make aid more effective, including a watershed change in the Bretton Woods institutions—the World Bank and the International Monetary Fund, widely seen as the main external architects of Africa’s economic policies. This report selects a number of areas that seem important in answer- ing the question of whether Africa can claim the 21st century. It brings together the implications of this recent body of work—particularly that emanating from Africa. It does not claim to be exhaustive. Nor does it attempt to lay out a blueprint for individual countries. But it draws on the many positive examples of African development to show how some countries are approaching common issues. African economies and sub- regions are diverse, and each will have to find its way to address the chal- lenges of the 21st century. How Fast Must Africa Grow to Reduce Poverty? The International Development Goals for the 21st century—adopted by the global development community and endorsed by many develop- ing country governments—set targets for poverty reduction, education, health, gender equality, and environmental sustainability for 2015 14 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? (OECD 1996). Here we concentrate on one goal: halving the incidence of absolute poverty, defined by the international poverty line of $1 a per- son per day, from current levels. Growth is not sufficient for poverty reduction, but it is essential—no country has achieved a sustained improvement in the economic fortunes of its citizens without substantial, as well as broadly based, increases in income. Indeed, where growth has been sustained and has increased con- Growth is not sufficient sumption, poverty in African countries has been reduced (chapter 3). for poverty reduction, but How growth affects poverty also depends on how it is distributed. it is essential Especially with Africa’s high income inequality, it is essential that growth be broadly based rather than narrow. But while cross-country evidence shows a wide range of variation between changes in income levels and distribution, it finds a neutral overall relationship between growth rates and inequality. So, income distribution is assumed here to be constant. The performance needed to halve the incidence of absolute poverty depends on the period in which it is to be achieved. Demery and Walton (1998) consider a period of 25 years, corresponding to the interval between the latest data available (for 1990) when the goals were formulated and 2015. This also produces a useful minimal criterion for Africa. The region’s pop- ulation is doubling every 25 years at current growth rates, so achieving this target would mean that the absolute number of absolute poor is neither increasing nor falling. To achieve this minimum goal, consumption per capita would need to rise by almost 2 percent a year. With a constant sav- ings rate, GDP would need to grow by 4.7 percent a year. But savings rates are too low to sustain the investment needed for rapid growth. Adding in an increase in the savings rate of 10 percentage points spread over 25 years sug- gests a target GDP growth rate of 5 percent a year just to prevent an increase in the number of the poor. Only a few African countries, including Botswana, Mauritius, and Uganda, sustained such growth rates in the 1990s—and a recent evaluation suggests that few countries have the condi- tions and resources to sustain such growth in the long run (UNECA 1999). But the growth hurdle to halving poverty by 2015 is now far higher because, on average, income and consumption levels did not rise in the 1990s. Including the projected increase in savings, the average GDP growth needed would be more than 7 percent a year. And if Africa’s terms of trade continue to deteriorate, or if the savings provided by foreign assis- tance continue to fall, the growth requirement will be even greater. Africa’s growth goal is higher than those for other regions for several reasons. First, consumption per capita needs to rise rapidly because of low 15 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? incomes, large numbers of poor people, and a very high poverty gap. Second, Africa’s population growth rate is the highest in the world. Unlike other regions—particularly East Asia, where the ratio of working-age population to dependents has risen sharply to around two to one— Africa’s dependency ratio has remained close to one (see table 1.1). There are signs that Africa is embarking on a demographic transition, and some Savings must increase projections foresee a considerable decline in the dependency ratio in the while also allowing middle of the 21st century. But today sharply lower fertility rates are lim- consumption to rise fast ited to a small group of middle-income countries with far better repro- enough to reduce poverty ductive health care, far higher contraceptive prevalence, and far higher health spending than the rest of the region (table 1.2). A third factor raising the growth hurdle for Africa is the need to increase savings while also allowing consumption to rise fast enough to reduce poverty. Higher savings and investment are not sufficient for growth—the productivity of investment, as captured by the long-run incremental output-capital ratio, needs to double to place Africa on the same trajectory as fast-growing regions (see table 1.1). Africa can call on some hidden reserves. Countries can grow for a period with moderate investment rates when recovering from extremely depressed conditions, such as those caused by extended conflict. And reversing Africa’s massive capital flight—estimated at almost 40 percent of private savings in the early 1990s (table 1.3)—could boost domestic savings. Even so, in the long run investment rates would need to be sustained at around 30 percent for an extended period if growth is to make a major dent in poverty. Both agriculture and industry are severely decap- Table 1.2 Indicators of a Demographic Transition in Africa by Income Group Indicator Lowest Low Middle All Fertility (percent), 1990 6.5 6.1 4.4 6.1 Fertility (percent), 1995 6.2 5.3 3.3 5.7 Infant mortality (per 1,000 live births), 1990 108 87 59 97 Infant mortality (per 1,000 live births), 1995 101 80 55 90 Maternal mortality (per 100,000) 1,015 606 277 822 Contraceptive prevalence (percent) 8 20 62 17 Health spending per capita (dollars), 1990–96 7.25 22.73 162.59 30.80 Public 3.19 9.58 71.99 11.22 Private 4.06 13.15 90.60 19.58 Note: Lowest-income countries are less than $300 per capita. Low-income countries are $300–765 per capita. Middle-income countries are more than $765 per capita. Source: World Bank data. 16 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? italized. Estimates place levels of capital per worker at half those in South Asia (see table 1.3). Degraded infrastructure has emerged as a critical barrier to growth as other impediments have been relaxed by reforms (chapter 5). With costs up to three times world levels, trans- port now poses a potent obstacle to internal and external economic inte- gration. Africa’s economy is unusually sparse, with GDP per hectare one-sixth or less its value in other regions, so high transport costs are Degraded infrastructure partly the result of geography. But in contrast to global transport costs, has emerged as a critical which have fallen continuously with deregulation and new technology, barrier to growth costs in Africa have risen because of poor road maintenance, regulatory barriers to competition, and, in some cases, long delays, heavy transit dues, and high taxes on vehicles and fuels. Power is another infrastruc- ture barrier in countries that sustain growth, such as Uganda. Firms’ investments in generators can consume more than one-third of their capital formation (Reinikka and Svensson 1998). Inadequate yet costly Table 1.3 Human, Natural, and Physical Capital Indicators by Region Africa excluding South East Latin Indicator South Africa Africa Asia Asia America Human capital Human development index, 1995 39.8 40.5 48.2 63.9 76.8 Life expectancy at birth (years), 1980 47.0 47.6 53.8 64.5 64.8 Life expectancy at birth (years), 1997 51.3 52.4 62.5 68.4 69.7 Infant mortality (per 1,000 live births), 1980 119.0 115.3 119.8 56.0 59.5 Infant mortality (per 1,000 live births), 1997 92.9 89.9 70.5 37.8 31.8 Under-5 mortality (per 1,000), 1995 — 157 116 53 47 Adult illiteracy (percent), 1980 57 57 58 30 18 Adult illiteracy (percent), 1997 46 43 51 17 13 Mean years of schooling , 1960 1.5 1.5 1.5 3.4 3.4 Mean years of schooling, 1990 2.4 2.4 3.4 6.2 5.2 Access to safe water (percent), 1996 45 47 81 77 75 Natural capital Land area per capita (hectares), 1970 8.03 7.85 0.67 1.42 7.09 Land area per capita (hectares), 1997 3.89 3.85 0.37 0.91 4.06 GDP per hectare (1987 dollars), 1970 65 70 357 111 172 GDP per hectare (1987 dollars), 1997 86 136 1,214 786 466 Average annual deforestation (percent), 1990–95 0.7 0.7 0.2 0.8 0.6 Physical capital Private capital stock per worker (dollars), 1990 1,069 — 2,425 9,711 17,424 Capital flight/private wealth (percent), 1990 39 –– 3 6 10 Source: World Bank data; UNDP 1998; Wood and Mayer 1998; Collier and Gunning 1999. 17 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? telecommunications impede participation in the burgeoning informa- tion economy. The additional infrastructure investments needed to sus- tain rapid GDP growth have been estimated at about 5 percent of GDP over 10 years. The growth target differs for countries depending on their initial condi- tions. For the poorest African countries, consumption per capita will need Especially for the poorest to rise faster to halve the incidence of poverty. These countries also have faster countries, there needs to population growth and lower savings. With 60–80 percent of their people be an emphasis on below the $1 a day mark, there is also less direct mileage from redistributive removing regulatory and policies. Especially for the poorest countries, there needs to be an emphasis other barriers to on removing regulatory and other barriers (including gender-based barriers) productive activity to productive activity (World Bank 1998c; Blackden and Bhanu 1999). Richer countries have more scope for addressing poverty with redistributive policies, including trade and fiscal reforms. Africa’s Growth Crisis: A Retrospective A T THE START OF THE 19 CENTURY, AFRICA’S INCOME LEVEL TH stood at roughly one-third of Europe’s. There then followed a long period of falling behind as industrialization, technology, and trade accelerated in the world’s major centers (Maddison, cited in Bloom and Sachs 1998). African growth may have approximated that in Europe in the first half of the 20th century, and many countries performed well until the oil shock in 1973. But thereafter, Africa again fell behind, with most countries experiencing a steep economic decline that ended only with the recovery of the late 1990s. Expectations and Outcomes Africa’s decline was not expected. During the decade that followed the independence of most African countries, Gunnar Myrdal wrote the three celebrated volumes of Asian Drama. This major work saw Asia, with its vast population and limited land resources, as doomed to stagnation. Meanwhile, Africa was poised to grow steadily along a path of relative prosperity. Indeed, in the 1960s many African countries were richer than their Asian counterparts, and their strong natural resource bases augured well for future trade, growth, and development. 18 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? In 1965, for example, incomes and exports per capita were higher in Ghana than in Korea. But projections proved to be far off the mark. Korea’s exports per capita overtook Ghana’s in 1972, and its income level surpassed Ghana’s four years later. Between 1965 and 1995 Korea’s exports increased by 400 times in current dollars. Meanwhile, Ghana’s increased only by 4 times, and real earnings per capita fell to a fraction of their earlier value. The parallels are considerable between Africa today Asia’s experience shows and Asia in the 1960s. Africa’s economic and social indicators in 1995 that Africa’s challenges were not much different from those of Korea in 1960 or Indonesia, in accelerating Malaysia, and Thailand in 1975—although savings and school enrol- development can be ment rates were somewhat lower (UNCTAD 1998). Many see Africa overcome today as caught in a low-equilibrium development trap, just as Asia was viewed in the 1960s. Asia’s experience shows that Africa’s problems in accelerating development can be overcome. But why have African growth and development been so slow? From Trade Dependence to Aid Dependence Has Africa’s low growth been due to a shortage of resources or to their ineffective use? Both. African investment rates, at about 18 percent of GDP, have been only slightly lower than those in East Asia and Latin America (22 percent). But when investment is measured in international prices that allow for Africa’s higher costs, investment rates are a third lower in Africa than in other regions (Hoeffler 1999). Part of the reason for slow growth, then, is the fact that investment tends to be more costly in Africa than in other regions. For example, trucks in Southern and East Africa cost about twice as much as in Asia. These higher costs reflect outside fac- tors as well as taxes and other policies. But productivity differences also loom large in accounting for Africa’s slow growth. Africa’s investment productivity, as measured by the incre- mental output-capital ratio, was only half that in Asia in 1970–97 (see table 1.1). The deceleration of growth after 1973 from about 5 percent to barely 1 percent parallels the decline in investment productivity from 25 percent to 5 percent, even while investment levels in the earlier part of this period were at their highest (figure 1.2). As the return to borrowed funds fell short of the cost of borrowing, this phase saw a major increase in development assistance and a rise in external indebtedness. The growth recovery since 1994 has relied on productivity gains rather than an increase in investment. 19 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 1.2 Growth, Exports, Investment, and Investment Productivity in Africa, 1964–97 Five-year moving average (percent) 60 GDP growth (x 10) 50 The erosion of Africa’s world trade share between 1970 and 1993 40 represents a staggering annual income loss of 30 $68 billion Exports/GDP 20 Investment/GDP 10 Incremental output-capital ratio 0 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 Source: World Bank data. What role did trade play in this story? Strongly trade oriented in the 1960s, Africa was the only region to then experience a decline in real dol- lar exports per capita (see table 1.1). Paralleling its slow income growth, Africa’s share of world trade fell from more than 3 percent in the 1950s to less than 2 percent in the mid-1990s (and to only 1.2 percent, exclud- ing South Africa). The erosion of Africa’s world trade share in current prices between 1970 and 1993 represents a staggering annual income loss of $68 billion—or 21 percent of regional GDP. Part of this loss reflected the erosion of the trade share for traditional products, as well as policies that discouraged private investment and diversification into products for which world demand was growing more rapidly (figure 1.3). Only in fuels did Africa emerge as a substantial new presence in world markets. Relative to GDP, exports changed only modestly (in current prices), benefiting from hikes in world oil prices. The more recent recovery stems from pol- icy reforms, including exchange rate liberalization and realignment to reduce overvaluation (which cut GDP in dollar terms) and reductions in other disincentives to exporting. 20 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 1.3 Africa’s Share in World Exports by Product, 1970–93 Percent 10 1970 9 8 1975 7 For many countries, aid 6 transfers have been 5 1985 offset by terms of trade 1990 losses 4 1993 3 2 1 0 All merchandise Primary Fuels Nonfuel primary Nonprimary exports commodities commodities commodities Source: United Nations, Handbook of International Trade and Development Statistics, various years. Worsening terms of trade were another source of loss for many African countries (figure 1.4). For African countries that are not oil exporters, and excluding South Africa, cumulative terms of trade losses in 1970–97 rep- resented almost 120 percent of GDP, a massive and persistent drain of pur- chasing power. In addition to the depressing effect on income and growth, external factors, coupled with a failure to diversify exports and attract pri- vate capital in previous decades, lie behind the aid dependence of the 1990s. From modest levels before the oil shock, aid increased sharply to meet the crisis, so that the nonoil-exporting countries (excluding South Africa) received large transfers from grants and concessional loans. Cumulatively, these transfers amounted to 178 percent of GDP (table 1.4). But the increase after 1970–73 (125 percent of GDP) was little more than the terms of trade losses. In addition, by 1997 this group of countries had accumu- lated external debt equal to their GDP, raising their debt service obligations. Terms of trade losses are not the whole picture, however. Africa’s oil exporters have benefited from massive terms of trade gains (see table 1.4). But as with most oil exporters in other regions, the gains have not been used to place countries on a path of sustainable growth. Excessively positive shocks, as shown by a number of studies, can destabilize devel- opment as much as negative ones (Gelb 1988; Auty 1998). 21 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 1.4 Africa’s Terms of Trade by Country Group, 1965–97 Index: 1965 = 100 400 350 Oil-exporting countries 300 Excessively positive shocks can destabilize 250 development as much as negative ones 200 South Africa 150 100 All other countries 50 1965 1969 1973 1977 1981 1985 1989 1993 1997 Source: World Bank data. Table 1.4 Cumulative Terms of Trade Effects and Financing Flows in Africa, 1970–97 (percentage of GDP) Oil-exporting South All other Indicator countries Africa countries Terms of trade effect a 483 189 –119 Gross resource flowsb 196 — 288 Net resource flowsc 124 — 234 Net resource transfersd 5 — 176 Grants and concessional flows 27 — 178 Foreign direct investment –5 — –10 Nonconcessional and portfolio flows –18 — 7 Change in net resource transfers from 1970–73 level 27 — 125 External debt, 1997 94 20 106 Present value of external debt, 1997e 91 19 83 — Not available. a. Capacity to import less exports of goods and services, in 1965 constant local currency prices. b. Long-term debt (excluding IMF), foreign direct investment (net), portfolio equity flows, and official grants (excluding technical cooperation). c. Gross resource flows less principal repayments on long-term debt. d. Net resource flows less interest payments on long-term debt and profit remittances on foreign direct investment. e. Sum of short-term external debt and the discounted sum of debt service payments due on public, publicly guaranteed, and private nonguar- anteed long-term external debt over the life of existing loans. Source: World Bank data. 22 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Explanations for Africa’s Slow Growth Africa’s aid dependence entering the 21st century thus mirrors its lock- in to primary export dependence, its weakness in attracting private finance and reversing capital flight, and its failure to diversify. But there is more to the story. Many other countries, including those in East and South Asia, have experienced declining terms of trade but have been able to adjust to Explaining Africa’s slow the losses, attract investment to new industries, upgrade skills, and diver- growth remains a major sify into more dynamic industrial and service product lines. Why did this challenge not happen in Africa? Explaining Africa’s slow growth in the second half of the 20th century remains a major challenge to economists and other analysts. But even though the large and growing growth literature both inside and outside Africa does not provide a simple answer on how to accelerate develop- ment, it does suggest important lessons for the future (see Collier and Gunning 1998 and Azam, Fosu, and Ndung’u 1999). The debate on Africa’s slow growth has offered many explanations. Some factors—such as geography (tropical location, a low ratio of coastline to interior and the resulting high transport costs), small states, high ethnic diversity, unpredictable rainfall, and terms of trade shocks—are taken to represent “destiny,” or exogenous factors beyond the control of African pol- icymakers. Others, such as poor policies (including trade and exchange rate policies, nationalization, and other restraints on economic activity) can, in principle, be changed. A second dimension distinguishes such factors depending on whether they are primarily domestic or external. These distinctions are only somewhat helpful, because over the long run it becomes hard to assess what is exogenous and what is endogenous. Policies respond to social, demographic, political, and structural factors, many of which also reflect the influence of income levels and trends over long periods. Policies and capacity can also moderate the effect of geog- raphy: the effect of being in a landlocked or tropical location depends partly on the efficiency of the transport sector and the health sector. Some factors that depress Africa’s growth—such as widespread and persistent gender inequality in access to productive resources—reflect both current policies and longstanding traditional and social practices (box 1.1). Geography, health, and demography. Bloom and Sachs (1998) offer esti- mates of the impact of various factors on Africa’s growth. Geographic fac- tors and the spatial distribution of its population lower Africa’s potential growth by almost 1 percentage point relative to other regions. Africa’s 23 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? high dependency ratio lowers growth by another 0.6 percentage point. Low life expectancy (a proxy for a variety of health-related problems, including malaria) reduces growth by a massive 1.3 percentage points. A “catchup effect” due to Africa’s low incomes partly compensates for these negative factors, adding almost 2 percentage points to Africa’s growth potential. The remaining difference in Africa’s growth rate, almost 1 per- African women work far centage point, is explained by policies—a lack of openness to trade and longer hours than African weak government institutions and fiscal policies. men One interpretation of these results is that the potential advantages of Africa’s low incomes for growth are more than offset by its unfriendly geography, its adverse public health, and its high dependency ratio. But poor health and high dependency are themselves influenced by income levels and public policies, as well as by the effectiveness of public service delivery, and so are not really exogenous. Even so, these findings are sig- nificant, especially for public policy. Sparseness, ethnic diversity, and democracy. Low population density raises the costs of providing infrastructure services, disseminating information, and integrating production and markets. Low density is also associated Box 1.1 Gender and Growth: Africa’s Missed Potential AFRICAN WOMEN WORK FAR LONGER HOURS THAN gain of any region. Some cross-country studies suggest African men. On average, their workdays may be 50 per- that if African women were given equal access to edu- cent longer, and their work is closely integrated with cation and productive factors, growth rates could be as household production systems. Women are especially much as 0.8 percentage points higher. In addition, pat- prominent in agriculture, particularly in processing food terns of capital formation tend to be biased against crops, and in providing water and firewood, although investments, such as wells and fuel-efficient stoves, men predominate in agriculture in much of the Sahel. with the potential to unlock more female time for Income earned by women is more likely to be used pro- high-productivity activities and education. ductively—for children’s food, clothing, and education. Thus Africa is losing out on the productive poten- But due to customary and legal restrictions, women tial of more than half its effective workforce. So, mea- in Africa have less access to productive assets, includ- sures to increase gender equality in Africa, in addition ing land, and to such complementary factors of pro- to their social and distributional implications, have duction as credit, fertilizer, and education. Women considerable potential to accelerate growth. What is farmers receive only 1 percent of total credit to agri- standing in the way? Longstanding traditions and culture. Women are less likely to control the product power. Women’s political participation is still low— of their labor than men, reducing their incentives to only 6 percent in national legislatures and 2 percent in pursue productive, income-earning opportunities. cabinets. Half the national cabinets have no women. And between 1960 and 1990 average schooling for African women increased by only 1.2 years, the lowest Source: Blackden and Bhanu 1999. 24 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? with higher ethnic diversity, which several studies find associated with lower growth. A common perception is that higher ethnic diversity reduces growth by raising the risk of conflict. But new research suggests that Africa’s extensive ethnic conflict is explained by its poverty rather than by its diversity (chapter 2). An alternative explanation is that diver- sity increases the difficulties of cooperation, both in commerce and in policy formulation. Collier (1999), however, finds that diversity reduces Efforts to nurture durable growth by 3 percentage points in undemocratic countries but has no democratic systems will effect in democracies. One implication for Africa is that efforts to nur- pay off in better ture durable democratic systems will pay off in better economic economic management management. External shocks and social conflict. The small size of Africa’s nations and their high export concentration in a limited range of primary commodi- ties leave them exposed to terms of trade shocks that have often had an adverse effect on economic management and outcomes. But countries have responded differently to external shocks. Some have adjusted sharply and resumed growth, while others have launched into a long downward spiral of declining incomes and policy disarray. What made the differ- ence? Indicators of social tensions—such as income inequality and weaker and less democratic institutions—are associated with deteriorat- ing policies and lower economic resilience in the face of a volatile exter- nal environment (Rodrik 1998b). Domestic factors may therefore be more important than external destiny. Aid dependence. There has been a long debate on whether aid has been beneficial or detrimental to growth and development—and on how much its effects come by causing changes in policies or through other channels such as appreciating exchange rates, discouraging the develop- ment of exports, and sustaining inefficient patterns of investment, as in Tanzanian manufacturing (box 1.2). Recent research suggests that, his- torically, there appears to have been no significant net effect of aid flows on policies and that aid has fostered growth—but only in good policy environments (Dollar and Burnside 1997). Economic management. Postcolonial African governments developed economic controls—comprehensive in only a few cases but invariably involving extensive and arbitrary regulation and frequently the prohibi- tion of trade (Collier and Gunning 1999; see also World Bank 1989, 1994). Interventions were domestically as well as externally focused; some countries even banned interdistrict trade in food. Since the polit- ical base of governments was urban, agriculture was heavily taxed, and 25 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 1.2 Industrial Productivity in Tanzania AT INDEPENDENCE, MORE THAN 80 PERCENT OF THE What constrained capacity use? By far the most manufactured goods consumed in Tanzania were important factor seems to have been a critical shortage imported, and manufacturing accounted for only 4 of imported inputs and spare parts following the bal- percent of GDP. A succession of government plans ance of payments crises after 1974. What sustained placed heavy emphasis on import-substituting heavy capital investments and capital goods imports in industrial investments for basic consumer goods, the face of severe capacity underuse? One important construction, and related capital goods. Between factor was a substantial inflow of foreign assistance tied 1965 and 1980 real investment in manufacturing to the capital content of projects. Tanzania’s industrial grew by more than 21 percent a year, and in drive failed because investments could not generate 1986–90 investment rose to the remarkable level of enough manufactured exports to fund continuing more than 100 percent of manufacturing value imports of the materials needed to sustain production. added. Despite this massive expansion, output per Foreign aid sustained this neglect of export emphasis. worker fell as production rose slowly and capacity use collapsed. Source: Ndulu 1986; Devarajan, Easterly, and Pack 1999. highly centralized public administrations paid little attention to rural services. At the same time, trade and exchange rate policies encouraged firms to produce under noncompetitive conditions for small, captured, domestic markets, undermining the basis for industrial growth. Unstable, capital-hostile environments contributed to massive capital flight (see table 1.3). Public employment was emphasized over service delivery. The eco- nomic decline after 1973 may have increased pressure to expand employ- ment, which was reconciled with limited revenues by lowering wages, compressing pay at upper levels, and leaving little space for operations, maintenance, and nonwage spending. Civil service became the arena for ethnic groups to contest for resources, often with the costs of poor ser- vice and endemic corruption. Poor service raised costs to firms—weak telecommunications, for example, was estimated to lower African growth by up to 1 percentage point (Easterly and Levine 1997). Poor service also handicapped households through inefficient spending on education, health, and infrastructure. Simple quantitative data cannot easily capture many of these and other domestic policies. But growth studies and case studies show that they hurt Africa’s economic performance in the second half of the 20th century. How important were trade policies? On a range of indicators, Africa imposed higher trade barriers and sustained more severely overvalued 26 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? exchange rates than did other regions. These policies discouraged exports and may have been more damaging because of the small size of Africa’s economies. But there is some controversy over the specific impact of trade restrictions relative to that of a policy environment that hurts efficiency, productivity, and investment. Supporting this view—that trade restric- tions should be seen as part of a range of broader and more comprehen- sive policies and institutions that affect performance (Rodrik 1999)—is Sound policies and strong the fact that Africa’s exports have changed little relative to GDP (see fig- institutions can moderate ure 1.2). They have moved together, influenced by common external fac- exogenous factors tors and domestic policies. Trade reforms alone will not offer a simple fix, though increasing and diversifying exports will be critical in reversing Africa’s marginalization. The bottom line. Africa’s performance is influenced by its history and its geography. But sound policies and strong institutions can moderate exogenous factors, and Africa’s economies will, like others, respond to better economic policies. Studies suggest some of the focal points for ensuring that Africa embarks on a long-term process of rising incomes and falling poverty. The first area is governance and leadership. Adopting sound, growth- oriented policies on a sustained basis will be all the more essential as fur- ther globalization brings risks of external shocks and instability. Successful countries must approach globalization armed with a “business plan” that includes developing indigenous institutions for mediating con- flict without undermining economic stability and deterring investment and entrepreneurship, as well as improving public regulation and service delivery. Effective policies for Africa must therefore be win-win policies: to both strengthen the economy and to contribute to the formation of effective states (chapter 2). A second important area is investment in people. Some of the most important “exogenous” variables in growth studies, including poor health and adverse demographics, are partly the outcome of ineffective policies and long economic decline. With its population growing rapidly relative to natural resources, Africa must reverse the marginalization of many of its people—notably its women—and strengthen their capabilities and capacity. Africa loses twice as much labor through illness as any other region. This disparity will only increase as HIV/AIDS incapacitates 2–4 percent of the active labor force and depletes skills (chapters 3 and 4). A third area involves the high costs and risks of the business environment, which owe much to government policies since independence. Efficient 27 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? investment in infrastructure—physical, financial, and information—is essential if Africa is to overcome geographic isolation, and this requires the formation of public-private partnerships (chapter 5). Moreover, poli- cies for productive sectors, particularly agriculture and industry, need to encourage investment, employment, and export diversification (chapters 6 and 7). Most African countries Finally, especially given Africa’s high aid dependence and the impor- have embarked on reform tant influence of donors, aid needs to be reassessed to ensure that it con- programs intended to tributes to these objectives (chapter 8). regain macroeconomic balance, improve resource allocation, and Where Is Africa Now? Reforms and Their Legacy restore growth M AFRICAN COUNTRIES HAVE EMBARKED ON REFORM PRO- OST grams intended to regain macroeconomic balance, improve resource allocation, and restore growth. These substantial reforms contributed to the resurgence of growth in the second half of the 1990s. Nevertheless, Africa has emerged from the reforms with a diffi- cult legacy. And at current and projected growth rates of 4–5 percent, the performance of Africa’s poor countries still falls short of the levels needed to reduce poverty and offset decades of stagnation. Progress with Reform Reforms in Africa have been substantial in three important areas: macroeconomic balances, market forces, and private initiative. Macroeconomic balances. Many countries have made major gains in macroeconomic stabilization, particularly since 1994. Consider the 31 poor, aid-dependent countries covered by the Special Program of Assistance for Africa (SPA).1 Their fiscal deficits dropped to 5.3 percent of GDP in 1997–98 and averaged only 2.5 percent of GDP net of grant financing (figure 1.5). And most financed part of this residual deficit through concessional credits, making budgets more sustainable than otherwise. Macroeconomic balances are still fragile, however. Although infla- tion is now less than 10 percent in most African countries, deficit esti- mates do not fully reflect quasi-fiscal losses and contingent liabilities, such as guarantees to state enterprises. Some governments still run sub- 28 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 1.5 Fiscal Deficits in Special Program of Assistance Countries, 1984–98 Percentage of GDP 0 –2 Many countries have –4 moved toward Including grants sustainable –6 macroeconomic balances –8 –10 Excluding grants –12 1984 1986 1988 1990 1992 1994 1996 1998 Source: World Bank data. stantial arrears to suppliers. In addition to large external debt obliga- tions, countries such as Ghana, Kenya, Malawi, Tanzania, and Zim- babwe face high domestic debt burdens, in some cases because domestic financial markets were liberalized before fiscal deficits were brought under control. Nevertheless, many countries have moved toward sus- tainable macroeconomic balances, assuming that concessional financ- ing continues at recent levels. Fiscal improvements have not been stress-free. Public capital spend- ing, heavily supported by donors, has remained roughly constant as a share of GDP. But since 1993 tax revenues have increased relative to GDP while current spending has fallen. Many countries have taken steps to broaden their tax bases, creating autonomous revenue authorities, curb- ing arbitrary exemptions, and implementing value added taxes. But the combination of weak tax administration and rising tax effort on a narrow tax base has sometimes hit business profitability and reinvestment (Reinikka and Svensson 1998). Relative to other regions, statutory tax rates in Africa are quite high (table 1.5), and tax administration is some- times seen as predatory by the small number of formal sector firms that contribute most direct taxes. High statutory taxes encourage informal activity and employment. 29 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Table 1.5 Public Finance, External Support, Economic Management, Political Participation, and Risk Ranking Indicators by Region Africa excluding South East Latin Indicator South Africa Africa Asia Asia America Public finance Government revenue/GDP, 1997 21 25 22 — 26 Government spending/ GDP, 1997 25 30 28 15 31 Highest marginal tax rate, 1998 (median, percent) Individual 35 35 35 37 30 Corporate 35 35 38 30 30 External support Debt stock per capita (dollars), 1997 338 358 120 373 1,426 Foreign direct investment per capita (dollars), 1970 1.49 1.49 0.10 0.24 3.86 Foreign direct investment per capita (dollars), 1997 4.61 7.13 3.40 35.71 120.09 Aid per capita (dollars), 1997 — 26 3 4 13 Economic management and political participation Country Policy and Institutional Assessment (CPIA) rating (scale of 1 to 6), 1998a 3.0 3.0 3.6 3.2 3.7 Top third 3.8 3.8 3.9 3.9 4.3 Middle third 3.2 3.2 3.7 3.1 3.9 Bottom third 2.2 2.2 3.1 2.8 3.1 GNP per capita (dollars, at market exchange rates), 1997 (CPIA countries) 315 511 384 1,244 3,957 Top third 344 866 616 1,324 5,134 Middle third 387 387 377 884 4,024 Bottom third 249 249 435 520 1,976 PPP GNP per capita, 1997 (CPIA countries) 1,045 1,466 1,587 3,507 6,775 Top third 1,081 2,198 3,261 3,650 8,623 Middle third 1,245 1,245 1,611 2,871 6,546 Bottom third 900 900 1,418 1,320 5,103 Political rights and civil liberties (scale of 1 to 7) 1990/91 2.6 2.6 3.2 4.0 6.4 1998/99 3.5 3.6 3.5 4.4 5.4 Corruption perceptions index (scale of 1 to 10) — 3.6 2.8 3.3 3.4 Euromoney risk ranking (average rank among 116 countries) September 1992 70 68 34 35 49 March 1999 83 81 49 40 41 Note: PPP stands for purchasing power parity. a. The top third of countries under CPIA ratings for 1998 were Botswana, Cape Verde, Côte d’Ivoire, Eritrea, Ethiopia, Ghana, Lesotho, Malawi, Mauritania, Mauritius, Namibia, Senegal, South Africa, Tanzania, Uganda, and Zambia. The middle third were Benin, Burkina Faso, Cameroon, Chad, Gabon, The Gambia, Guinea, Guinea-Bissau, Kenya, Mali, Mozambique, Niger, Rwanda, Swaziland, Togo, and Zimbabwe. The bottom third were Angola, Burundi, Central African Republic, Comoros, Democratic Republic of Congo, Republic of Congo, Djibouti, Equatorial Guinea, Liberia, Madagascar, Nigeria, São Tomé and Principe, Seychelles, Sierra Leone, Somalia, and Sudan. Source: World Bank data; Freedom House 1991, 1999; Transparency International 1998; Euromoney. 30 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? On the spending side, many countries suffer chronic shortages of cur- rent funding, especially for operations, maintenance, and nonwage inputs. There are also large deviations between planned and actual spending, partly due to the need for cash-based expenditure manage- ment to achieve aggregate fiscal targets. Tight fiscal restraints—includ- ing on public sector salaries—and the proliferation of donor-driven initiatives have created perverse financial incentives for public sector Much of Africa has been employees. These problems have probably worsened due to the inten- opened to market forces sity of aggregate fiscal pressure. And they need to be addressed in the next stage of reform, especially in countries that have most consolidated their macroeconomic balances. Market forces. A second area of reform has been the opening of Africa to market forces. Most prices have been decontrolled and marketing boards eliminated—except in a few countries for such key exports as cot- ton and cocoa. Current account convertibility has been achieved and, except in a few countries, black market premiums average only 4 percent. Trade taxes have been rationalized from high and arbitrary levels. Average rates of 30–40 percent of the mid-1990s have given way, in many coun- tries (including those in the West African Economic Union), to trade- weighted average tariffs of 15 percent or less. Trade-weighted tariffs are now below 10 percent in more open countries such as Uganda and Zambia. Arbitrary exemptions, though still numerous, have also been rationalized. This opening to market forces continues in West Africa through the movement to a common external tariff with a maximum rate of 20 per- cent—and in East and Southern Africa through country-by-country reforms supported by several regional associations. Trade policies are still more restrictive than in the world’s more open developing countries, and many countries still confer substantial protection on domestic industry. But much of the gap in the early 1990s has been closed. Private initiative. A third change in Africa’s economic landscape has been wider space for private initiative. Thriving business networks have arisen in West, East, and Southern Africa, and in politically and economically stable countries private investment has increased by almost 3 percent of GDP in recent years. In a 1997 survey of 22 African countries, fewer businessmen saw the state as an opponent than had in 1987 (Weder, Brunetti, and Kisunko 1998). Foreign direct investment also rose in the second half of the 1990s—to about one- sixth the average level per capita for all developing countries. But it 31 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? was still concentrated in a few countries, especially those with mineral resources. The number of funds seeking investments in Africa has grown from almost none to about 30. So, Africa is becoming a viable business address. In many African countries privatization has accelerated and become more widely accepted. With more than 3,000 transactions totaling $6.5 Privatization is opening billion, privatization has entered a new phase, one marked by private par- the door to domestic ticipation in providing infrastructure services (box 1.3). Private operators businesses and to better have substantial involvement in telephone systems in 18 countries and in services water distribution in 23 countries. Railways and ports have been conces- sioned to private operators. Even when the lead investor is foreign (as is usually the case for the largest transactions), privatization is opening the door to domestic businesses, including as suppliers and distributors, and to better services. Regulations have not always advanced with privatization to ensure adequate competition, however, and most countries still need to expand the pool of investors. In some countries case-by-case privatizations have offered new owners exclusive rights to provide services to small national markets, whereas a subregional approach would have enabled more com- petitive service provision. Better regulations and more transparent priva- tization will need to remain a focus in many countries. Box 1.3 Privatization in Côte d’Ivoire OVER THE PAST EIGHT YEARS CôTE D’IVOIRE’S AMBI- Despite this track record, a number of questions tious privatization program has wholly or partly priva- remain. Côte d’Ivoire has not yet succeeded in attract- tized more than 60 firms—and yielded more than $450 ing a diverse group of private investors. Doing so would million in return. The program gained momentum after increase competition. The country also needs to nur- the 1994 devaluation, which restored the profitability of ture a solid base of small and medium-size enterprises. a number of agribusiness companies. It has been suc- Regulations need to be rationalized to clarify the roles cessful in attracting investors: in the past four years $1.4 of technical ministries and regulatory bodies, including billion were invested in agribusiness and more than $1 the Competition Commission. And despite the increas- billion in infrastructure. The private sector is now ing participation of private firms in infrastructure, the involved in almost all infrastructure sectors. A recent public sector still bears a significant part of market risks. study, conducted using the same methods as in other Most contracts—power, water, railways—are of the regions, concluded that the program has been a success: affermage (lease contract) type, with investment still the employment in privatized firms has grown by 4 percent responsibility of the state. Further transfers of risk to a year (it had been falling before), labor productivity has private operators will require policies that emphasize risen, and so has government’s corporate tax yield. transparency and the building of confidence. 32 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 1.6 Growth in Output, Investment, and Exports in Africa, 1981–98 Percent 9 Investment 8 7 Exports 6 By all indicators, Africa’s 5 performance improved in GDP Population growth the second half of the 4 1990s 3 2 1 0 1981–90 1991–94 1995 1996 1997 1998 Source: World Bank data. Recovery—and Other Legacies No single measure captures the rhythm of Africa’s economies. Aggregate output is dominated by South Africa, a country facing unique economic and political challenges. Population-weighted growth rates or median country performance offer broader-based measures. But all indi- cators show that performance improved in the second half of the 1990s (figure 1.6). In the typical country annual output growth rose to about 4.3 percent in 1994–98. Agriculture also performed well, growing 3.7 percent a year in the median country, well above previous levels. In 1995–97 exports also grew rapidly. While this period was one of excep- tional growth in world trade, especially in demand for key African prod- ucts, it also saw a reversal of falling trade shares—suggesting that African exports were becoming more competitive (Yeats 1999). Although esti- mates of poverty headcounts are available for only a few countries over time, they show that rising aggregate consumption usually results in sub- stantial declines in the percentage of the absolute poor (chapter 3). This improving picture came under stress in 1998 in a way that under- scores Africa’s vulnerability to external shocks and internal conflicts. Except for South Africa (where growth fell sharply), African countries were less integrated with world capital markets than most other regions and less exposed to the direct effects of the East Asian crisis. Still, many 33 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? countries suffered sharp declines in commodity prices. Oil exporters felt a massive terms of trade loss, but until late 1999 many oil importers were cushioned from the immediate effects of their slumping export prices by lower costs of oil imports (box 1.4). Even so, they faced intensified com- petition in depressed primary export markets. Another factor was the intensification of conflict in Central Africa, in parts of West Africa, and Macroeconomic and in the Horn of Africa with the resumption of war between Ethiopia and structural reforms in Eritrea. While many countries continued to grow strongly in 1998, the Africa have been highly region’s population-weighted growth slumped, leaving little growth space controversial to cut poverty. Growth appears to have picked up in 1999 and 2000, though not to the peak levels of 1996, and sharp increases in fuel prices shifted terms of trade losses back to oil-importing countries. Reform and recovery. Macroeconomic and structural reforms in Africa have been highly controversial.2 Some studies using information through the mid-1990s failed to find a link between reform and performance. Perhaps this is not surprising. It is not easy to disentangle the relative con- tributions of external developments, domestic economic policies, and deeper institutional factors over the long run, because they work together. Nor is evaluation easy in the medium run, because of lagged effects and Box 1.4 The East Asian Crisis and Africa THE SWING IN THE CURRENT ACCOUNTS OF EAST ASIAN with increased conflict, adverse weather in East Africa, countries in 1998 sent a massive deflationary shock and political uncertainty in Nigeria—pulled growth through the global economy—equal to 3 percent of down in Africa, especially in larger countries. world GDP. But except for South Africa, which suf- The longer-run impact of the crisis will be felt more fered from a speculative currency attack, Africa was less widely. Second rounds of commodity price declines are exposed to international capital movements than many hitting some producing countries severely. Oil prices other developing regions. The main transmission doubled, benefiting producers but hurting importing effects from the Asian crisis were through a halving of countries. World trade growth may be slower than growth in world trade and 20–40 percent declines in anticipated, and competition will come from other terms of trade for primary products. regions where exchange rates have depreciated sharply. The net effects were felt sharply by African oil For example, processed fish from Thailand has made exporters, which suffered a terms of trade loss of 7 per- severe inroads on Senegal’s exports. Investors may also cent of GDP. While other countries also suffered losses show less interest in projects to extract and process raw (particularly those exporting metals and tobacco), materials. Thus all the more pressing is the need to boost until late 1999 most were shielded from the immedi- Africa’s international competitiveness. ate effects of export price declines by sharp cuts in their oil import bills. The net effect of the crisis—coupled Source: World Bank 1998b. 34 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? because structural and institutional measures are difficult to quantify. Many African countries have moved in and out of compliance with macro- economic and structural reform programs, so formally being on a program has meant little for the policies actually pursued over longer periods. And short-term reforms have failed to address some difficult underlying insti- tutional problems—and in some cases may have worsened them. Despite all this, and recognizing the difficulty of specifying a clear Good economic counterfactual, some recent studies indicate that adherence to sound poli- management must be cies pays off in the medium run. But good economic management must sustained for some time be sustained for some time to have a substantial effect. An independent but then has a assessment of the Special Program of Assistance (SPA) cited eight African substantial effect countries as being generally “on track” in 1992–96.3 This group did bet- ter in 1992–97, both relative to its previous record and relative to a com- parator group of SPA countries: GDP per capita grew 1.1 percent in the on-track group but fell 0.5 percent in the others. Export growth, import growth, investment rates, and government spending were also higher for the on-track group. The combination of sustained reforms and financial assistance was associated with better performance, at least at the aggre- gate level. The on-track group also performed better on intermediate social indicators, though it still fell well short of what was required to achieve poverty reduction goals. Another way to assess the impact of economic management on perfor- mance is to group countries by broader indicators of macroeconomic, structural, and social policies and economic institutions. One such mea- sure is the Country Policy and Institutional Assessment (CPIA), carried out each year by the World Bank for all borrowing countries and used— along with population and income—to allocate International Devel- opment Association resources among recipient countries. Macroeconomic sustainability has a 25 percent weight in the CPIA, and structural and financial sector policies and legal institutions about 30 percent. The remainder is based on financial and budget management, social policies, safety nets, and environmental policies (IDA 1998). Worldwide, few if any countries appear able to make progress toward a middle-income level with- out also achieving a high CPIA rating. CPIA ratings for the late 1990s suggest that an upper tier of African countries has a good basis for further development. But a lower tier, including many very poor countries, is in danger of slipping ever further behind. Africa has many well-managed economies, especially in macro- economic terms (see table 1.5). The top third of its countries are not rated 35 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 1.7 Africa’s Annual Growth, Investment, Exports, and Deficits by Country Group, 1995–98 Percent Number of Per capita Investment Export Current account Budget countries GDP growth growth growth deficit/GDP deficit/GDP 50 3.0 10 10 10 8 7 2.5 40 8 8 8 6 2.0 5 30 6 6 6 1.5 4 20 4 4 4 3 1.0 2 10 2 2 2 0.5 1 0 0.0 0 0 0 0 All countries Countries with social stability Countries with social and macroeconomic stability Countries with social and macroeconomic stability and efficient resource allocation Source: World Bank data. much differently from their counterparts in other regions. And while this tier includes some of Africa’s richer countries, it also includes many poor ones. But the lowest tier of Africa’s countries is both poorer and rated far lower than their counterparts elsewhere. Countries are also distinguished by whether they have preserved a peace- ful base for development. As discussed further below, for many countries avoidance of conflict has been critical in the ability to sustain development. Figure 1.7 shows how growth, investment, exports, and current account and budget deficits have differed across countries according to whether they have been at peace and, if so, whether their economic management has been deemed effective. Both peace and good economic management have been important for Africa’s recovery, with better-managed countries seeing higher growth per capita and investment and export growth of more than 8 percent. There have also been signs of export diversification (chapter 7) and, in some countries, such as Uganda, of a reversal in capital flight. A number of countries have also advanced in international risk ratings, although few (with the notable exception of South Africa) are at the level required to attract appreciable private capital. 36 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Other legacies of the crisis decades. Thus reforms have been instrumental in Africa’s recovery and have laid the basis for deeper changes. But the focus on macroeconomic management over an extended period has also left deeper and difficult legacies for African countries: “hysteresis effects,” which are not quickly reversed. Perhaps unavoidably, economic management focused on short-term concerns. Thus reforms—for example, of the civil service—have restored The long period of macroeconomic balance rather than increased effectiveness. Many coun- macroeconomic tries have seen improvements in capacity within central banks and min- adjustment also left istries of finance. But with weaknesses in governance and severe erosion some difficult legacies of pay, especially at higher levels, the adjustment decades also saw a sub- stantial deterioration in the quality of public institutions, a demoraliza- tion of public servants, and a decline in the effectiveness of service delivery in many countries. Together with falling incomes, these effects— which cannot be speedily reversed—translated into falling social indica- tors and capabilities in many countries, and to losses of human capital, especially (though not exclusively) in the public service. Cash management limits to control aggregate spending and contin- ued macroeconomic instability increase the difficulty of assuring a pre- dictable flow of resources to agreed programs. The divergence between budgeted and actual spending is often gaping, with at least a 30 percent deviation in one of every five African countries for national budgets, and in half of African countries for sector and program budgets (Kostopoulos 1999). This discrepancy has undermined the accountability of sector ministries for agreed outcomes—and left programs poorly performing and subject to the diversion of funds. As external funding became more critical, African governments increasingly turned to external advisers, often those connected with the provision of funding. Conditionality became ever more intrusive, and the shaping of reforms was seen to lie mainly outside the region. This further weakened internal capacity for economic management and reduced African governments’ sense of ownership and account- ability for economic outcomes. Reforms were not “marketed” or explained to the population. Arrangements between governments and donors often weakened the role of representative institutions, partic- ularly parliaments, with essential legislative and budgetary functions. The effect was lower credibility for both the reforms and the programs that tried to enforce them. Foreign assistance, largely shaped by the strategic considerations of the Cold War, was not allocated in a par- 37 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? ticularly discriminating way between better-managed and worse-man- aged countries. This too did little to encourage credible reforms. The long crisis also lowered expectations of Africa and within Africa. In the 1960s governments actively strove for accelerated development. By the mid-1990s simply restoring growth to allow rising per capita income was seen as an achievement for many countries. The end of the 20th The end of the 20th century, however, marked the emergence of a century marked the fragile consensus between Africa and its donors, at least on broad prin- emergence of a fragile ciples. There was far greater understanding within Africa of the need consensus between for a stable macroeconomy, for working markets, for private initiative, Africa and its donors and for the need to increase global competitiveness. Donors had accepted the limits of narrow approaches. Market-driven development could not succeed without strong social and institutional infrastruc- ture—including a strong and capable state—and without active mea- sures to alleviate severe poverty and raise the capacity of the population. Africans and their development partners had also begun to ask how to deliver assistance in ways that strengthen the account- ability of governments to their people in Africa’s emerging but aid- dependent democracies. Toward An Agenda for the Future It is not sufficient for African governments merely to consolidate the progress made in their adjustment programs. They need to go beyond the issues of public finance, monetary policy, prices, and markets to address fundamental questions relating to human capacities, institu- tions, governance, the environment, population growth and distribu- tion, and technology. ——World Bank 1989 W HAT, THEN, IS NEEDED FOR ACCELERATED PROGRESS? WITH so many challenges—and so many interactions among them—it is hard for governments and donors to set priori- ties. How can African countries develop comprehensive development plans or “business plans” that will help guide them through the increas- ingly competitive and fast-moving 21st century, but that are sufficiently prioritized to guide implementation? 38 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Circles of Causation One approach is to focus on blocks of issues with strong cumulative interactions—circles of cumulative causation, which can be virtuous or vicious (figure 1.8). Success in one element of a circle will ease improve- ment in others, but it is difficult to envision Africa claiming the 21st cen- tury unless there is progress in all the circles. The unfinished agenda can be framed in four such circles: improving governance and preventing con- flict, investing in people, increasing competitiveness and diversifying economies, and reducing aid dependence and strengthening partnerships. Circle 1: Improving governance and resolving conflict. Governance, conflict, and poverty intertwine on several levels in Africa. At one end of the spec- trum, the countries that made the greatest gains in political rights and Figure 1.8 Africa's Circles of Cumulative Causation 1. Improving governance and resolving conflict 2. Investing in people 4. 3. Reducing Increasing aid dependence and debt competitiveness and strengthening and diversifying partnerships economies 39 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 1.9 Political Rights, Civil Liberties, and Economic Management in Africa by Country Group, 1990–99 Average score for political rights and civil liberties (scale of 1 to 7) 7 6 With highly diverse, multiethnic states, 5 African countries will need to search for 4 inclusive constitutional 3 1998–99 models and institutions 1990–91 2 1 0 Poor Unsatisfactory Average Good Economic policy performance Source: Freedom House 1991, 1999. civil liberties in the 1990s are also those with better economic manage- ment and performance (figure 1.9). This does not prove that political lib- eralization caused better economic management. But the relationship suggests that stronger and more accountable economic management has been associated with more participatory political systems and govern- ments less accountable solely to narrow interest groups. Conversely, increased accountability and decentralized service delivery that comes closer to the people can strengthen political participation, contribute to a stronger state, and raise efficiency. At the other end of the spectrum, about one African in five lives in a country formally at war or severely disrupted by conflict that, on average, lowers growth by at least 2 percentage points for every year that it per- sists. The direct annual costs of conflict in Central Africa and West Africa have been estimated at $1 billion and $800 million, and this does not include the costs associated with refugees and displaced persons— another $500 million in Central Africa alone. Indirect costs, including for neighbors not involved directly, are incalculable. Economic manage- ment has been far less effective in conflict-ridden countries, which make 40 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? up most of the lower third in the CPIA ratings. A growing body of evi- dence shows that poverty, lack of employment, and low education levels are important determinants of conflict—more so, perhaps, than ethnic diversity. Economic development is vital for political stability. But with highly diverse, multiethnic states, African countries will need to search for inclu- sive constitutional models and institutions that build consensus, facili- Confronting AIDS is tate the participation of diverse groups, entrench good governance, and essential if African lay a stable basis for development. These are themes taken up again in countries are to prevent a chapter 2. long-term downward Circle 2: Investing in people. Even with hidden growth reserves such as spiral reversing capital flight (Collier and Gunning 1998) and reallocating aid flows to better-managed countries (Collier and Dollar 1999), Africa’s sav- ings are too low to sustain growth in income and consumption at rates needed to rapidly reduce poverty. In addition, Africa’s productive base is rapidly shifting from natural resources toward people. The second circle of causation facing African countries is the strong interrelationship between investing in people, accelerating the demographic transition, and promoting savings and growth. Savings respond to higher and growing incomes, as well as to falling dependency ratios. Elbadawi and Mwega (forthcoming) suggest that a drop in Africa’s dependency ratio to levels prevailing in East Asia could increase private savings by 9 percent of GDP. Demographic trends, in turn, respond to higher incomes and to better health and social services— including female education and contraceptives, demand for which is sub- stantial in many African countries. Kenya shows that the demographic transition can be speeded by effective public policy even without rapid economic growth. Raising the efficiency of delivery mechanisms to invest in people—especially women and poor rural residents—is thus a key entry point into any poverty-reducing growth strategy, from a demo- graphic perspective as well as for savings and productivity. All this is threatened by a new factor, however. Although the full impact of the HIV/AIDS epidemic is not yet apparent, it promises to impart a massive shock to this interrelated system. Countries will expe- rience a reverse demographic transition as life expectancy falls by up to 20 years. Population growth will be lower, but the number of children orphaned by AIDS will explode. Age-based dependency ratios will rise despite a decline in fertility, because AIDS mainly affects young adults in their productive years. With 2–4 percent of the potential workforce 41 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? incapacitated at any point in time, actual dependency rates will increase even further. AIDS depletes scarce human capital. Firms, farms, and households are already seeing the impact in lower output, much higher health and funeral costs, increased family insecurity with the loss of breadwinners, and increased training needs to replace lost skills across a wide range of Africa’s economies have professions. AIDS will also further reduce the incentive to save, given the not been sufficiently increased risk of mortality. And it will deplete public and private dynamic to diversify and resources: caring for one AIDS patient costs as much as educating 10 pri- create rapid employment mary school children (World Bank 1997). Confronting AIDS and revers- growth ing rising transmission rates are essential if African countries are to prevent this second development circle from turning into a long-term downward spiral. Political commitment to address this problem is urgently needed. These themes are taken up in chapters 3 and 4. Circle 3: Increasing competitiveness and diversifying economies. With their close links to other sectors and importance for employment and exports, raising the productivity of agriculture and protecting the natural resource base are essential for Africa’s structural transformation (chapter 6). Eighty percent of Africa’s poor live in rural areas, but forested area per capita will halve in less than 20 years. And productivity in agriculture is rising only slowly. Africa is also urbanizing rapidly. At 4.9 percent, urban population growth is the highest in the world. Rural-urban migration reflects many factors, including the lack of access to essential services in rural areas, low productivity and incomes in agriculture, and, in some countries, conflict and insecurity. On current trends, Africa’s urban population will exceed the rural in the first quarter of the 21st century. By 2025 the urban pop- ulation will be three times larger than today. But Africa’s urbanization is unique—accelerating without rising incomes and without the usual structural transformation that accompanies development, including in agriculture. Urban agglomeration can have advantages. It is easier to deliver ser- vices to denser populations, and urban concentrations offer possibilities for building new industrial and service sectors that are impossible for sparsely populated rural economies. But Africa’s urban economies have not been sufficiently dynamic to diversify and create rapid employment growth. Real wages are down in most countries, and formal employment has been falling or stagnant, with informal activities taking up the slack. Open unemployment, which averages about 20 percent in a sample of 42 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? African countries, is becoming an urgent economic and political prob- lem. Unemployment rates are higher among the young and the better educated. And recent studies suggest that spells of unemployment are get- ting longer (Agenor 1998; Dabalen 1999). Cuts in public employment contribute to this dismal picture in a few cases, but the real culprit is the wider failure of private employment to expand. Why have Africa’s economies failed to diversify and create jobs in response to macroeconomic reforms? Labor costs and flexibility are a key issue in South Africa. But business surveys and comparisons with other regions suggest that the problem lies elsewhere in most other countries— The sharp decline in aid in poor infrastructure services, including for the information economy since the mid-1990s is (chapter 5), and in other factors and policies that cause high costs and cause for concern risks for investors (chapter 7). The third development circle therefore involves the interaction of pop- ulation growth, urbanization, and economic diversification. The politi- cal economy of this circle is important. Without productive urban centers, tensions will rise as cities fail to generate resources for their infra- structure needs and employment for growing populations. These trends will further undermine political and economic stability and degrade the business environment. Export diversification is essential to avoid these outcomes (chapter 7). Without exports, including of agroindustrial products, producers will be confined to tiny home markets and have fewer avenues to import global knowledge. No strong exporter lobby will arise to press for competitive service standards, including those needed to facilitate trade, whether in agroindustrial products, tourism, or manufacturing. Some African gov- ernments still need to forge a trusting and supportive relationship with their business communities, stressing entry and competition while phas- ing out informal, personalized links between government and business. Understanding why Africa’s economies have been slow to diversify and to grow strong productive sectors (including agriculture) is essential to understanding the challenge of the 21st century. Circle 4: Reducing aid dependence and strengthening partnerships. Africa is in the midst of an intense debate on aid dependence—on the size and allo- cation of assistance, on delivery mechanisms (including debt relief ), and on the relationship between donors and recipients. There is wide agree- ment that past aid programs have been disappointing, but also recogni- tion that the objective of much of the Cold War aid flow was strategic and political rather than developmental. 43 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Aid is a two-edged sword for Africa. On the one hand, foreign savings are essential to permit both higher investment for growth and higher con- sumption to reduce poverty. Even under favorable conditions for private inflows and Asian levels of investment efficiency, the typical African country faces a resource gap of more than 12 percent of GDP relative to the investment needs of a growth rate likely to achieve the poverty reduc- Limited resources and tion goal for 2015. Continued assistance is therefore essential, and the ineffective delivery create sharp decline in aid since the mid-1990s is cause for concern. massive inefficiencies in On the other hand, while high aid dependence and debt service are translating inputs into not the direct cause of weak capacity and accountability, they can make outcomes these problems worse and prolong them, especially when the institutional and capacity base is already weakened. With few exceptions, African countries face severe constraints on capacity and skills. Although weak education systems are a serious concern, capacity constraints are not sim- ply a matter of low supply. The region has been losing more than 23,000 professionals a year, partly replaced by some 100,000 foreign advisers funded by technical assistance at an annual cost of $4 billion. The fac- tors underlying Africa’s massive brain drain are not just economic. They also reflect security concerns and, in some countries, violent political upheavals. But economic factors have been important too. Since the mid- 1970s capacity has been weakened in many countries by the politiciza- tion of service under autocratic governments, severe wage compression, and inadequate working conditions. Only in the 1990s have reforms begun to redress pay and working conditions in the public sector, and only in a few countries. Political participation has increased, but Africa’s civil society and repre- sentative institutions are far from economically empowered A survey of government audit institutions in 22 countries showed that few satisfied cri- teria for professionalism, standards, staffing, independence, timely report- ing, and quality of follow-up. Only five produced timely reports, and in only two cases were these publicized to encourage scrutiny of public spend- ing by civil society. Few African parliaments have access to the information and technical support they need to monitor the use of public funds. Limited resources and ineffective delivery—and in some cases, admin- istrative barriers to cost-effective procurement—create massive ineffi- ciencies in translating inputs into outcomes. It has been estimated that Africa receives benefits worth only $12 for every $100 spent on medi- cines (chapter 4) and that, in parts of West Africa, achieving one 6-year primary school graduate can require the equivalent of 21 student-years, 44 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? given high dropout and repetition rates. Cross-country relationships between inputs and outcomes are therefore weak. How does this relate to aid? Net transfers (which take into account debt service paid on public and publicly guaranteed debt) may have com- pensated for terms of trade losses (see table 1.4), but most of this assis- tance has not supplemented normal flows of private income and public revenue. Commitments under SPA programs, which are largely untied There is still a long way and represent the closest equivalent to budget support, represent about to go in improving aid one-quarter of net disbursements and in total are less than the debt ser- effectiveness vice payments made by recipient countries. The rest of the aid flow sustains a parallel, multidonor, multiproject economy, obscure to host governments and where donors are some- times reluctant to share information. This parallel economy fragments public programs in key sectors—for example, donors are estimated to fund 40 percent of health spending in a typical African country (World Bank 1999b)—and makes integrated budget management impossible. Because donors prefer to fund capital spending on physical projects, aid also distorts recurrent and capital spending in favor of the latter. Recipient governments become cash poor and project rich, a trend exacerbated in the phase of fiscal stabilization with the tightness of cur- rent spending limits. Recipient governments also cannot compete with better-paying pro- ject implementation units that draw the best-trained staff out of public service. Moreover, negotiating aid programs and debt relief with multi- ple donors absorbs valuable time of key officials in aid-dependent coun- tries. Informal surveys suggest that these officials may spend half their time on donor-related activities rather than on internal administration. Particularly in countries that have only recently moved toward partic- ipatory political systems, aid dependence can make governments less accountable to their civil societies. Donor flows are equivalent to half or more of fiscal revenues in many countries—and finance a major part of social and infrastructure spending. Donors are concerned about the financial integrity of their projects, so governments have to account for aid resources using a variety of donor-specific procedures. But at the same time, governments face less pressure to be accountable to their societies. Institutions, accountability, capacity, and aid dependence thus consti- tute a fourth development circle. The weaker are the institutional capac- ity and accountability at the core of government, the stronger is the incentive for donors to rely on their own institutional controls, further 45 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? undermining government accountability and weakening capacity. Resolving this dilemma will require a fundamental rethinking of the rela- tionships among Africa’s civil society, governments, and donors. Major changes are under way, notably the World Bank’s Comprehensive Development Framework and the initiation of country-led poverty re- duction support programs (chapter 8). But there is still a long way to go Globalization and new in improving aid effectiveness—and in formulating a realistic long-run technology offer great exit strategy from aid. opportunities for Africa A Window of Opportunity Africa faces daunting challenges. But the start of the new century offers a unique window to address them. s Political opening. The sharp rise in political participation opens the way for greater public accountability and pressure from civil society for bet- ter management of public resources. Today’s African leaders are more focused on proper economic management than many of their prede- cessors, and they have the maturity to address weaknesses of previous policies. These are crucial developments, because the fate of Africa in the new century will be determined not by outsiders, but by Africans. s End of the Cold War. After World War II, Africa became a strategic and ideological battleground where external powers sought reliable allies rather than effective development partners. The end of the Cold War signaled a reduction in external support for peacekeeping and in aid flows due to waning geopolitical competition. But it also opened a window for donors and recipients to attend to development effectiveness. s Globalization and new technology. Globalization and new technology offer great opportunities for Africa. World markets are far more open now than ever before. Trade will probably continue to grow faster than world GDP. And the pool of capital seeking diversified international investments is growing rapidly, partly because of the demographic transition in industrial countries. Advances in the information econ- omy offer huge gains to Africa, historically a sparse region with a pop- ulation largely excluded from information. But these trends also pose risks. Technological change will continue to put long-run pressure on primary commodity prices. Countries that can- 46 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? not take advantage of trade and investment opportunities face further marginalization and a longer technological lag. As falling protection in major markets reduces the value of special concessions to poor countries, policies will need to emphasize competitiveness and productivity rather than (or in addition to) preferential trading arrangements. Will Africa be able to take advantage of the window? Will Africa’s devel- opment partners be able to support the needed trends? The first set of pri- orities emerging from these cumulative circles—the interaction of governance, conflict, and poverty—is perhaps the most difficult to address from the perspective of economics alone, but it is also the most funda- mental. For countries able to maintain peace and security, entry points into the three other circles must be found. Investment in people is essen- tial for the second circle—involving investment, growth, the demographic transition, and HIV/AIDS. The ingredients of effective programs are known; they can now be priced and budgeted. Addressing the structural and institutional issues in the third and fourth circles will also be funda- mental for sustaining the transition from adjustment to growth, social development, and poverty alleviation. This will require more than simply “staying the course” and deepening current reforms in macroeconomic and structural areas, even though they are far from complete. Notes 1. The Special Program of Assistance was created in 1987 to mobilize con- cessional, quick-disbursing assistance for poor, debt-distressed African countries with adjustment programs led by the International Monetary Fund and International Development Association. For more details, see OED (1998b). 2. IMF (1997) provides a detailed assessment of performance under Enhanced Structural Adjustment Facility programs; Guillamont and others (1999) find that consistent management contributes to good performance. IMF (1998) provides an external evaluation of the Enhanced Structural Adjustment Facility. For a critical view of adjustment programs, see Mkandawire and Soludo (1999). 3. The eight countries judged to be on track were Benin, Burkina Faso, Ghana, Malawi, Mali, Mozambique, Uganda, and Zambia, although Ghana and Zambia had lapses of discipline (see OED 1998b, p. 98). 47 CHAPTER 2 Improving Governance, Managing Conflict, and Rebuilding States Rapid changes in Africa’s Poverty brings about instability and insecurity, which breed under- political landscape have development. The reverse is also true. Democracy must deliver on created opportunities for the bread and butter issues, otherwise the Continent could slide back development and growth into situations where the politics of poverty gives rise to the poverty of politics. —Dr. Salim Ahmed Salim, Secretary-General, Organization of African Unity, 24 October 1999 G OVERNANCE, CONFLICT MANAGEMENT, AND STATE reconstruction are interrelated issues. Governance is the institutional capability of public organizations to provide the public and other goods demanded by a country’s citizens or their representatives in an effec- tive, transparent, impartial, and accountable manner, subject to resource constraints. Conflict management refers to a society’s capacity to mediate the conflicting—though not necessarily violent— interests of different social groups through political processes. State reconstruction combines national and supranational competencies for resolving violent conflicts, sustaining peace, and undertaking economic and political postconflict reconstruction. In the past decade this nexus of governance, conflict management, and state building has moved from rel- ative obscurity to being a central issue on Africa’s development policy agenda. Why? The first impulse has come from within Africa, where the political landscape has been changing rapidly. After years of authoritarian regimes and political and economic decline, there has been resurgent popular demand for multiparty elections and accountability in public resource management. Since the early 1990s, 42 of 48 Sub-Saharan states have 48 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES held multiparty presidential or parliamentary elections. Though these elections have not always been completely fair, they have often generated high voter turnout—sometimes more than 80 percent. This trend has been bolstered by the end of the Cold War, which has made donors less inclined to favor trusted allies over competent development partners (chapter 1). New aid relations emphasize ownership, accountability to domestic stakeholders, and good governance (chapter 8). Moreover, a African countries need number of African countries are ready to undertake “second generation” to seek inclusive, reforms, which require building social consensus and bargaining among participatory, and social groups. democratic polities Globalization also explains the increased importance of these issues. compatible with their Like other countries, African states face growing pressures both to decen- ethnic diversity tralize and to adapt to emerging global governance structures and stan- dards. These extend beyond trade to encompass many areas once considered within the purview of national policy. Globalization also brings risks of increased economic instability, which can lead to social conflicts. All these factors have increased the importance of sound gov- ernance and institutions for mediating conflicts and promoting social cooperation. This chapter analyzes Africa’s postindependence performance in gov- ernance and conflict management and highlights opportunities for resolving conflicts, building peace, promoting social cooperation, and improving governance in the 21st century. A first theme of the chapter is that it is wrong to think that Africa’s ethnic diversity dooms it to endemic civil conflicts. Poverty, underdevelopment, unemployment, and political exclusion are the root causes lurking behind social fractionalization. But socially fractionalized societies—like most in Africa—require careful management. Thus African countries need to seek inclusive, participa- tory, and democratic polities compatible with their ethnic diversity. Under the right conditions diversity can promote, rather than impede, social cooperation and stable growth. Active and collaborative involve- ment by regional institutions and international donors is also critical for resolving conflicts and building peace in Africa. A second theme involves options for improving institutions for national economic management. Africa has seen many such initiatives as part of reform programs, but success has been limited. One reason for past failures is that externally inspired technocratic measures to stream- line and strengthen the bureaucracy have not been matched by comple- mentary action by incumbent states, or by measures to generate demand 49 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? for good governance by local constituencies. This too is changing. A new breed of African reformers now places far more emphasis on transparency and on measures to empower the users of public services, in part through decentralization. Such measures have significance beyond their immedi- ate impact, helping over time to develop the civic organizations and the capacity needed to sustain a robust democratic system. Political and economic Together these two themes point to the following implication: political governance are and economic governance are inseparable, and together they underpin sus- inseparable—and tainable development. Especially with the spread of modern communica- together they underpin tions, a corrupt, ineffective state is unlikely to meet the popular and sustainable development economic demands of the 21st century. As East Asia’s experience suggests, states that successfully manage and develop their economies are likely to strengthen their legitimacy. Indeed, African countries with well-managed economies saw an increase in stability, political rights, and civil liberties in the 1990s. Conversely, states in conflict perform poorly on political crite- ria and have weaker economic policies and institutions (chapter 1). Characteristics of a Well-Functioning State W ELL-FUNCTIONING STATES SHARE CERTAIN CHARACTERIS- tics. Not all of these are necessarily preconditions for devel- opment—many countries, including many industrial ones, fall short on a number of relevant attributes. Nor is there a single model toward which all African countries should aspire. Successful options include “consensual democracy” in Japan, unitary liberal democracy in parts of Europe, and federalist democracies and confederacies in other regions. All of these approaches preserve political competition through popular participation in regular elections, but they differ in many ways. Yet while the diversity among successful democracies suggests a vari- ety of functional institutional arrangements, effective public institutions generally have some common fundamental characteristics. The first is the capacity to maintain nationwide peace, law, and order, without which other government functions are compromised or impossible. Second, states must secure individual liberty and equality before the law, a process still working itself out in the West and elsewhere. This has been a major institutional inadequacy in many African states. Secure property rights and transparent adjudication of disputes arising thereof are critical in 50 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES shaping investment decisions. Third, the state needs workable checks and balances on the arbitrary exercise of power. Public decisionmaking must be transparent and predictable. Oversight mechanisms should guard against arbitrariness and ensure accountability in the use of public resources, but need not eliminate the flexibility and delegation needed to respond quickly to changing circumstances. Once this institutional infrastructure is in place, the public sector has Without the foundations an important role in financing and providing key social, infrastructure, of good political and and dispute resolution services. Effective states raise revenue and supply economic governance, these services in ways that contribute to development. Where corruption Africa’s development will is detected, legal and administrative sanctions are implemented, regard- be sluggish—or stalled less of the social and political status of perpetrators. A free press and pub- lic watchdog organizations guard against abuse of power and reinforce checks and balances and effective service delivery. The political process is broadly viewed as legitimate and provides an anchor of predictability for private investment and economic development more broadly. Besides enhancing individual liberties, a participatory civil society, free speech, and an independent press are indispensable for promoting productive and healthy investment. It would be naïve to expect these characteristics to be adopted automat- ically as the political platform of any country’s leadership. Governments the world over are susceptible to factional contests for political power, moti- vated by incentives other than those that encourage good governance. But without political stability and checks and balances on power, public respon- sibility for key services and social legitimacy for government are in jeopardy and economic development may not be achieved. Without these founda- tions of good political and economic governance, Africa’s development will be sluggish—or stalled. African Governance since Independence P ERCEPTIONS OF AFRICAN GOVERNANCE HAVE BEEN BEDEVILED BY A tendency toward sweeping generalization—an unwillingness to acknowledge not just failures but also mixed outcomes and some successes. Any review of Africa’s governance track record since indepen- dence thus confronts the challenge of both describing general patterns and highlighting variations across countries. 51 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? By definition, colonial rule tended to be unaccountable to Africans and overly reliant on the military to suppress dissent. Its departure was rapid and unanticipated by both colonizer and colonized. Part of the early caution about the departure of colonialists was perhaps a response to the recognition that local skills were inadequate and the institutional foun- dations of incoming African governments were poor. For example, when A complex patchwork of Congo gained independence in 1960, it had just 16 postsecondary school old and new state graduates—for a population of 13 million. institutions produced a The constitutional innovations introduced at independence partly varied but generally sought to promote long-repressed local values. But these were unavoid- disappointing record in ably blended with the formal structures of national governance intro- national governance duced by European colonialism. With notable exceptions like Kenya and Zimbabwe, British colonialism bequeathed to its former dependencies the legacy of “indirect rule,” which provided considerable autonomy to “traditional” rulers—whether these were genuinely traditional or not— against the backdrop of English common law. In contrast, former French colonies inherited a metropolitan-cen- tered system of direct rule extending to the remotest rural cantons, cir- cles, and communes. Belgian administration in Burundi, Congo, and Rwanda was comprehensive and highly autocratic. Until its cataclysmic end in 1974, Portuguese colonialism in countries like Angola, Guinea- Bissau, and Mozambique abjured local participation in governance, much less indigenous representation. This complex patchwork of old and new state institutions produced a varied but generally disappoint- ing record in national governance. But there were exceptions—like Botswana, Côte d’Ivoire (until the 1980s), Kenya, and Mauritius— where public institutional capability was considerable. Overall, the political transition between the 1960s and the early 1990s can be divided into three phases: s Guarded experimentation—1960s to early 1970s. Former British colonies inherited variants of the Westminster system, with competi- tive parties, independent judiciaries, and cabinet governments based on a merit-recruited, politically neutral civil service. Former French- ruled states got a powerful presidential system wielding strong execu- tive authority. Under this system the comparatively weak office of the prime minister headed the public service and was answerable to a chamber of deputies elected on a run-off constituency-majority system. But confronted by the divisive, ethnic-driven politics of redis- 52 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES tribution in the 1960s, innovations were made to introduce all-pur- pose nation-building ideologies. Single parties emerged encompassing dissidents and competitors, sometimes using patronage to consolidate power—and not always peacefully. Thus conceived, national unity was expected to facilitate faster, friction-free growth. Though many presume that economic and institutional decline set in almost immediately after independence, that was not the case. With With limited aid, African limited aid, African economies grew by more than 5 percent a year economies grew by more between 1965 and 1973. Primary school enrollments rose sharply, and than 5 percent a year new universities, infrastructure, and public service training programs between 1965 and 1973 were developed. At the same time, driven by the development ortho- doxy of the day, the supposed scarcity of indigenous entrepreneurs, and the fear of commercially dominant expatriate minorities, many countries laid the foundations for increased state control and central- ization of resource allocation in a broad range of economic activities. s Military rule, dictatorships, and economic regress—mid-1970s to 1990s. After military takeovers in the early 1960s in Congo-Brazzaville, Dahomey (Benin), and Togo, the first gush of military coups in 1965–66 in Burundi, Central African Republic, Congo-Kinshasa, Ghana, Nigeria, and Upper Volta (Burkina Faso) opened the way to autocratic military rule. External involvement played a major role in such cases. Many proved disastrous from an economic and institu- tion-building point of view, as evidenced by Ethiopia (1974–91), Ghana (1966–69 and 1972–83), Mali (1968–91), Nigeria (1983–98), Somalia (1969–91), Uganda (1971–79), and Zaire (1965–97). By 1990 half of Africa’s states had military or quasi-mil- itary governments. In parallel with authoritarian military govern- ments came a trend toward single-party rule under autocratic civilian leaders, largely pursuing interventionist economic policies, in some cases under the banners of socialism or Marxism. Especially when combined with external shocks, the resulting economic decline and politicization of the bureaucracy eroded much of what remained of institutional governance capacity and undermined many of the accomplishments of the 1960s. s Political and economic liberalization—late 1980s and 1990s. Recurrent balance of payments crises and economic regress, together with pres- sure from donors, led a number of African governments to adopt struc- tural adjustment policies in the 1980s, opening up markets, encouraging deregulation and private initiative, and reducing state eco- 53 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? nomic intervention. The popular processes that led to the collapse of Benin’s military government in 1989, the fall of the Berlin Wall in late 1989, and the release of Nelson Mandela from prison in early 1990 increased demands for constitutional reform. Under popular pressure, some francophone states (Benin, Congo-Brazzaville, Mali) held national conferences that replaced authoritarian constitutions with A few African states have French-style democratic ones. Especially after 1989, popular discon- built effective national tent with military or autocratic regimes found vent in mass demon- governance institutions strations in favor of individual freedoms and multiparty government. on the foundations of Most remaining African governments conceded the principle of genuinely competitive democracy in the first half of the 1990s. By 1999 nearly all countries democracy and the rule had held multiparty elections with varying degrees of credibility. of law… Variations across Countries A closer look at the experiences of individual countries also points to much greater diversity than is commonly imagined. Capable and effective governance. A few states, like Botswana and Mauritius, have demonstrated a capacity to build effective national gov- ernance institutions on the foundations of genuinely competitive democ- racy and the rule of law. Although Botswana’s dominant party (Botswana Democratic Party) has been in office since independence in 1966, it has provided wide freedom to opposition parties and maintained the rule of law. Mauritius—with its medley of ethnic and religious groups, includ- ing Hindus, Muslims, Creoles, Africans, and Europeans—has defied the view that ethnolinguistic diversity undermines economic growth. This has been achieved through regular multiparty elections where competi- tion cuts across the ethnic divide and—significantly—by a delicate bal- ance of ethnic representation at the top levels of government. South Africa’s transition since 1994 also points in this direction. The linchpin of the 1994 transition was an ethnically inclusive government of national unity underpinned by the visionary leadership of Mandela. Violent conflict and state disintegration. At the other end of the spectrum are states where governance has disintegrated into protracted civil wars and lawlessness. These states include Angola (since 1975), Burundi (since 1993), Democratic Republic of Congo (since 1997), Guinea-Bissau (1997–99), Liberia (1989–97), Sierra Leone (1992–99), Somalia (since 1991), and Sudan (since 1983). In addition, large slices of states border- ing these countries have suffered the spillover effects of conflict. 54 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES The vulnerability of these countries to conflict mirrors a global pat- tern. Since 1980 more than half of all low-income countries have been involved in conflict, including 15 of the world’s 20 poorest countries. Africa is no exception. In 1999 one African in five lived in countries severely disrupted by wars or civil conflicts, and 90 percent of the casu- alties were civilians. There were more than 3 million refugees and 16 mil- lion internally displaced persons. And an estimated 20 million landmines …but many have been had been laid in Africa, including 9 million in Angola alone. caught in a low-level State crisis and institutional decay. About two-thirds of African states have equilibrium of poor neither enjoyed the opportunities created by development success nor institutional capability endured the violent risks inherent in the opposite extreme. By the 1990s and ineffective economic many of these countries were caught in a low-level equilibrium of poor transformation institutional capability and ineffective economic transformation. Some had initially showed high promise. Kenya, for example, was an African “miracle” in the 1960s and early 1970s, growing by 7.9 percent a year between 1965 and 1973. Internal security, working infrastructure, and capable public institutions staffed by competent Kenyans underpinned that performance. But since the mid-1980s the country has been a vic- tim of corruption and institutional decay. Since 1989 it has seen rising internal violence, economic mismanagement, and declining external aid. Other countries struggling to escape a low-level equilibrium trap include some with enormous economic potential and large populations, includ- ing Cameroon, Nigeria, and Tanzania. What Accounts for the Evolving Patterns of Governance? Broadly speaking, there are two types of explanations for Africa’s gov- ernance patterns. The first focuses on conditions inherited at indepen- dence—political and economic—along with structural factors that reflect Africa’s development experience. The second focuses more on successive generations of leaders and the political and economic policies they have pursued. Rather than arbitrate between these competing views, the dis- cussion here highlights the relevance and the implications of each. The administrative heritage of colonialism. Although colonial rule generally provided poor preparation for African self-rule, some countries emerged from it better prepared than others. This is evident in the cross-country dif- ferences in investment by colonial powers in the skills needed to govern an independent state—good leadership, administration and management of public resources, understanding of the formulation and application of laws. 55 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? In this regard the British dependencies in West Africa—Ghana, Nigeria, Sierra Leone, arguably The Gambia—had a head start. Indirect rule and the absence of European settlers in West Africa facilitated a greater presence of trained Africans in the governments of these states at independence relative to British colonies in East Africa, Zambia, and Zimbabwe. So did the output of Gordon Memorial College in Sudan. In There is no difference in contrast, the first institution of higher learning in East Africa—Makerere performance between College in Uganda—opened its doors only in 1930. Segregated public multiethnic and service systems in most of East and Southern Africa did not permit much homogeneous states that African participation in government—as elected representatives or civil sustain democratic servants—until well into the 1950s, on the eve of independence. institutions French-governed territories were also not as well prepared for self-rule as was anglophone West Africa. French colonial policy advocated assim- ilation into an empirewide public service and recruitment into one impe- rial French army. Only a few Africans studied at French universities and served in the French public service, many of them in what is now Benin. Similarly, education opportunities for Africans at top French schools— like Ecole Normale William Ponty in Dakar, Senegal—were limited. Only in the 1950s were university-level institutions opened in Dakar and Tananarive (Madagascar) to serve French colonies. Under the French Union (1946–60) a few Africans were elected to the French legislature and served as government ministers, but the system called for African acquiescence. Its limits are best demonstrated by the precipitous departure of French colonial officers after the Guinean vote for independence in 1958—leaving Guinea without effective adminis- tration almost overnight. Education opportunities for Africans in Belgian, Portuguese, and Italian colonies were even more sparse. The impacts of these colonial inequalities have long persisted. Ethnic diversity. African states are exceptionally diverse in ethnic and lin- guistic terms. Some have argued that such diversity damages or destroys national consensus on infrastructure, macroeconomic reform, and the allocation of public goods. But while ethnic conflict is a major factor in African politics, recent research suggests that its impact on economic per- formance is mediated by a country’s institutional structure. There is no difference in performance between multiethnic and homogeneous states that sustain democratic institutions (Collier 1998). Without such insti- tutions, however, multiethnic states grow far more slowly. This finding is consonant with the argument that faction-ridden societies are best administered by a decentralized democracy.1 56 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES Tanzania illustrates the potential for ethnic harmony in a racially diverse setting. With an estimated 120 ethnic groups, it has avoided all ethnic conflict or political appeal to linguistic units. National unity cuts across ethnic boundaries, leading to a widespread rejection of tribalism. This outcome can be attributed to former President Julius Nyerere’s inte- grative political efforts and his government’s promotion of Swahili as a common language. Civil war lowers per Political leadership. How much has Africa’s governance been shaped by capita GDP by 2.2 the quality of its leaders? And might good leadership, where it exists, percentage points a year shape the political institutions of the 21st century? Some imaginative gov- ernments have turned supposed liabilities (ethnic and linguistic diversity in Tanzania, for instance) into a nation-building asset. In contrast, some states with religious, ethnic, and linguistic homogeneity (like Somalia) have slid into political disaster. Leadership is important, and many stud- ies of African leadership since independence distinguish four types (box 2.1). But in few cases have African leaders been successful in promoting sustained development in their countries. Civil Conflict A BOUT ONE-FIFTH OF AFRICANS LIVE IN COUNTRIES SEVERELY DIS- rupted by conflict. Excluding independence wars, nearly 20 African countries have experienced at least one period of civil strife since 1960. This unfortunate legacy has huge direct costs (box 2. 2) and incalculable indirect costs, including the destruction of physical infrastructure, loss of institutional capacity and social capital, and flight of financial and human capital. Civil war lowers per capita GDP by 2.2 percentage points a year. Moreover, dynamic sectors that use or supply capital and transact intensively—manufacturing, construction, trans- port, distribution, finance—suffer disproportionate losses (Collier, Hoeffler, and Pattillo 1999). Civil wars also leave a social and political legacy that can affect development for decades. Conflict has reinforced perceptions of Africa as a doomed continent with inescapable ethnic cleavages and tribalism. But recent analysis of the determinants of civil wars in Africa and other regions points to deep polit- ical and economic development failures as the root causes. In diverse soci- eties where intergroup interactions have been uncooperative, the 57 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 2.1 Four Types of African Leadership s Successful and conservative leaders. Recognizing the states such as Guinea-Bissau and Mozambique, the complex mix of peoples and cultures arbitrarily result was economic regress. enclosed within colonial boundaries, these leaders s Predatory leaders. Instead of focusing on efficient introduced ethnically inclusive policies and infor- national resource management and growth- mal power-sharing arrangements. They also pur- enhancing policies, predatory leaders did the oppo- sued growth-oriented economic policies and site. National and state offices were treated as increased human resource investments. Botswana’s personal money-making positions. The archetypal founding president, Sir Seretse Khama, provides a case of Zaire under Mobutu Sese Seko has been leading example—one that has been maintained by duplicated to a lesser degree in a number of other his successors—as does Felix Houphouet-Boigny in states. Conditions in Nigeria under Sani Abacha Côte d’Ivoire between 1960 and the mid-1980s. (1993–98) also fit that mode. Under Jomo Kenyatta, Kenya enjoyed stability and s Tyrants. Because of the eccentricity that often high economic growth rates, though complaints marks tyrants, and the shocking human rights about ethnic inequalities emerged toward the end abuses that they perpetrate, this form of leadership of his rule. has received more international attention than the s Radical and ideological leaders. Motivated primarily rest. Besides the cost in lives, its economic legacy is by African (or Marxist) socialism, these leaders the most catastrophic. Uganda under Idi Amin sought an economic and social transformation of (1971–79) and Equatorial Guinea under Macias their societies through state intervention and the Nguema (1968–79) are the worst examples. The leadership of a mass-based one-party state. In some Rwandan regime that organized the 1994 genocide cases (Kwame Nkrumah in Ghana, Julius Nyerere represents tyranny at its most extreme, costing in Tanzania) there was success in molding national more than 500,000 lives and cutting GDP by two- consciousness. Elsewhere the policy proved socially thirds in a matter of months. divisive. Economically, state intervention yielded disappointing results. When combined with war in Source: Chege 1999. fundamental problem has been a failure to develop political institutions able to accommodate such diversity. The highly centralized governance systems in most African countries have failed to take into account sociopolitical differences. This becomes explosive when mass poverty enters the picture. And once started, civil wars retard economic and social development and aggravate poverty—completing the vicious circle of conflict, poverty, and exclusionary politics. Causes of Conflict The high incidence of civil wars in Africa is commonly attributed to ethnic diversity. This inference might seem self-evident, given that rebel movements almost always have ethnic identities. But more systematic 58 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES analysis suggests that Africa’s civil wars conform to a global pattern explained by political and economic factors as well as by ethnic, cultural, and religious diversity (Collier and Hoeffler 1998, 1999; Collier, Hoeffler, and Soderbom 1999; Collier, Elbadawi, and Sambanis 2000a, b). Civil wars are less likely when the young men who otherwise provide ready recruits to rebel causes have earning power in productive activities (as proxied by indicators of economic development, such as per capita Africa’s civil wars GDP or education attainment). To a certain degree, extensive natural conform to a global resources—including diamonds and other minerals—are associated pattern explained by with a higher risk of war. Resources provide a convenient way to sustain political and economic “justice-seeking” rebel movements and are easily lootable assets that can factors encourage “loot-seeking” rebellion. They can also help governments fund armies or buy popular support. The risk of civil wars has also been associated with political repression and the absence of political rights. This literature also suggests that the influence of social diversity on civil wars is more complex than a casual reading would suggest. Ethnic, reli- Box 2.2 Costs of Conflict in Africa CONFLICT IMPOSES HEAVY SOCIAL AND ECONOMIC COSTS GDP. Its civil war may have reduced growth by up to in the countries where it occurs. It also imposes costs 8 percentage points. on neighboring countries by generating refugee flows, Less dramatic but also significant in many countries increasing military spending, impeding key communi- has been an increase in violence and crime. One sur- cation routes, and reducing trade and investment vey of South Africa put the cost of crime and violence (domestic and foreign). The resources diverted from at about 6 percent of GDP; this is not out of line with development uses by conflict—over and above any estimates for a number of countries in Latin America. additional assistance provided by the international In addition to its direct economic and human costs, community—are estimated at $1 billion a year in violence inhibits development in many ways. Farmers Central Africa and more than $800 million in West in predominantly agrarian economies cannot cultivate Africa. To this must be added the costs of refugee assis- and harvest in bandit-infested regions. Vendors cannot tance, estimated at more than $500 million for Central operate beyond limited hours because of the security Africa alone. risk. Factories cannot operate more than one shift These estimates do not include the costs of envi- because employees cannot commute safely to work. ronmental degradation occasioned by the disruptive High and in some cases growing criminal violence has movements of large numbers of people. With an esti- many causes, including unemployment, high inequal- mated 400,000 refugees, Guinea has suffered severe ity, and the limited legitimacy and responsiveness of deforestation. Sudan’s high military spending—more police forces and public security structures. than three times the African average—may have caused investment to fall by 16 percentage points of Source: World Bank; Sunday Times, 14 February 1999. 59 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? gious, or cultural diversity becomes problematic when it approaches polar- ization between two dominant groups. In such polarized societies it is eas- ier to start and to sustain a rebellion. But further diversity can actually reduce, rather than increase, the risk of civil war, because maintaining the unity of a rebel movement composed of diverse groups tends to become harder over time. Better political rights, What, then, accounts for Africa’s high risk of civil wars? higher living standards, and more diversified s The median African country faces a high risk of civil war—though not economies are key in higher than countries in some other regions. reducing the risk of s Four factors drive Africa’s propensity for violent conflict. First, many civil war countries are dependent on natural resources. Second, income in Africa is low—the fact that young men are very poor and often have little education has increased the risk of civil conflict. Third, a lack of democratic rights has also increased the risk of violence. Until the 1990s the only prospect for power transfer in many countries was through violence. Fourth, African countries tend to be small. Even though countries with smaller populations have a lower risk of war, Africa as a region has a higher risk because the risk does not increase proportionately with population size.2 s Allowing for other factors, Africa’s ethnic diversity is a deterrent rather than a cause of civil war. Globally, countries with homogeneous or highly diverse societies are significantly less prone to violent conflicts than are polarized countries. How effective are political reforms and economic development in reducing the risk of civil war? Better political rights, higher living stan- dards, and more diversified economies are key—achievements in any of these areas are associated with a lower risk of conflict. And while the most effective strategy is to make progress on all fronts, better political rights appear to be most important in reducing the risks, both directly and because they are associated with stable economic growth (chapter 1). Conflict Resolution, Peacebuilding, and State Reconstruction The previous section discussed a broad framework for preventing civil wars. Ideally the same framework should provide guidance for resolving conflict and building peace after a war. But once a civil war starts, it takes on a life of its own. Especially during protracted conflicts, mistrust among 60 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES warring factions increases, destruction of economic and social capital is substantial, and opportunistic behavior dominates, including by groups who benefit from continuation of the war. Hence resolving conflict and building peace are much more complex than preventing war. This con- stitutes one of the main challenges facing African countries. Unless a government is committed to political reforms, it is in its best interests to renege on peace agreements once rebels lay down their Resolving conflict and arms. This credibility problem suggests the important role that an building peace are much external agency (such as a supranational regional body) can play in con- more complex than flict resolution. Conflict resolution and peacebuilding efforts in preventing war Mozambique offer important lessons. A commitment to peace by the key protagonists was essential. But without active regional and inter- national assistance it would have been difficult to rebuild public confi- dence, establish government legitimacy, and persuade interest groups to support peace (box 2.3). An end to violence does not ensure sustainable peace. Once hostilities have ceased, peacebuilding and postconflict reconstruction must begin— otherwise violence can easily recur. Peacebuilding is multidimensional, involving activities ranging from demobilization and reintegration of for- mer combatants and resettlement of refugees to demining, emergency Box 2.3 Reversing a Spiral of Decline in Mozambique MOZAMBIQUE OFFERS A STRIKING AND UNLIKELY EXAM- sought a zero-sum solution. Negotiations produced a ple of the reconstruction of national governance insti- new democratic constitution, multiparty elections in tutions after a brutal civil war. Colonized by Portugal in 1994, full demobilization of both armies, and the build- the 16th century, it served primarily as a colony of last ing of a new party-neutral army. Though not part of gov- resort for that country’s poor. Political discontent with ernment, RENAMO enjoys a share of state resources and Portuguese rule produced a guerrilla war and victory in local support in its central Mozambique bailiwick. A sec- 1974, led by the current ruling party FRELIMO. But ond round of elections was held in late 1999. before long FRELIMO’s failing Marxist program was Peace and economic liberalization have changed sabotaged by RENAMO, a guerilla force supported by Mozambique beyond recognition. Though still very Rhodesia and South Africa . The indiscriminate destruc- poor, it was one of the fastest-growing economies in tion of infrastructure and killing of civilians by REN- Africa in the 1990s. Strong macroeconomic manage- AMO and by FRELIMO counteroffensives left most of ment has attracted considerable external aid and higher rural Mozambique a vast killing field. private investment than many of its wealthier neigh- Discussions between the two sides began in 1989, bors. Much remains to be done, however, especially in leading to full-fledged negotiations in 1992. Unlike talks the countryside—and especially with the massive elsewhere in Africa, neither FRELIMO nor RENAMO destruction wrought by recent floods. 61 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? relief, food aid, and economic rehabilitation, including infrastructure repair. The move from war to peace is a long-term process of political, economic, and social transformation. A core element is the development of institutions, such as fair courts and inclusive electoral processes, that facilitate negotiation and nonviolent resolution of disputes. Different wars pose different challenges for peacebuilding. Long wars and International and regional ethnic and religious conflicts are more difficult to end through peace settle- intervention can underpin ments. On the other hand, war weariness can reinforce the desire to main- the credibility of tain peace. How and when third-party intervention is used, and the nature measures to end of the intervention, affect its chances of success. Early intervention can pre- hostilities vent hostility from rising over time, but in cases of extreme hostility not even a peace treaty and a multilateral peace operation can assure peace. What are the policy implications of these findings? A number of gen- eral lessons emerge, although the circumstances and nature of the con- flict will determine the required approach. A peace treaty is an important first step, because such treaties are highly correlated with peacebuilding success. But efforts must also be made to address the sociopolitical prob- lems that caused the war and to develop institutions that encourage eco- nomic growth, equitable distribution of resources, and political inclusion. Regional organizations can make a major contribution. In most conflicts inter- national intervention is needed to end hostilities. The United Nations is the primary institution for peacekeeping and peacebuilding, and in some cases a multinational operation under the United Nations is essential. But attention is increasingly being given to regional approaches, and the Organization of African Unity and subregional organizations have taken on conflict management responsibilities. The establishment within the Organization of African Unity of a conflict management mechanism has increased its capacity to initiate and manage diplomatic interventions and conflict mediation efforts. Subregional organizations such as the Economic Community of West African States and the Southern African Development Community have added security cooperation to their man- dates and engage in joint military training and peacekeeping exercises. The ability of subregional organizations to mount peacekeeping operations has evolved considerably as experience has been gained and capacity built. Because effective collective security arrangements depend on the national security forces that comprise them, attention must be given to creating coherent and efficient national security structures. At the same time, regional security protocols can promote security reform at the 62 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES national level. For example, there is considerable scope for greater regional cooperation to curb cross-border trade in small arms—as has happened in West Africa. The international development community also has a role. The emphasis on African solutions to African problems should not, however, be seen as an excuse for disengagement by the international community. Even when African institutions mount operations, they need considerable financial Security initiatives must and logistical assistance. Recent peacebuilding operations also suggest that be supplemented by security initiatives must be supplemented by efforts to help war-affected efforts to help war- regions develop economically. Multilateral and bilateral development insti- affected regions develop tutions have to actively cooperate with other regional and international economically organizations to ensure coordination and implementation of initiatives. They also need to find different approaches to address the problems of post- conflict countries. Postconflict reconstruction necessitates a comprehensive approach; it is long and costly, requiring both considerable resources in the early stages of recovery and commitment over the long term. Countries coming out of conflict usually face difficult choices and adverse initial conditions. They are faced with the immediate need to pro- vide security, both to protect against violence and to prevent a recurrence of hostilities. But conflict usually undermines individual security and weak- ens state and civil society institutions that could provide law and order and engender trust. Rebuilding such institutions takes time and resources, but the need to restore fiscal discipline, usually with few options to raise rev- enue, leaves little room for major new spending. Other factors also reduce the scope for redeploying budget resources. Civil wars normally fail to produce decisive peace, and the creation of a smaller unified national army does not necessarily save money, particu- larly in the short term. Countries in or emerging from protracted con- flict often face unsustainable debt and arrears to international creditors—debt that stalls the involvement of multilateral institutions in their reconstruction programs. The policies adopted by governments and their development partners can help build and sustain peace. These include measures for: s Resolving institutional breakdown, through the creation of a fully accountable, transparent, and participatory system of government that protects the rights of ethnic, religious, and cultural minorities. s Reducing individual insecurity and consolidating the broader politi- cal process—for example, shifting financial and human resources to 63 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? strengthen institutions of law and order, coupled with demobilization and the creation of a professional, capable, and unified military. s Improving laws and incentives. Efforts should be made early on to cre- ate the legal and incentive environment required to restore professional ethos and ensure the effectiveness and vitality of formal and informal institutions of civil society. Better governance should s Undertaking economic reforms and restoring growth and develop- aim at the 3 E’s: ment. Certain policies could be particularly helpful for repatriating Empower citizens flight capital and recovering assets and investments. As Uganda sug- Enable governments gests, debt relief in support of a sound postconflict reconstruction pro- Enforce law gram can be one such instrument (box 2.4). Restructuring and Reforming Africa’s Institutions of Governance B ETTER GOVERNANCE IS A DEVELOPMENT IMPERATIVE FOR MOST African countries. Most stories of African governance in recent decades are stories of shortcomings. Good governance should aim to achieve the “three E’s”: s Empower citizens to hold governments accountable through partici- pation and decentralization. s Enable governments to respond to new demands by building capacity. s Enforce compliance with the rule of law and greater transparency. Box 2.4 The Contribution of Debt Relief in Uganda’s Repatriation of Flight Capital TO SUPPORT UGANDA’S REMARKABLE ECONOMIC In 1992, $15 million in flight capital left Uganda. reforms after 1992, international financial institu- By 1997 the government had turned the tide: $311 tions made it the first country to quality for debt million—17 percent of private wealth—was repatri- relief under the Heavily Indebted Poor Countries ated. Still, there was enormous potential for continued initiative. This move had dramatic effects on confi- repatriation. Were all flight capital to return, the stock dence. Institutional investor risk ratings jumped of private capital could be doubled. from 5.2 to 20.3, overtaking countries such as Côte d’Ivoire. Source: Collier 1999; Collier, Hoeffler, and Pattillo 1999. 64 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES These objectives are not simply current fashions. Comparative studies point to the importance of creating durable and inclusive systems of polit- ical representation, especially in ethnically diverse societies. Improving the capacity of the state is also key, not only for economic management but also for strengthening and legitimizing the state (box 2.5). To achieve these goals, Africa needs institutional reform tailored to each country’s social, political, and economic priorities. Building on recent gains in political participation, most countries need to develop systems and structures that facilitate political pluralism, toler- ance, and inclusion; to institutionalize constitutional government, the Box 2.5 Can Stable Development States Emerge in Ethnically Diverse Africa? AT THE DAWN OF AFRICAN INDEPENDENCE, W. ARTHUR parent budget process enables repeated and stable bar- Lewis (1965) recognized that cultural diversity called gaining that leads to an outcome owned by all parties. for consensus-based, decentralized, and inclusive gov- There is also a need for reliable information and con- ernance rather than centralized one-party authoritari- tract enforcement for the business community, to anism. Lewis’s insight has been corroborated by recent level the playing field between individuals and studies stressing the importance for development of groups—say, in access to credit. A third point con- political arrangements able to foster compromise and cerns the role of governments in ethnically diverse resolve conflicting claims. A functioning democracy societies. Public sectors in such countries are faced offsets the adverse effects on growth of high ethnic with continuous pressures to dispense patronage diversity, whereas political rights have little effect on along ethnic lines. Active measures are needed to con- growth in ethnically homogeneous societies. tain this, such as competitive examinations for entry, In a study of Europe, Tilly (1993) finds that repre- tighter definitions of job functions, and performance- sentative institutions and successful states emerged out based assessments. In addition, the boundary between of intergroup bargaining where the state gradually public and private service provision might be shifted assumed functions—including the provision of secu- toward the latter. rity—previously provided through ethnic groups. All these observations point in a similar direction. Under the right conditions this can lead to a develop- Acquiring capacity—to provide information, manage ment-oriented state, which ensures that economic resources transparently, and provide services effectively growth is equitably distributed to reduce economic to businesses and households—will be essential to the disparities (Collier and Binswanger 1999). For such consolidation of stable, representative systems of gov- coalition politics, a polarized society divided into just ernment in Africa. The use of ethnic identification to two contesting ethnic groups will find a development- meet needs and perform functions will be replaced by oriented bargaining equilibrium more fragile than one other means, facilitated by the state. Governance with many groups, provided political arrangements reforms that increase such state capabilities are win- enable these groups to represent their interests. win—contributing both to the quality of economic In Africa these principles imply, first, the need for management and to the consolidation of durable polit- open information on policies and budgets. A trans- ical systems. 65 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? rule of law, and respect for human rights; and to promote accountability and transparency in democratic institutions. Measures to bring service delivery closer to the people can provide a useful entry point in creating constituencies for broader public sector reform. At the same time, regional initiatives can improve enforcement of legality and the rule of law—and hence better governance—within countries. Proactive measures are needed to build political Political Dimensions of Governance accountability and power sharing, starting with the The sociopolitical environment in most African countries is in flux. public service Countries are trying to break away from patterns of authoritarianism, but most have not yet fully instituted participatory systems of governance. Multiparty electoral systems can be put in place relatively quickly, but developing accountable, credible, and durable democratic institutions is a longer process. The role of political leaders in this process cannot be overemphasized: proactive measures are needed to build political ac- countability and power sharing, starting with the public service. Political leaders can lead by example and instill the principles of democracy in soci- ety. Over time nondemocratic practices will weaken and democratic progress will take hold, helping to create national unity. Individual African countries have to determine the political struc- tures that suit them best. Democracy can have many faces, but some general principles must be shared by all: constitutional government, respect for human rights, adherence to the rule of law, and freedom of expression and association. Reforming countries are struggling to insti- tutionalize these principles. To succeed, reforms will need to strengthen the capacity of citizens to engage in collective action and hold govern- ments accountable, while increasing government capacity to be responsive. Given the increased availability of small arms, the question of provid- ing security for the state and its people is at the center of the debate on political reform in Africa. Better governance should promote the demo- cratic oversight of security forces and protect people against violence and crime. There are positive examples of security reform in Africa—includ- ing South Africa’s open discussions on defense policy since the end of apartheid, as well as its integration of disparate forces into a national army, Mali’s public debate on military restructuring and promotion of a mora- torium on small arms, and Zimbabwe’s police reforms, which focus on accountability and responsiveness to community needs. 66 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES Elections and Electoral Systems Elections alone do not create functioning democracies, and many African states that have moved to free elections need to fortify basic democratic tenets. Several factors stand in the way, including the incongruence between Western electoral systems and Africa’s ethnic politics. African countries must develop democratic systems that facil- African countries must itate political inclusion and representative parliaments, able to develop inclusive respond to the needs of a citizenry that defines itself largely in terms representation—but of ethnic kinship. have many options for Most countries have adopted electoral systems from established doing so Western democracies, making little attempt to adapt them to local reali- ties or needs. In many countries elections have been conducted on a win- ner-takes-all basis, excluding some groups from political power. There is a high development price to be paid for this, as the most economically successful and best-educated minorities have sometimes been among those excluded. Ways must be found to make electoral systems more inclusive, through diverse arrangements at the national and local levels. These might include proportional representation or hybrid systems. Even when people vote in ethnic or religious blocs, electoral systems can promote factional repre- sentation and stability. What is required is more consensus-based, decen- tralized, federalist-oriented, inclusive forms of governance. Although a strong state is needed and economic policy considerations should inform proposals for political reform, there are a number of options for broader and more inclusive representation in Africa: s Informal power sharing among elites. s Proportional representation that protects minorities. s Bicameral legislatures in which one (upper) chamber represents diverse regional or ethnic groups, giving them equal power regardless of their numerical or economic strength. s Regional autonomy, with compensation mechanisms for less advan- taged regions. s Federalism with national-level guarantees of individual rights so that discrimination against minorities in specific states can be assuaged by higher intervention. s Confederacy, providing constituent groups with wide powers short of national defense and foreign policy. 67 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? All these national governance concepts provide more space for autonomous local initiatives than the political systems currently in place in most African countries. Though most attention has been given to pres- idential and national elections, devolution of political power can promote good governance. Locally elected officials are more easily held account- able and have greater incentives to respond to community demands for Innovative structures that better services. Population groups that may not be well represented at the facilitate broader national level can still assume responsibility for managing their affairs at participation and provincial levels. In many cases innovative structures that facilitate representative broader participation and representative governance can more readily be governance can more put in place at the local than at the national level. Traditional and formal readily be put in place at governance structures can also be more easily blended and power-sharing the local than at the arrangements worked out at subnational levels. national level Although electoral systems can facilitate political inclusion and rep- resentation, effective political parties are also needed. Throughout Africa, greater political freedom has increased the number of political parties. But these parties often lack a broad constituency or distinctive platforms. New parties also need to develop organizational skills and access financial resources. Further, political parties must ensure that women have opportunities to participate in the political process, both as candidates and as informed members of the electorate. Local and provincial politics can provide a useful training ground for participation in national politics. The high cost of elections and political campaigns must be contained if elections are to be sustained without substantial external support. In many African countries the costs of campaigning are very high relative to income levels—in Uganda, for example, campaign costs for parliamen- tary candidates were as high as $60,000 in 1998. This is partly because of widely dispersed rural populations, poor and costly transportation and communications, and limited media coverage. But in some cases cam- paign costs are driven up by traditions and expectations of political patronage. The high cost of campaigning undermines political competi- tion by excluding those who lack sufficient resources. The appropriateness of state funding for political parties and campaigns is widely debated. A legislated limit on campaign spending could help con- trol the cost of campaigns and broaden the pool of candidates. Appropriate and frequent access to media channels by all parties—as well as more press freedom—would guarantee public exposure at a fixed cost, even where the government media dominates. Finally, to preserve public confidence in 68 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES the political process, elections must be transparent. Independent electoral institutions can help ensure this, as in Ghana (box 2.6). A further challenge for many African countries is achieving peaceful political succession. For this, a sound institutional base and commitment to democratic principles are required. The rule of law and due process should apply to political leaders, who must be held accountable for their actions while in office. Violations of human rights cannot be tolerated. At Peaceful political the same time, political leaders need to be assured that they will be finan- succession requires a cially and physically secure upon retirement. In countries undergoing sound institutional base political transition it may be necessary to consider special arrangements, and commitment to such as amnesty, to ensure a peaceful political change. A number of African democratic principles countries have already adopted constitutional mechanisms, such as presi- dential term limits, to facilitate orderly political succession. Leaders who have served with integrity and diligence and who are accorded adequate provisions, both financially and in terms of function, can continue to play an active role in the development of their countries and their continent. Institutional Development and Better Governance In a democratic, participatory political system, all three branches of government—executive, legislative, and judicial—have important roles Box 2.6 The Electoral Commission of Ghana AS AN INDEPENDENT INSTITUTION CHARGED WITH REG- Advisory Committee brought together representatives istering voters and candidates, organizing polling, of political parties and the election authority, provid- counting votes, and announcing results, the Electoral ing a forum for constant dialogue. Soliciting the active Commission of Ghana has earned a reputation for pro- involvement of and collaborating closely with domes- fessionalism and integrity since the multiparty elec- tic poll-watching groups also enhanced transparency tions of 1992. It operates at arm’s length from the and greatly boosted public confidence in the outcomes ruling party and is widely seen as impartial—which is of the elections. why Ghana’s opposition party accepted defeat grace- In preparation for the December 2000 elections, the fully in the 1996 elections. electoral commission has helped draft a bill that seeks In preparing for the 1996 elections, the electoral to address some of the remaining concerns of political commission undertook reforms that contributed to parties. It has also convened meetings of the Inter Party fair elections and general acceptance of the results. It Advisory Committee to discuss outstanding issues and responded to concerns about the electoral system and problems in the electoral process. The commission is created a transparent election process that helped making a marked contribution to strengthening resolve electoral conflict. The innovative Inter Party Ghana’s nascent democracy. 69 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? to play. Each branch must function effectively, and a balance of power must be established among them. Few African countries have reached this point. The nature and type of government, and its responsiveness to pub- lic demands, will be determined by the ability of the executive to provide leadership while respecting the independence and institutional integrity of the legislature and the judiciary. In turn, the legislature and the judi- Public involvement is ciary are the primary vehicles for upholding constitutional provisions, essential for reforms to promoting the rule of law, and protecting citizens’ rights. be sustained, and Political reform has led to a renewed emphasis on constitutionalism. institutional development But constitutions can only provide for predictable and stable governance must be embedded in and protect human rights if they are recognized as the ultimate source of broader political and authority. To the extent that constitutions are repressive, they will not governance reforms institutionalize democracy. Further, political leaders must adhere to con- stitutional principles, and the military and the judiciary must uphold them—processes that can be promoted by popular awareness of consti- tutionally defined rights and duties. State institutions. Institutional development cannot be limited to build- ing technical capacity—institutional accountability is also critical. Public involvement is essential for reforms to be sustained, and institutional development needs to be embedded in broader political and governance reforms. Good governance requires a competent executive that respects the constitution and the rule of law and that exercises sound leadership. It also requires institutions that counterbalance executive power and hold the executive accountable. Parliament is especially important, particularly in performing legisla- tive duties such as scrutinizing budgets. To enhance parliamentary per- formance, most new African democracies need better information, equipment, technical resources, and professional staff. Efforts to build par- liamentary expertise, especially of key committees, would also facilitate legislative oversight. Some of Africa’s development partners are helping to make parliaments more effective by providing equipment and training. They could also help by reviewing their procedures and ensuring that development assistance agreements, which fund a large part of public spending in many countries, are subject to legislative review (chapter 8). In many countries political liberalization has led to the creation of independent agencies that report to parliaments, including ombuds- men, human rights and legal commissions, auditors-general, and anti- corruption agencies. But these bodies often lack the autonomy and resources needed to carry out their tasks. Few auditors-general, for exam- 70 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES ple, have the resources and support needed to provide timely, high-qual- ity reports (chapter 1). Strengthening such agencies would increase par- liamentary effectiveness. While this is primarily a domestic responsibility, development partners can also help—at relatively little cost. Kenya’s Office of Controller and Auditor-General offers a good, and perhaps unexpected, example of how this complementarity can work, though the dividend from its findings has been limited by the The rule of law is weak follow-up to its recommendations (box 2.7). essential for a The rule of law is essential for a predictable, stable environment in predictable, stable which conformity to formal rules—rather than reliance on patronage and environment in which connections—prevails. It is as necessary for facilitating investment and conformity to formal rules business transactions as it is for protecting political rights and freedoms. prevails But upholding the rule of law also requires an independent, professional, and competent judiciary. Access to justice is still denied many Africans, particularly in rural areas, because of weaknesses in the legal system. In some cases private sector development is constrained by limited legal expertise in areas such as financial and contract law. In others corruption and delays in the administration of justice have undermined public con- fidence in the judicial system. For all these reasons, legal reform has become a priority in many countries, and one that Africa’s development partners are beginning to assist. A comprehensive legal sector review can help countries prioritize reforms. A well-functioning and credible legal system requires a merit- Box 2.7 Kenya’s Office of Controller and Auditor-General THE KENYAN OFFICE OF CONTROLLER AND AUDITOR- Parliament’s public accounts committee has the General is an independent body established to audit all power to summon civil servants to explain abuses of government accounts and to report annually to parlia- public funds based on the office’s reports—and it ment. It has fulfilled its obligations without fear or does so. The press uses the reports to embarrass favor since Kenya’s independence in 1963. Despite offenders. The reports are useful in assembling constant intimidation and attempts to whittle down its Kenya’s fiscal statistics and in keeping donors authority, the office has consistently provided full informed of trends in public spending. In a country accounts of the abuse of public funds at all levels of facing entrenched corruption in the public service, government. Although the state has never been quick the Office of Controller and Auditor-General is an to prosecute the culprits, the office’s reports provide a island of institutional integrity whose output could forum for parliamentary debates in which cabinet min- support future reforms. isters are held accountable for gross malfeasance in their ministries. Source: Chege 1999. 71 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? based career structure, adequate compensation, and mechanisms to ensure accountability. Specific training is often needed to meet new demands on the legal system. Streamlining legal procedures and increas- ing the transparency of legal decisions can help contain corruption. In addition, a stronger legal infrastructure and the use of computer tech- nology can expedite legal decisions, reduce opportunities for corruption, A vibrant and diverse civil and increase transparency by helping to disseminate a public record of society is needed to hold court proceedings at low cost. Alternative dispute mechanisms and pro- governments accountable vision of legal aid improve access to justice. Civil society. Good governance is not the sole responsibility of govern- ments. A vibrant and diverse civil society is also needed to hold govern- ments accountable. The freedoms of association, information, and assembly resulting from political transition have expanded civic activism throughout Africa. Civil society organizations have an important role to play in articulating popular interests, monitoring government perfor- mance, and facilitating participation in governance. But this role has to be earned. Not all nongovernmental organizations are genuinely representative or democratic. Some are formed around prominent individuals; others serve narrow interest groups. In some cases groups that helped bring about political transition find it hard to adapt to new circumstances. Nonetheless, vibrant interaction between civic groups—whether traditional councils of elders, ethnic mediators, or con- temporary religious and secular organizations—has been indispensable in resolving conflict in African societies. Civil society organizations have also been at the forefront of efforts to combat corruption. Public education and dissemination of information are among the most significant functions of civil society organizations. The media have an important role to play in this regard, and new technologies have rad- ically improved public access to information. Although political liberal- ization has usually increased press freedom, private print and electronic media are often still subject to censorship and restrictions, information that should be in the public domain remains difficult to access, and jour- nalistic harassment continues in some countries. Continued state domi- nation of the media also reduces the possibility of objective, nonpartisan reporting during elections. In most cases private media are underfunded and poorly equipped, and training is needed to enhance skills and professionalism. Better cov- erage of economic and security issues would increase public awareness of policies in these areas. Expansion of independent radio and television 72 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES would also increase public access to information. Although newspapers and magazines have become an important source of information in cities, the difficulties and expense of distribution—coupled with low literacy— mean that radio is still the primary means of reaching mass audiences. Although the private sector is relatively weak in most African countries, political and economic reforms are creating a more enabling environment for private activity. A growing private sector and the resulting increase in A growing private sector economic and employment opportunities outside government contribute contributes to economic to economic growth and better governance. A diverse and capable private growth and better sector can also provide and attract the investment that helps open up the governance economy and society and create options for people to act on their own ini- tiative. In addition, private actors can function as countervailing forces to executive power. Business associations, such as those developing in West, East, and Southern Africa, also provide a way to articulate business inter- ests in the provision of public services (chapter 7). Creating Demand for Good Governance Accountability and transparency are at the heart of efforts to improve governance in Africa. Corruption often flourishes where institutions are weak, where the rule of law and formal rules are not rigorously observed, where political patronage is rife, where the independence and profes- sionalism of the public sector have been eroded, and where civil society lacks the means to generate public pressure. Once entrenched, corrup- tion hinders economic performance, increases the cost of public invest- ment, lowers the quality of public infrastructure, decreases government revenue, and makes it burdensome and costly for citizens—particularly the poor—to access public services. Corruption also undermines the legitimacy of governments and erodes the fabric of society. Combating corruption is not straightforward or easy. But it is not impossible, especially with increased public awareness of the problem. Indeed, as the costs and consequences of corruption have become more publicly known, efforts to fight it have intensified throughout Africa. Although results take time, civil society organizations and the press have made corruption a public issue and challenged governments to address it. For example, business associations in West Africa are documenting the incidence of unofficial transport levies that are often twice as high as for- mal levies. Broad coalitions of civil society, the private sector, and gov- ernments are required to combat corruption, underpinned by reforms 73 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? that increase accountability and transparency and enhance public partic- ipation in decisionmaking. Anticorruption strategies must be realistic, achievable, and consis- tently implemented. They also have to be country specific, because what works in one country may not work in another. Some countries have made a lot of progress by reforming tax laws and investment codes, elim- Anticorruption strategies inating price controls, reducing permits and licenses, and revising pub- must be realistic, lic procurement procedures. Constitutional and legal requirements for achievable, and assets disclosure by political leaders and senior officials can also make a consistently implemented difference. By contrast, stop-start efforts, a piecemeal approach, overemphasis on legal measures, and sporadic anticorruption campaigns are unlikely to yield lasting results. Specialized agencies and anticorruption bodies can only be effective if they have sufficient independence, authority, and resources. Ineffective bodies that lack real power can undermine rather than enhance public accountability. Public sector management. A professional, meritocratic, and qualified public service is essential to ensure effective and efficient delivery of pub- lic services and to combat bureaucratic corruption. For too many Africans, public agencies—their most direct point of contact with gov- ernment—are synonymous with poor service, corruption, and ineffi- ciency. Popular dissatisfaction undermines confidence in public institutions, undermining government legitimacy. Just as other state institutions need to adapt to changing circumstances and be made more efficient, cost-effective, and accountable, so does the public service. In most countries this will require a fundamental change in orientation. Instead of exercising control, agencies have to move toward facilitation and public service delivery. Efforts at civil service reform have mostly been in the context of adjustment programs negotiated with the World Bank and International Monetary Fund, and have focused on reducing the wage bill rather than on improving quality. While capacity has increased in some areas (cen- tral banks, ministries of finance), there has been little progress in devel- oping the capacity of employees more broadly or in reversing the decline in public service institutions. Revitalizing public service agencies will require transparent, merit-based recruitment procedures, promotion based on performance, sound management, in-service training and career development, and interlocking checks and balances to counter corruption. Internal rules that deal with professional ethics have to be 74 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES consistently and impartially applied. Piecemeal reforms are unlikely to be more than a short-term palliative—what is needed is an overarching strategy for sequencing changes. Political commitment at the highest level is also needed if reforms are to be successfully and consistently implemented. Pay policy in the public sector is especially challenging. Since the early 1970s most public sectors in Africa have been subjected to severe wage Without higher pay, it will compression, as tight as a factor of two to one in Tanzania. Salaries of be impossible to attract, public employees at the low end of the pay scale are often commensurate retain, and assure the with or higher than in the private marketplace. But at the high-skill end, integrity of highly skilled even after a recent trend toward widening differentials as part of reform public officials programs, earnings are often far below market levels. Trained in accor- dance with European qualifications and fluent in the main international languages, African professionals are highly mobile. As a result many African governments cannot, for example, retain qualified auditors and accountants. Unless a way can be found to improve pay at the higher levels, it will be impossible to attract, retain, and assure the integrity of highly skilled public officials. The problem is often not one of total resources, as the number of senior officials is quite small, but of willingness to accept sig- nificant differentials in pay between top administrative officials and lower-level employees in an integrated civil service. Countries could con- sider introducing a senior civil service for highly qualified civil servants. Entry to such a cadre would be competitive and meritocratic, and would be rewarded by higher salaries and better professional opportunities. Political liberalization has generated a number of examples of partici- patory public sector initiatives. User surveys and other quantitative score- cards of public services are increasingly used in African countries, and the results are increasingly publicly available. User participation in service delivery and oversight is rising, empowering parents to participate in the governance of schools, allowing user groups to manage irrigation systems, involving community groups in the delivery of urban water and waste sys- tems, and so on. Social funds have supported efforts by communities and nongovernmental organizations to invest in and deliver services to the poor in some countries. Increased transparency and participatory service delivery can be mutually reinforcing, as illustrated by Uganda’s education reforms (box 2.8; chapter 4). Decentralization. Decentralization is increasingly seen as a way to improve service delivery and increase popular participation in gover- 75 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 2.8 Toward Transparent Funding: Uganda’s Education Reforms IN UGANDA A 1996 BUDGET TRACKING SURVEY HIGH- parent-teacher associations. To eliminate the diversion lighted a stark gap between intent and reality: less than of funds for overhead and other purposes by govern- 30 percent of the resources targeted by the Ministry of ment bureaucracies, reforms included the writing of Finance for nonwage education spending actually checks directly to individual schools. The amounts of found their way to schools. Uganda is committed to these checks were posted publicly in each locality— universal primary education, to devolving responsibil- empowering parent-teacher associations and others to ity for delivering services to local authorities, and to monitor how the resources were used. In addition, ran- involving citizens directly, including through active dom audits were initiated to follow up. nance. Decentralizing responsibility for the delivery of front-line ser- vices—or, more broadly, for decisions on the allocation of scarce public resources—from central to local governments can bring government closer to the people. But decentralization is no panacea. Nor should it be used as an excuse for central governments to reduce their responsibilities to regions. Decentralization has to be part of a national policy to create more responsive and equitable governance, and has to be managed carefully. Effective communication between local and central governments needs to be maintained, and measures of accountability implemented to counter corruption. Equitable allocation of central resources is also needed, as is the ability of decentralized authorities to generate and allocate their own resources. Decentralizing government may also require additional resources, at least in the short term, unless local government structures already func- tion effectively. In most cases local institutions are weak and need to be strengthened before taking on additional responsibilities. Providing infrastructure, equipment, and training can be costly, and government employees accustomed to working in central offices are often unwilling to relocate to provinces and districts. Decentralization can facilitate innovation and experimentation, but local structures need to deliver results if they are to improve governance. There is no guarantee that decentralized authorities will be more responsive than central govern- ment agencies to the needs of women and other marginalized groups. South Africa’s approach to decentralization offers some suggestions on overcoming these constraints (box 2.9). Setting a course of action. Given the range of issues to be addressed with limited resources, all countries have to decide which actions to prioritize. This involves more than just copying what has worked elsewhere—close 76 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES attention to the minimum package of required governance measures and to the country’s initial conditions are essential. In countries where governance is reasonably strong and where macro- economic reform and state restructuring are well advanced, public man- agement reforms can move to the forefront of the governance agenda. But such reforms pose a formidable challenge, because the seemingly dis- parate elements of a high-performing public sector are in fact closely Public agencies are likely interdependent. Priority social needs can only be met if the budget sys- to deliver results only if tem enables politicians to choose among competing initiatives and, once they have strong they have made these choices, to resist pressures to reverse their commit- incentives to perform ments. Even with sufficient resources, public agencies are likely to deliver results only if they have strong incentives to perform—that is, if they are in some way held accountable. Box 2.9 Decentralization in South Africa FEW COUNTRIES HAVE TAKEN SUCH A FUNDAMENTAL local governments to access capital markets directly, approach to reforming their intergovernmental systems while ensuring clear rules on disclosure and public sec- as South Africa, which has embarked on an ambitious tor bankruptcy. In addition, governments are allowed to program of political, fiscal, and financial decentraliza- form partnerships with the private sector, including tion. At the political level, racial jurisdictions were elim- nongovernmental organizations, for service delivery. inated with the end of apartheid. New elections were As in other countries, many local governments lack held for all tiers of government, including several new capacity for effective management. So, South Africa has provinces. A new constitution was introduced to define introduced an innovative demand-driven approach to and protect the powers and responsibilities of each tier. capacity building. A fund has been created to help Fiscal reform sought to improve the distribution of municipalities hire experts and strengthen their ability income by reassigning expenditures (education and to work with private agents. health are centrally funded provincial responsibilities), Though South Africa’s decentralization is far from providing central funding for redistributive subsidies, complete, several lessons are apparent. First, decen- and developing stable and predictable intergovern- tralization can be compatible with macroeconomic sta- mental grants. The amount of redistribution to a local bility and pro-poor distribution policies. Second, a jurisdiction is based on the average income per capita comprehensive approach is required in which institu- of households residing there, as well as the share of tional and fiscal restructuring precedes financial decen- rural inhabitants for provinces. Local authorities can tralization. Third, the overall approach need not be set user charges, property taxes, and certain business completely uniform—as between major urban con- taxes, but provinces are under the strict oversight of centrations and other local jurisdictions—and some central authorities. aspects may require tight central oversight. Finally, a On the financial side, a program has been created to demand-driven capacity-building mechanism can transfer capital grants from the center to local levels, and greatly assist the process, especially for new or poor a regulatory framework is being established to enable provinces or local authorities. 77 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Technocratic or top-down public management reforms require the most robust governance foundation if they are to succeed. This is because they focus on the core operation of the bureaucracy rather than on the provision of specific goods and services. Thus they are less easily subjected to civic scrutiny and monitoring. These reforms are more likely to suc- ceed in countries where sustained civic engagement, functioning over- For many African sight institutions, accountability to the legislature, and progressive and countries the most competent political leadership have already created a culture of commit- manageable public ment to development performance throughout the bureaucracy. governance reforms will Where institutions are weaker, public management reforms need to focus on increased proceed in tandem with measures that raise awareness—such as an anti- transparency and greater corruption initiative that draws civic attention to how politicians and participation in service bureaucrats use and abuse public resources. This approach should be han- delivery dled with care, however. If governance institutions are too weak, reforms may be implemented inadequately—with the net result not of better gov- ernance and reduced corruption, but of heightened civic frustration and disillusion. At the limit, public institutions might prove too brittle to absorb the heightened conflict, raising the risk of precipitating a debili- tating downward spiral. For many African countries the most manageable public governance reforms, at least in the initial stages, will focus on increased transparency and greater participation in service delivery. Both reforms aim to empower citizens and their government counterparts to engage more directly with one another and to build demand for results-based good governance. Progress—or lack of it—is also easy to monitor. Once a firm basis has been built, more complex governance reforms can be under- taken. Ongoing efforts in Ghana and Guinea show how different coun- tries are striking the balance between technocratic and participatory reform (box 2.10). While the outcomes of these efforts will only be seen in the longer term, they represent attempts to devise workable institu- tional reforms and improve government. Regional and Global Dimensions Just as regional economic cooperation and integration can help African countries economically, regional initiatives and institutions can strengthen governance in individual countries. Evolving geopolitics may create opportunities to strengthen international monitoring and enforce- ment even in countries where judicial independence is lacking. Regional 78 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES cooperation to combat corruption could also support the anticorruption efforts of individual countries. Regional institutions. Regional and subregional organizations can put pres- sure on member governments to conform to norms of good governance and democratic behavior. In recent years the Organization of African Unity has emerged as a strong advocate of democracy throughout the con- tinent, and election observation is now one of its functions. At its Algiers Summit in 1999 it passed a resolution to exclude governments that come to power through extraconstitutional means. Though commendable and bound to send a strong signal to potential coup-makers, this resolution does not address those who retain power by refusing to submit to elections or by rejecting the free and fair results of the ballot box. Box 2.10 Different Routes to Better Government in Ghana and Guinea GHANA AND GUINEA ILLUSTRATE ALTERNATIVE EM- 303 rural communes by broadening their member- phases in reforms—technocratic and participatory— ship to include a wide range of social, cultural, eth- that aim to make government more effective and nic, and economic groups, and by making regional responsive. Building on previous reform, the reform administration increasingly accountable to these launched by Ghana in 1997 aimed to reinvent and mod- communes. ernize the core public sector. Its agenda included: s Creating a demand-driven local investment fund to s Reforming subvented agencies that employ more support communal social and infrastructure projects than 400,000 of the country’s 600,000 public with matching grants, as well as introducing revenue- employees, providing them with a coherent mandate sharing mechanisms and other systems of matching and sufficient resources, defining their relations with finance. line ministries, and strengthening their planning and s Realigning subnational administration to reflect the monitoring. shift in accountability to local communities. This s Strengthening regulation within the public sector, includes revising the administrative frameworks that improving incentives and human resource manage- define roles and responsibilities of different levels of ment. government, improving participatory mechanisms s Realigning line ministries to adapt to decentraliza- (such as parent-teacher associations, health center tion and to enhance public-private partnerships, and management committees, and farmer groups), introducing targets for service improvements, such as building capacity at local levels, and introducing an reducing the average time for delivery of services incentive system to reward well-working communes. from one month to a week or less. Today almost three-quarters of budgeted funds are Departing from its long tradition as a top-down, cen- spent on administrative functions upstream, but Guinea tralized bureaucracy, Guinea’s reform program seeks to hopes that within 10–15 years at least 70 percent of bring government closer to the people. Initiated in mid- operating funds will reach the service delivery level. It 1996, its agenda includes: also hopes for an 80 percent increase in the quality of s Enhancing the responsiveness of the 33 urban and and access to services for the rural population. 79 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Harmonization of rules and procedures within subregional groups can help institutionalize the rule of law within individual countries. Subregional conventions can help strengthen country-level property rights, financial regulation, and contract enforcement. Similarly, agree- ments to exchange information and collaborate on investigations can counter crime and corruption within subregions and individual coun- Subregional conventions tries. There is considerable scope for involving regional nongovernmen- can help strengthen tal organizations to monitor compliance and develop expertise. OHADA country-level property provides an example of such an initiative (box 2.11). rights, financial Other regional mechanisms could encourage observance of human regulation, and contract rights, democratic principles, and governance practices by African coun- enforcement tries by providing opportunities to exchange experiences and monitoring progress. Regional initiatives to engage former political leaders in advo- cacy for issues such as HIV/AIDS or regional integration could also be considered. There is also scope for building capacity within parliaments and independent agencies by sharing information on a regional basis. Box 2.11 The Organization pour l’Harmonisation en Afrique du Droit des Affaires IN THE EARLY 1990S SOME FRANCOPHONE AFRICAN discharge of liabilities, debt collection proceedings, countries realized that a lack of confidence among pri- and arbitration. vate investors was hurting their efforts to promote the OHADA’s institutions comprise a council of min- private sector. Problems included obsolete legislation isters of finance and justice with a secretariat in dating from the colonial period; difficulties in enforc- Yaounde (Cameroon), a common court of justice in ing contracts, particularly in the banking sector; and Abidjan (Côte d’Ivoire) with final jurisdiction over unpredictable court judgments. To address these business transactions in member countries, and a issues, 15 countries signed a treaty establishing the regional school of magistrates in Porto Novo (Benin) Organization pour l’Harmonisation en Afrique du to provide continuing education. Droit des Affaires (OHADA) in 1993. OHADA has increased confidence among the busi- The treaty aims to facilitate regional economic ness community, and several contracts have been integration and international trade by providing signed under its provisions. But it still faces a number unified, modern business legislation for member of challenges. There is insufficient dissemination and states, strengthening legal and judicial security for knowledge of OHADA laws. There have been sub- enterprises, promoting arbitration to settle contrac- stantial delays in setting up a court registry. There is tual disputes, and providing continuing education insufficient financing for OHADA institutions. And to magistrates and judicial personnel. To date, uni- there is a need to monitor implementation, build form laws have been enacted for general commercial OHADA jurisprudence, identify additional legal areas law, corporations and economic interest groups, requiring harmonization, and assess best means to secured transactions, bankruptcy proceedings and establish links with anglophone countries. 80 IMPROVING GOVERNANCE, MANAGING CONFLICT, AND REBUILDING STATES Global institutions.Globalization increasingly demands adherence to international standards. Faced with a variety of choices, serious long-term investors are unlikely to be attracted to countries with rampant corrup- tion and weak contract enforcement and property rights. International agreements will increasingly complement regional and subregional arrangements to promote good governance. African membership in rules- based organizations such as the World Trade Organization will support Countries are subject to compliance with international norms in certain areas. The development much greater scrutiny of of international legal institutions and criminal tribunals means that coun- internal affairs than tries are subject to much greater scrutiny of internal affairs than before. before Recourse against abuse of human rights is increasingly found in the inter- national arena. Throughout the world, the impulse is toward integration and cooper- ation through the creation of trading blocs as well as political and security arrangements. New technologies have permitted the free movement of information and ideas. Ease of travel and communications has strength- ened cross-border connections between countries. This process is under way in Africa in both formal and less formal ways. Although Africa has long had regional integration groupings, they and their individual mem- ber countries need to come to terms with the governance implications of these potentially far-reaching changes. Much more can be done internationally to promote good governance in Africa, focusing on actions in industrial countries. Some steps, such as the OECD convention against bribery, are being implemented. Tighter regulations on money laundering and international crime will also help African countries by, among other things, countering capital flight. Increased attention is also being paid to weapon flows, including through binding international codes of conduct for arms exports. Concern about conflict in Africa and how it is funded has raised the question of whether tighter international controls on the export of natural commodities— such as diamonds—can reduce the resources available for financing wars without harming legitimate exporters. Formulating a broader regional approach toward conflict management and economic progress will be a priority for Africa and its development partners in the new century. Development partners. Development agencies have both a special respon- sibility and an unusual opportunity to support efforts to make Africa’s governments more transparent and accountable to their people. The responsibility arises from their obligation to ensure that aid is used for its intended purposes. More fundamentally, it arises from the need to direct 81 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? assistance to countries willing to make effective use of all resources, not just those of the agency. The opportunity arises from donors’ access to the full range of stake- holders in recipient countries—not just government officials but also the media and opposition groups. Donors are only beginning to take advan- tage of this opportunity. The African Development Bank has recently Donors have a special taken steps to promote good governance by including governance crite- responsibility and an ria in its lending decisions. This is in line with the trends in bilateral assis- unusual opportunity to tance agencies and international financial institutions. Governance has support efforts to make also been a criterion in allocations of funds from the World Bank’s Africa’s governments International Development Association (IDA), and the weight of per- more transparent and formance in IDA allocations has been increasing. accountable Africa’s development partners can also promote better governance by providing assistance to strengthen institutions such as the judiciary and the legislature, or to support a fledging independent press. Many are already doing so, and hopefully will continue over the long term, recognizing that democratic institutions and behavior cannot be created overnight. Donors can also ensure that their practices conform to standards of good governance and that they support openness and accountability not just to their own polities but also to Africans and their representative institutions (chapter 8). Just as private corporations are increasingly adopting codes of conduct to promote good corporate governance, so too Africa’s development partners should consider adopting codes of conduct that cover their own practices and the ultimate use of funds. The Cold War promoted a culture among African countries and their development partners of nontransparent man- agement of aid resources. But these expectations are changing rapidly—a process that it is in the interests of Africa’s people to move even faster. Notes 1. This argument goes back as far as James Madison’s Federalist Paper 10. Granting political factions—be they ethnic, geographic, racial, or religious— political space for self-expression increases confidence in the larger unit as long as the factions operate within the law and the constitution. This perspective is contrary to the centralizing tendencies that African leaders adopted after 1960. 2. If a hypothetical nation of 100 million people is divided into 10 nations of 10 million people, then the risk of civil war occurring somewhere among the 100 million people triples. There is also a much higher risk of international war simply because there are many more nations. 82 CHAPTER 3 Addressing Poverty and Inequality S OME 300 MILLION AFRICANS—ALMOST HALF THE POPULA- Growth is essential to tion—live on barely $0.65 a day (in purchasing power par- reduce the number of ity terms), and this number is growing relentlessly. poor people—but Moreover, a severe lack of capabilities—education, health, attention must also be nutrition—among Africa’s poor threatens to make poverty paid to inequality “dynastic,” with the descendants of the poor also remain- ing poor. The rural poor account for 80 percent of African poverty, but urban poverty is substantial and appears to be growing. Africa is not only poor, it also suffers from vast inequality in incomes, in assets (including education and health status), in control over public resources, and in access to essential services, as well as per- vasive insecurity. These dimensions of poverty and deprivation are worsening in many parts of the region. Primary school enrollment rates, after increasing sharply until the 1980s, show signs of decreas- ing. In some areas there are indications of a deterioration in the gen- eral health of the population, particularly among the poor and children. Not surprisingly, the elimination of deep poverty has emerged as the overriding objective of development in Africa. Growth is essential to reduce the number of poor people, and will do so if sustained at high rates. But growth is less effective in the face of massive inequality. Given the depth of deprivation in Africa, growth will not be enough without attention to easing inequality and to eliminating the barriers that con- strain poor people’s ability to benefit from a growing economy and to contribute to that growth. Indeed, although African economies respond to better economic policies, a major acceleration of growth is unlikely without a dramatic improvement in human capital, particularly public health (chapter 1). 83 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Vigorous action against HIV/AIDS is an essential component of that agenda. Similarly, a higher savings rate is unlikely without an acceler- ated demographic transition. This requires lower child mortality and higher female education. So, reducing poverty and improving social conditions are not simply consequences of development—they are essential components of any viable development strategy. Measures to reduce For these reasons Africa’s development strategies cannot be focused poverty are not a solely on growth. They will need to take into account likely distribu- luxury—they are tional implications and be grounded in a solid understanding of who essential for peaceful the poor are and why so many have such trouble escaping from poverty. development Development strategies will also need to be adequately financed; peo- ple cannot increase consumption while sharply raising investment to support growth. Poverty on the African scale is more than an individual phenome- non. It is also a social and political one, entering into the workings of economies and societies in a multitude of ways that differentiate the initial conditions of poor countries from rich ones. The poor are not simply the rich with less money. They often live in different areas, fre- quently in the most degraded environments. Poverty also makes it harder to avoid further environmental degradation. At the margin of existence, concern for security can inhibit the adoption of new, poten- tially advantageous cropping patterns or technology, reducing growth potential. Failing to address growing poverty in Africa risks rising vio- lence and crime and imperils the peaceful development of viable states (chapter 2). Thus measures to reduce poverty are not a luxury; they are essential for the peaceful development of Africa and for other regions. Dimensions of Poverty P ARTICIPATORY ASSESSMENTS AND SURVEYS HAVE INCREASED understanding of African poverty in recent years, both as seen by the poor and in terms of statistical coverage. Poverty has many facets. In addition to low incomes and assets, participatory assessments draw attention to exclusion and isolation, as well as lack of trust in pub- lic agencies. Almost everywhere, poor people say that new ways have to be found that allow them to participate in development programs and ensure that such programs reach their intended beneficiaries (box 84 ADDRESSING POVERTY AND INEQUALITY 3.1). With new technology, rapid assessments such as the Core Welfare Indicator Questionnaire are enabling speedy assessment of other fac- tors that affect the capabilities of the poor, including access to essen- tial public services. Almost all countries now have at least one household survey, and these are being made available on CD-ROM to enable wider analysis. These surveys typically allow an assessment of income or consumption poverty, which reflects the economic oppor- tunities available to the poor. Box 3.1 Voices of Africa’s Poor “Poverty is like heat: you cannot see it, you can only feel and security for their families. Being poor means being it; so to know poverty, you have to go through it.” excluded—being treated “like dogs” by service providers —A man from Adaboya, Ghana and traders, unable to negotiate fair prices for crops or make one’s voice heard at community meetings. The “Women are beaten at the house for any reason…They most important trigger for downward mobility was ill- may also be beaten if the husband comes home drunk ness and injury—everywhere, illness was dreaded. or if he simply feels like it.” Gender relations are often traumatic. As poor men —A researcher from Ethiopia lose their jobs and women are forced to earn cash incomes, gender relations based on men as breadwin- A RECENT SURVEY, VOICES OF THE POOR, BROUGHT ners and women as homekeepers are being challenged. together the voices of 60,000 poor women and men While in many places poor women are taking a stand from around the world. The study used participatory and becoming involved in household resource deci- research to explore poverty realities, experiences, and sions, violence against women remains widespread. priorities. While poverty is often specific to certain Since all poverty interventions affect gender relations groups and locations, some broad patterns cut across in households, gender discussions must include both groups. Most of those surveyed believed that things had men and women. gotten a lot worse for the poor and that traditional sys- Finally, there is a fundamental distrust of state insti- tems of social support had eroded—leaving poor tutions. Almost universally, poor communities express- households in deeper poverty and greater vulnerability. ed more trust in church organizations and indigenous Africa was the only region where food insecurity was or local institutions. There was less confidence in non- the most common descriptor of poverty: many poor governmental organizations, though more than in gov- people were preoccupied with where their next meal ernment institutions. Government services rarely work, would come from. Poor people also spoke extensively and even when they do, government servants are cor- about the importance of assets for getting loans and rupt, rude, and exclusive. Poor people encountered cor- making it through rough periods; they rarely spoke ruption on a daily basis. The “us versus them” attitude about income. Entrepreneurship and multiple sources toward the state is a serious problem that will take time of income contributed to the movement out of poverty. to fix. It takes just days to destroy trust, but decades to Poor people also spoke extensively about the social rebuild it. and psychological dimensions of poverty. They craved a sense of belonging, a future for their children, safety Source: World Bank 1999b. 85 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? But much more needs to be done in monitoring poverty, including obtaining a better understanding of its dynamics—how poverty evolves for individuals and groups and how it is influenced by changes in economic policies. It is also important to strengthen capacity in Africa to analyze survey data. A number of initiatives, including by the African Economic Research Consortium, are making a contribution in Better health, nutrition, this area. A final critical dimension of poverty is insecurity; the poor and education are likely face continued risks of further impoverishment, while the near-poor to have major effects on face threats of falling into poverty traps. labor productivity and income growth Capabilities and the Poor Capabilities such as good health, nutrition, and education are important in their own right. Poor health, malnutrition, illiteracy, powerlessness, and social or physical isolation measure directly the low levels of well-being in most of Africa. But these capabilities can also be considered human capital, which has enormous potential to raise incomes and living standards. Much literature emphasizes education as the key to higher incomes, both for individuals and countries. But espe- cially in an agriculture-based region, better health and nutrition are also likely to have major effects on labor productivity and income growth (chapters 1, 4). Two of these dimensions—mortality and edu- cation status—show Africa far behind the rest of the world (see table 1.3). Mortality. Child mortality is particularly sensitive to the well-being of the population. In Africa infant mortality is close to 10 percent, and on average 157 of every 1,000 children die before the age of 5. But in many countries the mortality rate exceeds 200 per 1,000. This com- pares with 53 in East Asia and 9 in high-income countries. Even taking into account its low income levels, Africa’s under-5 mortality rates are exceptionally high (figure 3.1). The region has had the smallest improvement in under-5 mortality since 1970, and some countries—including Kenya and Zimbabwe—saw mortality increase in the 1990s. AIDS is also wreaking havoc on Africa’s people: life expectancy has declined in almost one-third of its countries, in Botswana by almost 10 years (chapter 4). Nutrition. Anthropometric indicators of weight, height, and age pro- vide further evidence of deterioration in the health of Africans. Children with low weight for their height are considered to be wast- 86 ADDRESSING POVERTY AND INEQUALITY ing; this indicates low recent nutrition levels. Children with low height for their age are considered stunted, a condition resulting from longer- term malnutrition. The overall picture is mixed (table 3.1). In some countries there have been improvements in urban populations but deterioration in rural ones. In other countries, notably Mali and Senegal, nutrition levels appear to have deteriorated overall. The poorest 20 percent of the population has been the most affected Mortality in Africa is by this deterioration. Among the eight countries in table 3.1, stunting high, even considering its has worsened among the poorest in four (Ghana, Mali, Senegal, low income Tanzania). But wasting has worsened among the poorest in six (Ghana, Madagascar, Mali, Senegal, Uganda, Zimbabwe). Education. Outside Africa, most of the developing world has achieved almost universal primary enrollments, though with significant dropout rates. But in Africa primary enrollments dropped between 1980 and 1993, from 80 to 72 percent. Moreover, less than a quarter of secondary school-age children were enrolled in secondary school. And many adults have little or no education. This is important because in Africa Figure 3.1 Under-5 Mortality by GNP Per Capita and Region, 1995 Under-5 mortality (per 1,000 live births) 175 Africa 150 125 100 South Asia Middle East 75 East Asia 50 and Pacific Latin America Europe and Central Asia 25 0 0 500 1,000 1,500 2,000 2,500 3,000 3,500 GNP per capita (dollars) Source: Demery and Walton 1998. 87 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Table 3.1 Nutrition Measures for Children in Eight African Countries (percent) Change First year Second year (percentage points) Low weight Low height Low weight Low height Low weight Low height Region/country (years) for height for age for height for age for height for age Urban Ghana (1988 and 1993) 7.3 24.6 9.1 17.0 1.8 –7.6 Madagascar (1992 and 1997) 3.8 40.5 5.3 44.8 1.5 4.3 Mali (1987 and 1995) 9.9 19.6 24.9 23.9 15.0 4.3 Senegal (1986 and 1992) 3.5 17.5 8.8 15.2 5.3 –2.3 Tanzania (1991 and 1996) 5.1 38.0 8.1 32.6 3.0 –5.5 Uganda (1988 and 1995) 0.6 24.8 1.4 22.7 0.7 –2.1 Zambia (1992 and 1996) 5.4 32.8 3.3 32.9 –2.1 0.1 Zimbabwe (1988 and 1994) 1.4 16.0 6.5 19.0 5.0 3.0 Rural Ghana (1988 and 1993) 8.5 31.4 13.1 32.3 4.6 0.9 Madagascar (1992 and 1997) 6.0 50.6 8.3 49.5 2.3 –1.1 Mali (1987 and 1995) 12.3 26.2 24.4 36.2 12.2 10.0 Senegal (1986 and 1992) 7.1 26.5 13.4 32.7 6.3 6.3 Tanzania (1991 and 1996) 6.4 45.0 7.3 46.1 0.9 1.2 Uganda (1988 and 1995) 2.0 45.2 3.2 40.7 1.3 –4.5 Zambia (1992 and 1996) 5.0 46.5 4.9 48.9 –0.1 2.4 Zimbabwe (1988 and 1994) 1.1 34.3 5.6 25.0 4.5 –9.3 Source: Sahn, Dorosh, and Younger 1999. parents’ education is an important determinant of whether their children attend school. Income, region, and gender also help determine whether children are enrolled. Primary enrollments are low overall, but particularly among poor rural females—in the 1990s only 24 percent of this group was enrolled among 16 countries surveyed (table 3.2). In Ethiopia, The Gambia, Guinea, Mali, and Niger enrollments were less than 10 percent; only in Ghana, Kenya, and Zambia were more than 50 percent of primary school- age children enrolled. Secondary enrollments were almost uniformly low. On average only 7 percent of the poorest rural group (male and female combined) was enrolled, and in 13 of the 16 countries enrollment was negligible for this group (3 percent or less). This compared with an average secondary enroll- ment of 44 percent among the urban upper-income quintile. Judged by these measures, the capabilities of African populations have shown little improvement in recent years—and in some cases have deteri- 88 ADDRESSING POVERTY AND INEQUALITY Table 3.2 Net Enrollments in 16 African Countries by Region, Consumption Quintile, and Gender, 1990s (percent) Rural areas Urban areas Poorest quintile Richest quintile Poorest quintile Richest quintile Level Male Female Male Female All Male Female Male Female All All Primary 32 24 50 42 36 53 48 75 70 63 40 Rural areas Urban areas Poorest quintile Richest quintile All Poorest quintile Richest quintile All All Secondary 7 15 11 21 44 33 19 Source: Demery 1999. orated considerably. Poorer parts of the population are largely excluded from acquiring the capabilities they need to partake in and contribute to the growth of a modern economy. Low female enrollment is also slowing the demographic transition, reducing the prospect that African countries will move toward a virtuous circle of growth, demographic transition, and savings (chapter 1). Measures of Poverty There is no single measure of poverty, and all choices have their advantages and weaknesses. For welfare levels, consumption is the pre- ferred criterion. But many surveys—especially those outside Africa— measure income. Poverty lines. The choice of a poverty line is always arbitrary. Two options are available. One is to set an absolute standard common across all countries, such as $1 a day per person adjusted for purchasing power parity (PPP). This approach facilitates cross-country comparisons of poverty, although the conversion from national currencies into PPP dollars is subject to error. A second option is to define the poor as those falling below the poverty lines of their countries. This relative approach allows for differences in poverty lines depending on a country’s level of development. But it also makes it harder to compare countries. A choice must also be made on how to show the prevalence and depth of poverty. The headcount ratio, or percentage of the population falling below the poverty line, is a widely used measure of the preva- lence of poverty. The poverty gap takes into account the extent to which the consumption of the poor falls below the poverty line. It is a measure of the depth of poverty, as well as its prevalence. The squared 89 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? poverty gap weights more heavily the poverty of the poorest parts of the population and so emphasizes extreme deprivation. Analysis using an absolute poverty line of $1 a day shows that almost half of Africans live below this level and that the number of poor has been steadily increasing. The vast majority of Africans consume less than $2 a day. This is a reflection of the desperately poor conditions Dealing with poverty in prevailing in the continent and indicates how vulnerable entire soci- the region must involve eties are to falling into poverty, with large tracts of the population just expanding the income a little over the $1 a day poverty line. Dealing with poverty in the region opportunities of whole must involve expanding the income opportunities of whole groups. groups The second approach, using relative poverty lines, yields a similar picture. In 21 countries surveyed in the 1990s, more then half of the rural populations lived below the national poverty lines (table 3.3). Rural poverty is both deep and severe. The average income of the rural poor is just $163 a year, barely half the average regional poverty line for rural areas. Ghana recorded the lowest rural poverty, with a head- count ratio of 29 percent. But nine countries had rural headcounts above 60 percent. Urban poverty is also high, as judged by national poverty lines, and is moderately deep. More than 40 percent of the urban population is poor according to national criteria, and the average income of this group is only $352 a year. More than half of the urban population is poor in Ethiopia, Guinea-Bissau, Tanzania, Swaziland, and Zambia. With the rapid growth of Africa’s urban populations, high urban poverty threatens political and economic stability. Trends in poverty and growth. For some countries it is possible to trace recent trends in consumption poverty based on household data. These reveal a mixed pattern (table 3.4). Some countries, notably Nigeria and Zimbabwe, have experienced significant increases in poverty. Ethiopia, Table 3.3 Poverty in 21 African Countries Using National Poverty Lines, 1990s Indicator Rural Urban Overall Headcount ratio (percent) 56 43 52 Poverty gap (percent) 23 16 22 Squared poverty gap (percent) 13 8 12 Mean expenditure (dollars a person per year) 409 959 551 Mean poverty line (dollars a person per year) 325 558 Source: Ali 1999. 90 ADDRESSING POVERTY AND INEQUALITY Mauritania, and Uganda have experienced widespread improvements in economic well-being that have filtered down to the poor. Ghana shows a mixed picture for 1987–96. Poverty rose in urban areas (espe- cially Accra) but fell in rural areas, apparently reflecting distributional shifts due to reform programs. More recent trends appear to have changed this pattern, causing urban poverty to decline. How do these poverty trends relate to overall growth? On average, Africa has perhaps the a 1 percent increase in consumption is associated with almost a 1 per- world’s highest income cent drop in the poverty headcount ratio (figure 3.2). Growth that inequality… translates into rising consumption is thus essential for poverty reduc- tion. But growth is not sufficient, given Africa’s low incomes and high inequality and exclusion, which result in the world’s largest poverty gaps. Table 3.4 Consumption Poverty in Various African Countries Headcount ratio Squared poverty gap First Second First Second Change in per capita Country, years year year year year consumption (percent) Ethiopia Rural, 1989 and 1995 61.3 45.9 17.4 9.9 8.2 Urban, 1994 and 1997 40.9 38.7 8.3 7.8 5.1 Ghana, 1987 and 1996 31.9 27.4 2.5 Rural 37.5 30.2 Urban 19.0 20.6 Mauritania, 1992 and 1996 59.5 41.3 17.5 7.5 11.5 Rural 72.1 58.9 27.4 11.9 Urban 43.5 19.0 9.7 2.1 Nigeria, 1992 and 1996 42.8 65.6 14.2 25.1 –16.3 Rural 45.1 67.8 15.9 25.6 Urban 29.6 57.5 12.4 24.9 Uganda, 1992 and 1997 55.6 44.0 9.9 5.9 22.4 Rural 59.4 48.2 10.9 6.56 Urban 29.4 16.3 3.5 1.65 Zambia, 1991 and 1996 57.0 60.0 25.5 16.6 –1.4 Rural 79.6 74.9 39.1 23.2 Urban 31.0 34.0 9.7 5.4 Zimbabwe, 1991 and 1996 37.5 47.2 7.2 9.3 –1.8 Rural 51.5 62.8 10.2 13.0 Urban 6.2 14.9 0.5 1.4 Note: Headcount ratio and squared poverty gap are based on national (nutritionally based) poverty lines. Comparisons between countries are not valid. Ethiopia data are based on small samples. Nigeria data are provisional. Source: World Bank data. 91 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 3.2 Changes in Headcount Ratios and Per Capita Consumption in Selected Countries and Periods Change in per capita consumption (percent) 25 20 …but growth is still 15 essential for poverty 10 reduction 5 Headcount ratio = 2.59 – 0.67 Per capita consumption R2 = 0.74 0 –5 –10 –15 –20 –30 –20 –10 0 10 20 30 40 Change in headcount ratio (percent) Source: Table 3.4. Inequality and Its Implications A FRICA HAS PERHAPS THE WORLD’S HIGHEST INCOME INEQUAL- ity. Both rural and urban incomes are unequally distributed. There is also considerable inequity in the distribution of social spending, with more going to higher-income groups than to the poor. To be effective in fighting the depth of African poverty, development strategies have to address inequality and exclusion. With current fiscal policies and service delivery systems, inequalities in capabilities will not soon be alleviated. A Profile of Income Inequality As conventionally measured, Africa has the world’s second highest inequality after Latin America (table 3.5). But most of Africa’s house- hold surveys measure inequality using consumption, whereas most other surveys use income. Adjusting for this difference, Africa’s inequality is as high as or higher than that in any other region. The 92 ADDRESSING POVERTY AND INEQUALITY poorest 20 percent of Africans account for just 5.2 percent of total household consumption, or about 4 percent of GDP. This is equiva- lent to less than half the foreign aid to a typical poor African country in the 1990s. At 58 percent, South Africa boasts the region’s highest Gini coefficient (box 3.2). Africa’s inequality has two distinctive features. First, rural inequal- ity is almost as high as urban inequality, with the poorest 20 percent Rural inequality is almost of the population accounting for less than 6 percent of consumption as high as urban in both cases (Ali 1999). Because most land is held communally in inequality Africa, in most cases rural inequality does not stem from severe inequality in landholdings. Rather, it reflects geographic differences in the quality of land, in climatic conditions, and in access to markets and to remittances from urban areas. (The exception is Southern Africa, where in addition to the above factors, inequality in land hold- ings is a major determinant of rural inequality.) Africa’s poor, sparse economies are not well integrated, and communities far from roads are typically far poorer than others. Spatial factors, including those relat- ing to inadequate rural capital and infrastructure, therefore need to be taken into account in designing antipoverty policies (chapters 5, 6). In urban areas job creation and economic diversification are crucial challenges (chapter 7). A second feature of African inequality is its high level despite low average income. A stylized (though debated) feature of development is the Kuznets hypothesis—that income distribution tends to become more unequal as countries develop, before tending to equalize again at relatively high income levels. Ali and Elbadawi (1999) suggest that the income at which African income inequality will naturally start to Table 3.5 Income Inequality by Region (percent) Gini Share of top Share of Share of bottom Region coefficient 20 percent middle 20 percent Africa 45.0 50.6 34.4 5.2 East Asia and Pacific 38.1 44.3 37.5 6.8 South Asia 31.9 39.9 38.4 8.8 Latin America 49.3 52.9 33.8 4.5 Industrial countries 33.8 39.8 41.8 6.3 Note: Data for Africa are calculated on a consumption basis. Adjustment to an income basis (as is common in other regions) involves raising the Gini coefficient by 6 percentage points, making Africa’s Gini 51 percent. Source: Deininger and Squire 1996. 93 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 3.2 Inequality in South Africa ALONG WITH BRAZIL, SOUTH AFRICA IS PERHAPS THE poor, especially the poorest, are disproportionately world’s most unequal economy. The poorest 20 per- found in rural areas. Labor market factors are also cen- cent of the population disposes of just 3 percent of tral. Many Africans are unemployed, so many house- income, while the richest 20 percent disposes of 42 holds do not have access to wage income. Age and percent. What underlies this high inequality? education are also factors. New entrants to the labor Inequality within racial groups accounts for about 60 market have trouble finding jobs, while lower educa- percent of overall inequality, but inequalities between tion means far lower probability of finding work and racial groups account for 40 percent—a great deal relative almost no chance of finding well-paid work. to other countries. (In Malaysia, for example, inequalities How can this situation be remedied? Policies between racial groups account for just 13 percent of over- should follow two broad strategies. The first is to nar- all inequality.) The share of income held by white house- row the mismatch between the supply of unskilled holds fell from 72 percent in 1960 to 60 percent in 1991, labor and the demand for skilled labor. This involves but some of the decline was due to slower population changes in both labor market policy and education: growth among whites. The average per capita income of younger cohorts need to have better access to sec- Africans, 9.1 percent of that of whites in 1917, had risen ondary education and higher-quality education, with to just 13.5 percent in 1995. For any poverty line, the frac- a focus on technical and vocational training. The sec- tion of African workers below it is far greater than the frac- ond strategy is to strengthen safety nets and poverty tion of white workers. For example, if the line is set equal alleviation efforts for people—especially in poor rural to monthly adult equivalent poverty income, 4 percent of areas—with few prospects for long-term sustainable the white labor force is poor—but more than half of the employment. Both planks will require robust growth African workforce is. to create new jobs and fund the social safety net. But other factors are important as well. The unem- ployed, household domestic workers, and farm work- Source: African Economic Research Consortium, comparative ers are the poorest and most vulnerable groups. The research project on poverty and inequality in Africa. decline is $1,566 (in 1985 PPP dollars)—several times average income today. This implies that pronounced inequality is likely to be a feature of African economies for a long time, and reinforces the importance of including distributional elements in development pro- grams. The Distributional Impact of Reform Income distribution reflects deep structural features of an economy and so usually does not change much over time. Yet some African countries have experienced substantial changes—whether toward or away from equality—over short periods. Some of these changes may reflect changes in macroeconomic policy, which has considerable potential to shift incomes between social and economic groups. 94 ADDRESSING POVERTY AND INEQUALITY Until recently little evidence was available of the impact on income distribution of policy reform, but that is beginning to change. Many poor groups—those linked to markets and public services—have ben- efited from the reforms and economic recovery of the 1990s (box 3.3). But other poor households, notably those in remote locations and rely- ing on subsistence crops, as well as those without work, have fared badly. Reforms can lift many out of poverty. But there is a danger that many of the very poor will be left behind. Box 3.3 Winners and Losers from Reform and Recovery in Ghana and Uganda MANY AFRICAN COUNTRIES EXPERIENCED ECONOMIC Trends in consumption and poverty were also not recovery in the 1990s, partly because of major eco- even across all groups and regions. Central Uganda nomic reforms. How these reforms affect poverty and gained the most, while the eastern region lagged inequality is of massive significance for the long-run behind. In Ghana the declines in poverty were con- sustainability of growth. In Ghana and Uganda reform centrated in the west, Greater Accra, Volta, and Brong and recovery led to surprisingly similar results for Ahafo, while the poorest ecological zones (the center, households and their living standards. In Uganda real north, upper east) saw poverty increase. How house- GDP per capita grew by some 5 percent a year in holds fared also depended on the main source of liveli- 1992–97, and real private consumption per capita hood. In Uganda there were sharp falls in consumption grew by just over 4 per cent a year. Real GDP and pri- poverty among households engaged in cash-crop pro- vate consumption growth rates were also high in duction, noncrop agriculture, and manufacturing. Ghana in 1992–98. Who were the main beneficiaries The higher living standards of those growing cash of this growth, and did the poor benefit? crops accounted for more than half of the observed fall In both countries GDP growth appears to have sig- in poverty. But poverty among food-crop farmers (rep- nificantly lowered consumption poverty. Mean house- resenting more than half of consumption poverty) hold consumption per adult equivalent in Uganda declined only marginally. And poverty actually in- increased markedly in the 1990s, causing the poverty creased among those in miscellaneous services and headcount ratio to fall from 56 percent in 1992 to 44 those not working. A similar picture emerges for percent in 1997. In Ghana the headcount ratio dropped Ghana: economic well-being improved significantly from 51 percent in 1991/92 to 43 percent in 1998/99. for export farmers and those in formal and nonformal The declines in poverty in both countries are robust with wage employment, but much less for nonexport respect to the choice of poverty line (and poverty index). (mainly food) farmers. And as in Uganda, poverty Income distribution also improved in both coun- increased in Ghanaian households where the head was tries. In Uganda decreases in inequality explain 10 per- not working. cent of the decline in the headcount index. (The Thus in both countries many poor groups benefited remainder came from an increase in mean household from the reforms and economic recovery of the 1990s. consumption.) Similarly, in Ghana an improvement But other poor households—notably those in remote in income distribution explains just under a quarter of locations, those relying mainly on subsistence food crop the decline in the headcount index for the country as production, and those not working—fared badly. a whole. Inequality did not fall in all parts of these countries, however—and in some areas it rose. Source: Appleton 1999; Ghana Statistical Service 1999. 95 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Unequal Access: Public Spending and the Poor Improving the human capital and capabilities of Africans, partic- ularly the poor, is crucial to reduce poverty and to improve people’s lives. Actions to develop human capital must be seen across a broad front. Reducing child mortality might require, in addition to higher incomes, increased food consumption, cleaner water, more female education, reduced disease-bearing vectors, better immunization pro- grams and postnatal care, and more widespread basic clinical services. Not all of these objectives involve public services and public spend- ing, but many do. Chapter 4 discusses the need for better delivery sys- tems for public services and offers examples of effective interventions. The question here is the degree to which current budget allocations and fiscal policies are focused on benefiting the poor. The evidence is not encouraging. Health spending, for example, is not well targeted to the poorest (table 3.6). In seven countries for which data are available, the poorest 20 percent of the population receives only 12 percent of the subsidy—compared with more than 30 percent for the richest 20 percent of the population. The only exception is South Africa, where the richest 20 percent of the popu- lation mainly uses private health care. The overall picture for educa- tion is similar to that for health. Africa’s poor, particularly its women, have less access to fiscal resources directed toward enhancing their capabilities. This gender dimension to inequality hinders growth and contributes to poverty and inequality (chapter 1). Table 3.6. Benefit Incidence of Public Health Spending in Various African Countries (percent) Primary facilities Hospital outpatient Hospital inpatient All Poorest Richest Poorest Richest Poorest Richest Poorest Richest Country, year quintile quintile quintile quintile quintile quintile quintile quintile Côte d’Ivoire, 1995 14 22 8a 39a 11 32 Ghana, 1992 10 31 13 35 11 32 12 33 Guinea, 1994 10 36 1a 55a 4 48 Kenya, 1992b 22 14 13a 26a 14 24 Madagascar, 1993 10 29 14a 30a 12 30 Tanzania, 1992/93 18 21 11 37 20 36 17 29 South Africa, 1994 18 10 15a 17a 16 17 a. Includes inpatient spending. b. Rural only. Source: Castro-Leal and others 1999. 96 ADDRESSING POVERTY AND INEQUALITY Security S ECURITY IS IMMENSELY IMPORTANT TO MOST AFRICANS. FOR THEM, life involves hazards that threaten livelihoods and capabil- ities (such as health). A participatory poverty assessment in Ethiopia investigated this dimension of well-being among both urban and rural communities. One striking finding was the value Ethiopians Security is a source of place on peace and the freedom it brings as a source of well-being, quite both well-being and apart from its effects on economic opportunities. This message must economic opportunity resonate across Africa, given the wars and rumors of wars that are rife in the region. Ethiopian rural households were asked to identify events in the past 20 years that had caused great losses of income or wealth. Four broad events were associated with serious household losses: harvest failure, due mainly to drought; policy failure, highlighting the disastrous effect on rural areas of the Derg regime; labor problems, such as the death of a breadwinner; and livestock problems, especially with oxen (table 3.7). While respondents highlighted the 1984 drought as a catastrophic har- vest shock, there is continuing concern about harvest failure. Erratic rainfall is a major preoccupation among the poor. Annual variations in the agricultural harvest are a source of great uncertainty and seriously undermine household well-being. Surveys confirm these fluctuations in well-being. Just 31 percent of the rural population surveyed was poor in both 1989 and 1995 (table 3.8). But three-quarters of the population experienced poverty in one or more of the two years. Table 3.7 Events Causing Hardship in Ethiopia, 1975–95 (percentage of respondents) Village location Event Tigray Amhara Oromiya SEPA All War 15 10 3 5 7 Harvest failure 96 86 66 74 78 Labor problems 50 29 34 54 40 Land problems 36 14 17 14 17 Oxen problems 73 47 25 33 39 Other livestock 69 36 30 30 35 Policy 40 44 35 50 42 Crime/banditry 5 2 1 4 3 Asset losses 13 18 15 15 16 Source: Dercon 1998. 97 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Table 3.8 Movements In and Out of Poverty in Rural Ethiopia, 1989 and 1995 (percent) Poor Nonpoor All Category in 1995 in 1995 households Poor in 1989 31.1 30.2 61.3 Nonpoor in 1989 14.8 23.9 38.7 All households 45.9 54.1 100.0 Assistance must be Source: Dercon 1998. based on an understanding of the Some of the variation in these data is due to rainfall—1989 was a coping mechanisms bad year for the harvest, and 1995 was a relatively good year. But idio- employed by the poor, syncratic shocks must also have been at work, dragging some house- and their limitations in holds into poverty and helping other out of it. Similar results have been protecting welfare found for short panels in Côte d’Ivoire (Grootaert, Kanbur, and Oh 1997). Year-to-year insecurity in livelihood is only part of the story for an agrarian economy like Ethiopia. The participatory assessment found that most communities were also preoccupied with variations in con- sumption (especially food consumption) within the year. Seasonal fluc- tuations in food availability and prices are second only to drought as perceived causes of insecurity in rural communities. Seasonality was even cited by urban respondents as a problem for most households, especially the poor. The survey also points to large within-year fluctu- ations in household consumption, with significant seasonal variations in poverty. Households are also concerned about the effects of a death of a working adult. High burial costs and income losses represent a major catastrophe for a household. AIDS has obvious and massive implica- tions for household welfare in communities that have little cushion above bare survival. How can policies help households cope with these unforgiving uncertainties? Assistance must be based above all on an understanding of the coping mechanisms employed by the poor, and their limitations in protecting welfare. Participatory assessments have found that rural communities reduce consumption during shocks or during lean sea- sons, or cope by borrowing cash or by generating other income through migrant work or petty trade. There are two broad kinds of policies to deal with risk and uncer- tainty. First, governments can help reduce the risks by providing bet- ter water storage and management and by assisting with crop research 98 ADDRESSING POVERTY AND INEQUALITY and diversification. Second, governments can provide a safety net that is triggered by a shock such as drought or harvest failure. The safety net can also be designed to smooth consumption within the year. Community-based public works programs can meet both these safety net objectives. To the extent that policies enable the rural sector to recapitalize itself (chapter 6), the poor will also have more assets to buffer uncertainties. Macroeconomic and structural policies that encourage growth and Strategies for Reducing Poverty in Africa employment are essential for any poverty reduction strategy W HATEVER THE MEASURE—CONSUMPTION POVERTY, direct indicators of well-being—the situation in Africa is serious. Income poverty increased in the 1990s. Malnutrition (wasting) appears to have worsened. Some countries have experienced increased child mortality—and lower life expectancy, in part because of AIDS. School enrollments have back- slid. Growth has not been high or sustained enough to offset the pre- vious decline, and the population has limited capacity to take advantage of income opportunities. Given these challenges, what are the key ingredients of a poverty reduction strategy for Africa? Growth and Jobs Macroeconomic and structural policies that encourage growth and employment are essential for any poverty reduction strategy. Raising the growth rates of African economies would have two main benefits. It would enhance the consumption potential of the popu- lation, improving food consumption, raising nutrition levels, and reducing the number of poor people. It would also generate resources that could be used to increase spending on basic needs such as health and education—which, if well targeted to the poor, would enhance their ability to take advantage of better employment oppor- tunities and contribute to growth. How much growth is required? More than 5 percent a year seems needed simply to prevent the num- ber of poor from rising, whereas meeting the International Development Goals for 2015 will require growth of more than 7 per- cent a year (chapter 1). 99 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Inclusive Policies But growth is not enough. Africa’s high inequality increases the importance of inclusive policies. High initial inequality implies higher growth requirements to achieve a given poverty target, and can adversely affect growth prospects (Alesina and Rodrik 1994; Deininger and Squire Improving human capital 1996). Changes in inequality could have a considerable impact on the is crucial for Africa, both number of Africa’s poor. For example, a 10 percentage point rise or drop to reduce income poverty in the region’s Gini coefficients could move 50 million people in or out and to directly improve of poverty. Such a variation is within the range of historical experience people’s lives of countries over a 15-year period. Attacking the depth and severity of poverty, as measured by the poverty gap and the squared poverty gap, requires attention to sources of persistent inequality. Different aspects of poverty respond differently to changes in income and inequality. Changes in the distribution of income—as measured by the Gini coefficient—are more powerful for attacking deep poverty, as shown by the response of the poverty gap and the squared poverty gap (figure 3.3). Geographic targeting of assistance, including for the construction of essential rural infrastructure, is key for reducing high rural inequality. And in Southern Africa and a few coun- tries elsewhere in the region, land redistribution measures may be required as well. Addressing constraints to economic diversification, investments, and job creation will also have to be an essential feature of any development strategy (chapters 6, 7). Better Capabilities Improving human capital is crucial for Africa, both to reduce income poverty and to directly improve people’s lives. Accelerating programs to fight HIV/AIDS is perhaps the most pressing priority for many coun- tries. But efforts to boost human capital in the region must cover a broad front. As noted, efforts in one area—such as reducing child mortality or raising education levels—are often linked to other objectives for well- being. Not all involve public services and public spending, but many do. Africa’s fiscal policies have been ineffective in achieving these better outcomes. Major efforts are needed to ensure that poor and excluded groups receive a larger share of public spending for essential social ser- vices and infrastructure, so that better capabilities can help close the inequality gap. 100 ADDRESSING POVERTY AND INEQUALITY Figure 3.3 How African Poverty Responds to Changes in Income and Inequality Elasticity of poverty measures 5 Urban 4 Government measures to 3 help households cope with uncertainties must 2 supplement the coping 1 mechanisms used by the poor 0 Headcount ratio Poverty gap Squared poverty gap 3.0 2.5 Rural 2.0 1.5 1.0 0.5 0 Headcount ratio Poverty gap Squared poverty gap Change in mean income Change in income inequality Source: Ali 1999. Delivery Mechanisms and Accountability Antipoverty programs will not succeed unless delivery systems are adjusted to deliver more public resources where the need is greatest, to increase transparency and accountability to beneficiaries, and to build the capacity of poor communities to help themselves. In highly cen- tralized but poorly administered public bureaucracies, little public spending is likely to trickle down to the poor communities where it is most needed. Effective decentralization has both a governance com- ponent (chapter 2) and a service delivery component (chapter 4). 101 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Stability and Security Government measures to help households cope with uncertainties must supplement the coping mechanisms used by the poor. Participatory assessments are especially useful in improving under- standing of these. Macroeconomic instability also hurts the poor dis- proportionately, because they have fewer mechanisms to cope with the consequences. Governments can help reduce risks by delivering better services (water storage and management, crop research and diversifica- tion) and by providing safety nets against shocks (drought, harvest fail- ure). A safety net can also smooth consumption. Well-designed public works programs can meet both these safety net objectives. 102 CHAPTER 4 Investing in People A FRICA’S FUTURE LIES IN ITS PEOPLE. INDEED, AFRICA Africa must solve its must solve its current human development crisis if it human development is to claim the 21st century. It can solve the crisis by crisis if it is to claim the replicating the decentralized service delivery mecha- 21st century nisms already in place in some African countries, by increasing international cooperation, by sustaining political commitment to the poor, and by using the extra financial resources that will come from the enhanced Heavily Indebted Poor Countries initiative (chapter 8). The crisis can be solved in one genera- tion if countries focus on the basics: basic nutrition, education, health, and protection against increased vulnerability. Investment in people is becoming more important for two reasons. First, Africa’s future economic growth will depend less on its natural resources, which are being depleted and are subject to long-run price declines (chapter 1), and more on its labor skills and its ability to accel- erate a demographic transition. Growth in today’s information-based world economy depends on a flexible, educated, and healthy workforce to take advantage of economic openness. Accelerating the demo- graphic transition to reduce population growth will require education, especially of women, and widely available contraceptive and repro- ductive health services. Second, investing in people promotes their individual development and gives them the ability to escape poverty. This again requires educa- tion and health care as well as some measure of income security. Africa’s households and governments have invested heavily in human development since independence. By the 1980s this investment had started to pay off in much improved human development indicators. But in the last 10–15 years of the 20th century these indicators, still lagging 103 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 4.1 Fertility Rates by Region, 1960–2015 8 Middle East and North Africa 7 Africa 6 South Asia Africa’s demographic 5 East Asia transition remains slow— and Pacific 4 Latin America and well behind other and Caribbean Europe and poor areas of the world 3 Central Asia 2 High-Income countries 1 0 1960–65 1965–70 1970–75 1975–80 1980–85 1985–90 1990–95 1995–00 2000–05 2005–10 2010–15 Source: World Bank 1999d. behind those of other regions, started to stagnate or even decline. Not only is Africa still well behind the rest of the world, there is also a major danger the gap will widen unless major changes are introduced. This chapter makes no claim to be comprehensive. Instead it focuses on some critical factors that account for this slowdown in progress and on the major actions needed if progress is to be resumed and, indeed, accelerated so that Africa’s people can claim the 21st century. Africa’s Human Development Crisis I N ONLY A FEW AFRICAN COUNTRIES HAS FERTILITY STARTED TO decline, marking the last stage in the demographic transition, and they are the ones with higher per capita incomes and, especially, high health spending and fairly good access to contraception. Overall, how- ever, Africa’s demographic transition remains slow—and well behind other poor areas of the world, notably South Asia (figure 4.1). Africa’s continued high fertility rates result not only in rapidly growing popula- tions but also in populations with large portions of young people. The momentum generated by past population growth means that Africa, including both Sub-Saharan and North Africa, is now the only region 104 INVESTING IN PEOPLE Figure 4.2 Gross Enrollment Rates by Education Level and Region, 1980 and 1995 Primary Secondary Tertiary Africa Africa Africa Arab 1980 Arab 1980 Arab 1980 states 1995 states 1995 states 1995 South South South Asia Asia Asia Latin America Latin America Latin America and Caribbean and Caribbean and Caribbean East Asia East Asia East Asia Transition Transition Transition economies economies economies More developed More developed More developed regions regions regions 50 60 70 80 90 100 110 120 10 30 50 70 90 110 0 10 20 30 40 50 60 Percent Percent Percent Source: UNESCO 1998. where the absolute number of 6–11 year olds is growing (World Bank 1995). Coupled with the impact of HIV/AIDS on adult mortality, Africa’s high fertility is resulting in 1.1 workers per dependent, compared with 1.4 in South Asia and 2.0 in East Asia (see table 1.1), with deleteri- ous consequences for savings and investment. So high has been the growth of the school-age population that African countries have had trouble keeping enrollment rates constant. Africa is the only region where primary enrollment rates were lower in 1995 than in 1980 (figure 4.2). Though there were improvements in the late 1990s, the primary enrollment rates of 1980 have not been reattained for boys or girls (table 4.1). Enrollment rates at all levels are far behind those in other regions (see figure 4.2). Low primary enrollments seriously undermine economic growth and poverty reduction. Worldwide, no country has enjoyed sustained eco- nomic progress without literacy rates well over 50 percent. The conse- quences of low secondary and tertiary enrollments are harder to analyze but may be particularly critical in Africa. There is increasing evidence of positive backward links between secondary and higher education and other parts of the system, especially teacher education. Only in Africa, for example, does the correlation between female education and fertility reduction not kick in until the secondary level (UN 1987; Ainsworth 1996; NRC 1993). Tertiary education levels are so low that they limit the 105 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? development of society’s leaders. Moreover, universities have a potentially greater role to play in Africa than in many other regions—they are often the only national institutions with the skills, equipment, and mandate to generate new knowledge through research or to adapt global knowledge to help solve local problems. The content and quality of African education are also in crisis. At the Rapid enrollment growth primary level the regular assessment of student achievement remains rare. in higher education, The assessments that exist are not encouraging, however (figure 4.3). coupled with declining Poor quality not only produces poorly educated students, it also results resources, has in excessive repetition and low completion rates—at enormous cost. In significantly lowered 14 of 32 African countries for which data are available, more than one- quality third of school entrants do not complete the primary cycle. In 11 of 33 countries the input-output ratio is more than 1.5—that is, these coun- tries use 50 percent or more resources than is necessary in an ideal sys- tem. At the university level religious studies and civil service needs have resulted in the development of the humanities and the social sciences and the neglect of natural sciences, applied technology, business-related skills, and research capabilities. Rapid enrollment growth in higher education, coupled with declining resources, has significantly lowered quality (World Bank 1999c). Another major factor affecting school performance is the health and nutrition of students. Their health and nutrition also affect their future productivity in the workforce. Nutrition trends have yet to return to the levels of 1975 despite recent improvements in some countries. Population growth is causing a rapid increase in the Table 4.1 Gross Enrollment Rates in Africa, 1960–97 (percent) Level 1960 1970 1980 1990 1997 Primary total 43.2 52.5 79.5 74.8 76.8 Primary female 32.0 42.8 70.2 67.6 69.4 Primary male 54.4 62.3 88.7 81.9 84.1 Primary female as share of total 37 41 44 45 45 Secondary total 3.1 7.1 17.5 22.4 26.2 Secondary female 2.0 4.6 12.8 19.2 23.3 Secondary male 4.2 9.6 22.2 25.5 29.1 Secondary female as share of total 32 33 36 43 44 Tertiary total 0.2 0.8 1.7 3.0 3.9 Tertiary female 0.1 0.3 0.7 1.9 2.8 Tertiary male 0.4 1.3 2.7 4.1 5.1 Tertiary female as share of total 20 20 22 32 35 Source: UNESCO, Statistical Yearbook, 1978–79 and 1998. 106 INVESTING IN PEOPLE Figure 4.3 Mean Scores of Primary Students on Three Dimensions of Reading Comprehension in Four African Countries, 1998 Percent correct 80 70 60 Ill health in Africa results much more from 50 infectious diseases and 40 nutrition deficiencies 30 than it does elsewhere 20 10 0 Namibia Mauritius Zanzibar Zimbabwe Narrative prose Expository prose Documents Average Source: SACMEQ 1998. absolute number of underweight children, from 23 million in 1975 to 35 million in 1995. Ill health in Africa results much more from infectious diseases and nutrition deficiencies than it does elsewhere (Feacham and Jamison 1991). This pattern affects Africans in their youth, when they may be too weak to attend school or to learn when they do attend, and remains with them as they grow up. The potential income loss from adult illness in Africa is about 6.5 percent, two to three times that in other regions, con- firming cross-country evidence that poor health is associated with slow growth (chapter 1).1 Indeed, the burden of disease is dramatically higher in Africa than else- where (figure 4.4). And the disease pattern is different (figure 4.5). Malaria, onchocerciasis (river blindness), trypanosomiasis (sleeping sick- ness), and HIV/AIDS occur elsewhere in the world but are concentrated in Africa. Malaria, for which 80 percent of the world’s cases occur in Africa, accounts for 11 percent of the disease burden in Africa and is esti- mated to cost many African countries more than 1 percent of their GDP (Leighton and Foster 1993; Gallup and Sachs 1998; Shepard and others 1991). (One estimate for Kenya puts it at 2–6 percent.). Onchocerciasis affects 18 million people, 99 percent of them in Africa. Trypanosomiasis 107 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Disability-adjusted life-years lost (millions) Eastern Southeast Latin America Europe Western Low- and North High- Mediterranean Asia and Europe middle- America income Central income Western Asia Western Pacific Pacific (excl. China) Burden of Infectious Diseases in Africa, 1998 Disability-adjusted life-years lost (millions) HIV/AIDS Malaria Diarrheal Acute Measles Tropical Tuberculosis Sexually Pertussis diseases lower diseases transmitted respiratory diseases infections (excl. HIV) 108 INVESTING IN PEOPLE occurs in 36 African countries and has recently surged. Two-thirds of the world’s HIV/AIDS cases are in Africa. Every three seconds an African child dies—in most cases from an infectious disease. In some countries one in five children die before their fifth birthday. Almost 90 percent of deaths from infectious disease are caused by a handful of diseases: acute respiratory infections, diarrheal dis- eases, HIV/AIDS, malaria, measles, tuberculosis, and sexually transmit- Since 1990 life ted infections (see figure 4.5). These diseases account for half of all expectancy has premature deaths, killing mostly children and young adults. Every day stagnated in the region— 3,000 people die from malaria—three out of four of them children. Every and has dropped sharply year 1.5 million people die from tuberculosis and another 8 million are in countries with a high newly infected. AIDS alone has orphaned more than 8 million children. adult prevalence of Life expectancy in Africa increased between 1950 and 1990, though HIV/AIDS at a lower rate than elsewhere. Since 1990, however, life expectancy has stagnated in the region, largely because of HIV/AIDS—and has dropped sharply in countries with a high adult prevalence of HIV/AIDS (figure 4.6). In 1982 only one African country, Uganda, had an adult HIV prevalence rate above 2 percent. Today there are 21 countries where more than 7 percent of adults live with HIV/AIDS. It is estimated that only 10 percent of the illness and death that HIV/AIDS will bring have been seen—despite more than 11 million deaths and 23 million cases Figure 4.6 Estimated Life Expectancy at Birth in Selected African Countries, 1955–2000 Years 65 60 55 Kenya 50 Botswana Zimbabwe 45 Zambia Uganda 40 Malawi 35 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: UN 1999. 109 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? among Africa’s 600 million people. HIV is increasing child mortality (more than 1 million children are infected) and affects adolescents and women disproportionately, with half of new infections occurring among those 15–24 and six women infected for every five men in a number of the hardest-hit countries. HIV thus hits people in their prime produc- tive years, profoundly disrupting the economic and social bases of fam- Family structures and ilies and dramatically reducing national income. income security are As noted, there are more than 8 million orphans in Africa as a result of severely threatened by HIV/AIDS, 1 million in Uganda alone. Dependency ratios are shooting the increased up and economic insecurity is increasing. At the national and even the vulnerability brought by continental level, the illness and impending death of up to one in four HIV/AIDS, conflict, adults in some countries will have an enormous impact on national pro- drought, and urbanization ductivity, earnings, and savings (World Bank 1999b). This impact will be strongest in Southern Africa, where HIV is most widespread and where much of Africa’s GDP is located. The combination of HIV infection and malaria infection is especially insidious, weakening in a mutually destruc- tive action the immune systems of both the pregnant mother and the fetus. Though perhaps the most dramatic element undermining family structures and threatening income security, HIV/AIDS is not the only one. War and civil conflict became more common in the 1990s, and 28 percent of the world’s 12 million refugees are now in Africa (UNHCR 1998). Increasing numbers of refugees and migrants, coupled with high urbanization, will exacerbate the spread of HIV/AIDS. As the new cen- tury opens, there is hope that the main recent conflicts are being resolved. But much peace is fragile, and the consequences for Africa’s families are profound. Furthermore, many conflicts remain. War and conflict come on top of other external shocks for many peo- ple, such as more than 30 years of drought in the Sahel. Indeed, 60 per- cent of Africa is vulnerable to drought, and 30 percent is extremely vulnerable. In addition, much of the poor’s consumption is seasonal (chapter 3), and macroeconomic shocks have a greater impact on the poor than on others. Moreover, in Africa as elsewhere, urbanization, while generally promoting development through the concentration of populations, weakens traditional family structures. And in Africa par- ticularly, employment growth appears to have stagnated along with economies more generally. Coupled with massive poverty, family struc- tures and income security are severely threatened by the increased vul- nerability brought by HIV/AIDS, conflict, drought, and urbanization (World Bank 1999a). 110 INVESTING IN PEOPLE Why the Human Development Crisis? I F AFRICA IS TO CLAIM THE 21ST CENTURY, IT MUST REVERSE THIS LATE 20th century pattern of rapid population growth, stagnating primary enrollments, declining health, poor nutrition, and growing income insecurity, all affecting children and women disproportionately as a result of poverty and deteriorating family structures. Reversing the pattern Households and means understanding its causes. This section explores some possible communities are willing explanations. to invest in the future of their children Do Africans Value Investments in Human Development? It is sometimes suggested that African households do not invest in human development, especially education, because the private returns to that investment are not high enough to justify it. The evidence on pri- vate returns to education in Africa is mixed and somewhat dated. But it appears that market wage returns are usually high, as elsewhere in the world, especially for postprimary education. There is considerable controversy about the absolute size of the returns to education in Africa. Psacharopoulos (1994), for instance, aggregates the private returns to primary education at 41 percent, to secondary edu- cation at 27 percent, and to higher education at 28 percent. Mingat and Suchaut (forthcoming) put them at 30, 21, and 28 percent. Others think that these estimates overestimate the returns to schooling. And indeed, issues of omitted variable bias and selection complicate the interpretation of wage-education gradients in Africa (as elsewhere). Even studies that control for bias, however, find substantial private returns to education in Africa, on the order of an 8–10 percent increase in wages per year of schooling (van der Gaag and Vijverberg 1987). These data are largely static. Unresearched in modern Africa is the key question of whether returns to skills are rising because of increasing demand or declining because of increasing supply (Knight and Sabot 1990). Whatever the precise numbers, the private returns to schooling are sig- nificant in Africa—suggesting that households should want to invest. This quantitative evidence is strongly supported by anecdotal evi- dence. In many countries the buildings erected through voluntary effort for primary and secondary education, for local training centers, and for health clinics attest to the willingness of households and communities to invest in the future of their children. Outlays on school fees, uni- 111 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? forms, and the like account for a substantial claim on households’ cash income (Fine and others 1999). Given the poor and declining quality of education offered to many poor households, their continued will- ingness to forgo a considerable share of current consumption provides unambiguous evidence of a strong desire to invest in their children’s future. In Mauritania and other countries, parents fund private tutor- Extremely poor ing (often by the same teachers) to supplement low-quality public households have fewer schooling. Offered timely, comprehensible, and appropriate advice, mechanisms for coping African mothers will take appropriate measures to provide for their chil- with increased dren’s nutrition and development. Entire communities have often vulnerability banded together to support a gifted child’s secondary and university education. Strauss (2000) has summarized the evidence on household and com- munity factors affecting investment in human development in Africa. Household investment is largely determined by the education of the par- ents, by household income, and by income responses (at least for health care). There is almost no evidence on the response of households to school choice in Africa, but evidence from elsewhere indicates that there will likely be an income response. The implication of all this is that public, rather than private, health and education services are becoming more tar- geted at low-income populations. At the community level there is considerable evidence that health and school facilities are more likely to be used when they are close to the com- munity. The impact of distance on use seems to be greater than that of user fees, though there is not as much evidence on user fees in Africa (Strauss and Thomas 1988). While households demand investments in education and health, and invest their own funds in these areas, a disturbing recent development is the inability of the poorest of the poor to cope with increased vulnera- bility. Traditionally, the poor have had diverse mechanisms for protect- ing themselves against vulnerability—joining labor-sharing clubs in Togo, taking children out of school to work in the household in Swaziland, selling cattle in Zimbabwe. But these traditional mechanisms have become less effective at managing household risks as the risks, and household vulnerability, have increased. In Burkina Faso, for example, cattle sales by households during the most extreme drought period finance only 20–30 percent of the village-level income shortfall. In addition, Africa’s traditional system of social protection—the extended family—is under extreme stress because of conflict, HIV/AIDS, 112 INVESTING IN PEOPLE drought, and migration, and can no longer provide the economic and social protection to households that it once did. This, in turn, is begin- ning to affect households’ abilities to enroll their children in school, as in Côte d’Ivoire, Kenya, and Zambia. This increased vulnerability is not just a rural phenomenon: the primary enrollment rate in Nairobi (Kenya), for instance, has dropped to 61 percent from 103 percent in 1980. The increased attraction of education programs that include meals attests to Relative to GDP, Africa this increased vulnerability. spends as much—or more—on education and Are Resources Used Efficiently? health as other regions Because of its young population, Africa’s human development invest- ment needs are great. Yet its resources are limited, even with external aid. Thus it might seem that Africa simply does not have enough resources to invest in its people. But the reality is more complicated. In 1993 public investment in edu- cation averaged 3.8 percent of GDP in Africa compared with 2.7 percent in Asia and 2.8 percent in Latin America (table 4.2). In general, private spending adds another 50 percent to public spending. Health spending in Africa averages 5.6 percent of GDP, the same as the global average for low- and middle-income countries and significantly more than the 3.5–4.1 percent for Asia (table 4.3). Public spending accounts for about half of Africa’s health spending. Of course, these spending data refer to the continent as a whole. One of the most remarkable features of human development investments in Africa is their differentiation across countries. Public spending on edu- cation in francophone West African countries amounts to 5.5 percent of GDP; that in anglophone East African countries is 2.3 percent of GDP. Median per capita public spending on health is about $6 a year in Table 4.2 Public Spending on Education in Africa, Asia, and Latin America, 1975 and 1993 (percentage of GDP) Region 1975 1993 Africa 4.0 3.8 Asia 2.6 2.7 Latin America 2.9 2.8 Memorandum item All countries with GDP below $2,000 3.6 3.6 Source: Mingat and Suchaut forthcoming. 113 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Table 4.3 Spending on Health in Africa, Asia, and Latin America and Caribbean, 1990s (percentage of GDP) Region Total spending Public spending Africa 5.6 2.8 East Asia and Pacific 3.5 1.5 South Asia 4.1 0.8 Latin America and Caribbean 7.2 3.0 Investments in human All low- and middle-income countries 5.6 2.8 development differ Source: World Bank 1997. considerably across Africa Africa—but averages $3 in the lowest-income countries and $72 in mid- dle-income countries (Peters 1999). The completely different patterns for education and health spending require caution in generalizing about human development. In education the main issue is the efficiency of resource use, as spending tends to account for a larger share of GDP in the poorest countries than in the richer ones. In health the issue is resource availability in the poorest countries and efficiency in all countries. In Burundi, for instance, annual public spending on health is only $1.5 per capita—a level that is simply insufficient for progress. Moreover, especially in health, expressing available resources as shares of GDP obscures the need for significant spending in foreign exchange for drugs and other supplies. And, more generally, the youth of most African populations means that spending on education should probably account for a larger portion of GDP than in many higher-income coun- tries. Yet African countries’ high dependency ratios are just one reason it is hard to increase tax efforts. There is enormous potential for more efficient human development spending in Africa: s Internal efficiency. Relative to GDP per capita, Africa’s unit costs in education are twice as high at the primary level as in Asia and Latin America (table 4.4). This reflects not only high repetitions and dropouts but also high teacher salaries relative to GDP per capita, espe- cially in the Sahel countries of West Africa (Mingat and Suchaut forth- coming). In health, patients at public health facilities may receive benefits worth just $12 for each $100 of public spending on drugs (box 4.1). The range of outcomes achieved with the same public spending (relative to GNP) is very wide for both health and educa- tion—higher spending is not necessarily reflected in better outcomes. 114 INVESTING IN PEOPLE Table 4.4 Education Unit Costs in Africa, Asia, and Latin America, 1975–93 (percentage of GDP per capita) Primary Secondary Tertiary Region 1975 1985 1993 1975 1985 1993 1975 1985 1993 Africa 20 16 15 117 117 56 1,293 691 656 Asia 12 10 8 32 22 19 192 226 86 Latin America 8 8 7 12 12 11 149 82 66 All countries with GNP < $12,000 16 13 12 72 42 37 758 400 373 Source: Mingat and Suchaut forthcoming. s Allocative efficiency. Despite low secondary and tertiary enrollment rates, education spending is biased toward these levels of education, which mainly benefit the better-off. The primary level offers higher returns, especially for the poor. Similarly, public health spending is not focused on the essential components of basic health care. Rather, it is significantly biased toward expensive secondary and tertiary care. The poorest 20 percent of the population receives only about 12 percent of public health subsidies (chapter 3). Combined with the inefficiency in the drug supply system, that means that this group may receive less than $2 in benefits for every $100 spent on drugs. Are African Governments Committed to Human Development? The persistence of such inefficiencies, coupled with the low volume and poor quality of many human development services, often leads to the charge that African governments are not committed to their people’s development. This may be true in some cases, especially among countries in conflict. Generally, however, it is far off the mark. More than 40 Box 4.1 Waste in the Drug Supply System AFRICA’S HEALTH DELIVERY SYSTEMS COULD BE MADE $100 of tax revenue spent on drugs. The main sources a lot more efficient through improved maintenance of of waste are noncompetitive procurement ($27), poor equipment and facilities, better-informed investment storage and management ($19), inappropriate pre- in high-level training, and redeployment of redundant scriptions ($15), poor projections of requirements staff. Symptomatic of such inefficiencies is the waste in ($13), inadequate buying practices ($10), and incor- supplying drugs, a significant component of private rect use by patients ($3). and public health spending. Patients at public facilities may be receiving benefits worth only $12 for every Source: World Bank 1994. 115 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? African countries have developed national “education for all” programs. And most have subscribed to the International Development Goals for 2015, which include targets for education and health along with those for poverty reduction, gender equality, and environmental sustainability (chapter 1; OECD 1996). The problem is not necessarily a lack of political commitment but It is difficult—but not rather the wide range of actions needed and the intensely political nature impossible—for of the reforms required to create effective service delivery systems. In governments to move recent years most governments have been preoccupied with improving forward on the many macroeconomic policy (chapter 1). Political commitment is now needed fronts needed to create not just to boosting human development in general but to improving effective service delivery nutrition, to implementing major health and education reforms, to con- systems fronting HIV/AIDS, to protecting the vulnerable, and so on. It is diffi- cult for governments, however committed, to move simultaneously on many fronts, each of which is vastly more complicated than macroeco- nomic reform. This difficulty is compounded by the political nature of the reforms. They involve overcoming massive vested interests, which requires stead- fast political will and is not always feasible—especially given the new democratic climate and frequent elections in many countries and the polit- ical weakness of rural populations. Teachers tend to be heavily unionized, university students often represent a powerful political force though a tiny numerical minority, hospitals have more influence than clinics, and so on. Taken together, public education and health labor forces usually represent the bulk of the nonmilitary public service in African countries. Despite these complex issues of political economy, many countries have made a major start. Burkina Faso, Guinea, and Senegal, for exam- ple, are making teacher salaries more flexible, partly by permitting the recruitment of community-based teachers who are off the civil service pay scales. More progress can be expected, linked to the growth of civil soci- ety throughout Africa and to the power of information. As Africans bet- ter understand what is at stake, they will increasingly demand better services through standard political channels and through civil society organizations. At the same time, reform is always a lot easier when economies are growing and transition costs can be more easily absorbed through increased resources. Not only must vested interests be overcome, but human development programs must simultaneously focus on the needs of the poorest, through basic health and education, and on the need to 116 INVESTING IN PEOPLE build societies more generally, which involves an important role for other parts of the education system, including higher education. Balancing these priorities would not be easy even in the absence of problems of polit- ical economy. In two areas, however, political commitment remains severely lacking: fighting HIV/AIDS and reducing fertility. Not all African leaders are con- vinced of the seriousness of the HIV/AIDS epidemic, nor do they real- Political commitment ize the potential impact it will have on their countries. Because of this, remains severely lacking not all have made HIV/AIDS a high priority. Strong political commit- in two areas: fighting ment to fighting AIDS is crucial to provide the resources, leadership, and HIV/AIDS and reducing enabling environment needed to control the epidemic’s spread and care fertility for the nation. Accurate and relevant data are a powerful tool for con- vincing leaders to increase their commitment to confronting HIV/AIDS (World Bank 1999b). Where there is political commitment, AIDS can be met head on—as in Uganda, where high infection rates have been brought down, and in Senegal (box 4.2). Are Service Delivery Mechanisms Appropriate? If Africa’s households and communities want to invest in human devel- opment and if there is political will, why has the human development record been so poor in recent years? Mention has already been made of the difficulty of moving simultaneously on many fronts. But this is mainly true at the national rather than the local level. Africa’s public insti- tutions are relatively weak at the national level. Yet its communities, except in areas torn by war and conflict, are among the strongest in the world—especially in West Africa, as evidenced by their response to the availability of social funds and other community-based investment funds. Almost all human development programs, however, have been national Box 4.2 Senegal Confronts AIDS UNLIKE THOSE IN MANY AFRICAN COUNTRIES, Africa (1.8 percent). The small number of HIV posi- Senegal’s leaders chose not to deny the existence of the tive individuals allows the government to consider HIV/AIDS epidemic, but to face the challenge from using treatment schedules that otherwise would not the start. Enlisting all key actors as allies in a timely and have been affordable. aggressive prevention campaign has helped the coun- try maintain one of the lowest HIV infection rates in Source: World Bank 1999b. 117 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? programs, implemented by weak institutions and ignoring strong com- munities. External donors have exacerbated this pattern of excessively top-down delivery. A recent review of completed World Bank education projects in Africa, for instance, found that only 8 percent had resulted in institutional strengthening. Centralized control often results in a focus on the wrong issues, on Centralized control often inputs to programs rather than on results. Centralized recruitment and results in a focus on the deployment of teachers, for example, leads ministries of education and wrong issues, on inputs health to focus on teacher and health worker interests and diverts them rather than on results from education and health results in individual schools and clinics. It also diverts attention from delivering services to dealing with central public employees—who, as noted, tend to be predominantly education and health workers. It leads teachers to spend days away from their schools attempting to receive their pay, which is still rarely handled at the school level. Centralized procurement of drugs, contraceptives, and textbooks can lead to the all-too-common phenomenon of supplies stored in cen- tral warehouses long after clinics and schools needed them and to exten- sive inefficiency in the use of funds (see box 4.1). In social protection, centralized programs focus on coping with shocks, not mitigating or averting them. Overly centralized management has resulted in human development programs that are perceived as distant by their beneficiaries, with low transparency and limited accountability (chapter 1). Around the world, there is a trend toward decentralized delivery of human development ser- vices, partly in response to the global growth of democracy and civil soci- ety. The jury is still out on whether decentralized programs are more effective and efficient in societies where institutions are relatively strong. But in Africa, where institutions tend to be weak, service delivery is supe- rior when it is controlled by beneficiaries and implemented by them or by autonomous agencies (Frigenti, Hasth, and Haque 1998). This find- ing is increasingly confirmed by the World Bank’s assessments of its pro- jects: those based on community-driven delivery mechanisms have fewer problems than others. Until recently autonomous local control of service delivery represented a political threat to central governments and elites in Africa. That is changing rapidly as civil society and democratic political institutions grow. Indeed, Africa is poised to adopt service delivery mechanisms more attuned to its political development, as has already happened in some countries (chapter 2). 118 INVESTING IN PEOPLE Is There Enough International Cooperation? International cooperation takes many forms. This section concen- trates on partnerships among African countries and between them and their development partners. International cooperation is particularly important in human development—and above all in health, because dis- ease knows no boundaries. Africa is poised to adopt In education there is a vibrant partnership among African countries and service delivery external aid agencies through the Association for the Development of mechanisms more African Education. There are also other important forums, such as the attuned to its political United Nations Educational, Scientific, and Cultural Organization and development the Organization of African Unity, in which African governments meet and share experiences. Yet something is lacking. Francophone education systems have been little influenced by anglophone ones, and vice versa. Similarly, in health there are various organizational forums, notably AFRO (the World Health Organization regional office for Africa) and the Organization of African Unity again. Particularly noteworthy has been the shared experience of implementing the Bamako Initiative, with its empha- sis on community involvement in basic health delivery. But in health, as in education, something is lacking in the sharing of ideas and experience, probably because of the lack of forums for such exchanges to occur. Maternal mortality halved in three years in Inganga, Uganda, when tradi- tional birth attendants were partnered with public health centers using modern communications. How can such innovations be replicated? External partners can supply knowledge, finance, and research. Much aid to Africa is focused on human development. For example, the International Development Association, the World Bank’s soft-loan win- dow, targets 50 percent of its funding to Africa and 40 percent of that to the social sectors. Many bilateral donors have similar priorities. The mul- tilateral Heavily Indebted Poor Countries initiative (chapter 8) will free resources for education and health programs in countries now saddled with high debt service obligations. External finance is available. Indeed, institu- tions such as the International Development Association have found it hard to use all their funding because of limited absorptive capacities resulting from weak institutions and inappropriate delivery mechanisms. In knowledge and research, however, much remains to be done. The onus lies on African countries in terms of knowledge and on them and their OECD partners in terms of research. There is resistance in Africa, perhaps understandably derived from the struggle against colonialism, to 119 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? learning about human development from other parts of the world. Yet the experiences, especially of East Asia and Latin America, are profoundly important for Africa. More openness is needed to these experiences. In research, Africa suffers from its uniqueness. Because the predominant diseases in Africa tend to be mainly African, there has been little interna- tional effort to develop appropriate vaccines and other medical interven- When international tions. But that is changing. Indeed, now that some of these diseases—like partnerships are malaria and HIV—are spreading around the world, attention is finally mobilized against African focusing on them. Today there is a concerted international effort to develop diseases, the results can vaccines against HIV, malaria, trypanosomiasis, and the like. Still, the be tremendous and highly African nature of these diseases has made it difficult to mobilize relative to, cost-effective say, the successful global effort to eliminate smallpox 20 years ago. Yet when international partnerships are mobilized against African dis- eases, the results can be tremendous and highly cost-effective. River blindness is on the retreat as a result of two successful programs: the Onchocerciasis Control Program in West Africa and the African Program for Onchocerciasis Control in East and Central Africa. Together these programs comprise the largest human disease control program in opera- tion today, with 93 partners and an economic return on investment of 17–25 percent (box 4.3). Tools for Investing in Africa’s People R EVERSING RECENT TRENDS AND INVESTING IN AFRICA’S PEOPLE SO that they can claim the 21st century will not be easy. The social development targets of the International Development Goals for 2015 offer a benchmark: s Achieving universal primary education. s Eliminating gender disparities in education (by 2005). s Reducing infant and child mortality by two-thirds. s Reducing maternal mortality by three-quarters. s Achieving universal access to reproductive health services.2 These goals appear reasonable but are not going to be easy to reach. In some areas, such as primary education, it is only in the past few years that the declines of the 1980s and early 1990s have started to be reversed. 120 INVESTING IN PEOPLE In others, such as child mortality, trends are worsening—largely because of HIV/AIDS. Achieving these goals will require resources, political commitment, appropriate service delivery, and increased international cooperation. Elements of all four are already partly in place throughout Africa, and they are yielding results. What is urgently needed now is to replicate them throughout the continent, adapting them to national and local circumstances. Box 4.3 The Successful International Partnership against Onchocerciasis ONCHOCERCIASIS IS A PARASITIC DISEASE, ENDEMIC IN African governments, sponsoring agencies (United West Africa, that causes debilitation, eye damage, and Nations Development Programme, Food and Agri- (eventually) “river blindness.” The disease is caused by culture Organization, World Bank), bilateral donors, the a parasitic worm and transmitted by the bite of the private sector, and an international technical staff headed female blackfly, which breeds in rapidly flowing rivers. by the implementing agency, the World Health Two onchocerciasis programs are the essence of effective Organization. The parasite is dying out in the human development partnerships: results-oriented, compre- population. People previously infected are recovering. hensive, widely representative, international, instilling More than 12 million children born in the program area ownership, capitalizing on a diverse range of compara- since the program began are growing up without risk of tive advantages, and focusing on poverty reduction. contracting the disease. An estimated 25 million hectares These successful programs have seen nearly 100 partners of arable land have been freed from onchocerciasis and come together with the sole purpose of providing a are being resettled. New villages are being established, global public good: eliminating a disease that devastates and agricultural production is increasing. The cost: just the poorest in Africa. $0.57 a person per year in 1987 constant dollars. The Onchocerciasis Control Program, begun in A second program, the African Program for 1974, has halted transmission of the disease in 95 per- Onchocerciasis Control, has extended the benefits of cent of the 11-country, 34-million-people program onchocerciasis control to all affected African countries. area by destroying the blackfly larvae in its river breed- It further recognized that the efficacy of ivermectin in ing sites using insecticides sprayed from the air. To preventing onchocerciasis allowed for a control pro- complement vector control, the program also collabo- gram based entirely on its mass distribution. At the rated with a pharmaceutical company, Merck and Co., launch of the program in 1995, the river blindness to develop a drug called ivermectin. Ivermectin has partnership was widened to include two important revolutionized the treatment and prevention of partners: nongovernmental organizations (now num- onchocerciasis by providing a safe and effective drug bering more than 40), who help acquire and distribute that, when dosed once a year, prevents the blinding the donated ivermectin, and local communities, whose and itching caused by the parasite. Merck announced ownership of the program is essential for the program’s in 1987 that it would donate as much ivermectin as long-term sustainability. There are currently 57 pro- needed for as long as necessary to eliminate onchocer- jects under way in 12 countries, with 32 million peo- ciasis in Africa. ple under annual ivermectin treatment. The program The Onchocerciasis Control Program has been sus- already reaches nearly 70 percent of the population tar- tained by a unique partnership involving 11 West geted for treatment by 2007. 121 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Resources We have seen that there are serious inefficiencies in the allocation of resources for human development in Africa. Nevertheless, extra resources are needed now, for four reasons. First, some countries are so poor that they simply do not have sufficient domestic resources, regardless of effi- More resources are ciency considerations. These are generally the lowest-income countries, needed to achieve goals like Burundi and Guinea-Bissau. for health and education Second, many countries have embarked on structural reforms designed to reduce inefficiencies and reallocate resources, but the reforms will take time and often will be slow to yield savings. The adoption of volontaire primary school teachers, paid less than public service teachers, in many Sahel countries is a good example. Over time this reform will lower unit and total costs. But in the short term, by reducing the student- teacher ratio while not displacing existing teachers, it increases the teacher salary bill. Third, new programs and service delivery mechanisms are needed to combat HIV/AIDS and malaria. Effective programs against HIV/AIDS may cost 1.5–2.0 percent of GDP a year in a typical African country, and more in those with high HIV infection rates. Malaria program costs may run 0.3–0.5 percent of GDP a year. Finally, as service coverage increases, the unit costs of delivering ser- vices to the previously unserved are higher than those to the previously served. These beneficiaries tend to be the rural poor, the poorest of the poor, living in dispersed areas without good transport and other infra- structure. So, proportionately more resources are needed to achieve goals for health and universal primary education. Moreover, an important barrier to serving such beneficiaries has been the need for them to pay for services. Though the poor are willing to pay for human development investments, their resources are limited. User fees have deterred primary school enrollment and health center use. Fees have been advocated because they generate revenue and increase alloca- tive efficiency—and there is merit to both arguments. Anecdotally, mod- est user fees seem to improve the quality of health services. In Madagascar, for instance, the ability of health facilities to charge fees—and to retain them—has kept drugs in stock and increased patient demand because quality is perceived as having improved. But the effect of such fees on ser- vice use has likely been severely underestimated, especially in education, and most especially for the poor. In Uganda, for example, primary enroll- 122 INVESTING IN PEOPLE ments doubled in one year, from 2.6 million to 5.2 million, when par- ent-teacher association dues were eliminated (box 4.4). Revenue generation can be effective when the revenues are held and used at the community level. The impact of fees on resource allocation has not been sufficiently studied for there to be clear results in Africa; we simply do not know if higher charges at hospitals than at health centers, Box 4.4 Uganda’s Commitment to Basic Education DURING THE 1990S UGANDA EMBARKED ON A SWEEP- managed at the district level using a community ing national program to achieve universal primary edu- demand approach, which has resulted in faster and bet- cation. This program, probably the most ambitious in ter construction. Multigrade teaching is being piloted Africa, has the following elements: in sparsely populated areas. Support to schools and Massive political commitment. Education was the teachers is provided by a cascading system linking principal electoral platform of President Yoweri teacher training colleges to district coordinating cen- Museveni in his successful 1996 campaign and is the ters and then to schools. Nationally, 560 tutors are in most talked-about topic in Uganda today. Basic edu- place, each responsible for supporting 20 schools, a cation is Uganda’s top priority. large but manageable responsibility. Schools select Elimination of barriers to access. Until 1996 educa- textbooks from a nationally approved list. tion was not free. Fees were minor, but parent-teacher Accountability. Districts and schools are held ac- association dues amounted to $6–8 a child—a major countable for results and funds are used transparently. burden for most Ugandan families. In 1997 free Curriculum reform. The curriculum has been mod- schooling was introduced for up to four children a ernized for the core subjects of mathematics, English, household. Primary enrollments immediately doubled social science, and natural science. Books and materi- from 2.6 million to 5.2 million, and in 1999 reached als have been developed and are being deployed. An 6.5 million. assessment system is being put in place to measure stu- Sustained budget commitment. The government has dent achievement. dramatically increased the share of the national budget Teacher support. Teacher pay has been increased going to education, from 22 percent in 1995 to 31 per- to provide a living wage. Competency tests have cent in 1999. Two-thirds of this goes to primary edu- been administered to all uncertified teachers, and an cation, allocated to districts on a capitation basis. in-service training program introduced for those Waste has been eliminated with the elimination of deemed trainable. There are still not enough teachers, ghost teachers, cutting payroll numbers by a third. given the massive increase in enrollments, but the gov- Moreover, the government is committed to concen- ernment is committed to reducing student-teacher trating future increases in spending—including from ratios from about 60:1 (and as high as 100:1 in the first the Heavily Indebted Poor Countries initiative—on two years of primary school) to 40:1 as soon as is finan- education. cially feasible. Budget increases to fund more teachers Decentralization with central support. All primary and build classrooms are the government’s spending education is now run by Uganda’s 45 districts. Each priority for the next decade, and resources released district deploys and pays teachers, though they remain through the Heavily Indebted Poor Countries initia- centrally financed. Classroom construction is also tive will be used for these purposes. 123 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? for instance, increase the portion of people initially seeking care at the centers. We do know that modest fees for drugs at health centers seem to improve both quality and use. The extra resources that are needed should be made available. Africa remains a principal beneficiary of much multilateral and bilateral aid and of the Heavily Indebted Poor Countries initiative (chapter 8). It will be Sustained and specific necessary to finance fiscal deficits that may seem large in conventional political commitment is GDP terms, but this will be justified so long as the macroeconomic con- needed for effective sequences are funded by grants or highly concessional loans and so long investment in human as the programs the deficits finance expand access to and improve human development development services. This may entail large deficits, with continued aid dependence over an extended period (chapter 8). But these funds need to enhance programs, not simply finance them. Special programs may be needed for countries not eligible for the Heavily Indebted Poor Countries initiative or for which the terms of the expanded initiative do not free sig- nificant resources. Political Commitment General political commitment to human development is already in place in most African countries. What is needed for effective investment in human development is sustained and specific political commitment. This involves focus, sustained resources, and active involvement. Focus can come from a commitment to the poor, especially poor chil- dren. Poor children require political commitment because they are voice- less in society, even though those under 15 typically account for 45 percent of African populations—a portion unlike that anywhere else in the world. Children represent these societies’ futures as well as half their present. A commitment to poor children is also a commitment to equity. Closing urban-rural and male-female gaps is a central challenge for human development, above all in education. Primary enrollment rates in Niamey (90 percent), Addis Ababa (85), and Bamako (80) are more than four times those in the rural areas of Niger, Ethiopia, and Mali (World Bank 1999c). Girls’ enrollment rates lag boys’ in most countries but can be increased rapidly with sustained political commitment, as happened in Guinea, Mauritania, and Uganda in the 1990s. Resources for human development must be sustained over time, as with education in Uganda (see box 4.4) and nutrition in Madagascar (box 4.5). Commitment also involves continued involvement in human devel- 124 INVESTING IN PEOPLE opment by the political elite, as happened in both of these countries in a direct way, with education being a key topic of discussion throughout Uganda and child nutrition throughout poor areas of Madagascar. A particular type of commitment is needed to combat HIV/AIDS, commitment of the sort seen in Senegal (see box 4.2). This commitment requires a readiness to openly discuss topics—including sex and sex work- ers—that are normally below the surface in Africa. Discussing such top- Special commitment is ics is not easy for political leaders anywhere. Many African countries have needed to combat begun open discussions of these topics, but more must do so to reverse HIV/AIDS the epidemic. A commitment to the poor requires a commitment above all to basics: basic nutrition, basic education, basic health, and basic protection against vulnerability. These basics have long been emphasized but have yet to be achieved. Moreover, a commitment to basics does not mean ignoring Box 4.5 Improving Nutrition in Madagascar THE MADAGASCAR FOOD SECURITY AND NUTRITION s Programs must be truly community-based—planned, Project, recently completed and now being extended, managed, and implemented by local beneficiaries. reduced malnutrition among target populations by s Programs must be flexible and provide training to about 50 percent over four years. In Antananarivo mal- increase the capacity of communities to address nutrition dropped from 43 to 18 percent, and in challenges. Toliary, from 26 to 13 percent. s Strong national political leadership is essential, so The project had several key elements: communication efforts are needed to keep govern- s Strong political support, as evidenced in the provi- ment and people aware of the programs and to sion of new funding in a tight fiscal situation and ensure that they support them. in public support by the political elite. s Collaboration and partnerships are also essential, s A social fund that financed income-generating especially with nongovernmental organizations activities. that know how to work with community groups, s A food for work program. donors, and United Nations agencies. s A nutrition program that worked through moth- s Technological innovations must be applied, such as ers groups, each organized by a community nutri- the use of micronutrients, as well as simple policies tion agent and supported by nongovernmental like salt iodization. organizations. s Programs must be multisectoral. Targeting must s The universal iodization of salt. focus on the malnourished, but interventions must The lessons from the project and other success sto- be varied to meet the needs of the community (such ries—such as the Senegal Community Nutrition as literacy classes, food for work programs, and Project, the Benin Community-based Food Security microcredit for agriculture). Project, and the Mali Grassroots Initiatives to Fight Hunger and Poverty—are simple but important: Source: World Bank; UN ACC/SCN 1997; UNICEF 1996. 125 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? other parts of the social system. Basic education, for example, can only be achieved through a direct commitment both to the basic level and to the balanced development of the education system as a whole. Appropriate Service Delivery Appropriate interventions Human development service delivery in Africa should be based on two vary according to the simple premises: problem to be addressed s Most problems have well-known, cost-effective interventions. s Weak public institutions at the national level mean that effective deliv- ery must be based on stronger community and private institutions. Appropriate interventions vary according to the problem to be addressed. In education, for example, they involve removing barriers to access and providing books, materials, and trained and motivated teach- ers to children healthy and well-nourished enough to learn in schools close enough to their homes for them to attend (World Bank 1999c). In nutrition they include salt iodization, which reduced the African popu- lation at risk of iodine deficiency from 33 percent in 1994 to 23 percent in 1997, including in such countries as Kenya (100 percent iodization), Madagascar (100 percent; see box 4.5), and Nigeria (97 percent; UN ACC/SN 1997). In preventing HIV infection appropriate interventions involve public information and condoms, the use of which has resulted in a sharp decline in new HIV and sexually transmitted infections among sex workers in countries as diverse as the Democratic Republic of Congo and Thailand (World Bank 1999b). Indeed, the elements of a complete national program against HIV/AIDS are well-known, if not yet fully in place in any one African country (box 4.6). Implementing such programs could cost $15 billion a year for the continent as a whole. Decentralized delivery focused on the community and the local school or health facility is the second key to effective service delivery. It charac- terizes successful programs for onchocerciasis in West Africa (see box 4.3), education in Uganda (see box 4.4), nutrition in Madagascar (see box 4.5), and safe motherhood in Chad (box 4.7)—all very different societies and economies, but all with weak national institutions. Decentralized delivery can involve a range of mechanisms but is based on the simple concept of getting resources to where they are needed, and putting them more under the control of the immediate beneficiaries. This 126 INVESTING IN PEOPLE can include decentralization to the district level, decentralization to autonomous schools and health centers, and much greater reliance on nongovernmental organizations and other private organizations, includ- ing public funding of private service delivery. What is common to these approaches is their proximity to the beneficiaries, involving them in gov- ernance structures so that there is increased accountability and better ser- vice availability and quality. Decentralized delivery is Examples abound. Zimbabwe’s Social Fund has enabled communities based on the simple to mitigate the consequences of drought and economic stagnation, and concept of getting even helped empower communities further. Community schools are resources to where they growing rapidly in Chad and Mali, partly in response to the slow expan- are needed sion of the formal system. Nutrition programs in Senegal rely on imple- mentation through a contracted private agency, with payments directly related to actual results in terms of nutrition outcomes among the target population. Centers run by nongovernmental organizations are an important aspect of Zambia’s health program. Public funds are being used to fund private schools in Cameroon. Box 4.6 Elements of Successful HIV/AIDS Programs SUCCESSFUL NATIONAL HIV/AIDS PROGRAMS SHARE s Community participation in government policy- a number of features: making as well as in the design and implementation s Government commitment at the highest level and of programs, many implemented by nongovern- multiple partnerships at all levels with civil society mental organizations, civil society, the private sec- and the private sector. tor, and people living with HIV/AIDS. s Early investment in prevention efforts. s Core interventions that include developing com- s Cooperation and collaboration among many munication programs to reduce risky behavior, groups and sectors: those most affected by the epi- especially among youth; making the diagnosis and demic, religious and community leaders, non- treatment of sexually transmitted infections readily governmental organizations, researchers and health available and affordable; treating opportunistic professionals, and the private sector. infections, including tuberculosis; making con- s Decentralized participatory approaches that doms affordable and widely accessible; ensuring a bring prevention and care programs to a national safe blood supply; making voluntary counseling scale. and testing available and affordable; and preventing s A response that is forward-looking, comprehensive, transmission from mother to child. and multisectoral, addressing the socioeconomic Few countries have all these elements in place. They determinants that make people vulnerable to infec- may cost 1.5–2.0 percent of GDP. tion and targeting prevention interventions, care, and treatment to support them. Source: World Bank 1999b. 127 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Decentralization is not a panacea, however. Nor can it be universal. Inappropriate or overly rapid decentralization can have negative effects, as has often been the case with that to district governments. With some notable exceptions, local government has had a checkered past in Africa. Newly independent governments, keen on strengthening a fragile sense of nationhood, were reluctant to devolve powers that might aggravate Decentralization is not a ethnic and tribal divisions. This anxiety was especially apparent in Nigeria panacea, however—nor and Uganda, where colonial rule was largely exercised through traditional can it be universal authorities that retained considerable autonomy. More generally, colonial rule, though often limited, was tightly retained at the center. Indeed, in francophone countries the metropoli- tan model was highly centralized. Few countries entering independence Box 4.7 Chad’s Health and Safe Motherhood Project CHAD IS ONE OF THE WORLD’S POOREST COUNTRIES, s Support the development and implementation of a and its demographic and health indicators lag behind national drug policy. those of most low-income countries. In 1998 life Progress is already apparent. In 1994, 310 of the expectancy at birth was 50 years, one of the lowest in 656 responsibility zones and 24 of the 50 health dis- the region. Maternal mortality is estimated at 827 tricts were operational, covering 33 percent of the pop- deaths per 100,000 live births, a staggering eight times ulation. By 1998, 453 zones were operational, the African average. covering 71 percent of the population. By the end of Despite difficult political and economic conditions, the project 80 percent of the population is expected to Chad’s government increasingly committed itself to be covered. And use is up: in Guera and Tandjile dis- addressing these problems in the 1990s. It adopted a tricts the rate of prenatal visits doubled from less than national health plan (1993–2000) whose central objec- 15 to almost 30 percent in four years. tive is to increase access to quality basic health care, Government commitment is strong, to health in focusing on the most vulnerable groups—children and general and the project in particular. Ministry of women of childbearing age. The key instrument for this Health outlays increased from 3.3 percent of govern- is decentralized service delivery at the district level, cru- ment spending in 1994 to 7.1 percent in 1998. The cial given Chad’s dispersed population. government has also allocated funds to the project Within this framework, the Health and Safe beyond those required in the project agreements— Motherhood Project supports the development and funds that were used to drill boreholes to provide water implementation of policies and investments de- to health centers. Chad has passed a law allocating signed to: increased revenues to health (along with education, s Strengthen capacity to support regional health ser- rural development, and transport), expected as the vices. country develops its oil reserves. This should assure s Provide assistance for health, nutrition, and family sustained continued increases in health coverage rates, planning services by establishing a network of dis- lowering maternal mortality and increasing life trict health facilities. expectancy in the near future. 128 INVESTING IN PEOPLE had developed a tradition of local government. And central governments rarely had the personnel and machinery needed to monitor local govern- ments’ activities. As a result governments in many districts, towns, and cities proved cor- rupt, inefficient, and unresponsive to local needs. In country after coun- try in the 1970s and 1980s, locally elected councils were replaced by centrally appointed commissions that exercised limited independent Decentralization is most authority over service delivery and the raising of revenues to finance it. likely to be effective More recently, there have been commendable attempts to revive local when it is to communities government, but the process will take considerable time as capacity is and autonomous built. Thus decentralization is most likely to be effective when it is to institutions, not just to communities and autonomous institutions, not just to lower levels of lower levels of government, whose institutions may be just as weak as those of central government government. Some functions are not appropriate for decentralization. The most important is public budgeting, for two reasons. First, coherent public budgeting is essential for macroeconomic management. The variability of government revenues in Africa from year to year—reflecting the unpre- dictability of trade- and transaction-based tax revenues in small, open economies—leads sector ministries (of which education and health are usually among the largest) to engage in opportunistic behavior, especially with external aid. This tendency can be compounded if local govern- ments are allowed to enter into relationships with external sources of funds. Second, even where some revenues are raised locally, national sys- tems are needed to compensate for the different resources available throughout a country. This is usually carried out through transfers from the central government. Certain nonbudget functions are also most appropriate for central gov- ernment. In education, assessment systems must be national to permit comparisons of schools. And, as Uganda shows, support to teachers in decentralized schools can be provided most effectively through a central- ized system linked to teacher training. Drug procurement can be ineffi- cient if it is carried out entirely by local institutions; national procurement implies some national pharmaceutical storage capacity. Public informa- tion campaigns for HIV/AIDS should be delivered locally but require development at the national level. The key to making decentralized delivery effective is the governance of the local systems. Such governance is most effective when communi- ties are directly involved, formally through school and clinic boards, for 129 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? example, or less formally, as is much more common. Governance struc- tures that support autonomy, transparency in the sources and uses of funds, and accountability are essential (chapter 2). Increased International Cooperation Some key aspects of Some key aspects of human development in Africa must be tackled human development in internationally. These fall into four categories: Africa must be tackled internationally s Providing resources—the international community must provide more resources, including those freed by debt relief (chapter 8). s Reaping the benefits of economies of scale, given the small size of many African economies and populations. Many areas are ripe for regional and subregional cooperation, including higher education, social sci- ence research, distance education, and drought and disease early warn- ing systems. Little has been done in these areas, but recently there has been a welcome resurgence of interest. s Tackling diseases that recognize no borders. The successful approach followed with onchocerciasis provides an example for the international community as it marshals human and financial resources (see box 4.3). The same approach is needed for malaria, trypanosomiasis, and other endemic diseases, where concerted actions across countries are essen- tial for sustained success. International cooperation is beginning in malaria, most notably with the World Health Organization’s Roll Back Malaria program. But cooperation is still needed for other diseases. s Funding research to develop vaccines and drugs to deal with diseases that are essentially African. Vaccines, for instance, are one of the most cost-effective interventions in health, and many African diseases are in principle preventable through vaccines. New genetically based vac- cines hold great promise, though many potentially effective vaccines (such as for malaria) are still in the research and development phase and not yet operational. Past successes with vaccines and their use, notably against smallpox and polio, have been driven by the diseases’ global nature. Major efforts are under way to develop vaccines against African diseases.3 But much more is needed to encourage research, including commitments to purchase new vaccines for poor countries. 130 INVESTING IN PEOPLE Notes 1. Surveys in Côte d’Ivoire Ghana, and Mauritania show potential losses of almost 6.4 percent of normal earnings from illness. Losses were 2.5 percent in Indonesia and the Philippines and averaged 3.2 percent in Bolivia, Jamaica, and Peru. Losses in the United States were 1.5 percent (Strauss 2000). 2. The other goals are to reduce extreme poverty by half, to implement a national strategy for sustainable development in every country by 2005, and to reverse trends in the loss of environmental resources by 2015 (OECD 1996). 3. These initiatives include various partnerships among the World Health Organization, United Nations Children’s Fund, World Bank, pharmaceutical companies engaged in research and development, foundations, and nongovern- mental organizations such as the Children’s Vaccines Initiative, the International AIDS Vaccine Initiative, the International Vaccine Institute, and the Global Alliance for Vaccines and Immunisation. 131 CHAPTER 5 Lowering Infrastructure, Information, and Finance Barriers S Developing infrastructure ERVICES SUCH AS TELECOMMUNICATIONS, POWER, TRANS- is difficult in Africa due to portation, water, and sanitation—often called “hard” infra- its low population density structure—are vital for economic growth. But the financial and high number of small sector—part of “soft” infrastructure—is just as important. and landlocked countries Africa needs both types of infrastructure to develop com- petitive agriculture and manufacturing. And to make sure that development is broadly based, it is essential that as many people as possible have access to all these services. One sector above all offers Africa a chance to leapfrog forward. If Africa can rapidly equip itself with an excellent information and communica- tions technology infrastructure, it will be able to exploit the gains offered by the emerging knowledge-based economy. This opportunity exists now, and it will not come again. If it is missed, information and communica- tions technology will become yet another sector in which Africa trails the rest of the world. In developing infrastructure, Africa faces problems more severe than any other region. Vast distances and low population density make service provision costly. The division of Sub-Saharan Africa into 48 states, many of them landlocked, makes the barriers worse because small national mar- kets limit scale economies, reduce competition, and increase risk. Poor policies are also to blame. Weak states have taken a large role in these sec- tors—with disappointing results. State capacity has been overstretched or even undermined, and service provision has been inadequate. In their current state, infrastructure and the financial sector, rather than promot- ing development, are barriers to it. This chapter examines these barriers and suggests ways to surmount them. It concludes that new ways of doing business are needed—from a more regional approach to infrastructure development to greater partic- 132 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS ipation by the private sector and local communities, with the state con- centrating on facilitation and regulation rather than direct provision. Though Africa requires an estimated $18 billion a year in infrastruc- ture investments, investment is not the whole story. Substantial benefits could be reaped from more effective operations and maintenance of exist- ing facilities, from better regulations and policies, and from greater devo- lution of functions to the private sector and to lower tiers of government Africa requires and communities. Such efforts have produced impressive results in several investment––as well as countries. Worldwide experience suggests, however, that development of better policies, appropriate regulation should precede privatization or liberalization. operations, and Widening access to infrastructure services, especially for rural populations, maintenance requires both more resources and innovative approaches. Community and user involvement in infrastructure construction, maintenance, and man- agement—especially in water supply, irrigation, and rural roads—is an important way of improving services in rural areas. The policy challenge posed by information and communications tech- nology in Africa is to create mass awareness of how it works and what it can do, to foster indigenous capacity and research, and to identify ways to achieve universal access to service. Meeting this challenge requires edu- cation. In primary and secondary schools, this can be done through school networking programs. In universities, capacity must be enhanced in applying new technology for research, teaching, and learning. Lifelong learning must be offered through community centers and school and uni- versity networks that promote equal access to all. Funding access to technology remains a major challenge, however. A growing number of African countries—Botswana, Mauritius, South Africa, Uganda—are adopting innovative approaches to fund mass access to information and communications technology, and other African coun- tries could learn from them. Regional cooperation is urgently needed to develop strong system backbones and share resources and knowledge. Broader regional collaboration could also lead to bulk purchasing of capacity, capacity-building initiatives, and innovative financing, helping to achieve economies of scale and to lower costs. The financial sector also poses policy challenges. In modern finance both the quantity and quality of capital matter greatly. On both counts Africa suffers huge deficits. Liberalization is incomplete, and the thinness of financial markets and gross inefficiencies need to be addressed. There is also an urgent need to expand access by offering financial instruments that serve the economically active poor and by developing closer rela- 133 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? tionships between the formal and informal sectors within an integrated financial market. The most effective way to improve the quality, cost, accessibility, and quantity of capital is to build a market-based financial system. This requires that governments follow sound fiscal policies, that banks and firms be commercialized or privatized, and that governments not stifle Regional pooling would markets. In many countries financial sector governance is a higher prior- diversify risk, promote ity than further liberalization. Improving transparency, contract enforce- competition, and ment, payments systems, and other micro and institutional aspects of the generate economies of financial system presents the biggest challenge for development. scale Regulation and supervision are particularly important, especially accounting standards, disclosure requirements, and contract law. As with hard infrastructure, better regulation should precede liberalization. Banks dominate Africa’s financial sectors. Greater emphasis should be given to developing nonbank financial institutions such as stock markets, contractual savings institutions, and leasing companies. In addition, Africa’s financial markets are tiny. Regional pooling would diversify risk, promote competition, and generate economies of scale. A cross-border financial system requires improvement in commercial and financial law, contract enforcement, accounting standards, and prudential supervision, and their harmonization across countries. Catching Up on Infrastructure E SPECIALLY WHEN SOUTH AFRICA IS EXCLUDED, AFRICA LAGS behind the rest of the world on almost all dimensions of infra- structure development—quantity, quality, cost, and equality of access (table 5.1). Moreover, over the past 15 years the gap between Africa and the rest of the world has widened. In 1997 Africa (excluding South Africa) had 171,000 kilometers of paved roads, about 18 percent less than Poland. Africa also contains just 2 percent of the world’s telephone mainlines. There are about 10 million telephones in Africa—less than in Brazil—and half are in South Africa. The other 5 million are so dispersed that most Africans live two hours from the nearest telephone. Even when Africa appears to be doing well, other measures highlight inadequate supply. For example, Africa fares better than East or South Asia on length of roads per capita but is at the bottom 134 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS when it comes to road density per square kilometer of land area (figure 5.1)—meaning that most people are farther from a road in Africa. In Ethiopia 70 percent of the population has no access to all-weather roads. War-affected economies in Africa are perhaps the hardest hit by the inadequate provision of infrastructure services. Physical infrastructure stocks—telecommunications, airports, ports, roads, bridges—are often key targets during war. Although some parts of these countries may not War-affected economies be directly affected by war, infrastructure maintenance is neglected dur- are perhaps the hardest ing war, and capital spending is cut back in favor of military spending. hit by the inadequate The quality of infrastructure also tends to be worse in Africa. The wait- provision of infrastructure ing time for a telephone connection averages 3.5 years. Only 16 percent services of roads are paved. More than 80 percent of unpaved roads are only in fair condition, and 85 percent of rural feeder roads are in poor condition, with accessibility limited in most cases to the dry season. In many coun- tries such roads have to carry a large portion of transported goods. These shortcomings are not simply a matter of limited investment. Inadequate maintenance and operating inefficiency have reduced the value of much of the investment that has taken place. One-third of the roads built in Sub-Saharan Africa in the past 20 years have eroded from lack of main- tenance. Timely maintenance expenditures of $12 billion would have saved $45 billion in road reconstruction costs over 10 years (World Bank 1994c). Table 5.1 Infrastructure Indicators by Region International Electric telecommunications power Telephone Paved roads (dollar cost of Population Population consumption mainlines (percentage three-minute with access with access per capita per 1,000 of total call to the to safe water to sanitation (kilowatt-hours), people, roads), United States), (percent), (percent), Country group/region 1996 1997 1997 1997 1995 1995 Low and middle income 851 60 30 6.22 75 — East Asia and Pacific 624 50 10 5.60 77 — Europe and Central Asia 2,788 204 83 4.33 — — Latin America and Caribbean 1,347 110 26 4.42 75 68 Middle East and North Africa 1,166 75 50 6.02 — — South Asia 313 18 41 — 81 20 Sub-Saharan Africa 439 16 16 8.11 47 47 Sub-Saharan Africa excl. South Africa 146 10 — — 46 47 Source: World Bank 1999. 135 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 5.1 Road Density and Road Length Per Capita in Africa, Asia, and Latin America, 1997 Kilometers 700 600 500 400 300 200 100 0 Africa South Asia East Asia Latin America Roads per 1,000 square kilometers Roads per 10,000 people Source: World Bank 1999. Costs are also a problem—Africa’s transport costs are the highest of any region. The continent is isolated from major maritime and air routes and is served by peripheral, high-cost routes. Freight costs for imports are 70 percent higher in East and West Africa than in developing Asia. For landlocked Africa costs are more than twice as high as in Asia. Air trans- port costs should be less affected by boundaries and distance from ports, but air transport costs across the continent are two to four times costs over the Atlantic. And in many West African countries air cargo trans- port is simply not available. Internal transport costs are also high in Africa. For example, in the mid-1990s road transport costs in Côte d’Ivoire were two to three times those in Southeast Asia (UNCTAD 1999), and charges for moving agri- cultural produce were two to five times higher in Ghana and Zimbabwe than in a group of Asian economies (Mariki 1999). Higher costs in Africa result from lower road quality, higher fuel taxes, higher imported vehicle costs, and costly bureaucratic procedures. It is estimated that roadblocks and bribes paid to police raise the cost of road transport by one-third in parts of West Africa. For other infrastructure services the picture is mixed. The cost of tele- phone calls between African countries can be 50–100 times the cost of calls within North America, but the average rate for a three-minute local 136 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS call is lower in Africa ($0.09) than in Europe ($0.11). But averages are misleading. Electricity tariffs, for example, ranged from $0.001 per kilowatt-hour in Burundi and $0.022 in Ghana to $0.31 in Guinea- Bissau in the mid-1990s. (The typical cost in OECD countries is $0.06.) This variation reflects both real cost differences and policy dif- ferences. Ghana, for example, is blessed with one of the world’s lowest- cost sources of hydropower. In other cases high charges may reflect Access to infrastructure much higher costs (or monopoly profits), while low charges may not services is more unequal cover costs. Paradoxically, very low electricity prices may be as undesir- in Africa than in any other able as very high prices. If prices are low but costs are not, subsidies will part of the world be needed, creating macroeconomic imbalances, or the supplier will have less money to expand supply or improve quality—which may be more important than price for competitiveness or access. Access to infrastructure services is more unequal in Africa than in any other part of the world. Less than one African in five has access to elec- tricity, and less than half have access to sanitation or safe water. The dis- tribution of services is skewed—urban areas receive more than 80 percent of services, while rural areas, with more than 70 percent of the popula- tion, get 20 percent. About two-thirds of rural Africa lacks access to ade- quate water supplies, and three-quarters is without proper sanitation facilities. Consequences of Lagging Infrastructure Development Why does Africa’s low infrastructure development matter? Production of all goods and services lags in Africa. Does infrastructure have a signif- icance beyond that of any other type of production? Yes, because the value of infrastructure for growth and development lies in its consumption, not its production. Infrastructure is an input to all other production. This is clear in the case of economic infrastructure such as power and transport. But even social or household infrastructure, such as sanitation facilities, affects people’s productivity and so indirectly affects production. Africa pays a high price for its inadequate infrastructure in lost opportunities for growth, for poverty reduction, and for access to services that could improve people’s lives. Low competitiveness. Poor infrastructure is one of the main causes of Africa’s low competitiveness. This is not just a matter of inadequate quantity. Cost, quality, and access are all important determinants of competitiveness. 137 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Africa’s high transport costs are a major burden on competitiveness and growth. Amjadi and Yeats (1995) conclude that transport costs are a higher trade barrier than tariffs in Africa. Limão and Venables (1999) conclude that weak infrastructure accounts for most of Africa’s poor trade perfor- mance. The volume of trade is very sensitive to transport costs—a 10 per- cent drop in transport costs increases trade by 25 percent. And transport Infrastructure plays an costs are sensitive to the quality of infrastructure, as measured by such vari- important role in ables as the density of the road network, the paved road network, and the determining the rail network, or the number of telephones per person. Improving a coun- destination and size of try’s worldwide rank in infrastructure quality from the 75th percentile to private capital flows the 50th (median) increases the volume of trade by 50 percent. Unreliable service can be even more damaging to competitiveness than high costs. Production stoppages, missed delivery dates, or an inability to communicate reliably preclude the development of higher value-added products that depend on timely delivery. About 25 percent of the decline in Africa’s share of world exports can be attributed to weak price com- petitiveness. The rest is due to nonprice factors, including infrastructure services and the flow of trade information (Oshikoya and others 1999). In newly industrialized countries successful exporters exhibit persistent export growth even in the face of falling world income. They are able to do so partly because they are in close contact with foreign customers, hav- ing established “insider” relationships with them. The quality of transac- tional infrastructure, as represented by the number of telephone lines per capita, is a statistically significant variable in explaining the success of insider countries (Mody and Yilmaz 1994). Given its inadequate infrastructure and service levels, it is no surprise that Africa is considered a bad business address. This makes it hard for Africa to compete for private capital flows as public flows decline. Infrastructure plays an important role in determining the destination and size of private capital flows. African firms feel strongly about the importance of infra- structure in their business decisions and operations, ranking it high on their list of complaints (WEF and HIID 1998). Not all African countries are badly placed. But even the better per- formers may be dragged down by bad neighbors. As much as 1 percent- age point of Africa’s lackluster growth performance may be due to neighborhood effects (Easterly and Levine 1997). In some cases this is merely reputational—guilt by association. But costly or unreliable infra- structure in neighboring countries can be nearly as important as a coun- try’s own (Limão and Venables 1999). 138 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS Weak market integration. Inadequate infrastructure also impedes the inte- gration of domestic markets. Though less visible than the barrier to global competitiveness, the barrier to market integration is just as damaging to growth—and even worse for broadly based growth and poverty reduc- tion. The lack of all-weather rural roads, in particular, condemns rural areas to isolation, subsistence production, and high risk. High transport and other transactions costs, and the possibility of Inadequate infrastructure being cut off from markets and supply sources at critical times, limit is a major barrier to the attractiveness of specializing in high-value crops (UNCTAD growth and poverty 1999). Though specialization might bring higher average returns in reduction the long run, there would be no long run if there were one catastrophic year in the short run. Better roads and other infrastructure reduce risk and create opportunities for high-value production—including nona- gricultural activities, the classic path out of poverty for rural house- holds the world over. Falling transport costs also expand markets for urban production, lower food costs in urban areas, and create oppor- tunities for people and investment to move back and forth between rural and urban areas. Deregulation of transport in Kenya in the 1970s, for example, set in motion a virtuous circle of growth between Nairobi and smallholder agricultural areas for 100 miles around (World Bank 1980). Slower growth. Many studies have found a link between infrastructure development and growth. The World Bank’s Word Development Report 1994 found that a 1 percent increase in infrastructure stock was associ- ated with a 1 percent increase in GDP. Easterly and Levine (1997) found that inadequate telecommunications infrastructure caused a 1 percentage point drop in Africa’s growth rate. What is harder to see is whether growth causes infrastructure or infra- structure causes growth. But it is generally recognized that the link works both ways. Despite the ambiguity about causality, it seems clear that inadequate infrastructure is a major barrier to growth and poverty reduc- tion, particularly because it lessens competitiveness and impedes market integration. Poverty and inequality. Some infrastructure services—such as sanitation and safe water—contribute directly to poverty reduction. But the provi- sion of infrastructure services does not automatically reduce poverty. Poorly designed infrastructure could have more costs than benefits for poor people because of inadequate targeting or adverse social, health, financial, and environmental effects (DBSA 1998). 139 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? In addition, infrastructure provision can widen the gap between the poor and the nonpoor where access is expensive or where services are not planned to meet the needs of the poor. Delivery can also be disempowering if it turns the poor into passive recipients of services rather than central actors in their own development. There is a presumption, however, that developing rural transport and water infrastructure will especially benefit women, because Developing rural they bear the biggest transport burden in Africa (box 5.1). transport and water infrastructure will Causes of Lagging Infrastructure Development especially benefit women, because they bear the Africa’s infrastructure development has lagged for many reasons, biggest transport burden including structural features—geography, poverty, low urbanization, division into small states—inadequate investment, and poor policy. Difficult geography. Africa is a vast continent with a sparse population mostly living far from the sea. This geography makes transport to and within the region expensive. Bloom and Sachs (1998) identify some spe- Box 5.1 The Gender Impact of Infrastructure Provision KENYAN WOMEN WORK AN AVERAGE OF 41 HOURS tural activities. There is evidence that a significant a week, compared with 26 hours for men. In portion of time saved is used productively. Cameroon and Guinea-Bissau women’s working days s Increasing crop production. Agricultural output can are twice as long as men’s. In Uganda women produce benefit, particularly where bulky, low-value crops 80 percent of food and provide 70 percent of agricul- are involved. For example, trucks can be hired to tural labor. move bulk harvests, fertilizer can be moved to vil- Similarly, village surveys in Burkina Faso, lages and stored in local facilities, and hired farm Uganda, and Zambia have found that African women labor can move more readily to the fields. move, on average, 26 metric ton-kilometers a year s Improving marketing opportunities. Isolated rural (especially water and fuelwood) compared with less communities have great difficulty marketing their than 7 metric ton-kilometers for men. This, com- crops. Crops can be moved in bulk by trucks, but bined with women’s contribution to agriculture, has also in smaller quantities by cart or bicycle if ade- led to rough estimates that women contribute about quate roads or paths are available. two-thirds of the total transport effort. Given these s Expanding access to social services and nonagricul- disparities, time savings in these activities will bene- tural income-generating activities. These include fit women most. Improvements in rural infrastruc- health clinics, for which travel time can be reduced, ture can also raise the incomes of the poor, and travel from periurban locations to work in ser- particularly women, through several mechanisms: vices and construction in the urban informal sector. s Reducing the time spent collecting water and fuel- wood. The time freed can be used for leisure or for Source: ADB 1999 based on Weiss 1998 and Barwell 1996; productive purposes such as education or agricul- Hanmer and others 1997. 140 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS cific problems: Africa’s distance from major markets in Europe and North America, the barrier imposed by the Sahara Desert, Africa’s small coast- line relative to total area, a shortage of natural ports along the coastline, the fact that only 19 percent of Africans live within 100 kilometers of the coast, the large proportion of landlocked states, and the small number of navigable rivers. Widespread poverty and low urbanization. Large markets lower infrastructure Many indicators of lagging costs by allowing economies of scale and by broadening competition. But infrastructure infrastructure costs are also affected by per capita income and urbanization. development reflect low Many indicators of lagging infrastructure development reflect low demand demand rather than rather than inadequate supply. If basic household telephone service cost 5 inadequate supply percent of household income, for example, less than 10 percent of Tanzanian households could afford telephone service (Mariki 1999). Africa’s GNP is only slightly larger than that of Belgium, and it has less than one-fiftieth the per capita income and one-twelfth the popula- tion density. Even if Africa were a single market, this would not offset the disadvantages for infrastructure development of low income relative to area. In this respect it is interesting to compare Africa with India. Total and per capita GDP are comparable, but India has two important advan- tages when it comes to infrastructure development: it is a single country, and its population density is nearly 13 times that of Africa. Small states. The division of Africa into many small states also affects infrastructure development. Sometimes there are physical incompatibil- ities between infrastructure systems: rail lines may be of different gauges or may not link up at borders. More generally, border crossings entail high transactions costs. Even if rail systems are compatible, coordination between independent systems entails long delays and high costs that lead to a disproportionate share of bulky items being transported by road rather than rail in East and Southern Africa. For truck transport, border delays of 10 hours are common, while taxes, licenses, and insurance requirements raise the direct costs of transport. Protection of domestic transport and tour operators further raises costs, impedes the development of cross-border tourist circuits, and greatly reduces competition and service in air transport. Finally, and most impor- tant, potential sources of low-cost energy and water resources remain untapped because of the lack of regional cooperation. World-class, low-cost sources of hydropower have not been exploited because of the difficulties, rivalries, and uncertainties attached to producing energy in one country for consumption in another—often with transmission across a third. 141 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? More disturbing is the enormous amount of energy wasted through gas flaring, particularly in West Africa. Africa flares gas equivalent to 12 times the energy it uses. Because of the distances involved, not all this energy can be used commercially. But a significant amount could be har- nessed, to the benefit of producers and consumers, if the countries with these resources demonstrated a commitment to developing regional solu- Institutions, incentives, tions to energy shortages. and policies are the main Inadequate investment. UNCTAD (1999) argues that Africa’s poor infra- barriers to the provision structure performance is mainly explained by a collapse in investment of infrastructure over the past 20 years. Most estimates suggest that Africa requires infra- structure investment of 5–6 percent of GDP a year, with most coming from the public sector. Yet total public investment more than halved in Africa between the early 1970s (12.6 percent of GDP) and the early 1990s (5.6 percent of GDP). Moreover, official development assistance fell in the 1990s, and the share going to infrastructure fell even more. This decline has not been offset by higher domestic or foreign private investment in infrastructure except in Côte d’Ivoire and South Africa, which have attracted foreign private investment. This investment squeeze contributes to the deterioration in infrastructure, especially in road trans- port. Insufficient funding for maintenance has also been a binding con- straint. In nine East African countries maintenance spending was sufficient for only 20 percent of current networks (Sylte 1996, cited in UNCTAD 1999). Bad policies. While structural factors and low investment help explain the current state of infrastructure in Africa, institutions, incentives, and policies are the main barriers to its provision. Almost without exception, infrastructure services have been provided exclusively by governments, which own, finance, and manage nearly all infrastructure projects. Public provision typically leads to low efficiency and high costs, with more atten- tion paid to creating jobs than to providing services. High subsidies to insolvent utilities undermine macroeconomic stability and growth. Although data for Africa are scanty, the World Bank recently estimated that energy subsidies for all developing countries total $100 billion a year, equivalent to two-thirds of sector investment requirements. Governments have often controlled prices with little regard for com- mercial objectives, including cost recovery. Most prices are far below what is required to operate, maintain, and rehabilitate facilities. In response to the resulting supply shortages, many businesses and households resort to self-provision, often at high cost. In Nigeria as much as half of public elec- 142 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS tricity capacity may be inoperable at a given time, mostly because of inad- equate maintenance of transmission and distribution networks. As a result more than 90 percent of manufacturing firms have bought their own gen- erators. For firms with 50 or more employees, the extra cost of private power generation was 10 percent of the machinery and equipment budget. For smaller firms the burden was as high as 29 percent (Lee and Anas 1992). Public policy toward the private sector also impedes infrastructure Geography need not be development. Licensing and other restrictions prevent private firms from destiny, and much can be competing with state firms and with each other. Restrictions on compe- done within existing tition are often defended on the grounds that they conserve scarce capi- constraints tal because utilities are natural monopolies. More often, the effect is to raise the cost and lower the quality of service, thereby restricting growth. More generally, administrative barriers and high taxes impede the pro- vision and use of infrastructure by the private sector. The high transac- tions costs arising from government restrictions deter private sector development and breed corruption, further undermining development. Kickbacks on construction contracts, pilferage in ports, corruption in customs services, and organized extortion of truckers all raise the cost of doing business and reduce competitiveness. The Way Forward Geography and other structural factors impose constraints on what can be done to solve Africa’s infrastructure problems. But geography need not be destiny, and much can be done within existing constraints. Countries elsewhere have overcome isolation and landlockedness. Moreover, new technology creates new opportunities for Africa—even the potential for leapfrogging stages of development. To move forward, Africa must boost investment, develop private-public partnerships, improve government credibility, increase cross-border and regional cooperation, and widen access. Boost investment. There is no doubt that Africa’s weak and often worsen- ing infrastructure performance is linked to low spending on investment and maintenance. The question is the extent to which low spending is an inde- pendent cause or the consequence of other factors—bad policies, lack of regional cooperation, structural features of geography and poverty—that lower the rate of return and, hence, the incentive for investment. In par- ticular, lack of accountability to communities and inadequate commercial orientation may have reduced the incentive to invest in infrastructure. 143 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Africa requires $18 billion a year in infrastructure financing—about 6 percent of GDP (ADB 1999). But increased spending will not be effec- tive, nor will the funds be forthcoming, unless efforts are made to improve policies, management, and regional cooperation. Moreover, difficult choices will have to be made between spending on infrastructure and spending on health and education. And within the infrastructure sector, Spending on rehabilitation choices must be made between spending in cities or in rural areas and and maintenance will between spending on new investment or on maintenance. probably provide a bigger Funding is not always the main obstacle, however: payoff than spending on new investment s Africa has a fairly well-developed stock of ports, rail lines, and long- distance trunk roads to the outside world. But this stock needs to be rehabilitated and used more efficiently. Rehabilitating this infrastruc- ture and filling in the gaps in East and Southern Africa would cost an estimated $400 million (about 0.25 percent of GDP). s Urban power, water, sanitation, and telecommunications require large investments, even if efficiency is improved. But much of this funding can come from the private sector—indeed, privatization can be a source of revenue for cash-strapped governments. s Inadequate rural infrastructure is the biggest barrier to market inte- gration and the most difficult to address. It is costly—bringing 90 per- cent of Ethiopia’s population within 20 kilometers of an all-weather road would cost $4 billion, or 75 percent of GDP. Simply catching up on deferred maintenance in Malawi would cost 2.5 percent of GDP. Rural infrastructure will remain dependent on public funding, includ- ing donor-supported spending, for a long time. Nevertheless, new ways of providing small-scale infrastructure by the private sector and increased user and community involvement in projects are also needed to ensure that access increases. Given the deterioration in infrastructure investment and severe capital constraints, spending on rehabilitation and maintenance will probably provide a bigger payoff than spending on new investment. The key ques- tion in such instances, however, is why the infrastructure has not been maintained in the first place. Before rehabilitation investment begins, poli- cies should be examined to ensure that incentives are consistent with main- taining the rehabilitated infrastructure. It is also important to consider whether a facility should be rehabilitated to the same standard as its orig- inal construction. Some facilities were built to uneconomic standards, 144 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS especially given today’s resource-constrained circumstances. Zambia, for example, has decided to downgrade the standard of some trunk roads. At the extreme, economic conditions may have changed so much that an existing facility should not be rehabilitated or maintained. There may still be instances, however, in which supply-led investment can attract productive investment—as with investment in an export pro- cessing zone or in an access road to a high-potential area. Not many gen- One of the best ways to eralities apply to all countries, but a few may be appropriate: finance investment and increase efficiency is to s Look first for quick-payoff changes that do not involve investment. increase private Improving border crossings for freight and tourists and eliminating participation in unofficial tolls are obvious examples. infrastructure s Develop appropriate regulations before preceding with privatization or liberalization. s In the case of regional cooperation, bilateral projects may be easier to arrange than grander multilateral programs. Latecomers can often join after a project has been launched. s If things are moving, the most urgent investment or next step will usu- ally be obvious, driven by demand. If the economy is stagnant and there are no obvious infrastructure bottlenecks, there may be a case for carefully chosen supply-led investments in infrastructure. Develop public-private partnerships. One of the best ways to finance invest- ment and increase efficiency is to increase private participation in infra- structure. Complete reliance on public ownership and provision of infrastructure has created inefficiencies in management and put an undue financial and managerial burden on the state. With the right incentives and regulations, the private sector and other nonstate institutions can deliver services that satisfy the socioeconomic objectives of public goods, often more efficiently than the state. Private investment in infrastructure varies widely across countries. Among industrial countries the United Kingdom has fully privatized telecommunications, power, and sewerage, while France and Germany retain almost total public ownership in these sectors (table 5.2). In devel- oping countries private participation in infrastructure could reach 40–50 percent (DBSA 1998). Even though Côte d’Ivoire is one of Africa’s lead- ers in attracting private investment, it lags behind many other countries. Private participation in infrastructure offers enormous scope for cutting budget costs (box 5.2). 145 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Table 5.2 Private Investment in Infrastructure in Various Countries, 1995 (percentage of total) Weighted Income group/country Telecommunications Power Transport Sewerage private share High income France 0 0 10 36 13 Germany 0 67 0 20 9 Japan 35 96 3 0 14 Netherlands 100 23 — 50 46 United Kingdom 100 100 21 100 71 United States 100 81 13 22 47 Middle and low income Chile 100 99 7 4 54 Côte d’Ivoire 0 30 0 25 10 Hungary 98 100 53 0 76 Philippines 87 49 25 0 32 Thailand 31 30 20 0 17 Source: DBSA 1998. Public-private partnerships can take many forms. African countries have used a variety of approaches to attract private participation in rail- ways, airports, and seaports (table 5.3). Introducing competition and pri- vate involvement in maritime transport in Côte d’Ivoire generated many benefits for consumers (box 5.3). Improve government credibility. There are many obstacles to increasing pri- vate participation in African infrastructure. The main sources of capital are likely to be foreigners or local European, Asian, or other ethnic minorities, and many governments do not want to cede control to either group. Governments also worry about private investors exercising mon- opoly power in small markets. Privatization may lead to higher prices for basic services such as electricity and water. Moreover, foreigners may be reluctant to invest. Political uncertainty is high in Africa, and in traditional utilities the capital costs are high, the expected lifetime of the investment is long, and returns will be in local rather than foreign currency. Thus investment appears quite risky, and if foreign investors are willing to invest at all, they may demand a high risk premium. To attract foreign investment on acceptable terms, governments need to create a favorable climate for business by providing macroeconomic stability, competitive taxes, freedom to repatriate capital, and all the aspects of governance that affect willingness to invest—including con- tract enforcement, low corruption, and adherence to transparent rules, 146 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS Box 5.2 Harnessing the Potential of Telecommunications TELECOMMUNICATIONS IS A STRIKING EXAMPLE OF Malawi has little chance of attracting foreign (or local) how new ways of doing business could both cut bud- investment for export production. Worse, many other get costs and improve business services. Malawi, with African countries have taken steps to attract foreign very poor telecommunications services, illustrates the investment and technology that will lower their potential. There are 0.31 telephones per 100 people, telecommunications costs and enhance their competi- compared with 0.5 in Sub-Saharan Africa and 50 in tive advantage. high-income countries. The average wait for a phone Malawi could attract new service providers and pri- line exceeds 10 years. The new, single-provider cellu- vate investment that could increase the number of tele- lar phone service is expensive ($1,000 to sign on) and phone lines sixfold within five years, vastly improve has chronic service problems. Many services—data other services, and lower prices—and it could secure transmission, paging, Internet—are limited or nonex- almost all of the required $300 million in financing istent. And the monopoly public provider, Malawi from private sources. Without such a program, includ- Posts and Telecommunications Corporation, cannot ing regulatory and other changes, Malawi has little afford investments that could improve service. hope of financing the service improvements needed to Telecommunications is the core of the information compete with its neighbors. infrastructure needed for countries to compete in the global economy. With such poor and costly services, Source: World Bank 1997. including for privatization (Ayogu 1999). At the same time, to protect against exploitation of a monopoly position, governments should develop regulations that conform to international good practice for governance and pricing. An even better way to prevent abuse of monopoly power is to permit free entry and open competition where this is compatible with market size and technology. New technology such as cellular phones and small-scale generating plants offer new scope for competition. In brief, governments need to enhance their credibility and the rule of law to attract private finance and to protect both property rights and the public interest. The appropriate form of public-private partnership depends on tech- nology and market structure. The key to deciding the structure of own- ership—whether a public-private partnership or full privatization—is whether the market can be made contestable, that is, potentially com- petitive even if only one firm is active. A starting point is the recognition that infrastructure services can often be unbundled into standalone ser- vices with distinct market structures. The electric power sector, for example, can be unbundled into gen- eration, transmission, and distribution. The technology for power gen- 147 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Table 5.3 Selected Forms of Private Participation in Africa’s Railways, Airports, and Seaports Form Sector Country Year Management contract Railways Cameroon Pre-1996 Togo Pre-1996 Malawi 1993 Burkina Faso 1997 Congo, Dem. Rep. 1998 Airports Guinea Pre-1996 Madagascar Pre-1996 Togo Pre-1996 Seaports Cameroon Pre-1996 Sierra Leone Pre-1996 Lease Railways Côte d’Ivoire Pre-1996 Gabon 1997 Cameroon 1998 Airports Mauritania Pre-1996 Côte d’Ivoire 1996 Seaports Mozambique Pre-1996 Zambia 1998 Concession/build-operate-transfer Railways Malawi 1993 Mozambique 1998 Airports Senegal 1996 Seaports Mali Pre-1996 Demonopolization/build-own-operate Seaports South Africa Pre-1996 Divestiture Airports South Africa 1997 Source: ADB 1999. Box 5.3 Private Involvement in Maritime Transport in Côte d’Ivoire RESTRICTIVE PRACTICES FAVORING THE STATE-OWNED In 1995 SITRAM was liquidated and a new carrier shipping line, SITRAM, resulted in high costs and with majority private Ivorian ownership, COMARCO, poor services for Ivorian exporters of major crops and was set up. COMARCO and other domestic shipping importers of essential goods. These restrictions were lines benefited from a reservation of 50 percent of bulk first eroded in 1993, when the banana-pineapple and refrigerated traffic for the three product groups that exporters association chartered its own vessels at much had been handled by SITRAM (bananas and pineapple, lower costs, halving freight rates for banana exports to palm oil, wine) until December 1996, when all non- Europe and cutting those for cocoa exports to the conference traffic was formally liberalized. These mea- United States by one-quarter. Given the increased sures substantially lowered import prices for consumers competitiveness of Ivorian products, the government and shipping costs for exporters, increasing the compet- agreed to liberalize maritime transport in stages. itiveness of Ivorian exports 148 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS eration is diverse, ranging from small diesel generators to large hydro installations. Installed capacity can be varied to suit demand. Thus it is possible to rely on the market to deliver an efficient industry configura- tion—provided the transmission sector is capable of switching between generating plants. If switching capability is limited, competitive disci- pline is weakened and regulation will be needed to offset this handicap. In principle, however, power generation offers considerable scope for full Well-managed road funds privatization. Cross-border partnership can extend the range of options can increase private outside national boundaries. participation in road Power transmission and distribution networks, on the other hand, are maintenance and boost costly and uneconomic to duplicate. Thus territorial exclusivity is war- the growth of business ranted. But public-private partnerships are possible through “competi- tion for the market,” in which competitors bid for the right to serve a territory—implying continued public ownership but private service pro- vision. In a state with a credible rule of law, contracts can blend deci- sionmaking and control rights that confer the advantages traditionally associated with ownership. In addition to financing, partnerships can involve institutional inno- vation. One promising institutional innovation has been road funds to improve road maintenance. Learning from mistakes made in earlier attempts, second-generation road funds are being used to contract out maintenance and are funded by user charges, normally a fuel levy plus vehicle licensing fees. The funds are overseen by public-private boards with broad representation, including road users, with an independent chairman and subject to external audit. Boards recommend charges to the legislature. Evidence suggests that users are willing to pay charges if these go toward efficient road maintenance. Well-managed road funds can increase private participation in road maintenance and boost the growth of business. In Ghana the revenue mobilized for road maintenance doubled in real terms between 1995 and 1997, and the share of roads rated as good or fair rose from 41 to 80 percent between 1995 and 1998. Road funds have also been successful in Zambia. They work best when users can see that the charges they pay are spent on maintenance, and when gov- ernance mechanisms ensure that stakeholders have an adequate voice in management. There is a danger, however, that road funds will reduce fiscal flexibility. Thus they should be viewed as a provisional solution for underfunding of road maintenance, to eventually be replaced by reintegration into a reformed and well-functioning bud- 149 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? get process or by a commercially operated road agency (Gwilliam and Shalizi 1999). Increase cross-border and regional cooperation. Regional cooperation could also improve the infrastructure linking African states with each other and with the rest of the world. There are two approaches to regional cooperation: a program approach and a project approach. A Regional cooperation recent example of the program approach is the Transport Protocol for could improve the Southern African, a promising effort to harmonize transport policies infrastructure linking and procedures in the region. Another is a resolution from a November African states with each 1999 conference of air transport ministers in Yamoussoukro (Côte other and with the rest d’Ivoire) under which 23 states agreed to liberalize air transport in West of the world and Central Africa within two years. The Yaounde Treaty of 1961 assigns to one company (Air Afrique) the traffic rights of 11 West and Central African countries and allows national carriers to service only local markets. Schedules are inconvenient, do not reflect market demand, and are changed for political reasons. Air safety and security are deficient. Prices are high and services limited—Burkinabe fruit and vegetable producers could sell more than 10 tons of produce a week to Gabon but are offered only 3 tons of capacity. And transport and han- dling charges total as much as 71 percent of costs for products sold on the Rungis market in Paris. It is hoped that liberalization will increase competition, lower air transport costs, modernize safety equipment and navigation systems, and promote tourism and trade. An example of the project approach is the initiative to develop the Maputo Corridor between Mozambique and South Africa, with the full support of the Southern Africa Development Community. This effort combines cross-border cooperation with private participation to rehabil- itate and upgrade transport infrastructure—including roads, rail lines, ports, and harbors—and promote broad economic development. The project also aims to streamline border crossings and involves large indus- trial investments, including a $1.4 billion aluminum smelter and a $2 bil- lion steel plant using Mozambican gas. The project is an example of infrastructure leading rather than following growth, the rationale being that the uncertainties for such a cross-border project would simply be too great without the public sector taking a lead and, in this case, involving international organizations as well. Regional cooperation could significantly cut the cost of power and water in some countries. By exchanging electricity with its neighbors, South Africa could save $80 million a year in operating costs. And with 150 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS coordinated construction rather than national plans, it could save $700 million in expansion costs over the next 20 years (Sparrow and Masters 1999). Such cooperation requires institutions or agreements that build trust—users have to abandon costly policies of self-sufficiency, and pro- ducers have to risk heavy investment for export production. International organizations and other outside agencies may be able to facilitate such agreements by providing finance or, just as important, by acting as medi- Widening access to ators or guarantors of projects. infrastructure services, A successful example of this approach is the Lesotho Highlands Water especially for rural Project, in which South Africa guaranteed repayment of a World Bank residents, requires more loan used to build a dam in Lesotho that provides water to South Africa. resources and more Another promising approach is the Southern Africa Power Pool, an asso- innovative approaches ciation of national power companies that meets regularly to coordinate power system planning, including regional production. Though no new large regional project has been launched, the power pool is laying the groundwork. West Africa would benefit from a similar mechanism to export the natural gas now being flared (see above). Investment in a pipeline would be needed, but the potential return is high. Widen access. Widening access to infrastructure services, especially for rural residents, requires more resources and more innovative approaches. Paradoxically, efforts to ensure equal access for rural and urban areas have often proven counterproductive. Rural residents are generally willing to pay considerably more than the actual costs for services such as electric- ity and clean water. Yet attempts to provide services below cost, along with political pressures not to collect fees, have limited funds for main- tenance and expansion—creating a vicious circle of poor maintenance and low payments. One promising way around this is being tried in Mozambique. Electricity can be produced from small diesel generators for about $0.18 a kilowatt-hour, excluding capital costs. This is more than twice the aver- age price of electricity in urban areas, but still well below the $0.25–0.35 a kilowatt-hour that rural users are willing to pay for high-value uses of electricity. The government has set up utility companies using diesel gen- erators that have then been sold to private investors below cost (a capital subsidy) for continued commercial operation. Innovative schemes such as this could greatly expand access to infrastructure services at modest public expense while providing incentives for efficient operations and maintenance—while also providing opportunities for small business to both provide and use the services. 151 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Community and user involvement in infrastructure construction, maintenance, and management is the most effective way to improve and expand infrastructure services in rural areas. Infrastructure projects with user participation are generally more successful than those without— especially for rural roads and water supply, where an inability to exploit economies of scale and lower technical efficiency make implementation To be effective, local difficult. For example, water systems in Kenya built as part of self-help participation should efforts proved far more reliable than those installed by the water ministry, incorporate all users of which were hampered by lack of funds, poor organization, and failure to infrastructure services design according to community needs. Many governments, usually in association with nongovernmental organizations or donors, have set up social funds to provide supple- mentary resources for small community projects. There are many vari- ants, but most such schemes allow communities to choose projects (for example, road, water system, or school) and require a substantial com- munity contribution to construction, maintenance, or both. Such par- ticipation increases efficiency, strengthens community ownership of projects, ensures transparency and accountability in project planning and implementation, and empowers the users or beneficiaries of the pro- ject. To be effective, local participation should incorporate all users of infrastructure services to ensure that the project meets local require- ments, uses local materials and technology, and is provided and main- tained at lower costs. Faced with undersupplied and poorly maintained infrastructure ser- vices, many African governments have taken steps to devolve responsi- bility for management, especially in sectors with direct local benefits (water supply, irrigation, rural roads). In water supply, governments are devolving management and maintenance to water associations, which ensure that decisions on supply are consistent with the local environment and the requirements of farmers. Decentralized planning and local participation requires that commu- nities be granted greater autonomy and be held accountable, and that there be functioning channels of coordination. Greater autonomy can come by making central funds available to implement local priorities in education, health, welfare, and poverty reduction. Local implementing agencies should also be given some financial independence in charging and collecting fees for services. Greater autonomy should be comple- mented by a system of accountability that enables local governments and community groups monitor the implementation of projects. 152 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS Exploiting Information and Communications Technology I N THE EMERGING KNOWLEDGE-BASED ECONOMY OF THE 21ST CEN- tury, information and communications technology will likely assume an importance that dwarfs other types of infrastructure. This shift offers Africa a chance to leapfrog intermediate stages of development by Politics and institutions avoiding costly investments in time, resources, and the generation and are the biggest hindrance use of knowledge. Africa has a chance to benefit not only as a consumer to the development of in the new knowledge economy, but also as a producer. It cannot afford Africa’s information and to miss this opportunity. communications Politics and institutions, not technology or economics, are the biggest technology hindrance to the development of Africa’s information and communica- tions technology. Africa’s leaders must have a better understanding of the benefits of information and communications technology in order to fos- ter the political, legal, and institutional conditions under which it will flourish. This involves developing the knowledge to apply the technol- ogy to local settings, improving relevant infrastructure, promoting equi- table access, and creating enabling environments for the development and flow of the necessary content and knowledge. Above all, African gov- ernments must promote a competitive telecommunications industry and educate their people in information and communications technology. Where Do Things Stand? Broadcast infrastructure. Broadcast technology, mainly radio, is the dom- inant mass medium in Africa. In 1996 Africa had more than 104 million radios, or 19.8 per 100 people, compared with 3.6 televisions and 0.3 personal computers per 100 people (Okigbo 1999). More than three in five Africans can be reached by radio transmitter networks, while televi- sion coverage is largely confined to major towns. Most information resources are widely shared—one copy of a newspaper may be read by more than 10 people, and there are usually three users per Internet dialup account. It is not uncommon to find most of a small village crowded around the only television, which is often powered by a car battery or small generator. Broadcast technology will continue to dominate the region. Thus African countries must integrate traditional broadcast technology with new Internet tools in a way that meets social, economic, and political 153 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? needs. Africa requires both high-tech solutions such as satellites and low-tech solutions such as wind-up radios and low-cost community telecenters where poor people can make telephone calls and receive faxes or email. Telecommunications infrastructure. Telecommunications is a core compo- nent of the economy, a primary form of infrastructure, and the basis for Although the development of the information society (Adam 1998). The telecommunications International Telecommunication Union estimates that in 1998 global infrastructure is sales of telecommunications equipment and services exceeded $1 tril- spreading, few Africans lion—five to six times Africa’s GNP. Africa has the world’s least developed can afford their own information and communications infrastructure, with just 2 percent of telephone the world’s telephones and fewer than 2 telephones per 100 inhabitants. On average there is one telephone line for every 200 people—and in Mali, Niger, and Zaire there is one line for every 1,000 people (Jensen 1999). Some African countries, however, have made telecommunications a priority and are installing digital switches with fiber-optic intercity back- bones and the newest cellular and mobile technology. For example, some of the world’s most sophisticated national networks are in Botswana and Rwanda, where 100 percent of the mainlines are digital. Mobile cellular telephony has grown rapidly in Africa, from reaching just 6 countries in the early 1990s to 42 countries serving more than 250,000 customers (excluding 2 million in South Africa). Although cel- lular phones are expensive, they are the only viable alternative to long waits for a standard phone—and more than 1 million Africans are on waiting lists for a phone. Operators provide access mainly in capital cities but also in some secondary towns and along major trunk routes. The use of fiber-optic cable for international traffic is still in its infancy in Africa, and most international connections are carried by satellite. Although it is improving, Africa’s terrestrial network is still analog in some countries and prone to faults caused by changing weather and poor main- tenance. But the low base of the infrastructure is a blessing for the instal- lation of digital circuits. In 1996 the portion of digital lines in Africa was 69 percent—close to the world average of 79 percent. Overall, however, the region averaged 116 faults a year per 100 lines, compared with a world average of 22 and a high-income country level of 7. Although telecommunications infrastructure is spreading, few Africans can afford their own telephone. In 1996 the average business connection cost $112 to install, $6 a month to rent, and $0.11 for a three- minute local call. But installation charges were above $200 in some coun- 154 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS tries (Benin, Mauritania, Nigeria, Togo), line rentals ranged from $0.80 to $20 a month, and call charges varied from $0.60 an hour to more than $5 an hour. The cost of renting a connection averaged almost 20 percent of 1995 GDP per capita, compared with a world average of 9 percent and an average for high-income countries of just 1 percent. There is a strong correlation between the liberalization of telecom- munications, increased access, and lower costs. In Africa liberalization has Improving information promoted a bottom-up approach in the form of short-term, low-risk and communications investment in cellular services, trunk radio technology, very small aper- infrastructure will require ture terminals (VSATs), and other value added services (such as the better training and Internet). equipment The need for universal service and increasingly complex technical standards, interconnectivity arrangements, and traffic and frequency management and monitoring have created pressure for better telecom- munications regulation. For example, the proliferation of broadcast and communication applications has made radio spectrum scarce in Africa. New policies are required to develop national information systems and harmonize national and international frequency plans (Struzak 1997). Many African governments have created regulatory bodies, drafted legislation, and sought technical assistance for telecommunications. But getting down to business has often been difficult. Some countries have established regulatory bodies simply to meet World Trade Organization or World Bank requirements. These bodies vary considerably in terms of scope, design, function, staffing, and separation from the parent ministry. Improving information and communications infrastructure, especially in deploying the Internet in rural areas, will require better training and equipment of these entities. Internet infrastructure. Internet growth has been phenomenal in Africa, with the number of countries with access jumping from 4 in 1995 to 50 in 1999 (including North Africa). Similarly, Internet hosts grew from 316 in 1995 to 10,703 in January 1999. Although these numbers are impres- sive, access is unequal both between and within countries. Access is largely confined to capital cities, though a growing number of countries have providers in some secondary towns. There is also a rapidly growing interest in kiosks, cybercafes, and other sites for public Internet access (schools, police stations, clinics) that can share the cost of equipment and access among many users. Many phone shops are adding Internet access to their services—even in remote towns where reaching the nearest dialup access point requires a long-distance 155 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? call. In addition, a growing number of hotels and business centers are providing Internet access. The cost of Internet access is a substantial barrier to its growth in the region. Charges vary between $10 and $100 a month. The average monthly cost of using a local dialup account for five hours is $60 (including usage fees and telephone time, but not telephone line The greatest challenge rental). Twenty hours of Internet access costs $29 a month or less in the for Africa’s Internet United States. Although European costs are higher than U.S. levels, connectivity is not most are far lower than African charges for comparable use. Moreover, access but content industrial countries have per capita incomes at least 20 times the African average. Competition could cut Africa’s costs dramatically. Most African cap- itals now have more than one Internet service provider, and there are more than 400 public providers across the region. Yet 20 countries have just one provider, most of which are run by public telephone operators. Other challenges include low-bandwidth access to international gate- ways, inadequate cooperation among local providers, poor strategies for managing domain names and Internet protocol (IP) addresses, insuffi- cient regional cooperation, and the lack of a regional Internet back- bone. Still, the greatest challenge for Africa’s Internet connectivity is not access but content. A recent survey found that Africa generates just 0.4 percent of global content. And when South Africa is excluded, Africa gen- erates a paltry 0.02 percent. It is difficult to categorize content on Africa into meaningful subject areas. But a large portion can be broadly classi- fied as business information—about institutional activities, products and services, and news. There is a dearth of scientific and technological infor- mation on Africa, from Africa. Applications for Social and Economic Development Despite the limitations, many Africans have embraced information and communications technology. Electronic mail, for example, has been adopted by almost every agency with international communication needs. Similarly, the Internet has become a cheap and effective means of exchanging information on and marketing African businesses, including for selling distinctive products abroad. More than 6,000 correspondence course students all over Africa can now use email and the World Wide Web to obtain advice and reading 156 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS materials from their tutors at the University of South Africa. The uni- versity offers its tens of thousands of students in South Africa electronic registration, downloading of study materials, and posting of exam results. Farmers are also starting to realize the benefits of information and communications technology. They have begun to search for the lat- est market quotations to negotiate better local prices for their crops, and many are exploring new avenues for international trade. A Kenyan Though some projects farming cooperative has established a relationship with the U.S.-based show promise, the Earth Marketplace to sell local produce directly to North American potential for dramatically consumers, bypassing distributors. Independent newspapers and mag- boosting Africa’s access azines in more than 40 African countries are now published on the Web, to education and allowing remote users to obtain the latest news and analysis without knowledge has barely waiting days or weeks for postal deliveries. been tapped The potential of information and communications technology for social and economic development is demonstrated by school networks in the Eastern Cape in South Africa and by a regional network for exchanging information on malaria outbreaks operating from South Africa’s University of Durban. To date these initiatives have been carried out as experiments, without sufficient human resources and tools. But access to information could stimulate change and create learning environments more meaning- ful and responsive to the localized and specific needs of learners. Teachers and learners could obtain material using new technology, transforming education and enabling people to develop new skills. The African Virtual University now brings top-quality scientific training and online reference materials to 13 countries in Africa. But the potential for dramatically boost- ing Africa’s access to education and knowledge has barely been tapped. Unlike earlier broadcast media, interactive information and com- munications technology can empower people. Such technology could, for example, play a decisive role in developing human capacity for food security in Africa, by providing people with the knowledge and skills they need to put agricultural science and production inputs to best use. Information and communications technology could also improve health care. Many of the problems in Africa’s health sector stem from a lack of information. Information and communications technology could provide health workers with rapid information exchange, conferencing, and distance learning, as well as immediate access to advice and diagnos- tic assistance (chapter 4). In Mozambique, for example, the Faculty of Medicine in Maputo is developing a local teleconsultation service that transfers images to doctors in other hospitals. 157 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Better information and communications technology can also improve people’s access to government, increasing participation in government decisionmaking and improving public services. New technology also offers benefits to government. Through a comprehensive database, South Africa’s government can now reconcile housing applicants across regions, spotting double applications and reducing fraudulent housing claims. Rapid changes in And government Websites are increasingly promoting tourism and cul- technology require ture to attract foreign investment and strengthen trade links. constant awareness not only of new developments The Way Forward but also of what has been done in other countries Though information and communications technology offers enor- mous benefits for Africa, developing it will not be easy. What steps should Africa take? Disseminate information on what is possible. Underdeveloped information and communications technology is often attributed to a lack of under- standing of what is possible. Rapid changes in this technology require constant awareness not only of new developments but also of what has been done in other countries. Many African countries have already developed a wealth of best practices that could be shared. Several countries have substantially privatized telecom- munications. Mozambique has developed a national information and com- munications infrastructure. South Africa has established an agency for universal service and conducted a study of electronic commerce. Mauritius has set up an informatics park. And Senegal, South Africa, and Uganda have created community information and communications centers. All these efforts offer lessons for other countries. Thus there is a need to: s Develop awareness-raising programs to improve government and pub- lic understanding of information technology applications as they are being used elsewhere. s Establish “centers of specialization” that train policymakers and gov- ernment and private users, and provide opportunities for advanced training at existing regional centers of excellence. s Offer training that uses distance learning technology to introduce users and policymakers to the creative use of existing infrastructure. Create an enabling environment. Although there is no universal model for liberalizing information and communications services, governments 158 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS should favor competition, not monopoly, and promote private rather than public investment. In addition, policymakers should assess the demand for new technology and set clear objectives. The need for a bet- ter quality of life and equality of access makes universal service a manda- tory objective. A growing number of countries—Mauritius, South Africa, Uganda— have created universal service funds to which telecommunications oper- Africa will have trouble ators contribute a small percentage of their revenues (0.16 percent in participating in the South Africa). The funds are then used to finance rural infrastructure global information development. Other countries use the license fees from telecommunica- economy unless it tions operators to finance rural telecommunications projects. In increases the Botswana the government ensures that rural villages have access to generation and flow of telecommunications services by contracting the operator to build the nec- knowledge essary infrastructure. Many policy issues could be tackled by developing clear and coordi- nated policies and guidelines through broad national participation, inter- national consultation, and within regional and subregional discussions of national information and communications infrastructure plans. Such plans are in place in more than half of African countries. By themselves, however, these national strategies are no panacea. Increased government commitment and action, improved capacity of regulators to evaluate new technologies and projects, and innovative applications are just as essen- tial. Policies should not only improve the governance of information and communications technology, but also use information and communica- tions technology to improve governance. Foster indigenous capacity and research. Africa will have trouble par- ticipating in the global information economy unless it increases the generation and flow of knowledge. Beyond building basic skills such as reading, writing, communications, and teamwork, Africa requires trained people—especially young people who can use technology, choose technology, and develop local applications. Making the next generation literate in information and communications technology will require progress in education, especially in integrating technol- ogy into primary and secondary schools through networking pro- grams. It will require enhancing the capacity of African universities to apply new technology for research, teaching, and learning. And it will require creating opportunities for lifelong learning through com- munity centers and school and university networks that promote equal access for all. 159 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Enhance national, regional, and international cooperation and partnerships. Given Africa’s small markets, regional and international collaboration is key for achieving the economies of scale needed to lower costs and attract sufficient private investment. Countries must collaborate to develop strong system backbones and to share resources and knowledge on infor- mation and communications infrastructure. Regional and national col- Regional and laboration that leads to the bulk purchasing of capacity, capacity-building international initiatives, and innovative financing arrangements—public offerings, collaboration is key for build-operate-transfer agreements, joint ventures, bond sales to users— achieving the economies could also help achieve economies of scale and lower costs. of scale needed to lower Some efforts have already been made. The Regional African Satellite costs and attract private Communications initiative, which plans to launch Africa-based satellite investment in information systems, has provided incentives for regional cooperation. In 1998 com- and communications munications ministers from more than 15 African countries agreed to technology… support an information and communications infrastructure known as the Africa Connection, and development efforts are under way by the Southern Africa Development Community, the Common Market for Eastern and Southern Africa, and the Economic Community of West African States. Kenya, Tanzania, and Uganda (together known as the East African Community) have launched a multimillion-dollar telecommu- nications backbone project to improve access to advanced and reliable communications. Regional cooperation could also help resolve common issues such as Internet governance and encourage the creation of eco- nomic communities. Developing a Robust Financial Sector A WELL-FUNCTIONING FINANCIAL SYSTEM IS ESSENTIAL FOR DEVEL- opment. It should be able to mobilize foreign and domestic resources and channel them to high-return investments, inter- mediate between savers and investors to reduce and allocate risk, and pro- vide broad access to financial services, including for people on the margins of the economy. In so doing, finance facilitates competition, market integration, broadly based growth, and poverty reduction. The quantity, quality, cost, and accessibility of finance are as impor- tant to development as those of more traditional forms of infrastruc- ture. In addition, the financial sector performs a crucial function that 160 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS has no direct parallel with physical infrastructure—it provides a chan- nel for macroeconomic policy, as an instrument for stabilization and growth. How effective is the financial sector in promoting African develop- ment? Despite numerous reforms, not very. South Africa has one of the deepest, most sophisticated financial sectors outside OECD countries, and a few other African countries—Kenya, Mauritius, Zimbabwe—have …just as a regional relatively developed systems. But most of the region’s financial systems approach to financial are weak. Limited savings are mobilized from domestic or foreign sources. sector development will Credit to the private sector is modest and often costly. Financial sectors be needed to increase are dominated by banks providing a small range of services. competition, cut costs, Harnessing finance for development will be a long process in Africa. and lower risks Progress will require financial sector development as well as financial reform. Indeed, most African countries have introduced market-based reforms, but post-liberalization problems need to be addressed. Increased access to financial services is essential, and will require making borrowers more creditworthy (rather than lowering standards for formal sector credit), developing nonbank financial institutions (leasing companies, mutual funds, insurance companies), and strengthening links between for- mal and informal financial systems. These efforts will improve quality and access to services and increase competition. Financial sector governance— regulation and supervision, transparency, contract enforcement—will also require sustained attention. Given the small size and limited diversity of many African economies, a regional approach to financial sector develop- ment will be needed to increase competition, cut costs, and lower risks. Financial Sector Reforms and Their Legacies After independence most African governments intervened heavily in the financial sector, nationalizing private banks, creating new state banks and nonbank financial institutions, setting interest rates for savings and lending, restricting the allocation of credit, and limiting external capital transactions. These policies were intended to increase savings and direct them to areas of high economic and social priority. The methods used were broadly in line with the development thinking of the time, and in many cases were supported (or at least not opposed) by international financial institutions and bilateral donors. By the late 1980s, however, it became widely apparent that this approach was not working. Repressed financial systems failed to mobilize 161 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? capital or steer investment to areas of growth, and the solvency and capacity of financial institutions were undermined. Controls encour- aged politically motivated loans and corruption and diverted funds from intended purposes. Nonperforming loans increased alarmingly in many African countries, and a lack of sound savings alternatives contributed to capital flight. While many countries Financial sector reforms introduced in the 1990s tried to correct these now have stronger problems. While the scope and pace of reforms differed across countries, financial systems, they were based on two pillars: liberalization and balance sheet restruc- reforms have often been turing. Most reforms liberalized interest rates and removed ceilings and less successful than other controls on credit allocation. Though the details varied, the out- expected comes were similar (Soyibo 1997). Thus even though Ghana lifted restrictions on lending much faster than did Tanzania, interest rates fol- lowed the same pattern (Nissanke and Aryeetey 1998). Weak standards for capital adequacy, lending, and accounting had led to excessive concentrations of risk, unrecognized loan losses, and inflated profit reports (Popiel 1994). Thus balance sheet restructuring and recap- italization of state banks were often among the first steps of reform. But as disillusionment with the results set in, efforts were directed toward increasing private participation in banks. Privatization of financial insti- tutions usually began with governments seeking strategic buyers to assume majority ownership of large commercial banks. This approach was only partly successful: some publicly owned banks were divested, but in many cases the state remains dominant. Other institutional reforms have been introduced in recent years. Licenses have increasingly been granted to new private banks—includ- ing foreign banks—and nonbank financial institutions, and efforts have been made to improve regulation and supervision. Stock markets have opened up in several countries. And an increasing range of nongovern- mental organizations and other agents have entered the semiformal or microfinance sectors. But while many countries now have stronger financial systems, reforms have often been less successful than expected. Costlier credit and wider spreads. Reform programs anticipated an initial increase in the spread between lending and deposit rates. But, more than a decade after reforms were started, the spread continues to widen in many countries, sometimes to high levels (table 5.4). And since liberal- ization, many financial systems have seen high real interest rates. Little financial deepening. Liberalization was expected to encourage finan- cial deepening, with a positive effect on savings mobilization and credit 162 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS allocation. But for the most part ratios of money and credit to GDP have not increased since reforms. On both indicators, most African countries continue to lag behind their Asian comparators. In many countries banks have reduced commercial lending (including in rural areas) in favor of holding government securities. Continued distress and limited competition. Governments are still reluctant to close distressed state banks. At the same time, small, undercapitalized Governments are still institutions have mushroomed since liberalization. Many of these new reluctant to close institutions are not only weak, they have also failed to trigger competi- distressed state banks tion in the banking sector. As a result market segmentation has emerged between foreign and domestic banks, solvent large private and public banks, and small private banks. Limited development of money markets and capital markets. In some cases access to cheap credit through central bank discount facilities has made interbank borrowing and lending less attractive. In other cases issues of large quantities of high-yielding bills to meet fiscal requirements Table 5.4 Inflation, Interest Rate Spreads, and Real Interest Rates in Africa and Asia, 1980–97 (percent) Interest rate spread Inflation (lending rate minus deposit rate) Real interest rate, Country 1980 1990 1997 1980 1990 1997 1997 Benin — — 3.5 8.3 9.0 — — Botswana 13.6 11.4 8.6 3.5 1.8 4.8 5.0 Cameroon 9.6 1.1 1.5 5.5 11.0 17.0 18.8 Côte d'Ivoire 14.7 –0.8 4.0 8.3 9.0 — — Ethiopia 4.5 5.2 –3.7 — 3.6 3.5 7.1 Ghana 50.1 37.3 27.9 7.5 — — — Kenya 13.9 15.6 12.0 4.8 5.1 13.5 12.8 Malawi — 11.8 9.1 8.8 8.9 18.0 13.0 Mozambique — 47.0 5.5 — — — — Nigeria 10.0 7.4 8.2 3.2 5.5 13.1 8.9 Senegal 8.7 0.3 1.8 8.3 9.0 — — South Africa 13.9 14.4 8.6 4.0 2.1 4.6 11.2 Tanzania 30.2 35.8 16.1 7.5 — 21.4 8.3 Uganda — 33.1 6.9 4.0 7.4 9.5 16.8 Zambia — 107.0 24.8 2.5 9.5 12.2 16.5 Zimbabwe 5.4 17.4 18.7 14.0 2.9 13.9 14.2 Bangladesh — 6.1 5.2 3.1 4.0 5.9 12.9 India 11.4 9.0 7.2 — — — 7.8 Malaysia 6.7 2.6 2.7 1.5 1.3 1.8 6.0 Philippines 18.2 13.2 5.9 1.8 4.6 6.1 9.7 Source: World Bank 1999. 163 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? have deterred other capital market issues. Though Africa has about a dozen stock markets, several of which opened in the 1990s, their mere existence is inconsequential for economic growth and investment if there are few opportunities for sharing risk, trading shares, and pro- viding liquidity. Except in South Africa, the region’s stock markets are by far the smallest of any region, both in the number of listed compa- Financial reforms have nies and in market capitalization. They are also highly illiquid, which built on weak institutions seriously constrains their ability to contribute to economic growth and have often been (Senbet 1997). poorly sequenced Why Have Reforms Been Disappointing? A number of explanations have been offered for the lackluster results of financial reforms. Incorrect sequencing. Financial reform has often preceded macroeco- nomic stabilization. In particular, interest rates were often liberalized before fiscal deficits were brought under control. When that happens, higher interest rates can increase government debt, crowd out private credit, and contribute to further macroeconomic imbalances—as well as reduce incentives for banks to seek out new clients. Domestic public debt has reached high levels in a number of countries, including Cape Verde, Ghana, Kenya, and Zimbabwe. In Nigeria unstable political and eco- nomic conditions led to the collapse of the financial system, necessitating policy reversals that undermined credibility (Soyibo 1996). Incomplete reforms. Continued poor financial performance has reflected a lack of progress on some reforms (World Bank 1994a). Financial sys- tems have still been used to finance public activities. Restructuring bal- ance sheets and recapitalizing banks were not sufficient to change behavior; that would only happen if banks were no longer publicly owned and pressured to lend to loss-making public enterprises. Weak institutions. To be fully effective, financial liberalization requires a number of prerequisites (World Bank 1994b). In addition to a stable macroeconomy and adequate regulation and supervision, there must be reasonably sophisticated and solvent banking institutions operating in contestable financial markets. Few African countries satisfied these con- ditions prior to liberalization and deregulation, limiting the possibility of rapid gains. A focus on national systems. Except in the West African monetary zones, reforms have focused on small national systems. These offer little scope 164 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS for competition, economies of scale, or diversification of risk, particularly given the dependence of most African countries on a few primary prod- ucts with variable prices. Macroeconomic risks. Macroeconomic risks reflect poor coordination between fiscal and monetary policy. If tight monetary policy is main- tained in the face of loose fiscal policy, interest rates will likely rise to unhealthy levels, and banks will retreat from developing new business in Financial reform and favor of holding public debt. Inconsistent policies (including overvalued development is a long exchange rates) and external shocks also contribute to uncertainty, again process involving the raising interest rates. High perceived macroeconomic risks can be inferred development of trust and from the short-term maturities at which most African governments bor- policy credibility, complex row. In some African countries these risks have been estimated to raise institutions, and government borrowing costs by 6 percentage points. complicated governance Market risks. Market risks arise from capital market inefficiencies such procedures as a lack of liquidity or severe interest rate volatility. For example, lack of a secondary market for treasury bills restricts liquidity and raises risks and the costs of borrowing. Poor liquidity management by governments is estimated to have added 0.5–3.0 percentage points to short-term bor- rowing costs in many African countries. Microeconomic risks. Microeconomic risks are also affected by govern- ment policy, but tend to have a greater impact on capital costs for the pri- vate sector. The accuracy and reliability of financial information, including company accounts, affect the cost of capital, particularly in equity markets. A legal system that does not enforce financial contracts in a timely manner will reduce the supply of capital, increase its cost, and limit access to finance. A payments system that does not permit rapid and reliable transfer of funds for settlement of financial contracts will increase the cost of capital. A system for title transfer that is untimely or insecure will increase the cost of capital raised through debt securities by reducing transactional liquidity in the secondary market or by causing a risk pre- mium to be built into secondary market rates. To these risks should be added the risk entailed in lack of diversifica- tion in small markets, along with the higher costs of supervision and other overhead that raise the cost of capital. Lowering the cost of capital is not a simple matter of stabilization or a few macroeconomic or financial pol- icy reforms. Rather, financial reform and development is a long process involving the development of trust and policy credibility, complex insti- tutions, and complicated governance procedures within a framework of economic and financial integration (Wilton 1999). 165 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? The Way Forward Africa’s financial systems face many challenges. The financial side of macroeconomic policy still requires strengthening—including by setting appropriate fiscal deficits, taking into account the arrangements for their financing. To a large extent, well-working financial markets are the result Commercial microfinance of sound government policy and its day to day operations. Money market institutions that serve development, for example, depends on such mundane factors as whether the economically active treasury bills are issued daily or weekly, and how these funding operations poor are an encouraging are coordinated with the central bank. Some priorities for financial sector recent development development can be summarized in light of the preceding discussion. Improve access to financial services. Increasing access to basic financial ser- vices—particularly savings facilities—is a major issue in Africa, where most people do not have access to the formal financial sector. As noted, the number of bankable clients should be increased by using innovative approaches rather than by lowering prudential standards and so increas- ing financial instability. One encouraging recent development has been the expansion of commercial microfinance institutions that serve the eco- nomically active poor (Robinson forthcoming). Leading examples include Bolivia’s BancoSol and Bank Rakyat Indonesia. The Kenya Rural Enterprise Programme, which is modeled on BancoSol, is Africa’s best-known example. Commercial microfinance institutions typically offer savings and credit services on commercial terms to economically active households and enterprises that are too small to be served by large commercial banks. Well-structured commercial microfinance institutions have managed to sustain high loan recovery rates, cover costs, and make profits. Their lending rates are higher than those of commercial banks but lower than those of informal moneylen- ders, who are the main alternatives for their customers. The growing financing needs of small borrowers can also be met by developing closer links between the formal and informal financial sectors. Such links can enable banks to lower the costs of information as well as develop innovative, community-based contract enforcement mecha- nisms. In Ghana, for example, there is potential for linking informal sav- ings collectors (susu) to commercial banks in a way that increases the portion of susu savers with access to susu credit (Aryeetey and Steel 1995). Such links, where formal institutions mobilize deposits and allocate credit through informal and microfinance agents, could be encouraged by fis- cal policies and regulation and supervision systems. 166 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS To share risk, informal and semiformal financial agents must be cred- ible. Because it is difficult to regulate and supervise such agents, they should be given incentives for increasing formalization through stronger links with the formal sector. A possible approach is to develop rural bank- ing based on cooperative arrangements that allow banks to regulate infor- mal and semiformal lenders (Aryeetey 1997). Strengthen financial sector governance. In many countries improving con- Accounting standards, tract enforcement, transparency, payments systems, and other micro and disclosure requirements, institutional aspects of the financial system is a higher priority than fur- and contract law will ther liberalization. While regulation and supervision have improved in require sustained some countries, further improvements will require, among other things, attention to ensure the paying competitive salaries for skills that are in high demand in the pri- integrity and credibility of vate sector and outside Africa. financial institutions There is also a long way to go in ensuring that regulators are truly inde- pendent. External links may enhance independence and offer economies of scale. For example, regional supervisory agencies might be more cred- ible than national ones. But accounting standards, disclosure require- ments, and contract law will all require sustained attention to ensure the integrity and credibility of financial institutions. The issues involved in creating proper incentives for financial sector development go beyond financial institutions to much broader issues of governance, such as judi- cial independence. Without a political commitment to good governance, financial sector development will be difficult whatever the level of tech- nical expertise in the sector. Develop nonbank financial institutions. As noted, Africa’s financial sectors are dominated by commercial banks. More emphasis needs to be placed on developing nonbank financial institutions, including those offering con- tractual savings and leasing services, as well as equity and debt markets. These can promote competition in different segments of the market. Africa’s young and growing population suggests potential for contractual savings institutions such as pension funds and insurance companies, but in many countries this area of finance is underdeveloped and provides few attractive options to potential clients. Capital markets improve risk management, offer opportunities for price discovery, bolster corporate governance, and create possibilities for privatization and can be stimulated by it (Aryeetey and Senbet 1999; box 5.4). While a portfolio in any one African country might be risky, rates of return for groups of countries are far less volatile. Pursue a regional approach to financial sector development. As noted, most African financial sectors are small, and most economies depend on a 167 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? few primary products. A few large firms may represent a dispropor- tionate share of the bankable demand for credit, and a few major banks may saturate the market, reducing the potential for competition and lowering incentives to develop new clients. In many countries, even well-intentioned efforts to strengthen national institutions will have a hard time overcoming these obstacles. Africa’s young and A regional approach offers many advantages. It enables institutions to growing population operate over a wider area and diversify risk, and it offers potential for suggests potential for greater competition and economies of scale—especially important for contractual savings spreading the high fixed costs of institutions such as stock markets and institutions such as bank supervision agencies. But in the presence of capital controls and pension funds and without a common currency, there are limits to what can be done region- insurance companies ally. And even with free movement of capital and a common currency, financial development will not occur unless other policies are in place. In the CFA zone during the 1980s, for example, banking systems were used to avoid the fiscal rigor required by the monetary union, leading to the buildup of arrears by public enterprises and subsequent financial distress. But a number of cross-border activities can be developed on a regional basis, including banking, bank supervision, and stock markets. The basic building blocks for cross-border banking are improving and harmonizing commercial and financial law, contract enforcement, accounting standards, and prudential supervision. A number of regional organizations—the Southern Africa Development Community, the Central Bank of West African States, the Macroeconomic and Financial Management Institute of Eastern and Southern Africa—are working at the political and technical levels to improve and harmonize regional stan- Box 5.4 Privatization Based on Capital Markets CAPITAL MARKETS HAVE BEEN AN IMPORTANT VEHICLE Capital market–based privatization also offers less for privatization in countries such as Chile and have, obvious benefits. These markets can provide a moni- in turn, been stimulated by new issues stemming from toring mechanism to curtail inefficiencies resulting divestiture. In Africa transactions such as the privati- from mismanagement. They increase the likelihood zation of Kenya Airways and of major utilities also have that enterprises will be fairly priced and so can help potential for stimulating capital market development, depoliticize privatization. And privatization through deepening markets by increasing the supply of major local capital markets allows for local investor participa- listed companies. This is particularly welcome given tion, diversifying ownership of the economy’s resources the thinness of Africa’s stock markets. and contributing to the credibility of privatization. 168 LOWERING INFRASTRUCTURE, INFORMATION, AND FINANCE BARRIERS dards. Well-capitalized regional and international financial institutions are increasingly recognized as a means of providing a base of institutions with the ability to diversify risks within their aggregate balance sheet, and it is notable that Africa already has the highest penetration by foreign banks of any region. Foreign banks have provided stability, know-how, and a range of ser- vices to African financial systems. But the marginal returns to further for- Pooling resources for eign entry may be lower than elsewhere. And if finance is confined to small regional capital market countries, foreign entry will not solve the problem of banking concentra- development would tion. In the next phase of financial sector development, greater gains may enhance the potential for come from improving incentives and transparency in local markets and mobilizing local and aligning policies and regulation to facilitate regional banking. international finance More broadly, pooling resources for regional capital market develop- ment would enhance the potential for mobilizing local and international finance for regional companies, while injecting more liquidity into the markets (Senbet 1998). Among the potential vehicles for financial inte- gration are regional securities and exchange commissions, regional self- regulating organizations, regional committees to harmonize legal and regulatory systems, and coordinated monetary arrangements. Tax treat- ment of investments must be reviewed with a view to harmonization, because tax policy is an important incentive or disincentive for both issuers and investors. Clearance, settlement, and depository systems, along with regulation and accounting standards, should conform to inter- national standards. This discussion of regionalization is not taking place in a vacuum. Initiatives have already developed mechanisms for regional capital mar- kets, anchored around the Abidjan (Côte d’Ivoire) Stock Exchange. There are also proposals in Southern Africa for developing stronger links between the Johannesburg (South Africa) exchange and the smaller exchanges of Botswana, Namibia, Swaziland, and Zimbabwe (Aryeetey and Senbet 1999). These efforts at regional capital market integration are positive examples for the rest of the region. 169 CHAPTER 6 Spurring Agricultural and Rural Development C Comprehensive ENTURIES OF POOR POLICIES AND INSTITUTIONAL FAIL- improvements in policies, ures are the primary cause of Africa’s undercapitalized institutions, and and uncompetitive agriculture. Adverse resource investment could endowments have also had some direct effects, as well accelerate agricultural as indirect effects through their influence on policy. and rural growth to levels The lack of a prolonged period of favorable incentives, that would help reduce rural public investments, and institutional supports has limited the rural poverty opportunities for African farmers and agroindustrialists. As a result the potential of African agriculture remains latent—good reason for optimism. Indeed, modest policy improvements in the 1980s and 1990s triggered a significant response. Thus persistent and compre- hensive improvements in policies, institutions, and public and private investment could accelerate agricultural and rural growth to levels that would help reduce rural poverty. Indeed, the undercapitalization of agriculture will have to be addressed if Africa is to feed itself, compete in world markets, and reduce rural poverty. As the main source of rural livelihoods, agriculture dominates many African economies, accounting for about 35 percent of the region’s GDP, 70 percent of employment, and 40 percent of exports (World Bank 1997a). One often overlooked contribution of agriculture is the strength of backward and forward linkages within agriculture and with other sectors of the economy. Recent evidence from Africa suggests that the added growth and rural income from such linkages, especially from increases in farm incomes, has been underestimated (Delgado, Hopkins, and Kelly 1998).1 Moreover, these linkages generally become stronger with devel- opment (Vogel 1994) and drive agriculture-led industrialization (Adelman 1984). 170 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT Indeed, few low-income countries have achieved rapid nonagricultural growth without rapid growth in agriculture. Thus agriculture cannot continue to be neglected. Drawing on analysis of these issues, this chapter offers a “business plan” for agricultural and rural development in the 21st century—a strat- egy for capitalizing agriculture and increasing its competitiveness. In developing the elements of this strategy, several questions need to be Few low-income countries answered: have achieved rapid nonagricultural growth s What are the main issues confronting African agriculture as it enters without rapid growth in the 21st century? agriculture s What should be done to address these issues? s What should be the roles of African states, other stakeholders, and development partners? s What is the likely impact of the proposed strategy on overall agricul- tural performance, food security, natural resources, and rural poverty? s Where will the resources come from to finance the strategy, and how should they be used and allocated? s What challenges lie ahead, and what can be learned from leading and emerging agricultural countries? Explaining the Poor Performance of African Agriculture D ESPITE AGRICULTURE’S IMPORTANCE TO AFRICA, IT HAS remained below its potential—even backward relative to other developing regions. This is apparent in agriculture’s extreme undercapitalization and lack of competitiveness in world markets (table 6.1; figure 6.1). Less than 7 percent of cropped area in Africa is irrigated, and the use of purchased inputs and machines is limited. Cereal yields (a reflection of the productivity of land under cereal production) are less than half those in other developing regions.2 Even for tubers and plantains, which have suitable agroecological conditions in Africa, yields are lower than in Asia and Latin America.3 Agricultural labor productivity is low: histori- cally, the marginal product of labor has been about the same as the aver- age product, whereas in Asia and Latin America the average product of 171 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? labor is much greater than the marginal product (Delgado and Ranade 1987). Africa’s agricultural capital stock per hectare of agricultural land in 1988–92 was about one-sixth of that in Asia and less than one-quar- ter of that in Latin America (UNCTAD 1998). Undercapitalization is associated with the lack of competitiveness of African products in world markets. And this position is made worse by high transactions costs (Ahmed and Rustagi 1987; Jaffee and Morton 1995), inadequate market infrastructure (Hayami and Platteau 1997), weak institutions and support services (Eicher 1999), inadequate diver- sification, and limited vertical integration (Delgado 1998b). As a result Table 6.1 Agricultural Indicators for Africa, Asia, and Latin America Indicator Africa Asia Latin America Agricultural GDP (millions of dollars), 1997 62,367 400,105 143,186 Agriculture/GDP (percent), 1995 30 25 10 Labor force/agriculture (percent), 1995 70 72 29 Agriculture/exports (percent), 1995 40 18 30 Agricultural production index (1961–64 = 100) 1965–69 113 115 115 1975–79 135 154 153 1985–89 166 230 200 1995–98 221 338 253 Agricultural production per capita index (1961–64 = 100) 1965–69 100 103 102 1975–79 92 110 106 1985–89 84 135 112 1995–98 87 169 120 Cereal yields (kilograms per hectare), 1994 1,230 2,943 2,477 Cereal output per capita (kilograms), 1993–96 133 285 256 Agricultural land/labor (hectares per worker), 1994 5.9 1.3 24.8 Fertilizer/arable land (kilograms per hectares of arable land), 1993–96 15 180 75 Irrigated area/arable land (percent), 1994 6.6 33.3 9.2 Tractors/arable land (number per 1,000 hectares), 1994 290 804 1,165 Road density (kilometers of road per square kilometer), 1995 0.06 0.37 0.16 Paved roads (percentage of total roads), 1995 15 29 25 Population density (people per square kilometer), 1995 25 146 24 Rural nonfarm income/total rural income (percent) 42 32 40 Nonagricultural/agricultural value added per worker, 1980–90 7.8 3.6 2.5 Source: World Bank 1997a, 1999a, 1999c; FAOSTAT 2000; UNCTAD 1998; Hayami and Platteau 1997; Reardon and others 1998; Larson and Mundlak 1997. 172 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT Figure 6.1 Africa's Share of World Trade for Its Main Export Crops, 1970 and 1997 Percent 80 70 1970 60 50 1997 40 30 20 10 0 Cocoa Groundnuts Coffee Cotton Tea Rubber Bananas Sugar Tobacco Source: FAOSTAT 2000. African agriculture has been steadily marginalized in world trade (Ng and Yeats 1996). What caused these factors to occur? History and Policy African agriculture has been plagued by centuries of poor policies and institutional failures—and a record of heavy extraction and heavy taxation of rural areas (box 6.1). Although there were policy improvements between the mid-1950s and the late 1960s, these were temporary. Subsequent pol- icy distortions—in the form of overvalued exchange rates and inward-look- ing industrialization policies—reversed the gains, particularly in crop exports. Over the past few centuries private individuals and groups have had few opportunities to engage in free, competitive trade and investment in agriculture and agroindustry. Farmers have had little incentive to invest in cash or in kind in their farms and natural resources. There has been no extended period of active public investment for agricultural and rural development—and the programs that were implemented have suffered from severe public sector bias and excessive centralization. In most countries local populations have not been able to use local tax bases for their development—because tax bases were assigned, by design or default, to colonial or central governments or to monopolistic private or 173 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? state structures. Despite high taxes, public investment in rural services and infrastructure has been poor.4 Indeed, if high taxes had been com- plemented with significant public investment in agriculture (as in Asia), the sector would not have fared so poorly. Box 6.1 Centuries of Extraction from African Agriculture Precolonial era. Extraction from rural Africa during the different seasonal labor profiles from traditional crops, precolonial era occurred through the slave trade. allowing farms constrained by seasonal labor bottle- Especially between 1650 and 1850, the slave trade dis- necks to significantly expand cultivated land (Delgado rupted Africa’s demographic, social, institutional, and and Ranade 1987). Market-oriented agriculture grew moral development (Fage 1977, Aplers 1977, Curto rapidly in many countries (Delgado 1998b). But this 1992). The political entities that conducted the slave improved performance was halted by policy changes raids were never able to reproduce themselves that shifted from export crop growth strategies toward (Meillassoux 1981). They even failed to reproduce the import-substituting industrialization, partly induced population of captured slaves, depending on ever- by the 1973 oil shock. Real exchange rates became widening geographic areas to capture new slaves from overvalued, and incentives shifted from agriculture to subsistence agricultural systems. manufacturing. Colonial era. With the onset of colonialism, policies Postcolonial era. The chance was missed to create a for extraction from rural areas changed. Several mech- better policy environment for agriculture at the start of anisms were developed to ensure labor supplies for the postcolonial period. Policies continued to impose mines, plantations, settler farms, and public works high explicit and implicit taxes on agriculture: pricing (Binswanger, Deininger, and Feder 1993). Access to policies taxed agriculture about as much as the indirect markets was restricted through cooperatives or monop- tax resulting from industrial protection and macro- oly marketing schemes that excluded peasant farmers or economic policies (Schiff and Valdés 1992; Herrmann forced them to sell their crops at depressed and uncom- 1997). With help from donors, postcolonial regimes petitive prices. In East and Southern Africa land for built on the institutional residues of colonial powers peasant agriculture was systematically reduced, confin- and increased public sector dominance over agricul- ing these farmers to less fertile lands. In addition, access tural marketing and input supply systems, inhibiting to agricultural public goods and services (roads, exten- the development of individual traders, private compa- sion, credit) was limited to plantations or settlers. Such nies, and farmer cooperatives. In most countries out- distortions were also used on other continents, but in put markets were dominated by marketing boards Africa they persisted much longer and left policy and (World Bank 1994). In more than 60 percent of institutional remnants still visible today. African countries, governments completely controlled Between the mid-1950s and late 1960s, however, the procurement and distribution of fertilizer and policy improvements, together with favorable world seeds (World Bank 1981), yet these systems were unre- prices, bolstered the performance of African agricul- liable. Parallel trading or processing was inhibited. ture, and export cropping spread rapidly (Anthony and Controls on crop movements, particularly for grains others 1979; Kamarck 1967; De Wilde 1967). Export (Jayne and Jones 1997), were common. And such mar- crops induced technological change because they had keting systems imposed huge fiscal costs. 174 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT More recently, particularly in the 1970s and 1980s, heavy taxes and constraints on private and collective initiatives continued to retard agri- cultural growth and rural development. Consider the limited opportu- nities of a dynamic rural entrepreneur in a typical African country around 1980. Private investment in agriculture and agroindustry was undermined by heavy taxation, and the space for private sector activity was severely limited by the dominant public sector. There was little Economic policies and potential for producer organizations and nongovernmental organiza- institutions in Africa have tions to be involved in the development process. Local governments been characterized by could not provide public services (roads, schools, health, agricultural ser- urban bias and by vices) because the authority and financing needed to do so were with centralized political, centralized government agencies. Even if they wanted to raise revenues fiscal, and institutional for local development, local governments did not have access to systems significant tax bases. Economic policies and institutions in Africa have been characterized by urban bias and by centralized political, fiscal, and institutional systems (chapter 2). Both features have inhibited agricultural and rural develop- ment. And both have received increased attention in the literature. The urban bias in services and prices persistently favored urban peo- ple over rural, harming efficiency and income distribution (Lipton 1977). By organizing, centralizing, and controlling political and economic power, elites have controlled policy and the distribution of resources. In many other countries pernicious political, administrative, and fiscal con- sequences have made urban bias unsustainable. But these pressures do not seem to have been strong enough in most of Africa, despite the conti- nent’s exceptionally high urban bias. Why? Because of the lack of open political systems and of well-articulated, competitive institutions in civil society (Lipton 1993). Africa’s postcolonial regimes had many reasons for establishing highly centralized political, fiscal, and institutional systems for rural develop- ment. These reasons included a desire for political integration of fragile nations and the dominance of state-led development and planning ide- ologies in the Western and Marxist development economics of the time (Manor 1999). Recent World Bank research on decentralization and rural develop- ment developed scores for decisionmaking and resource allocation in six important areas of rural development: rural primary education, rural primary health care, rural road maintenance, agricultural extension, rural water supply, and forestry management.5 The African countries in the 175 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 6.2 Levels of Decentralized Rural Service Delivery in Various Parts of the Developing World, 1990s Jiangxi (China) Colombia Philippines Poland NTT (Indonesia) Bahia (Brazil) Chile Zambia Kamataka (India) Tunisia Hidalgo (Mexico) Punjab (Pakistan) Tanzania Egypt Bangladesh Senegal Burkina Faso Côte d’Ivoire Imo (Nigeria) 0 1 2 3 4 5 6 7 8 Decentralization score (scale of 1 to 10) Source: McLean, Kerr, and Williams 1998. sample had the most centralized institutions for rural development in the first half of the 1990s (figure 6.2). High centralization inhibited the devel- opment of local institutional capacity, limited local resource mobilization, undermined the accountability of development programs to local popu- lations, and discouraged popular participation (McLean, Kerr, and Williams 1998; Parker 1995). Further inhibiting local initiatives was the lack of democracy in most countries—and the discouragement or even Agricultural subsidies and suppression of voluntary private associations. market access In addition to Africa’s poor policies and institutions, developed coun- restrictions in developed try policies and market access restrictions—prominent in the postcolonial countries have limited period—have limited Africa’s agricultural export growth (box 6.2). Several Africa’s agricultural developing countries (Brazil, Thailand) have managed to penetrate devel- export growth oped country markets for some products despite such restrictions. But Africa, for the most part, has not. Indeed, poor domestic policies and insti- tutional failures, as well as developed country policies limiting market access, have reduced incentives to invest in African agriculture. 176 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT Box 6.2 OECD Subsidies to Agriculture—Equal to Africa’s GDP TRANSFERS TO FARMS IN OECD COUNTRIES FROM TAX- and many of these commodities show a downward payers and consumers—a result of the agricultural trend in real prices over time. policies used by OECD members—have changed lit- s Commodity prices would become more stable. The tle in recent years. In 1996 these transfers were esti- freer is world trade, the less volatile will world food mated at $300 billion (OECD 1997), about the same prices become. Surpluses and deficits can be evened as Africa’s GDP. These transfers are largest in the out more easily when there are more trading part- European Union, with Japan and the United States ners with different climate conditions for food transferring income at just over half the EU level crops (Bale and Lutz 1979; Zwart and Blandford (Josling 1998). 1989). Removing these supports would have significant s Real income in Africa and other poor regions would benefits. Global trade in beverages, meat, and livestock increase. Annual per capita income would increase products would increase significantly (Hertel, And- by $1 in South Asia, $4 in Southeast Asia, $6 in erson, and Francois 1999). Production patterns would Africa, and $30 in Latin America. The average pro- shift, with agricultural production declining in ducer household in developing regions would gain Western Europe and increasing in developing coun- from liberalization, while consumer households tries. Meat production in Africa could increase 20 per- with a food deficit would incur losses. But the gains cent (Anderson and Strutt 1996). for producers would be larger than the losses for The welfare cost to developing countries of OECD consumers and would have dynamic multiplier agricultural policies is well above that of OECD tex- effects for rural areas and developing economies as tile and clothing trade barriers. Not only are OECD a whole—so even consumers could benefit in the countries’ protection rates still very high, but “dirty” long run. tariffs and the introduction of tariff rate quotas in the s Welfare in OECD countries would increase as well. Uruguay Round mean that large commitments to OECD countries are incurring $63 billion a year in bound tariff cuts, quota expansion, or both will be welfare losses from their distortionary policies needed to significantly reduce agricultural protection (Anderson, Hoekman, and Strutt 1999). The main (Anderson 1999). losers are consumers, who pay higher prices for such What would happen if OECD countries reformed commodities as milk, sugar, and bananas. The their agriculture policies? main gainers are favored producers, who will likely s World food prices would increase, but not by much. be strongly opposed to the needed liberalization. Expected price increases are 4–6 percent for wheat, rice, and coarse grains (Valdés and Zietz 1995)— Source: Adapted from Binswanger and Lutz 2000. Geography and Resource Endowments Africa’s natural adversities have often been used to explain agriculture’s poor performance. Indeed, many studies have highlighted Africa’s adverse conditions: landlockedness (Bloom and Sachs 1998; Collier and Gunning 1997), poor land quality (Voortman, Sonneveld, and Keyzer 1998; Donovan and Casey 1998), endemic livestock diseases (Coetzer, Thomson, and Tustin 1994), and human diseases (Bloom and Sachs 177 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? 1998)—the most devastating being malaria, tuberculosis, and AIDS (chapter 4; UNAIDS 1998). UNCTAD (1998) suggests that almost half of Africa’s land is unsuitable for direct rainfed cultivation because the growing period is too short, mainly due to aridity. In addition, there is a high risk of drought on 60 percent of African land. In discussing endowment effects, a distinction needs to be made The low productivity of between the direct effects of adverse endowments on agricultural devel- African agriculture opment and their possible indirect effects as codeterminants of poor poli- cannot be attributed cies for agricultural and rural development. exclusively to bad Bloom and Sachs (1998) focus on the direct effects, discussing the con- technology or bad sequences of Africa’s climate, soils, topography, and disease ecology on geography—it also agricultural productivity. In addition, they suggest that the isolation of reflects unfavorable African agriculture from major global markets renders it noncompetitive legacies, including policy because, with a few exceptions, it is concentrated in the deep hinterlands failures and supported by a low-density, widely dispersed rural population. These factors retard agricultural development directly by increasing transporta- tion costs, inhibiting technology adoption, raising the costs of agricul- tural and social services, and suppressing competitive product, factor, and credit markets (Hayami and Platteau 1997). The direct effects of adverse endowments, not just adverse policies, therefore explain many of the institutional and market failures holding agriculture back. While there is little doubt that adverse endowments and physical con- ditions continue to be a negative factor in African agricultural develop- ment, it is not clear how important they are relative to adverse policies and institutions. As Udry (1998) points out, the low productivity of African agriculture cannot be attributed exclusively to bad technology or bad geography; it has clearly also been the result of policy failures. There is much evidence that farmers and rural nonfarm entrepreneurs respond to incentives (box 6.3). Conversely, there are many examples of well- endowed and well-connected regions and countries—Ghana, Guinea, Madagascar—whose performance has deteriorated rapidly as a conse- quence of worsening policies in the postcolonial period. Indeed, some of the areas with the strongest agricultural resource base are among the least developed on the continent—Angola, Central African Republic, Democratic Republic of Congo, Republic of Congo, Gabon, Guinea- Bissau, Liberia, Sierra Leone, and Sudan. In many countries agricultural performance over the past 25 years has been inhibited by civil war and conflict (chapter 2). Sudan has huge potential, but its current phase of civil war has lasted 16 years, about 178 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT 2.5 million people have lost their lives, and the country has the largest number of internally displaced people in the world—hardly an envi- ronment conducive to sustained agricultural growth. Conflict also con- tinues in Angola, Burundi, Democratic Republic of Congo, and Somalia, and has recently occurred in Guinea-Bissau, Liberia, and Sierra Leone. The benefits to agriculture from a cessation of conflict have recently been illustrated by Mozambique (luckily the main agri- Countries that emerge cultural production regions have not been widely affected by the recent from conflict can reap massive flooding). benefits for agriculture Political Economy A growing literature suggests that there are indirect causal links between low population density, remoteness from markets, and abun- dance of natural resources on the one hand, and conflict and adverse poli- cies and institutions on the other (Brenner 1977; North 1989; Tilly 1990; Rueschemeyer, Stephens, and Stephens 1992; Collier and Binswanger 1999, chapter 2). Binswanger and Deininger (1997) summarize the key arguments for population density as follows: s Low-density economies are subsistence-oriented, with little special- ization. s As a result few economic transactions can be taxed. Neither a profit Box 6.3 Do African Farmers Respond to Price Incentives? AFRICAN FARMERS, LIKE THEIR COUNTERPARTS ELSE- tor policy reforms will have only a limited impact on where, respond significantly to both price and nonprice farmers’ supply response if market infrastructure, insti- policy reforms. The level of this response has generally tutions, and support services are undeveloped been found to be lower in the short than in the long (Kwanashie, Ajilima, and Garba 1998; Elamin and run, for perennial than for annual crops, and for aggre- Mak 1997; Tshibaka 1997; Killick 1990; Oyejide gate than for individual crop output (Bond 1983; 1990; Binswanger 1989). In these situations transac- Oyejide 1986; Tshibaka 1986; Binswanger 1989; tions costs will be high and farmers are at a double dis- Elamin and Mak 1997). There is also a high degree of advantage because of high input costs and low output complementarity between pricing policies and invest- prices. Similarly, the removal of structural and institu- ments in public goods (Schiff and Montenegro 1997). tional constraints alone will have only a limited impact This relationship suggests that the removal of price on farmers’ response if price distortions remain signif- distortions (due to both direct and indirect govern- icant. Thus African farmers do respond. But they also ment interventions) through macroeconomic and sec- face both price and nonprice constraints. 179 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? nor an income tax can be used. Land has little or no value and cannot be a tax base. s Extraction of a surplus therefore has to be based on one or more of the following: coercion through slavery, servitude, or tribute; head or hut taxes to force the local population to supply cheap labor to large estates of the ruling elite or in mines and public works; discriminatory inter- Rural public investment ventions in product and factor markets—whether limitations on eco- has typically been low, nomic opportunities, restrictions on spatial or occupational mobility, and subsidies have or overt discrimination; and taxation of export commodities by the usually benefited large state, parastatal bodies, or monopolies (see box 6.1). farmers and other s All these policies and institutions for extracting an economic surplus members of the rural elite undermine the incentives of the poor to produce and invest—and so have a much higher deadweight loss than modern forms of taxation. Throughout history and across continents, a mix of such policies was often used in low-density areas. Clearly, it is not simply low population density that significantly retards agricultural development. Rather, it is the inability of sparse agricultural populations to organize themselves to have political voice. The negative effects of heavy taxation and extraction on agricultural growth could also have been mitigated if the ruling elite set taxes low enough and invested some of the surplus in rural public services and infra- structure. Indeed, East Asia provides some 20th century examples of rel- atively high extraction from rural areas. But this extraction was combined with substantial public investment in smallholder agricultural and rural development (Karshenas 1998). In Africa rural public investment has typically been low, and subsidies for fertilizer and credit have usually benefited large farmers and other members of the rural elite. The persistence of these policies is the result of the much greater capacity of the rural and especially the urban elite to organize relative to small farmers. The elite are therefore able to control policies, institutions, and the distribution of public resources. As noted, lack of open political systems and of well-articulated, competitive insti- tutions in civil society have characterized these systems (chapter 2). If policies and institutions are endogenous, and if a particular config- uration of resource endowments—such as low population density and high mineral wealth—is an adverse codeterminant of policies, how can poor policies and institutions be corrected? The power of external actors is real but limited, as shown by the increasing evidence on the effect of conditions tied to external loans and grants. Conditionality has only been 180 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT effective in bringing about lasting reform when there has been a strong domestic movement for change (World Bank 1998). Over time increasing population density and market access, and the associated increase in economic specialization and growth, could help improve policies. But that would be a painfully slow evolution. Surely no one would advocate increasing Africa’s population growth to get there faster. Instead the focus will have to be on helping poor rural populations Macroeconomic and organize themselves more effectively through education, training, and agricultural reforms have direct support to their economic and social organizations, and allowing begun to make them to build coalitions with internal and external allies that support pol- agriculture more icy and institutional change. Such an approach can only succeed if polit- competitive ical systems become more open and competitive, and if there is freedom to organize for economic, social, and political purposes. Thus African agricultural growth requires more than just reforming policies and institutions and increasing rural public investment. It also requires developing open political systems in which organizations of the poor can thrive and creating political coalitions that help improve poli- cies and keep in place the gains already achieved (chapter 2). Assessing the Impact of Agricultural Policy Reforms D ESPITE ADVERSE RESOURCE ENDOWMENTS, IN RECENT YEARS macroeconomic and agricultural reforms have begun to improve the competitiveness of the sector, though the effect on capitalization of agriculture and rural areas has been limited (chapter 1). The analysis in this section covers factors influencing the incentives fac- ing agriculture (recent macroeconomic and pricing reforms as well as the evolution of real prices for commodity exports) and a range of reforms in other areas influencing agricultural supply (transactions costs, entry bar- riers, investment and agricultural technology). Macroeconomic Policy Has Improved, but New Challenges Have Emerged The exchange rate overvaluations of the 1970s and 1980s have been reduced, and inflation and budget deficits have been lowered. Trade 181 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? policies still raise import prices (chapter 7), but the antiexport bias has been eased. But while macroeconomic stability has generally improved, in many countries it remains fragile. Financial sectors, a key area for improvement, need development (chapter 5). And institutions and rules are weaker than in other regions, diminishing investor confidence (Brunetti, Kinsunko, and Weder 1998). Reforms have focused on Further, in some countries there is still a danger that short-term capi- improving agricultural tal inflows triggered by high interest rates could lead to exchange rate incentives by reducing overvaluation (Elbadawi 1998; Asea and Rinehart 1995). To keep price domestic market incentives stable, despite current low capital inflows, African govern- distortions ments need to develop suitable approaches to global financial markets and consider the capital account effects of domestic fiscal and monetary policies. Export Crop Policy Has Improved, but Reforms Need to Be Consolidated Africa’s agricultural reforms over the past decade have focused on improving agricultural incentives by reducing domestic market distor- tions through open trade policies. Emphasis has been placed on moving domestic prices to border parity levels and reducing overvalued exchange rates (Meerman 1997). As a result price incentives for export crops have generally improved. Between 1990 and 1997 real domestic producer prices for agricultural exports increased in 15 of 19 African countries; in the 1980s only 9 of these countries experienced price increases (figure 6.3).6 This favorable trend is due to both higher world prices and better policies (Townsend 1999). In the 1980s real world commodity prices declined significantly. While world prices were falling, macroeconomic policies improved con- siderably, with sharp declines in overvalued exchange rates. But in many countries this barely offset the large declines in world prices. Over the same period the nominal protection coefficient for agriculture barely changed, indicating that changes in sector policies did little to raise farm- level prices. The situation changed in the 1990s. Real world commodity prices were more favorable in 1990–97, and sector policies contributed to higher domestic prices. Macroeconomic policies continued to improve, though these changes were less dramatic than in the 1980s because the space for further improvement was limited. Even so, the changes improved price 182 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT Figure 6.3 Changes in Real Producer Prices of African Agricultural Exports, 1981–97 Between 1981–83 and 1989–91 Between 1989–91 and 1995–97 Ghana Uganda Nigeria Tanzania Burkina Faso Mozambique Benin Nigeria Mozambique Cameroon Togo Senegal Tanzania Madagascar Madagascar Zimbabwe Mali Togo Zimbabwe Côte d’Ivoire Malawi Benin Chad Malawi Senegal Mali Burundi Burkina Faso The Gambia Ghana Uganda Kenya Kenya The Gambia Cameroon Burundi Côte d'Ivoire Chad –50 0 50 100 150 –50 0 50 100 150 Percent Percent Source: World Bank 1994; Townsend 1999. incentives. For the 15 countries experiencing real producer price increases in 1990–97 (see figure 6.3), the increase due to real exchange rate devaluation was more than twice the increase due to improvements in domestic policy. The decline in real domestic prices in Burundi, Chad, The Gambia, and Kenya is explained by the large decline in the producer’s share of the border price—suggesting that sector policies were the main cause of the price declines. Indeed, in a few countries agricul- tural policies have continued to erode the price benefits from higher world prices and inhibited the pass-through of exchange rate deprecia- tions to producer prices. So for some countries, even basic agricultural policy reforms are not yet complete. Real world prices became less favor- able in the later half of the 1990s, declining from 1996–97 onward. 7 Marketing boards and price stabilization funds (Caisse de Stabilization) were common export crop interventions across Africa, with the state con- trolling pricing, distribution, and marketing. Marketing boards typically set fixed prices that applied throughout the year in all growing areas, and controlled the physical handling of crops. Under the Caisse system, com- mon in West Africa, prices were determined administratively—with pur- chasing and selling prices set at each stage of internal commercialization 183 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? (as with cocoa in Côte d’Ivoire). Most of these state interventions have been or (as with cocoa) are being removed. West Africa’s cotton sector continues to be controlled by cotton paras- tatals (Pursell and Diop 1998). Under this scheme a single producer price for seed cotton is established each year before planting, and the guaran- teed price applies throughout the year in all growing areas.8 Although Active support may be prices have been more stable, the benefits have been outweighed by the required to encourage low share of the border price that farmers receive. These countries did not producer organizations or fare as well as other African countries in terms of real producer price private firms to enter increases between 1990 and 1997 (see figure 6.3). output and input markets Wide adoption of market liberalization policies was fueled by the idea that the private sector performs marketing functions more efficiently and competitively than the state. While there have been successes of private entry into markets after marketing boards have withdrawn (as with cof- fee in Uganda and cotton in Zimbabwe), in some countries the liberal- ization of domestic markets has not yet lowered the transactions costs involved in marketing export commodities (UNCTAD 1998). Privatization has reduced the role of marketing boards, but it has often not yet managed to improve marketing arrangements for inputs and products, provide access to credit and storage, and increase competition. This suggests that reforms need to be further consolidated, keeping in place gains already made. In some cases collateral reforms needed to facil- itate private entry may not have been completed. In other cases active support may be required to encourage producer organizations or private firms to enter output and input markets. Real Prices for Commodity Exports Are on a Secular Decline Between 1990 and 1997 several export crops—coffee, rubber, cocoa, groundnuts—experienced large world price increases that converted into more favorable terms of trade for many African countries. This was a wel- come upturn after significant price drops in the 1970s and 1980s. But in the last few years many of these favorable cyclical (short-term) trends fell to the downturn of the world market. The declines hurt African economies, whose agricultural exports con- tinue to be dominated by a few crops. (Since the 1970s nine crops have accounted for about 70 percent of agricultural exports.) Moreover, secu- lar (long-term) price trends toward lower prices for traditional African export crops appear firmly set in place. This suggests that Africa needs 184 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT both to diversify and to produce agricultural commodities at lower cost— using new technologies—if its position in world markets is not to erode further. In sum: macroeconomic reform and liberalization of export crop sec- tors began only in the mid-1980s, and in some places was fairly notional until the early 1990s. In most cases real world export prices for agricul- ture fell from the mid-1980s to the early 1990s, rose from the early 1990s Africa needs to diversify to 1997, and fell sharply thereafter. A few generalizations can be made: and to produce agricultural commodities s Where true export liberalization and macroeconomic reform occurred at lower cost if its together in the mid-1980s, export crop incentives were favorable position in world markets despite falling world prices. is not to erode further s Where true export crop liberalization did not occur, price incentives remained poor. s Where governments went backward on macroeconomic reform in the first half of the 1990s, exports started to slow down despite improv- ing world prices. Further Reductions in Food Costs Require Fewer Market Entry Barriers State intervention in Africa’s food markets has been sharply reduced. Marketing boards have been dismantled, and in most countries market forces now determine prices. East and Southern African governments have generally intervened more in food markets than their West African counterparts, with several countries continuing to set floor prices (Malawi) or ceiling prices on foods (maize meal in Zimbabwe). Food security concerns, still high on the agenda of many African governments, are usually the reason for continuing intervention in these markets. There are high risks of drought, and many domestic food staples (millet, cas- sava, plantains, sorghum, yams, white maize) are nontradable at current prices and transfer costs (Delgado 1992). Several factors led to initial market reforms in East and Southern Africa. Grain marketing board costs had escalated to unsustainable levels. The sys- tem of input delivery and crop payments had become increasingly unre- liable. Parallel markets had developed due to pan-territorial pricing. Increased instability in marketing board purchases and sales added to fis- cal demands. And smallholders had limited market access (Jayne and Jones 1997). The common reform package for marketing maize, a dominant 185 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? staple, included moving farmgate prices toward export or import parity, announcing administered prices closer to the planting times of crops on farms, speeding up payments to farmers, eventually liberalizing prices alto- gether, relaxing maize movement controls and other restrictions on trade, and restructuring parastatal maize marketing companies (Donovan 1996). The reforms have had observable impacts, the most apparent being a The greatest reduction in the huge fiscal costs incurred by marketing boards. Another beneficiaries of food crop impact is a reduction in the cost of marketing food to grain-deficit rural reforms appear to have areas, primarily by expanding small trading and milling networks to ful- been consumers—with fill the residual grain needs of rural households (Jayne and Jones 1997). smaller marketing In many countries (Kenya, Mali, Zambia, Zimbabwe) opening grain margins and lower food markets to private traders has increased competition and lowered costs in costs food marketing and processing, reducing marketing margins and food prices (Jayne and others 1995). But some mobility barriers—such as access to capital, energy, and spare parts, as well as political risk—con- tinue to constrain trader entry into market niches (Barrett 1997). The greatest beneficiaries of these reforms appear to have been consumers— with substantially lower food costs. With the reduction of state production subsidies, producer prices have fallen for many food crops (UNCTAD 1998). Lower producer prices, higher fertilizer prices, the focus on export crop promotion, and the removal of marketing boards have raised considerable debate on food security. Studies on a range of countries (Kenya, Mali, Mozambique, Senegal, Zimbabwe) have demonstrated synergies between cash crop investment and food crop production (Strasberg and others 1999). Still, ensuring an increase in the level and reliability of food staples supplied will require improving food production policies (for example, raising pro- ductivity) in some countries and lowering the costs and risks of import- ing (for example, by lowering transportation and other marketing costs) in others (Delgado 1992). Fertilizer Policy Reforms: A Mixed Bag Fertilizer application rates in Africa remain low—on average, one-fifth the rates in Latin America and one-twelfth the level in Asia (see table 6.1). Much of this difference is due to the dominance of rainfed agriculture and the characteristics of the land in Africa (Voortman, Sonneveld, and Keyzer 1998). This average application rate masks great contrasts in fer- tilizer use across countries, with some (Mauritius, Swaziland, commer- 186 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT cial agriculture in South Africa and Zimbabwe) applying fertilizer at the same rate as other developing or even developed regions. In the late 1970s and early 1980s almost all countries in the region adopted fertilizer subsidies, distorting prices and leading to an unreliable, high-cost marketing and distribution system with a limited choice of basic fertilizers (Lele, Chistiansen, and Kadiresan 1989).9 Most of the gains from these subsidies went to better-off farmers and intermediaries. The mechanisms used to Fertilizer reforms began in the 1980s with the removal of these subsidies deliver fertilizer aid inhibit in nearly all African countries. This, together with currency devaluations the development of and world price increases, caused fertilizer prices to rise, sometimes by sustainable private 200–300 percent. These high costs have led several countries to backslide supply systems for on previous reforms, reintroducing fertilizer subsidies. agricultural inputs A key issue in the reform process, one that is not always considered, is the sequencing of subsidy removal. Eliminating subsidies at the same time as major macroeconomic reforms (such as currency devaluation) will exacerbate fertilizer price increases and inhibit the entry of the private sec- tor to fulfill the role of parastatals. Alternatively, removing subsidies at the same time as a reduction in fertilizer import duties would mitigate some of the price increases from subsidy removals. The private sector has responded weakly to fertilizer market liberal- ization. A few large private firms dominate the market. Trade restrictions are still widespread, with tariff and nontariff barriers. Some countries impose restrictions on the types of fertilizer that can be imported, along with stringent clearance requirements for imports and specifications for who can import (Gisselquist 1994). Many countries also rely almost exclusively on fertilizer aid to meet their domestic requirements, causing uncertainties in supply, limiting product choice, and disrupting domes- tic fertilizer markets. In addition, the mechanisms used to deliver fertil- izer aid inhibit the development of sustainable private supply systems for agricultural inputs (box 6.4). Exploiting the Synergy between Price and Nonprice Factors R ECENT REFORMS HAVE IMPROVED AGRICULTURAL PRICE INCENTIVES. But they have not done as well at addressing other structural and institutional constraints, including rural infrastructure (irrigation, 187 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 6.4 The 2KR Aid Program JAPANESE GRANT AID FOR THE INCREASE OF FOOD governments usually distort the domestic markets for Production, also known as the 2KR aid program, pro- inputs received under the program, inhibiting private vides grant aid tied to the purchase of fertilizer, sector involvement in input (particularly fertilizer) machinery, and chemicals. In 1996 the 2KR program importation, distribution, and storage. In particular, provided 58 countries with these inputs. Twenty-six 2KR fertilizers have not been well integrated with the African countries received this aid, accounting for domestic market, being distributed through govern- about 40 percent of the annual 2KR budget of $260 ment channels with the exclusion of the private sector. million. The process of supplying inputs under the Competition in 2KR tendering and procurement is program is similar to programs of other donors. limited. Restrictions on who can participate in the pro- Formal requests are made to the government of the gram were most prevalent in the 1980s, when aid was donor country, discussions are held to assess the mer- tied exclusively to Japanese products procured through its of the request and the ability of the donor country Japanese trading companies. Even today the tendering to supply the goods, the donor opens a restricted ten- process appears to be insufficiently competitive, as der for the requested goods, an award is made to the indicated by the high price of 2KR inputs relative to lowest bidder, and counterpart funds are deposited by the cost in competitive markets. Some countries even the recipient country into a designated domestic have difficulties setting up counterpart funds, which account upon sale of the goods. The 2KR program has vary between one-half and two-thirds of the value of been a significant source of agricultural inputs for the the aid (depending on recipient country conditions). poorest African countries, but several concerns have Where these funds have been set up, they have often been raised. been used counterproductively. The procurement process has often resulted in a Changes to the program must ensure the emer- disconnect between the inputs acquired under the pro- gence of strong private networks for input delivery and gram (for example, the types of fertilizer, machinery, should offer greater transparency and consistency as and chemicals) and the inputs needed by recipient well as faster delivery. countries. Inputs acquired through the program typi- cally arrive too late for effective use. Recipient country Source: Tobin 1996; Adachi and Townsend 1998. roads, power, telecommunications), agricultural research and extension, and farmer education and health—factors that impede agricultural pro- ductivity and output (Binswanger 1989). Removing these impediments would require substantial increases in both public and private investments in rural areas. Not only is there a direct effect of public investments, there is also complementarity between public and private investments. Public Investments in Agriculture: Too Few and Too Inefficient Data on public spending and investment in African agriculture are hard to come by, but the available evidence suggests that since the 1960s the level of public resources allocated to agriculture has been consistently 188 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT low relative to the sector’s size and contribution to the economy. In most African countries the sector receives less than 10 percent of public (recur- rent and investment) spending but accounts for 30–80 percent of gross domestic output. Moreover, the direct and indirect transfers of income from agriculture to government and the rest of the economy have been larger than the pub- lic resources allocated to the sector. Inadequate public resources have con- Spending on agricultural strained the development of rural public goods (infrastructure, institutions, research has a potentially human capital, support services) and the ability of the private sector to high payoff in Africa develop. In turn, these policies have stifled economic development by for- feiting the strong linkage effects of high agricultural growth on the rest of the economy. Moreover, where public investments in African agriculture have been high, as in a number of countries in the postcolonial period, they have often been misallocated. Or the recurrent budgets to maintain these investments have been low (box 6.5) African countries that have maintained strong price incentives and developed rural public capital goods and services have enjoyed faster growth—price and nonprice incentives are complementary (see box 6.3). That makes it imperative for policymakers to enhance the price incen- tives facing farmers and other economic agents in agricultural activities. Policymakers also have to promote rural public goods and services and stimulate private agricultural investments. Despite High Returns, Research and Extension Remain a Low Priority We know a little more about public spending on agricultural research, for which donors have typically contributed about 40 percent of the funds (Pardey, Roseboom, and Beintema 1997). These investments have a potentially high payoff in Africa: a recent study finds a median internal rate of return on research spending of 37 percent (table 6.2). But after increasing from $256 million in 1961 to $701 million in 1981, agricul- tural research spending in Africa dropped to $684 million in 1991. The consistently high returns achieved in research stations and demonstration plots suggest that such research could contribute greatly to agricultural growth and development. Research continues by interna- tional and national agricultural research stations, though with shrinking budgets. But many constraints, including those discussed above, prevent farmers from adopting and internalizing these technologies. 189 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 6.5 Problems with Public Investment in African Agriculture Low public investment in Nigeria. The size and developed public agricultural capital goods, governments structure of public spending on agriculture have been have often not provided resources to maintain them and grossly inadequate in Nigeria, with weak government achieve high standards of management and use. commitment to agricultural funding worsening after Irrigation infrastructure suffering from poor man- structural adjustment. The share of agriculture in gov- agement and use is so widespread that it deserves men- ernment spending was 1.9 percent during the boom tion. In Ghana, of 18,000 hectares developed, only 33 period (1972–80), 3.0 percent during the crisis period percent is cultivated; the rest requires rehabilitation to (1981–87), and 1.1 percent after structural adjustment be effectively cropped. In Chad, of 12,000 hectares (1988–92) (Olomola 1998). Agriculture accounts for developed, only 25 percent is used effectively. In about 30 percent of GDP. Senegal, where large investments were made to develop Misallocation of public investment in Senegal. An irrigation infrastructure in the north, the experience is analysis of 79 agricultural projects and programs the same. implemented in Senegal in 1990–95, costing about 3 Why do most African governments put such a low pri- percent of GDP, provides a good illustration. About ority on investments in such a key sector? Simple benefit- 75 percent of the resources were allocated to crops, 15 cost analyses often grossly underestimate the benefits percent to forests and other natural resources, 6 per- of rural investments, particularly in rural infrastructure cent to fisheries, and 3 percent to livestock. For crops (Lipton 1987). For example, rate of return calculations the overwhelming share went to irrigated rice. Factors for building new roads usually ignore both the multi- such as agroecological potential, natural constraints, pliers and upsurge of economic activity that come from infrastructure development, human resources, institu- resource movement following new road development. tions, demographics, and an area’s contribution to But even when there is ample evidence of high returns, GDP do not seem to have been considered in the as in agricultural research, government commitment is regional allocation of public resources—the case in hard to obtain. Political economy issues are a major most of Africa. determinant of government spending—widely dis- Maintenance failures in Chad, Ghana, and Senegal. persed smallholders have a hard time organizing them- Africa’s capital investments are often not matched by selves for economic, social, and political purposes. adequate recurrent budgets, limiting the maintenance Given the tight budget constraints facing most African and management of these public goods. Examples governments, expenditures that are not defended by a abound for roads, irrigation infrastructure, and other well-organized constituency will likely be squeezed public structures. Even where significant investments out, no matter what is known about high returns. Better Policies Have Stimulated Agricultural Growth Agriculture has become more competitive as better policies have improved incentives. But it remains undercapitalized. In 1990–97, 25 countries had real agricultural GDP growth rates over 2 percent, with 12 over 4 percent (Benin, Cameroon, Chad, Guinea, Guinea-Bissau, Equatorial Guinea, Lesotho, Malawi, Mauritania, Mozambique, Namibia, Togo).10 In 1993–97 five more countries joined this group (Côte d’Ivoire, Ethiopia, Mali, South Africa, Zimbabwe). This is a big 190 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT Table 6.2 Internal Rates of Return on Agricultural Research and Extension Spending by Region Applied research Extension Number of Median return Number of Median return Region studies reviewed (percent) studies reviewed (percent) Africa 44 37 10 27 Asia 120 67 21 47 Latin America 80 47 23 46 There is still much to be OECD 146 40 19 50 gained from yield Source: Evenson forthcoming. improvements in every African country improvement over the 1980s, when only three countries (Benin, Guinea-Bissau, Togo) had annual agricultural growth rates exceeding 4 percent. Though Still Low, Land Productivity Is Rising Between 1980 and 1995 cereal production increased by 3.4 percent a year, mostly from area expansion. Cereal yields improved in 24 countries, and 9 countries had growth of more than 2 percent a year (Benin, Burkina Faso, Cameroon, Central African Republic, Ghana, Guinea, Guinea- Bissau, Mauritania, Mauritius). But there is still much to be gained from yield improvements in every African country. Continuing growth through area expansion is possible in only a few countries, because insti- tutional and economic constraints generally limit access to land. Labor Productivity Has Increased, Particularly in West Africa In 19 of 31 African countries agricultural value added per worker increased between 1979–81 and 1995–97 (World Bank 1999c). Agricultural labor productivity in West Africa showed a particularly strong improvement after 1983 (UNCTAD 1998). The use of bovine animal traction has spread in the cotton-maize zones of West Africa, in northern Benin (Brüntrup 1997) and Mali in particular. This was in response to the need for a power source for the profitable cotton-maize technologies being extended. For Africa as a whole there was a dramatic decline in agricul- tural labor productivity in 1975–84, then a temporary improvement in the mid-1980s followed by fluctuating but generally stagnant levels (UNCTAD 1998). 191 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Export Shares of Several Crops Have Grown, and Diversification Is Starting Since 1970 Africa has suffered losses in its world market share for agricultural exports—55 percentage points for groundnuts, 27 points for cocoa, and 14 points for coffee (see figure 6.1). But recent trends Policies clearly matter, have been more favorable (table 6.3). The export shares for five of the even where there are region’s nine main crops (bananas, cotton, sugar, tea, tobacco) rose serious physical between 1980–89 and 1990–97, though some increases were small. In constraints addition, many countries in East and Southern Africa (Kenya, Tanzania, Zambia, Zimbabwe) as well as in West Africa (Burkina Faso) have expanded into nontraditional export crops such as horticulture and floriculture. A Business Plan for Agriculture in the 21st Century P OLICIES CLEARLY MATTER, EVEN WHERE THERE ARE SERIOUS PHYS- ical constraints. That policies in Africa were poor for several cen- turies suggests huge unrealized opportunities for further growth in agriculture. Even limited and incomplete improvements have had sig- nificant effects. Yet many countries have not completed policy and insti- tutional reforms or are experiencing second-generation problems Table 6.3 Africa’s Share of and Change in World Trade for Its Main Export Crops, 1970–97 (percent) Share Annual change, Crop 1970–79 1980–89 1990–97 1970–97 Bananas 6 3 4 –3.3 Cocoa 59 45 40 –2.0 Coffee 28 22 14 –3.1 Cotton 13 11 12 –0.2 Groundnuts 40 8 5 –10.2 Rubber 6 6 5 –0.5 Sugar 6 6 8 –0.2 Tea 15 15 19 1.3 Tobacco 8 9 12 1.7 Source: FAOSTAT 2000. 192 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT associated with the implementation of policy reforms. Private agents have not sufficiently entered input, output, and rural financial markets, and market development and competition remain low. Tariff and non- tariff barriers to agricultural and agroindustrial trade continue to be high, and access to OECD markets is still limited. Public spending in rural areas remains inadequate. The privatization of agricultural paras- tatals is well advanced, but the decentralization of public agricultural and All stakeholders need to rural development services is proceeding slowly in most countries, with take part in developing fiscal decentralization still lagging badly. the vision for rural This section elaborates on key elements of the proposed agenda to development and capitalize African agriculture, increase its competitiveness, and harness agricultural the potential of agricultural growth and rural development. The agenda transformation and business plan must address three key questions: What are the best ways to capitalize agriculture and the rural sector? Where can resources be found to do this? And how can the use of these resources be made more efficient? Some of the proposed measures consolidate and expand the traditional domestic reform agenda. Others deal with emerging national, regional, and global developments. Many can be undertaken by African countries on their own. Others will have to be taken by their development part- ners, or in association with them. All stakeholders need to take part in developing the vision for rural development and agricultural transformation and the broad outlines of the business plan. Roles for the public and private sectors and priorities for public action need to be further clarified through a consultative process. The need for consultation and for dealing with development constraints outside agriculture that could have profound impacts on the sector has been vividly emphasized by the Organization of African Unity in a recent position paper on food security and agricultural development (OAU 1996). The OAU states that the actions to be taken for imple- mentation of this position must “ensure the participation of all segments of society in civil life through participatory and stable political institu- tions” and “mobilize national, regional and international initiatives to prevent conflicts and to resolve emergency crises” (p. 5). The OAU also suggests that to accelerate agricultural and rural development, the objec- tives must be “(a) to expand the effective participation of farmers and producers in the agricultural and rural development process; (b) to improve self-reliant food security throughout rural areas through increasing rural incomes; and (c) to promote and facilitate broad-based 193 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? and more self-reliant rural development, including improvements in infrastructure, better marketing arrangements, access to improved tech- nologies and supporting services and inputs, and more secure land tenure arrangements” (p. 14). Any business plan for agricultural and rural development must address complex issues. How to strike the appropriate balance between a central Huge investments will be vision and detailed, decentralized implementation? How to strengthen required to accelerate capacity and institutions? How to ensure that macroeconomic and agri- agricultural growth and cultural policies do not work at cross-purposes and to devise the appro- rural development priate sequencing of reforms? How to implement and finance the plan, dividing responsibilities among development partners (public sector, pri- vate sector, producers, and donors)? How to allocate resources within and among sectors and regions, between production types (upstream and downstream), and between economic agents? Moreover, implementation of a business plan should be continu- ously monitored and evaluated, and adjusted based on the findings. The assessment should analyze the plan’s impact on three sets of impact indicators: agricultural performance (production, productiv- ity, costs, competitiveness, diversification, vertical integration), wel- fare (food security, nutritional status, poverty reduction, food consumption, consumption of nonfood products, education, health), and sustainability of natural resources (preservation of farmlands, forests, and water). For a recent example of a comprehensive national strategy, consider the development of a framework to modernize agriculture in Uganda (box 6.6). Huge Investments Are Needed to Capitalize Agriculture Huge investments will be required to accelerate agricultural growth and rural development. Both the private and public sectors will have to make on-farm, agroindustrial, and infrastructure investments as well as investments in agricultural research, extension, and education (Thirtle, Hadley, and Townsend 1995; Vyas and Casley 1988).11 Women must be assured access to productive assets and services if the growth potential of these investments is to be realized (box 6.7). On-farm investments include agricultural inputs, livestock, tree capital, soil improvements, irri- gation, farm machinery, housing, and human capital. Agroindustrial investments are required for plants, equipment, skills, operating systems, and market development. 194 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT Investments will also be required to reverse natural resource and envi- ronmental degradation. Agricultural land is becoming extensively degraded, and desertification is on the rise. Soils are continuously being decapitalized. Insufficient investment in soil improvement has led to excessive nutrient extraction through crop production (Scherr 1999). Since World War II degraded soils have caused a 25 percent drop in Africa’s cropland productivity (Oldeman 1998). In many countries over- Investments will also be grazing has led to a decline in rangeland quality (Cleaver and Schreiber required to reverse 1994). In addition, water resources are being depleted and degraded natural resource and while deforestation continues unabated—with two-thirds of Africa’s environmental wildlife habitat already lost (Scheer 1999; Drenge 1990; Sharma and oth- degradation ers 1996; World Bank 1996). Why are these phenomena occurring? Many blame Africa’s rapid pop- ulation growth, combined with the slow adoption of more environmen- Box 6.6 Developing Uganda’s Framework for Modernizing Agriculture UGANDA IS DEVELOPING A SECTORWIDE FRAMEWORK youth and empower them to undertake income- to modernize agriculture. The process has involved generating economic activities. workshops held throughout the country to hear from The plan for modernizing agriculture has been set all stakeholders: government ministers, members of within the government’s medium-term economic pol- parliament, government officials, farmer organiza- icy framework, which aims at maintaining macroeco- tions, training institutions, and district officials. In nomic stability with low inflation, rapid and broadly implementing the plan, the government will: based economic growth, and a viable external balance s Make poverty eradication the overriding objective of payments. This should lengthen planning horizons of agricultural development. for savers and investors, create a climate of trust and s Transform smallholder farmers from subsistence to enthusiasm in the private business sector, and protect producing for the market. the poor against real income losses that would other- s Reduce public sector activities to the extent possi- wise result from inflation. ble, and support private sector development in all The explicit framework identifies priority actions commercial activities. for the public and private sectors and maps out a five- s Deepen decentralization of public service provi- year plan within the overall macroeconomic frame- sion. work. A joint product of the Ministry of Agriculture, s Support the spread of profound technological Animal Industry, and Fisheries and the Ministry of change throughout agriculture. Finance, Planning, and Economic Development, the s Address food security issues through trade rather document not only provides Uganda with a frame- than self-sufficiency. work for action, it also serves as a useful tool for coor- s Give priority to agriculture as the engine for eco- dinating donor activities. nomic growth and poverty reduction. s Improve access to productive assets for women and Source: Government of the Republic of Uganda 1998. 195 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 6.7 Ensuring Gender Equality in Access to Productive Assets and Services WOMEN PLAY A BIG ROLE IN AFRICA’S AGRICULTURAL women’s yields by more than 20 percent in Kenya production, performing 90 percent of the work of (Saito, Mekonnen, and Spurling 1994). And if processing food crops and providing household water Zambian women enjoyed the same level of capital and fuelwood, 80 percent of the work of food storage investment in agricultural inputs, including land, as and transport from farm to village, 90 percent of the their male counterparts, output could increase by 15 work of hoeing and weeding, and 60 percent of the percent (Saito 1992). work of harvesting and marketing (Quisumbing and Thus more must be done to ensure gender equality others 1995). Despite their importance in agricultural in access to productive assets and services. Efforts could production, women face disadvantages in accessing include providing clean, accessible water to reduce the land and financial, research, extension, education, and time burden of domestic work, investing in girls’ edu- health services. This lack of access has inhibited cation, ensuring gender-neutral land policy and legis- opportunities for agricultural investment, growth, lation, and building women’s skills and capabilities to and income (chapter 1). reduce their “political deficit.” For example, giving women farmers the same agri- cultural inputs and education as men could increase Source: Blackden and Bhanu 1999. tally friendly technologies and farming practices. The resulting degrada- tion of soils constrains agricultural growth. Lagging agricultural growth perpetuates rural poverty and food insecurity, impeding the onset of the demographic transition to lower fertility rates (Cleaver and Schreiber 1994, p. 198). Why aren’t farmers adopting new technologies and investing in their soils? Why are the normal intensification processes described by Boserup (1965) and Ruthenberg (1980) not occurring, or not occurring fast enough? Farmers will only make these investments and adopt more pro- ductive and environmentally benign farming technologies and practices if it is profitable to do so. The central thesis of this chapter is that poor policies and institutional failures have undermined this required prof- itability. Under favorable policies and institutions, farmers protect nat- ural resources—Kenya’s Machakos district is a well-documented example (Monitimore and Tiffen 1994). In addition to removing poor agricultural and macroeconomic poli- cies, higher profitability will require increasing investments in notori- ously weak transportation and communications infrastructure, as well as in food storage and processing facilities. Farmers will have more incen- tives to invest if input markets are made more efficient, property rights are strengthened (including formal and informal land tenure arrange- 196 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT ments; box 6.8), and investments are made in their education and health and in agricultural research and extension (Crosson and Anderson 1995). HIV/AIDS presents another significant challenge for African agricul- ture (chapter 4). The disease not only affects the rural population (pri- marily through increased deaths, lower labor productivity, and higher dependency ratios) but also the trained human capital needed to plan, design, and implement the business plan for agriculture and rural devel- opment. This makes the need for action against AIDS all the more urgent (World Bank 1999b). Box 6.8 Do Indigenous Land Rights Constrain Agricultural Investment and Productivity? MOST AFRICAN FARMERS STILL HOLD THEIR LAND UN- maintain. Moreover, titling does not always result in der indigenous, customary, or communal land tenure secure tenure (depending on the quality of the title and systems (not to be confused with open access systems respect for law), because national legislation for tenure or collective farming). In the past these land tenure sys- reform has limited capacity to change behavior where tems were alleged to provide insufficient tenure secu- indigenous values on land persist (Bruce, Migot- rity to induce farmers to make necessary investments Adholla, and Atherton 1994). in land (World Bank 1974; Harrison 1987). Thus it Migot-Adholla and others (1991) highlight some was thought that the systems contribute to land degra- circumstances where titling may be worthwhile: dation. But research has shown that such systems tend s Where indigenous tenure systems are absent or to allocate secure, inheritable land use rights to fami- weak. This is often the case in land settlement areas, lies and individuals. but it can also occur after major economic or polit- Evidence from rainfed cropping areas suggests that ical upheaval, particularly if traditional lines of indigenous tenure systems have been flexible and authority have been severed. responsive to changing economic circumstances (Place s Where land disputes are common. This may occur and Hazell 1993; Bruce and Migot-Adholla 1994). in areas where large numbers of migrants have laid Where population pressure and commercialization claim to land owned by indigenous groups. have increased, indigenous systems have evolved from s Where major project interventions are planned that a system of communal property rights toward one of require full privatization of land rights for their suc- individualized rights (Migot-Adholla and others 1991). cess or are likely to weaken the land rights of vul- Individualized rights secured by formal title make nerable groups. Some irrigation and tree crop farmers more creditworthy and so enhance their projects provide good examples. chances of receiving credit from formal institutions. So s Where population growth and market access have why not short-cut the process and replace customary led to an intensification of the farming system, to tenure with freehold tenure, combined with large-scale an individualization of communal tenure, and to land registration programs providing title to individ- high demand for credit from existing credit institu- ual holdings? One reason is that modern land admin- tions that could be supported through land title (for istration using formal title is costly to set up and example, periurban agriculture). 197 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Where Will Resources for These Investments Be Found? Foreign aid has declined, and most African countries are not consid- ered creditworthy in international capital markets. Rural financial and credit markets are poorly developed and difficult to establish (box 6.9). Even if such markets were well developed, credit cannot finance the con- Most of the needed stant and prolonged stream of investment required to capitalize Africa’s investments will have to farmers.12 And central governments all over Africa are overextended and be financed from rural have to concentrate on absolutely essential public services. Central and incomes local governments already partly or fully finance many investments, including transport infrastructure, water supply, electrification and com- munications, agricultural research and services, and human capital. But as noted, these investments are insufficient. So, where will the additional resources come from? In addition to removing the urban bias in public investment, most will have to come from rural incomes. But development partners should also reverse declining aid levels. Box 6.9 Poorly Developed Financial Systems and Limited Credit Systems A WELL-FUNCTIONING RURAL FINANCIAL SYSTEM CAN be supported by linking or interlocking the supply of help manage the savings and the liquidity constraints inputs and the provision and recovery of credit to of agricultural households and of the wider rural econ- agricultural marketing (Dorward, Kydd, and Poulton omy. But even with successful financial sector reform, 1998). Most well-performing formal and informal creating viable rural financial systems will take a long providers of credit in Africa (and many other devel- time in Africa. The difficulty is particularly severe in oping countries) use this approach. These lenders low-density areas that practice low-intensity rainfed enter a formal or informal contractual arrangement agriculture and where market penetration is limited by ensuring that they can recover the credit by subtract- high transport costs (Hayami and Platteau 1997). In ing it from the payment due to the farmer at the deliv- such areas rural financial systems face high transactions ery of the harvest. Examples include the cotton costs and high seasonality in the supply of deposits and parastatals in francophone African countries, con- demand for credit, as well as covariant risks in their tract farming systems in cotton, tea, and many other lending portfolios. This suggests that, even with good export commodities, farmer cooperatives in Kenya, financial sector policies, the expansion of the formal tobacco auctioning systems in Malawi and Zim- financial system into rural areas will be concentrated in babwe, and the credit recovery practices of many areas with high population density and high potential. informal lenders. But such systems usually cannot be (Chapter 5 provides more discussion on improving applied to food crops, where the farmer has many access to financial services such as savings and credit.) alternative ways to market the crop, and contract In some areas with well-developed cash crops, a enforcement is difficult for anyone but the local credit system, rather than a full financial system, can informal lender. 198 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT Most resources will have to come from rural agricultural and agroindustrial incomes. Most investment will have to be financed from the savings of rural populations and entrepreneurs, from cost recovery for services, from taxes levied by decentralized local governments and the central govern- ment, and from foreign direct investment. When incentives are favorable, even poor farmers are eager to save (Morduch 1999). Most of these sav- ings take place in the form of applying labor to in-kind investments in The business plan to land improvements, small-scale irrigation and drainage, growing of tree make agriculture and and livestock capital, and building of housing, storage facilities, and other agroindustry more farm structures. In addition, small farmers will use financial savings profitable must be opportunities if they are available in or close to their villages. Many of the pursued relentlessly world’s well-functioning rural microfinance schemes mobilize far more savings than they provide in credit to their members. But farmers and other rural people will not be able to save, pay for ser- vices, or pay taxes to local and central governments unless they have high agricultural profits, wage incomes, or other incomes from rural nonfarm activities. Since rural nonfarm activities are driven largely by demands from agricultural enterprises and households, they will thrive only if agri- cultural incomes and profits are high. And domestic and foreign entre- preneurs will invest in agroindustrial enterprises only if the potential profit from such activities is high. This is why the business plan to make agriculture and agroindustry more profitable must be pursued relentlessly—through further policy and institutional reforms in input and output markets and better access of agricultural and agroindustrial products to both African and OECD markets. Strengthening tenure security—under customary or modern forms of tenure—will also enhance agricultural investment and pro- ductivity (see box 6.8). Agriculture cannot be capitalized without get- ting tradable agriculture moving, and agricultural and agroindustrial growth cannot occur if producers are confined to narrow local or domes- tic markets. Only by exporting an increasingly diversified mix of raw and transformed products to cities, neighboring countries, and overseas can producers move beyond the low local demand for basic agricultural commodities. Implicit taxation of agriculture should be reduced. Macroeconomic and trade policies should seek to reduce implicit taxation from currency overvalu- ations and high tariff and nontariff barriers to improve agricultural pro- duction and investment incentives. Despite reforms, import taxes are still high, levying an implicit tax on agricultural and agroindustrial exports 199 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? (Ng and Yeats 1996, 1998). The threat of higher tariffs is also present. Though actual tariffs are much lower, under Uruguay Round commit- ments most tariffs are bound at 50–100 percent (Ingco and Townsend 1998). This raises risks for investors. Reducing the implicit taxation of agricultural commodities and the taxation of nonagricultural imports poses a fiscal dilemma because many Strategic public African countries depend on these revenues. Agriculture remains the investments can crowd in dominant sector in most African economies and so will have to continue private business to contribute to government revenues. The question is, how? The key principles when formulating agriculture taxes should be nondiscrimina- tion, minimization of efficiency losses, effectiveness of fiscal capture, and capacity to implement (box 6.10). Public investments should stimulate public-private partnerships. Governments can increase private sector activity by providing public goods. Invest- ments in roads (both quantity and quality) will benefit the private sector in all areas of agriculture (export crops, food crops, fertilizers) through better access and lower costs. Providing electricity to rural areas may encourage private millers and processors (Barrett 1997). Providing key market information (prices, volumes) will also encourage faster responses from the private sector (Badiane and others 1997). Box 6.10 How Should Agriculture Be Taxed? FOUR KEY PRINCIPLES SHOULD GUIDE AGRICULTURE TAXES. export taxes can be replaced by consumption taxes Nondiscrimination. Agriculture taxes should not be (sales or value added taxes) in countries with sufficient higher than those for other sectors, and should be inte- administrative capacity. grated with general value added, profit, income, and Effectiveness of fiscal capture. Income and value wealth taxes. added taxes are problematic because millions of small Minimization of efficiency losses. Output and input farmers do not have the accounting systems or capa- taxes should be minimized. Land taxes have been sug- bilities to comply with reporting requirements. Land gested as a way to minimize efficiency losses. Although taxes require careful design and local government such taxes do not exist in many African countries, agri- capacity building. Nevertheless, these forms of taxa- cultural land is growing in value and should gradually tion will become more important. be included in real estate taxation. Land or real estate Capacity to implement. In many African countries the taxes should be assigned to local governments (in the capacity to implement these new systems will have to be context of decentralization). Only local governments built over many years, during which little revenue will be have the detailed information on local land ownership generated. It may therefore be necessary to continue to and values needed for effective taxation, and only they rely partly on commodity and input taxes for revenue have a strong incentive to collect the tax. Commodity generation. But tax rates should be lower than in the past. 200 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT The financing and implementation of many of these services can be enhanced by public-private partnerships involving central, regional, and local governments. Such partnerships should go beyond private individ- uals and corporations to include producer organizations, as in the case of agricultural services. They can use many mechanisms—ranging from the privatization of some services and investments (including some agricul- tural research and extension) to formal partnerships, delegation of exe- Africa needs better cution, and contracting, with full or partial cost recovery. access to OECD Development partners should increase aid and improve market access. Recent agricultural markets as declines in donor assistance need to be reversed to provide resources for well as development key investments. Given the importance of agriculture to African assistance economies, the decline in research and extension, so central to the green revolution, is particularly disturbing. The decline has been fueled by four factors that suggest a fundamental misunderstanding of the importance of investing in agriculture (Delgado 1996). First, declining world cereal prices have created complacency about food availability. Second, large declines in real prices for Africa’s agricultural commodities have cooled enthusiasm for agriculture-led growth strategies. Third, there is fatigue from the lack of a visible green revolution in Africa. Fourth, some think that extensive market reforms in many African countries will somehow solve the problems without further attention from public authorities. These perceptions are misguided. Moreover, aid needs to be provided in the form of program or budget support rather than as balkanized project intervention. Development partners must also move beyond just providing aid— and improve the access of African countries to OECD markets. OECD and other developed countries have perpetuated trading arrangements that are particularly harmful to African countries, both for exports and imports. These barriers have huge costs (see box 6.2). OECD countries could take a number of steps to improve market access: s Vigorously pursuing agricultural reforms and reducing tariffs, nontar- iff barriers, and export subsidies. s Reducing tariff escalation, which has seriously hampered vertical and horizontal integration of African agricultural export systems. s Including agricultural and agroindustrial commodities in future pref- erential trade agreements with Southern and West Africa. s Streamlining phytosanitary and sanitary requirements and refraining from their abuse as market barriers. 201 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? s Providing technical assistance to public and private sectors in Africa to improve their capacity to apply World Trade Organization regulations and phytosanitary requirements and to strengthen their negotiating skills. African countries must know their rights and defend themselves against external attack. Most African countries cannot afford to take action on unfair trade practices in the World Trade Organization Much attention has to be because it is simply too costly. These costs need to be reduced. given to creating s Encouraging foreign direct investment in agriculture and related activ- representative ities to promote technology and knowledge transfers and make the sec- institutions and tor more competitive. transparent financial and political accountability How Can Resources Be Used More Efficiently? mechanisms Public investment will continue to be crucial for agricultural and rural development. Poor service delivery and public investment in rural areas have been explained by the urban bias in public spending and by the exces- sive centralization of the government and parastatal entities responsible for their provision. Many countries (Ethiopia, Ghana, Guinea, Tanzania, Uganda, Zimbabwe) have reintroduced elected councils at local levels. But these local governments need larger budgets for effective decentralized rural service delivery and public investment. The deconcentration of administrative and implementation responsibilities has become a feature of many sector investment programs. But progress in decentralizing and devolving resources and responsibilities remains limited. Decentralize resources and responsibilities. Improving the fiscal capacity of local governments will require a mix of instruments: the transfer of more elastic tax bases to these jurisdictions, the creation of revenue-sharing funds that transfer funds from better-off to poorer regions and local gov- ernments, and the use of cofinancing funds to favor specific investments or groups, such as the very poor. Much of the resource flow should be uni- fied—rather than in the form of balkanized projects—so that local com- mittees and elected councils can allocate among services and investments. For this to work, much attention has to be given to creating representa- tive institutions and transparent financial and political accountability mechanisms. Improve services for agriculture. Better services are needed for research, extension, transportation, and information on new markets and prod- ucts—to spur the growth of nontraditional export crops (such as horti- culture) and the expansion of exports of value-added products. Some 202 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT nontraditional exports require focusing on niche markets where timeli- ness, freshness, and quality are essential. Removing remaining restric- tions on air transport could facilitate this process (chapter 5). Even food staples like cassava, yams, and plantains could become major export commodities if efforts are made to develop market niches in industrial countries. This diversification is essential to deal with the secular decline in world commodity prices. Although real prices for nontraditional Regional and subregional export crops have declined, their rate of decline has been slower than agricultural research that for traditional exports. partnerships can provide Reduce trade barriers and seek regional approaches to research and development. significant benefits African countries need to work together to remove trade barriers and con- solidate economic, monetary, and trade areas.13 (Several such areas are already developing.) Doing so can lead to the pooling of their small mar- kets. It can enable more bulk production and purchase of raw materials. And it can facilitate the realization of other economies of scale. Moreover, large-scale infrastructure development is often a regional affair in Africa. Regional bargaining power is more powerful than that of any single country, and a good regional reputation can attract more for- eign investment. The prevention and containment of livestock disease, so prevalent in African countries, is also a regional affair (box 6.11). The research capacity of African countries differs widely. Some coun- tries (South Africa) have sophisticated research facilities, while others are just starting to develop limited capacity. As with other enterprises, there are significant economies of scale associated with research and technol- ogy development. Most African countries are small, and agricultural pro- duction is usually not valuable enough to sustain large agricultural research programs. But many African countries face similar constraints and use similar technologies. Thus it would be useful to develop regional and subregional agricultural research partnerships or institutes. Current regional efforts at cross-border collaboration, spearheaded by regional research organizations and by the Special Program for Agricultural Research, include the Association for Strengthening Agricultural Research in East and Central Africa, the Southern African Centre for Cooperation in Agricultural and Natural Resources Research and Training, and the West and Central African Council for Research and Development. There has been some debate on who will benefit from these regional partnerships—with concerns about losing market share to other African countries—but the regional benefits will likely outweigh the small compromises that some countries have to make. The 203 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 6.11 Regional Vigilance against Livestock Disease LIVESTOCK IS PROMINENT IN MANY RURAL AFRICAN caused major production losses through the loss of meat economies—Botswana, Burkina Faso, Cameroon, and milk production and draught power. Export rev- Chad, Ethiopia, Kenya, Lesotho, Madagascar, Mali, enues have also been lost because markets in Europe, Namibia, Nigeria, Senegal, Somalia, Sudan, Tanzania, North Africa, and the Pacific Rim are hesitant to Zambia. But diseases continue to threaten livestock import animal products from regions where contagious production systems and rural incomes. Africa has a diseases are prevalent. much broader spectrum of infectious disease among The most devastating disease impact in Africa was the animals than any other region (Coetzer, Thomson, rinderpest outbreak in the late 19th century. It spread and Tustin 1994). These diseases can be separated into over almost the entire continent within 10 years, killing two broad groups: erosive diseases (such as tick-borne an estimated 10 million cattle (Geering, Roeder, and Obi disease) and more serious epizootic or transboundary 1999). In South Africa the livestock losses from this dis- diseases (such as foot and mouth disease, rift valley ease disrupted agricultural production and transporta- fever, lumpy skin disease, rinderpest, and contagious tion. Human malnutrition was widespread and, bovine pleuropneumonia, known as CBPP). combined with high levels of malaria, caused thousands Epizootic or transboundary diseases are far more of deaths. The effect on the social structures of some rural important in terms of threatening large numbers of live- communities was devastating (Vogel and Heyne 1996). stock and thereby livelihoods over wide geographic While earlier outbreaks of epizootic diseases have areas. An outbreak of these diseases can result in explo- been contained and in some cases eradicated in Africa, sive losses. Examples include the 1995 CBPP outbreak their prevalence and distribution remain a serious con- in Botswana, which spread rapidly throughout the cern. Cross-border movements of livestock are com- Ngamiland area—resulting in about 300,000 cattle mon and have caused disease outbreaks in many being slaughtered as part of the eradication strategy. countries. For example, the 1995 CBPP outbreak in CBPP affects 27 African countries, causing losses of up Botswana was said to have come from the cross-border to $2 billion a year (Geering, Roeder, and Obi 1999). movement of Namibian cattle. Transboundary live- Foot and mouth disease outbreaks in Angola, stock diseases are thus a regional issue requiring Mozambique, South Africa, and Zimbabwe have regional cooperation and vigilance. Consultative Group on International Agricultural Research must also continue to play a significant role in improving agricultural technology in Africa (Anderson and Dalrymple 1999). Finally, biotechnology will inevitably become more important globally, and to maximize the bene- fits African countries will need to build their capacity to identify oppor- tunities, access appropriate technologies, and evaluate the risks associated with their use (Byerlee and Gregory 1999). Review procedures that discourage a competitive private supply of agroindustrial inputs. Although input markets are subject to fewer constraints than a decade ago, regulatory problems remain—and the commitment of African governments to stay out of markets is not yet credible. So, pri- vate firms are still reluctant to gear up for major investments. 204 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT Private intermediaries have been slow to enter the field vacated by parastatals, possibly because of the entry barriers that characterize the business climate more generally. In a recent study 60 percent of African entrepreneurs reported that unpredictable rules and policies have seri- ously affected their business (Brunetti, Kisunko, and Weder 1997), surely inhibiting private sector development. To attract private investment and foster competition, institutional arrangements need to be developed to Unpredictable rules and foster responsiveness, accountability, and the rule of law. As stressed by policies are barriers to the World Bank’s World Development Report 1997 (p. 38), “countries need private sector markets to grow, but they need capable institutions to grow markets.” development While there is a lot of potential for agricultural and rural development, realizing it will require learning from failed approaches and building on successes (see Delgado 1998a and Cleaver 1997). African countries must develop and own the agenda and take primary responsibility for concep- tualization and implementation. Government commitment to imple- menting a business plan for agriculture is a prerequisite for its success. Notes 1. Delgado, Hopkins, and Kelly (1998) add consumption-side linkages that arise from the stimulation of demand-constrained nontradables, finding that they surpass production-side linkages by a ratio of about nine to one. The authors find that growth in household incomes resulting from increased agri- cultural production is largely spent on nontradable items such as services, per- ishable foods, and locally produced nonfarm goods. Overall the study finds that adding $1 of new farm income potentially increases total income in the local economy beyond the initial $1 by an additional $1, by stimulating local prod- ucts and services that would otherwise not have a market. 2. There are exceptions: for example, maize and wheat yields on commercial farms in Zimbabwe are much higher than in the United States. 3. Average yields for cereals, cassava, and plantains are 1.2, 8.2, and 5.4 tons a hectare in Africa—while in Asia they are 2.9, 13.1, and 10.1 tons a hectare and in Latin America they are 2.6, 12.3, and 8.2 tons a hectare (FAOSTAT 2000). 4. Agricultural taxes in African and other developing countries were calcu- lated by Schiff and Valdés (1992). In Côte d’Ivoire, Ghana, and Zambia from the 1960s to early 1980s the average direct taxation was 23.0 percent, indirect taxation was 28.6 percent, and total taxation was 51.6 percent. The indirect component includes the effects of overvalued exchange rates (39.4 percent) and tariffs (25.7 percent). In other developing countries direct taxation was 12.0 per- cent, indirect taxation was 24.4 percent, and total taxation was 36.4 percent. 205 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Assessing individual commodities and including more African countries, these high taxation rates were corroborated by Nikolaus, Herrmann, and Günther (1996) for cocoa, Herrmann (1997) for coffee, and Pursell and Diop (1998) for cotton. 5. Because these scores are based on analysis of decisionmaking powers at dif- ferent administrative levels (school, district, administrative region, state, central government), they are free of biases associated with country size. 6. Data for each country are based on the percentage change in the real pro- ducer price of export crops. The aggregate price changes were derived as a weighted average of the major export crops. World Bank (1994) included other countries in its analysis, but reliable price data for these other countries were not readily available for 1989–91 to 1995–97. 7. These price trends are largely consistent with those in UNCTAD (1998). The period used by that report in a similar representation of prices (chart 20, p. 164) is from 1981–83 to 1992–94 for individual (mainly food) crops. Much of that report’s discussion is based on price trends in three groups of countries: “newly liberalized,” “continued intervention,” and “continued liberalization.” The groupings were based on country status in 1992. Trends in export crop prices are examined for each group from 1970. Interpretation of these trends is difficult because the implicit assumption used is that countries have remained in their 1992 status for more than 20 years, which is not the case. A more instruc- tive method would be to take trends in prices before reforms and after reforms on a country by country basis—a method used by Gardner (1995). 8. A second payment is made based on the difference in weight at purchase and factory, and on primary marketing activities performed by farmer organiza- tions. In recent years additional payments have been made in some countries based on the actual lint export price, or if the parastatal’s profits were higher than expected for the season. 9. Explicit fertilizer subsidies were widespread—25 percent in Malawi, 46 percent in Senegal, 50 percent in Cameroon, 60 percent in Tanzania, and 85 percent in Nigeria (in 1982/83 prices; Lele, Christiansen, and Kadiresan 1989). Implicit subsidies were also prevalent because almost all countries had an over- valued currency. The magnitude of these subsides placed huge direct pressure on government budgets. 10. Some of these growth rates may be overestimated due to the extensive drought in 1991/92, which had a significant impact on output, especially in Southern Africa. Agricultural output was thus increasing from a low base. 11. Thirtle, Hadley, and Townsend (1995) show that these investments are significant determinants of output and productivity growth in Africa. Vyas and Casley (1988) suggest the need to also develop technologies, institutions, and 206 SPURRING AGRICULTURAL AND RURAL DEVELOPMENT marketing structures appropriate to the development of intensive agricultural production systems. 12. First, in a risky sector such as agriculture, debt-equity ratios have to be quite low, implying substantial investment out of savings. Second, credit has to be repaid, making a strategy based on credit, rather than savings, unattractive given the high real interest rates likely to prevail in most African countries for the foreseeable future. 13. Noxious cereal export bans—slapped on at will by local authorities—are an example of these trade barriers. Such bans are retarding growth in many high- potential but remote areas that have a natural market in another country (Mali, Mozambique, Tanzania, Zambia). 207 CHAPTER 7 Diversifying Exports, Reorienting Trade Policy, and Pursuing Regional Integration T Africa has huge potential O SUCCEED IN THE 21ST CENTURY, AFRICA HAS TO for more diversified become a full partner in the global economy. The production and exports, region accounts for barely 1 percent of global GDP including in and about 2 percent of world trade. Its share of global agroprocessing, manufactured exports is almost zero. Over the past 30 manufacturing, and years it has lost market shares in global trade—even in services traditional primary goods—and failed to diversify on any scale. Africa thus remains almost totally dependent on its traditional export com- modities—despite their low income elasticity and declining and volatile terms of trade. Continuing concentration on these traditional exports would have adverse consequences for income and employment, even more so given the speed of rural-urban migration (chapter 1). Had Africa maintained the share of world trade it had in the late 1960s, its exports and income would be some $70 billion higher today. But Africa has huge potential for more diversified production and exports, including in agroprocessing, manufacturing, and services. The more successful African economies have already begun to diversify and make themselves more attractive business addresses. For some, nontradi- tional exports—including floriculture, other nontraditional agricultural goods, and nontraditional industrial products—have been growing by 30 percent a year since the mid-1990s, albeit from a low base. Tourism has also grown rapidly. And better-managed economies have been attracting higher foreign direct investment. The challenge: to sustain the momentum of diversification in some cases and to initiate it in others. Given the region’s tiny and fragmented 208 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION economies—with a median GDP of barely $2 billion—the issue is not whether Africa should be quickly integrated, both regionally and with the global economy. The question is how, for much still needs to be done to make African economies competitive (see Helleiner forthcoming and Collier 1997, 1998). Trade reforms are important, but much more is needed. The six most pressing policy actions: Given the region’s tiny s Anchor export orientation on competitive and stable real currencies. Africa’s and fragmented comparative advantage in exports should be based on sustained real economies, the issue is exchange rate competitiveness until economies are sufficiently devel- not whether Africa should oped to support a productivity-induced real currency appreciation. be integrated—but how s Make trade reforms credible and effective. This would require eliminat- ing the most damaging aspects of the remaining antiexport bias—by administering effective compensating mechanisms to exporters, cut- ting red tape, and ensuring best practice customs clearance. s Integrate further trade policy reforms with national “business plans” for economic diversification. For many countries that means further mod- erating tariff peaks, rationalizing exemptions, and taking other steps to ensure effective supply responses. The business plans should cover infrastructure, public service delivery, human capital development, stable and competitive exchange rates, and investment strategies— especially for small and medium-size enterprises. They should also broaden the domestic fiscal base away from trade taxes, so that reform is not destabilizing in macroeconomic terms. s Mainstream regionalism in a new way. Open regionalism would enlarge economic space and lock in trade and other reforms to boost their credibility—and regional convergence criteria would be negotiated for macroeconomic, regulatory, and infrastructure reforms. s Create a platform for effective African participation in multilateral forums such as the World Trade Organization. Such forums are essential for underpinning the credibility of reforms and for enforcing “appropri- ate” global standards, which are becoming prerequisites for accessing markets in developed countries.1 But African countries also need to help shape these standards. s Base all this on consultative processes. Underlying many of these actions are the relations between business and government and between labor and government. Too few governments have forged a supportive and consultative relationship with the private sector—one in which the government is accountable for service standards, and business for per- 209 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? formance. In the same vein, the cooperation and support of the labor movement have always been critical to successful and sustainable development policy. In many countries closer consultation with labor will be needed in the new era of globalization, democracy, and partic- ipatory politics. Without broad and growing markets, Why Should Africa Diversify? investment will not be attracted to Africa T HE NEED TO DIVERSIFY AFRICA’S ECONOMIES, PARTICULARLY TO increase the weight of industry, has preoccupied the region’s gov- ernments for many years. Diversification is indeed a valid con- cern. Africa’s urban population will triple by 2025. Urban growth and agglomeration create opportunities for new types of economic activity by lowering transactions costs, concentrating consumer power and skilled labor, and facilitating dense producer networks. But providing employ- ment for rapidly growing urban population will be an enormous chal- lenge—as will creating a productive urban economic base to support the infrastructure investment needed to make cities attractive places to live and invest. Export diversification has received less attention but is equally vital for two reasons. First, export receipts are needed to finance imports of consumer, intermediate, and capital goods. But receipts have been lim- ited by lost trade shares for traditional products and by concentration on a few primary commodities with low demand elasticity. The prices of these staples, though volatile, are expected to continue their long-run decline. Second, given Africa’s small economies, it is hard to imagine a successful diversification drive based solely on domestic markets. For the same reason, exports—especially of industrial and nontraditional prod- ucts—provide the best avenue for attracting high and productive invest- ment. As the experiences of other developing regions suggest, the virtuous circle begins with investment, which triggers higher and sus- tained growth, increased voluntary savings, and further investment (UNCTAD 1998; Helleiner forthcoming; Rodrik 1996; Agosin 1997). But without broad and growing markets, investment will not be attracted to Africa. African countries are not just small—they also have a history of high trade restrictions and low domestic competition, and are far behind on 210 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION global technology (chapter 5). This suggests that African firms are even more likely to see productivity gains from exporting than firms in other regions: s In many lines of activity the minimum efficient plant size is large rel- ative to the domestic market. Thus exporting can make plants more productive by raising capacity use. Exporters in Africa are s Competition has historically been low in African markets. Exporters typically about 20 are likely to be exposed to greater competitive pressures than produc- percent more productive ers for the domestic market—and so are likely to be more efficient. than nonexporters s Exporters learn from their buyers. Exporters of basic products gain by learning to process large orders, meet quality standards, and make timely deliveries. Even though this transfer of technology may not be at the upper end of the scale, it allows producers to establish reputa- tions with buyers that lead to transfers of technology, product, and management knowledge. Firm-level studies provide support for these propositions—exporters in Africa are typically about 20 percent more productive than nonex- porters (box 7.1). But most analyses of export diversification assume a sizable manufacturing base, true for only a limited part of Africa. South Africa’s strong manufacturing base, created through import-substituting and strategic industrialization, is shifting toward a more competitive, export-oriented focus. Côte d’Ivoire, Ghana, Kenya, and Zimbabwe have Box 7.1 Gains from Exporting in Africa ARE AFRICAN EXPORTERS MORE PRODUCTIVE THAN age exporting firm is not much older than the average nonexporters? The answer seems to be yes. Bigsten nonexporter, but it has almost three times as many and others (1998) find that among manufacturing employees. Thus it seems that exporting allows firms firms in Cameroon, Ghana, Kenya, and Zimbabwe, to break the scale barriers imposed by small markets. exporters have much higher technical efficiency. Capacity use is also higher for exporters. And external Exporting also increases efficiency over time. Small links through ownership or trade, though generally local markets and technological backwardness appear low among African manufacturers, are significantly to make the export experience more advantageous; it stronger for exporters. At 20 percent, the average share is not simply the case that exporting firms are the most of foreign ownership for exporters is three times efficient firms to start with. higher. An exporting firm is also about twice as likely Mengistae and Pattillo (1999) find other differ- to hold a foreign license and almost three times as likely ences between exporters and nonexporters. The aver- to have a foreign technical assistance contract. 211 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? manufacturing bases that need consolidation and expansion. Many other countries still need to create the essentials. Will an open trade regime with an export-oriented strategy increase investment in manufacturing without focused government support? And who will invest in African industry lacking a base of strong small and medium-size enterprises? Such questions concern policymakers as they Africa can diversify and assess strategies for raising output (Rodrik 1996). be competitive across a broad range of products—if policies are The Debate on Africa’s Diversification Potential improved and transactions costs C lowered REATING A BASE FOR COMPETITIVE INDUSTRIALIZATION IN AFRICA will not be easy. Efforts to replicate the success of industrializers in Asia and Latin America face some daunting challenges, includ- ing landlocked states, high transport costs, low economic density, geo- graphic isolation from high-growth clusters, and limited skills and technology (box 7.2). But there are enough examples to show that Africa can diversify and be competitive across a broad range of products—if policies are improved and transactions costs lowered. This is starting to Box 7.2 Challenges for Competitive Industrialization in Low-income Africa s Africa’s comparative advantage lies chiefly in low industrial sophistication and technology. labor costs (and sometimes low raw materials and s The private sector is weak, dominated by a few energy costs). But with global competition, these multinational corporations at one extreme and by lower-order comparative advantages have become a mass of small enterprises at the other. The middle less important. layer of medium-size indigenous firms is missing. s Africa’s main competitive strengths are in indus- s “Technological terms of trade” have shifted against tries where demand growth is slowest and where late-starters. The cost of acquiring new technology international competition—especially from low- has risen both in money and, more important, in cost Asian suppliers—is intense. the skills of operators, technicians, and managers. s The region’s economies are not part of a cluster, so s The importance of labor quality in attracting for- there is no Hong Kong (China), Japan, or eign direct investment counts against Africa. Singapore to undertake foreign direct investment s The region has become excessively and unsustain- on the scale seen in East or Southeast Asia. ably dependent on external support, including that s African countries are at a serious disadvantage in for foreign technology and expatriate skills. infrastructure costs, especially for transport. s They are at the bottom of the global league in Source: UNIDO 1996. 212 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION happen in Africa’s better-managed economies, and evidence suggests that reforms can have substantial catch-up effects. Still, can Africa expect to have a comparative advantage in labor-intensive products, including manufactures, rather than resource-based primary products? The Resource-based Thesis Africa is richer in natural Adrian Wood and his research associates (Wood 1997; Wood and resources—but poorer in Mayer 1998; Wood and Berge 1997) argue that in an era of globalization human capital—than any and integrated capital markets, physical investment is likely to be an out- other region come rather than a cause of comparative advantage. Instead, natural resources and human capital are likely to be the main determinants of comparative advantage. Africa is richer in natural resources—but poorer in human capital—than any other region, with ratios corresponding to those of Latin America in the 1940s or 1950s. This analysis predicts that Africa will find it hard to acquire a strong comparative advantage in processed primary exports and harder still to develop manufactured exports. Even with more education, improved infrastructure, and better policies, the share of manufactures in exports will remain far lower in Africa than in Asia, where natural resources per capita are far lower. Thus the way forward for Africa in the medium term is mainly to raise primary exports, both processed and unprocessed. Even so, one-third of African countries have considerable potential for manu- factured exports. But the resource-based thesis has been challenged by several scholars: s Resources are poorer than believed. Bloom and Sachs (1998) argue that Africa’s resource base is weaker than supposed. In their view special- ization in agriculture is not a viable development strategy. The impli- cation is that labor-intensive manufactures will provide the best poverty-reducing growth strategy if Africa takes steps to reduce the constraints of adverse geography, especially by improving transport infrastructure. s High transactions costs shape Africa’s economies. Collier (1997, 1998) observes that the resource-based thesis must operate by making African labor noncompetitive for manufacturing. But Collier argues that evidence does not support this. Africa’s extensive natural resources have not translated into higher labor costs. Instead, Africa is poor, undercapitalized, and uncompetitive in transactions-intensive activi- 213 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? ties such as manufacturing. Poor policies and weak institutions have led to exorbitant transactions costs, while repeated policy failures and reversals have led to high risk. These, rather than resource wealth, are the key constraints to growth and diversification. s Overvalued and unstable real currencies remain a threat. Williamson (1997) and Elbadawi and Helleiner (forthcoming) argue that a real Even while increasing exchange rate–led export diversification strategy remains relevant for traditional exports, different reasons than in the pre-1980s, when real exchange rates African countries should became overvalued due to controls and unsustainable and expansive have considerable scope macroeconomic policies. Because most African countries depend on to diversify official development assistance and few are poised to tap global capi- tal markets, the region’s economies will be increasingly susceptible to real currency overvaluation and instability. While these flows are essen- tial to support investment and diversification (Collier 1997), their effects on economywide competitiveness can be damaging without an explicit strategy for protecting the real exchange rate. As Chile’s recent experience makes clear, such a strategy is essential for successful export orientation (Williamson 1997; Hernandez and Schmidt-Hebbel 1999). What can be learned from this debate? Even if geography and climate limit African agriculture, the region is still performing well below its potential in this area (chapter 6). And there is no reason Africa should not fully exploit its comparative advantage in agriculture and minerals while also diversifying into (and deepening) other labor-intensive exports. A careful review of the debate suggests a broad consensus that, even while increasing traditional exports, African countries should have considerable scope to diversify. Many are poised, in the medium to long run, to significantly widen their comparative advantage—if they address the policy distortions (including those associated with uncompetitive or unstable real exchange rates), poor infrastructure services, and high risks and high transactions costs (including those due to corruption) that inhibit competitiveness. Indeed, business surveys carried out in 1996–97 for a large number of African countries indicate that in most cases these factors, rather than excessive wages or labor market rigidities, are seen as the prime barriers. (South Africa is a notable exception.) But the above studies also suggest that in many countries Africa’s industrialization is likely to be closely linked to natural resource endowments rather than simply composed of “footloose” industries. 214 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION Recent Evidence These conclusions are buttressed by recent trends in export diversifica- tion. The performance of nontraditional exports in eight African countries in 1994–98 suggests three encouraging patterns (table 7.1). First, in most cases the range of the new exports is quite wide. It includes diverse processed primary products, a few new agricultural exports, manufactures, and, in Many African countries Uganda, gold. have seen rapid growth in Second, though starting from small bases, growth of nontraditional nontraditional exports exports has been quite rapid in most of the eight countries. Even with gold exports excluded, nontraditional exports from Uganda grew by more than 70 percent a year, accounting for 22 percent of exports by 1998. Nontraditional exports from Ghana, Madagascar, and Mozambique have also shown impressive growth. In Ghana and Mozambique nontraditional exports now account for nearly one-fifth of exports. Most important, the growth in Ghana was mainly accounted for by exports of processed and semiprocessed products. In Madagascar the share of nontraditional exports soared to 86 percent. Côte d’Ivoire, Zambia, and to a lesser extent Senegal have also seen considerable export diversification, notably in product lines related to their natural resource bases. Table 7.1 Nontraditional Exports from Selected African Countries, 1994–98 (percent) Share of total exports Average annual growth Country 1994 1998 (in current dollars) Côte d’ Ivoire 13.5 17.4 16.4 Excluding processed cocoa, coffee 6.9 8.8 16.2 Ghana 9.7 19.2 35.5 Processed and semiprocessed 6.3 15.2 42.1 Madagascar 64.1 86.1 11.9 Export processing zone 14.3 37.4 32.2 Mauritiusa Export processing zone 67.2 68.9 2.9 Mozambique 5.6 17.8 50.3 Excluding processed cashews 3.5 10.1 47.1 Senegal 11.5 13.3 9.3 Ugandaa 5.6 34.9 101.5 Excluding gold 5.6 21.6 72.2 Zambiab 14.7 33.0 16.5 a. Data are for 1994–97. b. Nonmetal exports. Source: World Bank data. 215 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? With better policies and an improved economic environment, Africa’s comparative advantage in natural resources and diverse cultures has started to pay dividends in terms of new commodity and services exports. For example, horticulture exports from several African coun- tries have jumped to more than $2 billion a year (chapter 6), while tourist arrivals have been increasing at rates well above world averages African countries can (box 7.3). The potential of tourism is suggested by its 20 percent annual attract labor-intensive growth in Tanzania. manufactures Third, there is evidence that African countries can attract labor-inten- sive manufactures. With rising labor costs, Mauritius has probably approached its limit in terms of textile exports (see table 7.1). But there is good news: Mauritian firms are trying to surmount this problem by investing in poorer African countries (box 7.4). This is significant for Africa because a powerful force in East Asia’s development has been the “flying geese” phenomenon—as leading coun- tries have advanced on the technology and wage scale, labor-intensive activities such as garments and toys have moved to poorer countries. Mauritius shows that the geese can fly in Africa too. Confirming business surveys, recent international comparisons suggest that high labor costs are Box 7.3 Chances and Challenges for Tourism WITH ITS WIDE SPACES, SPECTACULAR WILDLIFE AND cent a year (in real terms) over the next 10 years, out- natural resources, and rich and varied cultures, Africa stripping global tourism growth of 3 percent. has tremendous potential for tourism. Moreover, Africa can do even better if governments and the pri- indigenous ownership of tourism facilities is quite high. vate sector cooperate to eliminate impediments to But according to the World Tourism Organization, tourism. Though largely a private activity, tourism Africa attracted less than 4 percent of the world’s needs public support through security, infrastructure tourists and accounted for just 2 percent of interna- development, and efficient visa and immigration pro- tional tourism receipts in 1997. Only South Africa was cedures. For European and North American tourists, among the 40 top tourism destinations in 1998. Africa remains the most expensive place to fly, largely The region is gaining momentum, however. In because of a highly regulated and inefficient air trans- 1988–97 world tourism grew 5 percent a year—but port system. In many countries visa processing and Africa’s growth was 7.2 percent, second only to East immigration formalities are a nightmare. Regional Asia and the Pacific. And in 1997 Africa had the fastest cooperation could help—at some borders, tourists and growth in tourist arrivals (8.1 percent). The World their luggage are forced to change buses because of pro- Travel and Tourism Council estimates that travel and tection of the local travel industry. And does it make tourism accounted for more than 11 percent of Africa’s sense for a tourist wishing to visit West Africa to secure GDP in 1999 and projects growth of more than 5 per- separate visas for each of the region’s 16 small countries? 216 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION no longer a major problem in most African countries, suggesting that more “flying geese” may be landing in Africa in the future. In Kenya, for example, labor productivity in multinational firms is comparable to that in non-African countries—but nominal wages are lower (Biggs and oth- ers 1996). Efforts to develop and upgrade skills are critical, but in many countries labor would be relatively competitive if other obstacles to busi- ness were reduced. And after a slow start, developments in Africa’s sub- After a slow start, regions stand to intensify intraregional investment. developments in Africa’s subregions stand to A Simulation Exercise intensify intraregional investment The discussion here suggests that the factors inhibiting diversification into exports of nontraditional commodities and services are similar to those explaining Africa’s low growth. They include human resources (including healthy and skilled workers), factors that affect transactions costs (including governance and infrastructure services), policies that ensure a stable and competitive macroeconomic environment, and geo- graphic factors. Some of the geographic factors, such as being landlocked or having a low population density, are most damaging when they inter- Box 7.4 Are the Geese Flying in Africa? THE MAURITIAN EXPORT PROCESSING ZONE EXPORTS marketing, and logistics, complementing such “soft- more than $1 billion a year in textiles and apparel. Its ware” with the “hardware” from emerging African firms are 75 percent owned by local capital. Floreal, the exporters. Just as Hong Kong needed China to grow, largest textile maker, has gone from a labor-intensive so Mauritius needs such countries to widen its eco- knitting company in 1971 to an integrated spinning, nomic space and keep its industries globally competi- knitting, dyeing, and finishing company with show- tive. East Asia’s development was spread and rooms in Paris, London, New York, and Hong Kong accelerated by the “flying geese” pattern, involving (China). In 1989 Floreal started shifting labor-inten- similar transfers of labor-intensive stages of production sive parts of its business to continental Africa, first from richer to poorer neighbors. Africa can attract manufacturing knitwear in Madagascar—where the labor-intensive activities and make the geese fly. export processing zone, dominated by textiles, has cre- But investors still see the usual obstacles. ated more than 55,000 jobs—then opening plants in Heightening the urgency of strengthening African Mozambique. With 17,000 workers, Floreal is assess- competitiveness in textiles is the abolition of the Multi- ing opportunities for expansion elsewhere in Africa. Fiber Arrangement on 1 January 2005. Guaranteed With pay levels three times those in poor countries, access to major markets, including through a renewed Mauritius must position itself to become a center for Lomé Convention and a liberal U.S. Africa Growth capital- and skill-intensive operations such as design, and Opportunity Bill, would help Africa compete. 217 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Figure 7.1 Simulated Annual act with other variables—being far from the sea, for example, is a bigger Values of Industrial and problem if transport services are poor. Processed Exports by a Elbadawi and Soludo (1999) estimate the relative effects of these variables Median Africa Country across 32 developing countries—22 of them in Africa—to account for coun- try shares of a broad range of industrial and processed exports relative to total Billions of dollars exports of the same type of products by the 32 countries (figure 7.1). The export shares are assumed to be explained by four sets of variables: 52.0 s Geography and natural endowments, proxied by the percentage of land in the tropics and an interaction term combining the percentage of land on the coast and the population density at the coast. This term measures the potential for facilitating trade through ports. s Development variables—capital and skilled labor endowments, with 20.4 investment and primary education used as proxies. s Two important policy indicators: the misalignment of the real exchange rate and its variability. s Transactions costs are proxied by three indicators: paved road density as 3.1 an indicator of infrastructure, the average cost of telephone calls to a Scenario 1 Scenario 2 Scenario 3 global economic center (the United States) to gauge ease of communi- Note: Scenario 1 shows results if the median cations, and a corruption index to capture the quality of public services. African country were to achieve East Asian exchange rate policies and transactions costs. Scenario 2 shows results if the median African country were to achieve East Asian exchange rate policies, transactions costs, The results confirm that geography affects the share of industrial and and investment and education levels. Scenario 3 (directly attainable only by African coastal countries) processed exports. Tropical location reduces the share, while a large, densely predicts potential coastal Africa’s industrial and processed export values if it achieved scenario 2 as populated coast increases it. But other factors matter a lot, and reduce the well as East Asian population density along the coast. role of geography. Higher investment and greater primary school enrollment Source: Elbadawi and Soludo 1999. are associated with higher industrial and processed export shares, as are bet- ter infrastructure and communications (roads and telephones). Corruption is associated with a smaller share of industrial exports. Consistent with inter- national evidence (Helleiner forthcoming), real exchange rate overvaluation and variability can also lower industrial and processed exports. Given the constraints of geography, what are the prospects for Africa to increase its market share in industrial and processed exports? To answer this question, Elbadawi and Soludo (1999) generate three illustrative sce- narios. First, if the median African country were to adopt East Asian exchange rate policy and attain that region’s transactions costs, its annual industrial exports would reach $3 billion (see figure 7.1). This would be a significant jump from the minuscule $28 million in industrial and processed products now being exported by the median African country. Moreover, it should be possible to attain the simulated levels of exports 218 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION in a relatively short period given that a better macroeconomic environment Figure 7.2 Aspects of and lower transactions costs could be achieved fairly quickly. Africa’s Geography Second, should the median African country also attain East Asian invest- Percent ment and education levels, its industrial and processed exports would reach $20 billion a year in the medium to long run. Geography does not seem to 94 be an insurmountable obstacle to diversification—the catch-up effects 84 unleashed by sound policies, especially when augmented by strategies to retain and attract investment and invest in people, seem very strong. 71 Third, the simulations suggest that coastal countries have more options because of their more favorable location. Were it to benchmark policies and development variables on East Asian levels and achieve East Asian coastal densities (an unlikely outcome), the median African country would achieve industrial exports of $52 billion (figure 7.2). True, any such estimates can only be taken as illustrative. But the cen- 21 tral point of the simulations is that despite the constraints of geography, a lot can be done. And with appropriate integration, the dynamic spillover effects from big coastal countries could shorten the catch-up time for the Geography variables median African country. The results also define the challenges facing poli- Population in African countries with coastal land/African population cymakers in Africa. With knowledge of what is possible, countries need to GDP of African countries with coastal land/ African GDP design and implement national policies and regional cooperative arrange- Average density of population within 100 kilometers of the sea (people per square ments to achieve their goals. kilometer) Coastal population density in Africa/coastal population density in East Asia Source: Elbadawi and Soludo 1999. A Business Plan for Export Diversification H AVING POTENTIAL IS ONE THING. REALIZING IT IS ANOTHER. Realizing Africa’s export potential requires actions on several fronts—appropriate and stable real exchange rates and other poli- cies to foster openness and economywide competitiveness, complementary measures to strengthen the supply response and raise international com- petitiveness, and measures to widen economic space through open region- alism and multilateralism. These measures go well beyond trade, but trade policy is the focus here. Sustaining Competitive and Stable Real Exchange Rates Real exchange rates are central to the business plan for diversifying exports. International evidence suggests that the real exchange rate is even 219 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? more powerful for export growth than trade policy (Rodrik 1997; Helleiner forthcoming; Elbadawi 1998). Successful trade policy reforms have usually been accompanied by liberalized foreign exchange rates, drastically reducing real exchange rate overvaluations or parallel market premiums. Recently, however, some countries have seen a surge of speculative and short-term capital inflows, mainly dri- Chile’s model of real ven by high real interest rates. The outcome has been increased real exchange rate–led export exchangerate instability. promotion offers Africa will have to attract much higher private capital flows in the important lessons for future. Thus it cannot afford to reimpose sweeping capital account Africa restrictions and so miss out on tapping global capital markets to finance future investment. Maintaining exchange rate stability and competitiveness on the one hand, and creating a hospitable and attrac- tive environment for foreign capital on the other, promises to be one of the key challenges for export diversification and competitiveness. Malawi and Chile illustrate the challenges and options facing many African countries. Malawi’s real exchange rate turbulence is among the highest in Africa. Much of this instability can be attributed to fiscal crises and to pegging the exchange rate at levels that become unsus- tainable. Two structural elements make matters worse: the seasonality of the country’s exports (70 percent are tobacco, mostly exported by three companies) and the difficulty of predicting concessional donor flows (which account for half of foreign exchange receipts). Countries like Malawi could do several things to create more stable incentives for trade: implement a medium-term budget framework to reduce fiscal crises, adjust the nominal exchange rate more often to prevent massive fluctuations, foster competition in the foreign exchange market by eas- ing controls, and work toward diversifying exports, particularly by encouraging manufacturing exports. (World Bank 1999a). Chile’s recent experience suggests that economic competitiveness need not come at the cost of adequate integration with the global cap- ital market. The Chilean model of real exchange rate–led export pro- motion offers important lessons for Africa, especially for countries with more advanced financial and capital markets. Chile has indi- rectly influenced both the type and size of private capital inflows in the context of an essentially open capital account. Long-term capital was encouraged while short-term and speculative capital flows were discouraged, holding aggregate capital inflows closer to sustainable levels. 220 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION Despite high capital inflows in the 1990s, Chile did not experience major declines in competitiveness. And unlike many emerging markets, it managed to avoid devastating financial and currency crises. In addition to strong macroeconomic fundamentals, genuine central bank independence has been important for Chile’s success in managing capital flows. The Central Bank of Chile, which is responsible for exchange rate policy, has an explicit target for the current account: over the medium term it should be Africa has come a long in deficit by 3–4 percent of GDP. This approach has allowed Chile to main- way on trade reform—but tain a competitive real exchange rate that supports rapid growth and export more needs to be done diversification. It has also allowed Chile to avoid financial crisis despite the temptation of massive capital inflows (Williamson 1997). Making Trade Policy Work for Diversification There is actually a fair bit of consensus on what constitutes a reason- able trade strategy for countries of Africa. The consensus can be crudely expressed in terms of a number of do’s and don’ts: de-monopolize trade; streamline the import regime, reduce red tape and implement transpar- ent customs procedures; replace quantitative restrictions with tariffs; avoid extreme variation in tariff rates and excessively high rates of effec- tive protection; allow exporters duty-free access to imported inputs; refrain from large doses of anti-export bias; do not tax exports too highly. —Rodrik 1997, p. 2 How far have Africa’s trade reforms come? Measured against these cri- teria, quite a long way. Quantitative restrictions, once widespread, have been replaced by tariffs. These tariffs have been steadily lowered in most countries, and their dispersion reduced. By 1998 trade-weighted tariffs in Uganda averaged 10 percent, with the countries of the West African Economic and Monetary Union not far behind. In most countries foreign exchange regimes have been liberalized for current transactions. And there have been significant moves to rationalize exemptions in most countries. What remains as the unfinished agenda? Policies still discourage exports. African trade taxes and restrictions are still higher than in other developing regions, and antiexport bias is still consid- erable in most countries. Especially because of the small size of their economies and the importance of imported inputs, this has considerable impact. But countries typically depend on trade taxes for about one-third of government revenue, with half or more coming from tariffs on inter- 221 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? mediate and capital goods. For countries where tariff collection approaches the average statutory rate, reducing tariffs is likely to mean losing fiscal rev- enue—trade liberalization is unlikely to be self-financing because exports will not expand sufficiently in the short run to permit a large increase in imports. Thus efforts to reduce trade taxes cannot proceed independently of measures to strengthen other sources of fiscal revenues. Liberalization has been Liberalization is not locked in. Liberalization is not yet anchored in an ide- uneven across the ology, such as export promotion. This is because reforms have been region—country–based, spurred by adjustment programs negotiated with international financial and not always institutions rather than by voluntary multilateral negotiations under- compatible with regional pinned by strong national ownership. Donor-driven liberalization is sub- coordination ject to reversal—for example, in response to chronic fiscal and foreign exchange shocks. In addition, African tariffs are bound at high levels under the Uruguay Round. These features make private agents less certain of the credibility and sustainability of reforms. An emerging policy issue is there- fore how trade reform can be “locked in” for credibility (Gunning 1998). Reforms have been country-based, not regional. Perhaps for similar reasons, liberalization has been uneven across the region. Even within such sub- regional groups as the Southern Africa Development Community, wide variations in tariffs and other regulations make it hard to enlarge the eco- nomic space for private enterprise. Country-based reforms are therefore not always compatible with regional coordination. Compensatory mechanisms for exporters often do not work. Africa is rich in export processing zones, duty drawbacks, exemption schemes, and value added tax rebates, to compensate exporters for tariffs on inputs. But except in Mauritius, these have not worked well. In West and East Africa incentives often leak to nonexporters, while rebates to exporters arrive late or not at all. In addition, key services—such as customs—often operate inefficiently, tak- ing weeks to clear consignments and imposing additional costs on business. The global frontier is moving rapidly in such areas, with normal clear- ance times down to as little as 15 minutes in some industrial countries. In other regions where trade restrictions are no lower than in Africa, export processing zones are well established and appear to operate more effectively. One example is Central America, where customs clearance is far faster and service standards are higher. An important reason appears to be the strength of powerful exporters and their ability to hold govern- ments accountable for good services. Exporters are not yet a strong pres- sure group in most African countries. But governments will need to act as though they were if economies are to diversify. 222 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION Completing Africa’s trade agenda requires embedding second-genera- tion reforms in an overall export promotion strategy that includes widen- ing economic space and working within—and influencing—the evolving rules of the global trading system. Three measures are important: s Eliminate further antiexport bias. Because of fiscal constraints, this can- not be done by sharply cutting tariffs across the board. Thus there is no Attracting substantial alternative but to focus on getting compensatory mechanisms to work investment is the efficiently. Aggressive export promotion also requires attention to service fundamental challenge for standards in key areas, especially for activities requiring imported inputs. export promotion s Sequence further cuts in import tariffs and broaden the fiscal revenue base away from trade taxes. s Deepen regional integration, not only to enlarge economic space but also to help lock in reforms. For many countries policy reforms will continue to lack credibility without a lock-in mechanism. This is pos- sible through enhanced use of World Trade Organization bindings, by concluding reciprocal free trade agreements with countries outside Africa, and by harmonizing trade and investment policies along sub- regional lines. Introducing Complementary Measures beyond Trade Policy Trade reforms need to be accompanied by measures that lay a stable base for investment and production. These include effective and non- corrupt tax administration, honest customs administration, working commercial courts, reliable infrastructure (including air transport), and a working financial system (chapter 5). Failure to effect these measures has blunted the investment response to first-generation trade reforms in most African countries. Lowering costs and risks. Attracting substantial investment to the export sec- tor is the fundamental challenge for export promotion. But with Africa ranked among the world’s riskiest place to do business, even retaining domestic savings becomes a challenge. So, the first order of business is for African governments to provide a safe and profitable environment to con- vince their citizens to invest at home. Investment booms everywhere have been led by domestic capital, including capital repatriated from abroad. In 1990 flight capital accounted for almost 40 percent of private wealth in Africa, compared with just 6 percent in East Asia and 10 percent in Latin America (see table 1.3). Capital flight from Africa and other regions has been 223 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? caused by factors similar to those that discourage private investment: exchange rate overvaluation, a high-risk environment, and high external debt (Collier, Hoeffler, and Pattillo 1999). Foreign capital follows domestic capital. As noted, high costs for transaction-intensive activities, particularly in manufacturing, and high perceived risks have been among the main con- straints to investment and diversification (Collier and Gunning 1999). Business surveys confirm the high costs of operating in Africa. To some extent this reflects Africa’s economic sparseness and the distance of much of its production from the sea. But weak business services, including infra- structure and regulation, are also major impediments to growth in countries that have advanced on macroeconomic and structural reforms (box 7.5). Box 7.5 Why the Cost of Doing Business Is High in Africa Local transport. An efficient Nacala rail line and lent to 3 percent of gross sales or 28 percent of invest- port could save Malawi 3 percent of GDP. A survey in ment in plants and equipment, and bears a similar cost Uganda found that transport and other costs raised the from theft and security charges. Crime and violence cost of capital goods by 50 percent in 1997; it required raise costs in many countries: a study for South Africa 8 or 9 days for intermediate inputs to clear customs put the effect at 6 percent of GDP in 1996, compara- after a 30-day journey from Mombasa. Road transport ble to estimates for Latin America (Bourguignon may be twice as costly as in Asia, in some cases reflect- 1999). ing unofficial tolls. Delays at checkpoints in Southern Trade and tax policies. Despite reforms, tariffs in Africa often last as long as a day. most African countries are still higher than in more International transport. International transport and outward-oriented developing countries. And they insurance charges are higher than necessary for African embody a significant antiexport bias, both for primary countries because of restrictive agreements. Air transport products (where the sum of export taxes and import is particularly vital given Africa’s economic sparseness, tariffs can exceed 30 percent) and for manufactures the prevalence of landlocked countries, the high costs of (due to high taxes on intermediate inputs and capital road transport, and the promise of new high-value goods). Duty drawback mechanisms have proven inef- exports such as horticulture. Yet schedules are often fective except in a few countries, and value added tax inconvenient, and tariffs and handling charges can be rebates are often slow. The effect is a high tax on poten- twice those for comparable flights in other regions. tial exporters requiring imported inputs. Communications. International telephone charges Slow regional integration. Regional integration has and Internet connections are among the world’s most been slow to integrate markets and stimulate internal costly. Despite higher investment than in the past, trade. Some countries belong to more than one telecommunications reach only a tiny fraction of the regional association and are torn between conflicting population, and waiting times for connections are the obligations. longest of any region. Restrictions everywhere. In many countries restrictive Power outages , bribes, and violence. Ugandan firms regulations and practices, often aimed at generating lose an average of 91 days a year because of power out- rents for officials and favored groups, constrain business ages. In addition, the median firm pays bribes equiva- activity, affecting both agriculture and industry. 224 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION Even better-managed African countries tend to rank lower on inter- national risk ratings than their policies would warrant. Some countries, such as Mauritius and Uganda, have steadily improved their risk ratings. But others, including Kenya and Zimbabwe, have seen sharp declines in ratings, offsetting gains for the region as a whole. High perceived risks have several causes (box 7.6). Increasing consultations with business and labor. Any business plan requires Any business plan developing a supportive, mutually accountable relationship among busi- requires developing a ness, labor, and government. Strong business associations and labor supportive, mutually movements can help in this. Some dynamic relationships are starting to accountable relationship evolve in Africa (box 7.7). Much of East Asia’s success has been attributed among business, labor, to active interactions between the state and business. The state provided and government incentives and services, while businesses delivered performance. Close interaction ensures effective feedback and continuing pressure on both parties. A skilled and supportive workforce is also critical to diversification. Labor needs to be well educated about the pains and gains of reforms, and special efforts need to be made to carry labor unions along. Cooperation and higher productivity are more likely when a consultative process ensures the effective participation of labor in policy formulation, or at least its full understanding of the benefits. Box 7.6 Why Risks Are Perceived As Being High PERCEPTIONS OF RISK IN AFRICA INVOLVE FACTORS big cuts in financing can be triggered by a failure to beyond political and social stability. On the macro- meet governance standards or structural benchmarks economic side, many countries liberalized before con- (such as the privatization of a given company by a cer- taining fiscal deficits, and in some cases this placed tain date) rather than by a loss of macroeconomic greater stress on fiscal management. Many countries control. have been prone to policy reversals—increasingly asso- Surveys of firms also highlight the risks of policy ciated with elections—and to external shocks. And real reversals. In contrast to other regions, Africa’s trade exchange rates, real interest rates, growth rates, and fis- reforms have been formulated as part of structural cal revenues have been unstable through the period of adjustment programs negotiated with the World opening to markets (Guillamont and others 1999). Bank and the International Monetary Fund rather Aid dependence and high indebtedness also than as part of multilateral negotiations with trading increase uncertainty. Large debt service obligations partners. This has meant weaker commitment and make countries more vulnerable. This is accentuated higher perceived risk of reversal and incomplete by “stop-go” patterns of quick-disbursing aid, where reform. 225 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 7.7 Listening to Business POOR COMMUNICATIONS BETWEEN GOVERNMENT AND trarily. As a result members can concentrate on busi- business limit growth in many African countries. Laws, ness and not worry about others trying to curry special rules, and institutions are often inimical to private sec- favors from the government. tor interests. Governments that lack policy credibility Ghana’s consultative group was among the first. have less influence on economic behavior. And a cli- Early initiatives led to a private foundation as an mate of uncertainty and mutual suspicion generates lit- umbrella organization for business associations. tle private investment. There is a bias toward short Hostility and suspicion between government and busi- investment horizons, and economic activity is pushed ness have been reduced and communications into the informal sector. improved. Madagascar, Senegal, and Uganda have set Enterprise networks are growing in West, East, and up similar foundations. Cameroon, Côte d’Ivoire, and Southern Africa, providing a voice for emerging Senegal have set up competitiveness commissions, African businesses. Several African countries are adopt- with public and private representation. ing public-private consultative bodies to facilitate Consultative groups work best where there is communication, some formal, some informal. These urgency (a deadline) and a well-focused agenda. The entities enable participants to take joint responsibility focus should first be on policies and regulations that for policy choices, and the repetitive nature of the col- affect the entire private sector. The initial stages of this laboration constrains self-interested behavior. This type of consultation are fragile and require moral and also helps establish credibility—private participants financial support. Open and public consultations believe that cheating and reneging are less likely. increase public involvement and enhance the account- Politically, these groups serve as proto-democratic ability of group members. These organizations can also institutions, providing direct channels to government act as “agencies of restraint” on government behavior, for business, labor, and academia. As important, the forming lobbying organizations to ensure support for rules established by the councils cannot be altered arbi- pro-export policies. Widening the Economic Space: Regionalism and Multilateralism Despite past failures and the lackluster implementation of existing schemes, the case for Africa’s economic integration remains compelling. There appears to be a widely held view within Africa that African unity could help stem its political and economic marginalization, create new structures out of its colonial heritage, and protect its interests in interna- tional political and economic negotiations. These political motivations, supported by the realization that integrated markets are needed for small African economies to develop, explain the continued support for inte- gration in Africa. The promise of pan-Africanism has kept alive the ideals of the Lagos Plan of Action despite serious lapses in implementation.2 More recently, continental African integration agendas have reflected the desire for even more ambitious economic and political integration—well beyond the Lagos Plan of Action.3 226 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION Thus the relevant policy question for the next century should not be whether regional integration will be on Africa’s economic and political agenda. Rather, it should be how regionalism can help achieve Africa’s devel- opment goals in a globalized economy. The starting point would be to iden- tify the reasons for the region’s rather disappointing record on regionalism. Why has regionalism failed? Despite a multitude of subregional schemes and the strong political rhetoric supporting them, the results of integra- Despite a strong political tion remain modest. Progress on the 1991 Abuja Treaty—which envi- impetus for integration, sions an African economic community—has been mostly subregional. integration efforts have The main schemes are the Common Market for Eastern and Southern had modest results Africa and the Southern Africa Development Community in the east and south, the Economic Community of Central African States in the cen- ter, and the West African Economic and Monetary Union and the Economic Community of West African States in the west. These arrange- ments are sometimes overlapping, with countries subject to conflicting obligations. There have also been wide variations in the nature and speed of integration (box 7.8). Regional integration was conceived as an inward-looking instrument of industrial development—a way to increase intraregional trade and aggregate small national economies into regional markets. But this approach was stalled by several shortcomings, including institutional and political constraints (Oyejide, Elbadawi, and Yeo 1999; McCarthy 1999). First, though regional economies are larger than individual economies, the combined market was still not big enough to support industrial trans- formation through import substitution. Second, the inward-looking strategy of industrial substitution had two unintended consequences that undermined regional integration. At the macroeconomic level, policies resulted in overvalued currencies and for- eign exchange shortages, forcing a preference for trading partners who offered the best credit facilities. Given that most of these partners are from industrial countries, national industrialization strategies continued to support the hub-and-spoke pattern of trade (Kasekende, Ng’eno, and Lipumba 1999). Moreover, the trade protectionism associated with national industrial strategies led to powerful lobbies and “economic nationalism” that also undermined regional development. Third, the design and objectives of regional integration schemes have been driven by a preference for formal trade and factor market integration rather than by basic policy coordination and collaboration in regional pro- jects. This has resulted in rather ambitious models of regional integration. 227 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? But Africa’s unfavorable structural features—competitive primary pro- duction, small size, low per capita income, limited manufacturing capac- ity, weak financial sectors, poor transportation and communications infrastructure—make these ambitious models difficult to implement. Fourth, African integration schemes have suffered from implementa- tion lapses—including those due to weak governance. Some states could not cope with a loss of national sovereignty. Other factors include a lack Box 7.8 Progress and Challenges for Africa’s Subregional Groups THE COMMON MARKET FOR EASTERN AND SOUTHERN linguistic lines, ECOWAS has helped keep the com- Africa (COMESA) and the Southern African munity together. Under its leadership, peace has been Development Community (SADC) both underwent restored to Liberia and Sierra Leone. The ECOWAS significant institutional changes in the 1990s, with travelers check—a step toward West African monetary potential positive effects. South Africa joined the union—was launched in July 1999. SADC, and agreement was reached on a SADC free The UEMOA has enjoyed significant achieve- trade area following ratification of the SADC Trade ments. Building on a convertible common currency Protocol in 1998. Cooperation is under way on harmo- (the CFA franc) and the relatively free movement of nizing financial infrastructure (including payments sys- capital, a customs union—to be fully implemented in tems and accounting standards), standardizing and 2000—will help create a subregional economic space improving bank supervision, and improving manage- to attract investment. ment of water resources. In addition, South Africa— The UEMOA faces challenges, however. The first which accounts for more than 70 percent of Southern is how to cope with the pressures unleashed by har- Africa’s GDP—has signed a free trade agreement with monized markets, including increased population the European Union, with profound implications for movements, and revenue losses for some members, regional dynamics. Independent assessments indicate such as Burkina Faso. A second is not having the cen- that the agreement will be largely beneficial to other tral bureaucracy become bloated and ineffective—the SADC members. UEMOA includes a subregional court, subregional COMESA has recently been focusing on moving parliament, and other institutions, and the import toward a free trade area and supporting regional trade duty to finance this is to be doubled from 0.5 to 1.0 through a guarantee facility to help provide political percent. The third is to ensure sufficient flexibility to risk cover. The existence of overlapping and compet- prevent the currency from again becoming pegged at ing groups—COMESA and SADC—is a lingering an unsustainable level. problem in East and Southern Africa, especially given The key challenge in ECOWAS is to build bridges the similarity of their agendas. across the linguistic divide and fashion a viable subre- In the west, the Economic Community of West gional group. Ghana is surrounded by the UEMOA. African States (ECOWAS) is the umbrella group for Nigeria has two-thirds of the population and 55 per- 16 countries. Within it are 10 francophone countries cent of the GDP of ECOWAS countries. A regional that belong to the CFA zone and have another sub- integration arrangement in West Africa that leaves out group—the West African Economic and Monetary Nigeria would be like leaving South Africa out of the Union (UEMOA). Despite the sharp division along SADC. 228 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION of adequate technical and management expertise, concerns about losing trade tax revenues, and concerns about equitable growth and polarized industrial transformation within the subregion. The way forward. Given the political, institutional, and other problems that have hampered African integration, especially outside the CFA franc zone, alternative approaches are needed. One is to stress an outward ori- entation—or “open regionalism”—and a flexible design, based on coop- An outward-oriented eration between countries, to jointly implement specific projects. These integration strategy may can include transportation and communications infrastructure and be the best approach investment regulation as well as trade policies (Oyejide, Ndulu, and Greenaway 1999; chapter 5). Such an approach is not necessarily incompatible with deeper inte- gration. It can provide greater flexibility and serve as a building block for eventual market integration once key constraints to intraregional trade, investment, and labor movements have been eliminated. McCarthy (1999) argues that since the focus is on specific issues, these are depoliti- cized and present less of a challenge to existing power structures. In time a culture of regional cooperation will develop, laying the foundation for market integration and the acceptance of the loss of sovereignty. Indeed, since African economies are very small, both individually and as subgroups, the potential welfare gains from freer trade in Africa may be limited, at least in the short to medium term. This raises the issue of whether the principal focus of integration should be on promoting invest- ment rather than intraregional free trade. Creating an economic space where investors can produce for regional as well as global markets may provide small African economies with better growth opportunities than simply removing barriers to trade among themselves. The Cross-Border Initiative is an attempt to operationalize these principle (box 7.9). As an alternative to “integration by design,” where countries are bound by treaty obligations, the Cross-Border Initiative is an example of “integration by emergence.” Under the initiative faster reformers set the pace of integration within a framework of harmonized policies that accepts the principle of variable geometry (allowing dif- ferent groups of countries to proceed at different speeds). Within the framework of a road map for tariff reform—a set of common targets for harmonizing trade policies, but without a treaty—participating countries have made good, if uneven, progress in removing barriers to trade among themselves, while also lowering barriers to trade with third parties. 229 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 7.9 The Cross-Border Initiative’s “Integration by Emergence” UNDER THE CROSS-BORDER INITIATIVE (CBI), not be robust. And there may be complications aris- launched in 1993, 14 countries in East and Southern ing from overlapping bilateral deals and complex rules Africa and the Indian Ocean have made progress on of origin. “integration by emergence.” For example, the average CBI countries have recently moved toward a more trade openness rating of CBI countries—based on an balanced approach, paying more attention to facilitat- International Monetary Fund methodology, with 0 ing investment. For example, they have agreed to har- being most open and 10 being least—improved from monize tariffs, regulations, and investment promotion 8.3 in 1993–95 to 5.9 in 1998. (This compares with policies. This approach combines tariff reform to lower an average of 6.2 for all non-CBI African countries the antiexport bias of trade policies with specific mea- undergoing economic reform and 4.4 for the rest of sures to remove barriers to cross-border investment. the world excluding Africa.) Moreover, a few coun- Specific actions on investment facilitation will be taken tries—Uganda, Zambia—have made considerable within a flexible framework of harmonization of poli- progress toward openness levels (rating of 2) in line cies, but without formal treaty obligations. The poten- with those of global good practice economies tial benefits of this approach would derive from (Chile, Colombia, Singapore). Nevertheless, since attracting additional foreign investment—currently this approach relies exclusively on peer pressure and just 1.2 percent of GDP for participating countries— example, without any formal treaty-based enforce- to produce for the regional market as well as for global ment rules, the mechanism for locking in reforms may markets, which offer still larger welfare gains. Regional coordination offers African countries many benefits. It could provide a collective agency of restraint, helping to rationalize trade and investment policies and enhance their credibility. Beyond trade, regional cooperation could provide a multilateral lock-in mechanism for orches- trating convergence criteria on policies, regulations, and licensing. Recent proposals for trade areas with the European Union and the United States have been discussed in the context of the renegotiated Lomé Convention4 and the Africa Growth and Opportunity Act.5 Both arrangements call for broader, more reciprocal and participatory economic relationships. Africa stands to gain by developing a coordinated approach to the two initia- tives, especially since both entail eligibility criteria for participating African countries. There will continue to be debates on how deep and how fast integration should proceed in Africa and in what areas. For example, in the long run it may be desirable for African countries to adopt a common currency or regional currency zones. But it is not clear how quickly these measures should be or could be implemented. And given Africa’s marginalization in world trade, there might be a payoff if coun- tries coordinated in subregional groups in multilateral negotiations at the World Trade Organization. 230 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION Africa and the world trade system. The World Trade Organization offers a multilateral forum for Africa to take advantage of a rules-based system for trade and development. Most African countries have acceded to the World Trade Organization, and the millennium round negotiations (which started in November 1999) will offer opportunities—and enormous challenges. New structures of global governance can increase Africa’s market access and clarify its rights in the international trading framework. But they also World Trade Organization bring obligations, including giving up a degree of sovereignty over trade rule-making should be and investment. As a consequence of continued global liberalization, there made compatible with will also be a continuing erosion of the preferences enjoyed by African coun- the institutional, human tries. African countries will incur large financial costs as they create the insti- capital, and tutions and implement the myriad standards demanded by the multilateral infrastructure system. For some least developed countries, implementing World Trade investments required for Organization obligations would cost as much as an entire year’s develop- poor countries to benefit ment budget. Finger and Schuler (1999, p. 1) note that WTO obligations from the global trading reflect little awareness of development problems and little appreciation of system the capacities of the least developed countries. In most cases standards have been developed with little input from the least developed countries, under- mining their sense of ownership. More fundamentally, it is not clear that all of these standards are ideal for the least developed countries, and there is the ever-present danger that they will be used to protect markets. What does this mean for Africa? African countries will need to pay more attention to multilateral negotiations and try to influence the out- comes. But only Nigeria and South Africa have six or more representa- tives at the World Trade Organization in Geneva, while about 20 African member countries have no representatives (World Bank 1999b). Multi- lateral institutions can offer technical assistance, including through the Integrated Framework for Trade and Development in the Least Developed Countries.6 But a subregional pooling of expertise is essential: small, poor countries cannot go it alone. Africa can use the multilateral system to achieve clearly defined goals. It can use the opportunity to lock in its reforms and so increase investor confidence. At the same time, it is important that African countries par- ticipate in setting the global agenda. They can partner with others to negotiate for the dismantling of restrictive trade practices that inhibit export diversification in poor countries. Three areas are important: agri- culture (chapter 6), processed goods, and textiles and clothing. Free trade should work for the poor—as well as for the rich. The next opportunity must not be wasted. 231 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Managing the Business Plan: The Role of the State Any serious plan for export diversification should include a strategy for structural economic transformation. Managing this must be the responsi- bility of the state. Still, nearly all development experiences suggest that even if the state delivers—providing stable macroeconomic policy, strong The state should manage incentives, the rule of law, basic infrastructure, and the like—an adequate structural transformation and diversified export response may not come quickly. Why? Because of and help overcome market imperfections due to a variety of factors—such as incomplete or market imperfections absent information on consumer tastes and producer needs in overseas markets, on the appropriate technology for producing competitive goods, and on the requirements for penetrating these markets. The presence of market imperfections—and they abound in Africa— suggests an important role for the state in opening up the economy, either by directly subsidizing activities aimed at internalizing these externalities or by supporting creative institutional designs (such as exporter associa- tions) to achieve the same goals. Most African states lack the capacity to address these complex tasks. But such constraints will not just disappear. States have to develop the capacity to ease them as they pursue economic diversification. For exam- ple, a number of countries have offered matching grants to stimulate firms to acquire new technology and overcome critical thresholds, includ- ing information needed to comply with the standards of export markets. African firms cannot yet benefit from large agglomerations of skilled employees and the externalities these provide, so there is a case for subsi- dizing training. Another possible but debated area is whether to offer tax holidays. Many countries do so, competing with each other as well as with countries in other regions. But statutory tax rates in Africa are often high, and countries might benefit more from moving toward uniform and lower tax rates as tax bases are broadened. These and other selective mea- sures should be approached with caution and should be continuously monitored to assess their effectiveness—in particular, that they do not simply subsidize activities that firms would do anyway. In addition, the experiences of other countries offer a useful guide. Again, Chile provides a compelling case for a limited but important role for the state in export promotion. Chile and other Latin American coun- tries are more relevant than Asia for Africa, because their endowments also include a rich natural resource base. As Chile makes clear, this does not nec- essarily inhibit development. In particular, abundant natural resources did 232 REORIENTING TRADE AND PURSUING REGIONAL INTEGRATION not prevent industrialization—but industrialization was built on different foundations than in Asia. Chile’s export promotion polices offer three use- ful lessons for Africa. First, well-managed temporary subsidies could prime the growth of nontraditional exports. Second, foreign direct investment is responsive to activities that open up new export possibilities or introduce new technologies. Finally, a growth strategy spearheaded by a few niche exports can pay handsome dividends (Agosin 1997). Notes 1. Not all of these global standards—most of which are set by more devel- oped countries—are helpful for Africa. Indeed, achieving these standards can be extremely costly for African countries (Finger and Schuler 1999). Moreover, across-the-board implementation of these global standards could limit trade between developing countries. 2. The Lagos Plan of Action (1980) was a declaration by African heads of states creating four regional groups (including one for North Africa) that would merge into an African Economic Union by 2000. 3. The political will to unite Africa politically and economically was recently put to the test in a September 1999 summit of the Organization of African Unity held in Libya. Some 43 heads of state and government attended the summit to work on a proposal for an African Union, tantamount to the United States, the former Soviet Union, or the European Union. The African Union will have a federal supreme court, a central bank, a monetary fund, an investment bank, and an elected legislature. The union will protect the continent on land, sea, and air and use the congress to help settle disputes between member states. 4. The European Union and ministers of the 71 African, Caribbean, and Pacific countries recently concluded negotiations on a new 20-year partnership agreement that replaces the Lomé IV Convention (which expired on 29 February 2000). The new agreement is based on three pillars—a political dimension, a new trade regime, and development cooperation—and will be signed in Fiji in May 2000. The agreement signaled a radical departure in relations between the European Union and African, Caribbean, and Pacific countries, toward broader and more reciprocal economic relations. 5. In 1999 the U.S. Congress approved the Africa Growth and Opportunity Act. This initiative is aimed at encouraging U.S. trade and investment in Africa by removing quotas and barriers for imports from African countries and estab- lishing a U.S.-Africa free trade area. Political and economic conditions of the arrangement, however, suggest that some African countries may not be eligible to participate. 233 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? 6. In particular, Elbadawi and Helleiner (forthcoming, p. 20) urge the World Bank to, “assist African members of the WTO to take full advantage of their rights therein and to defend themselves against the assaults of more powerful members.” The Bank appears to be prepared to take on this role. In his address to the Seattle, Washington, meeting of the World Trade Organization in November 1999, World Bank President James Wolfensohn called for a “new trade agenda” that emphasizes the complementarities between World Trade Organization rule-making and the institutional, human capital, and infrastruc- ture investments needed for poor countries to benefit from the global trading system. 234 CHAPTER 8 Reducing Aid Dependence and Debt and Strengthening Partnerships I N AFRICA MORE THAN IN ANY OTHER REGION, ENGAGEMENT It is unlikely that aid or with the international community has come in the context of aid debt relief can be and debt. Africa enters the 21st century in the midst of intense effective without the debate on aid dependence and debt relief, two closely related other issues. Past borrowing, accumulated into a huge stock of debt, dis- courages private investment and circumscribes the effectiveness of current and future aid. Relief from debt service payments, by releasing budget resources for other uses, is equivalent to an inflow of resources. It is unlikely that aid or debt relief can be effective without the other. While debate continues on the best ways to deliver assistance and effect debt relief, there is little doubt that most African countries will continue to need significant aid to achieve the International Development Goals by 2015. As explained in chapter 1, simply preventing the number of poor people from increasing requires annual growth of 5 percent, while cutting the number of poor in half by 2015 will take growth of 7 percent or more. Especially given the decapitalization of Africa’s economies, sav- ings levels of 13 percent of GDP in the 1990s are far too low to support such growth rates. Reversing capital flight can bring additional resources and, especially when recovering from conflicts, some African economies have grown rapidly without high investment rates. But in the long run, even with East Asian efficiency levels, investment of about 30 percent of GDP will be needed. From worldwide experience, pri- vate capital inflows of more than 5 percent of GDP are unlikely to be feasi- ble or sustainable. Thus Africa faces a substantial savings gap. Aid cannot be phased out rapidly without high costs in terms of prolonged poverty. Falling aid, by requiring domestic savings to rise sharply, would prevent a rapid increase in consumption and slow the reduction in poverty (chapter 3). Africa also faces new challenges: macroeconomic and structural policies have 235 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? improved, but combating HIV/AIDS in a poor country will cost 1–2 per- cent of GDP (chapter 4). Aid is no longer business as usual. Political support for aid is waning. Since 1990 foreign assistance from the United States has fallen 20 per- cent (in real terms) despite a $100 billion cut (in real terms) in the U.S. defense budget (Summers 2000). Relative to donor GDP, net disburse- Aid is no longer business ments of official development assistance have dropped almost 30 percent as usual in real terms (O’Connell and Soludo forthcoming). The composition of aid flows is shifting from project assistance and structural adjustment loans toward humanitarian assistance and peacebuilding. And competi- tion for aid has intensified, partly because transition economies in Eastern Europe are now also competing for aid. Africa has been a loser in these trends. In the late 1980s it was envisaged that aid to Africa would grow in real terms. But net transfers per capita have fallen sharply, from $32 in 1990 to $19 in 1998 (figure 8.1). Why? One factor may be Africa’s lower strategic importance since the end of the Cold War—as evidenced by the very different global responses to con- flicts in Kosovo and Sierra Leone. Another is donor fatigue, partly Figure 8.1 Per Capita Transfers of Official Development Assistance to Africa, 1970–98 Current dollars 35 30 25 20 15 10 5 0 1970 1977 1984 1991 1998 Note: Excludes South Africa. Source: World Bank data. 236 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS explained by the belief that aid to Africa has done little to raise growth or reduce poverty. Indeed, despite large aid inflows (largely offset, however, by terms of trade losses; see chapter 1), Africa has grown slowly. Furthermore, aid—and the programs supported by aid—has not focused on the poor. A typical poor country receives net transfers of 9 percent of GDP through aid, but the poorest quintile of the population consumes only about 4 percent of GDP (chapter 2). Aid to Africa is shrinking Many of the factors undermining aid effectiveness are amenable to just as the features that reform. They include the support provided for “trusted allies” even have reduced its when they pursue poor development policies, donor preferences on aid effectiveness are objectives and delivery mechanisms, and the effects of the debt over- beginning to change hang. And donors and Africans alike are well aware of how a multi- plicity of aid processes and instruments have weakened accountability and ownership of development processes in Africa. The aid system is changing to address these problems. Paradoxically, however, aid to Africa is shrinking just as the features that have reduced its effectiveness are beginning to change. Africa and its development partners need to work together for a more effective developmental aid regime—one that deconcentrates delivery systems, empowers local communities, and puts Africans in charge of their development programming, with development partners recogniz- ing and supporting Africa’s leadership and responsibility. Intrusive micromanagement by a host of uncoordinated donors serves no one’s interests. Rather, it weakens African bureaucratic capacity and account- ability and undermines aid effectiveness. Aid must not be seen as a sub- stitute for the productive energies of Africans. While aid is moving in a new direction, its underlying principles—a comprehensive approach, strong ownership, selectivity, participation, partnership, decentralization—need further refinement. They need to become integrated with the sociopolitical processes of recipient countries. Work is needed to include aid flows in recipients’ national budgets and financial management processes, to coordinate donor and country pro- cedures, to support decentralization, and to enhance debt relief. In some cases donors will have to adjust their procedures. Aid also needs to support Africa’s changing needs. Mechanisms need to be developed for regional aid delivery. Programs should not be con- fined to national borders—they should support economic integration, encouraging policy coordination and funding public goods such as vac- cines, regional transportation and communications infrastructure, 237 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? financial infrastructure for trade, and centers for developing critical skills, including in agricultural research (chapter 6). Aid should also focus on combating public bads such as multicountry conflict, infec- tious disease transmission, and drug trafficking. Finally, even though aid cannot be phased out rapidly, an exit strategy is needed. This is not a matter of simply setting a timetable for phasing The Cold War left a out aid. Rather, it requires a serious strategic partnership that enables legacy of ineffective aid, Africa to outgrow aid dependence. Africans need to implement a “busi- partly in the form of loans ness plan” to reshape domestic regulations and institutions that deter that have accumulated domestic and foreign investment. For its part, the international commu- into large debt stocks nity should open markets unconditionally to African exports, including those based on agriculture and processed primary products. This would be the clearest demonstration of a genuine commitment to Africa’s long- term development—not dependency. The Context and Profile of Aid A ID HAS GONE TO AFRICA FOR MANY PURPOSES—ONLY ONE OF which is development. Donors use aid to advance their values, their commercial interests, their cultural aspirations, and their diplomatic and political objectives. Aid flows reflect political pressures from groups in donor countries and bureaucratic imperatives from within their aid agencies, including pressures to spend all available aid funds within set budget cycles. The end of the Cold War diminished but did not eliminate the importance of diplomatic objectives for some govern- ments. But the Cold War also left a legacy of ineffective aid, partly in the form of loans that have accumulated into large debt stocks. Aid has also served development goals. Development aid has always sought to raise living standards and reduce poverty in poor countries. But concepts of how aid can help achieve those goals have shifted almost decade by decade (box 8.1). African countries have been among the world’s largest recipients of aid. Many receive net official development assistance equal to 10 percent of their GNP (at market exchange rates). In the early 1980s the top five African aid recipients were Sudan, Tanzania, Kenya, Somalia, and Zaire (now the Democratic Republic of Congo). All but one of these countries (Tanzania) played key roles in the Cold War politics of the United States 238 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS Box 8.1 Changing Thinking on Aid SINCE THE END OF WORLD WAR II AID HAS SOUGHT izing trade, reducing price controls and subsidies, and to raise living standards and reduce poverty in poor shrinking the state’s role in the economy. countries. But concepts of how aid can achieve those In the 1990s development thinking shifted yet again. goals have shifted considerably. During the 1950s and Development specialists began asking why investment 1960s access to capital was considered crucial for invest- and growth remained low even after economic reforms. ment and growth in poor countries. But private inter- The answer they came up with was the quality of gover- national capital was limited and disinclined to locate in nance. Where public institutions are weak, incompetent, poor countries. Thus public international capital was or corrupt and where governments lack transparency or needed, preferably on highly concessional terms—that predictability, even the best reforms will not produce is, foreign aid. Aid needs were estimated on the basis of growth. A number of developed country governments a target growth rate, the incremental capital-output came to identify democracy with good governance—and ratio, and the funds available from domestic savings and so pushed for political reforms as part of development. international investment. Foreign exchange was seen as This phase coincided with the collapse of the socialist another constraint, so aid needs were also calculated bloc and the spread of democracy through much of the using balance of payments gaps. developing world. In the mid-1990s some development Ideas about aid shifted markedly in the 1970s. It experts and aid officials also began to argue that aid to came to be thought that growth did little to improve the civil society organizations—especially nongovernmental lot of the poor—and may even worsen relative and organizations working on human and civil rights—was absolute poverty. Thus aid was used more directly to important for development. help meet the basic needs of the poor, usually defined as Several other shifts in development thinking occurred basic health and education, rural roads, water, shelter, in the 1990s. There was a renewed emphasis on poverty sanitation, and tools for increasing employment and reduction as a key purpose of aid. And there was increas- income. Much of this aid was provided through com- ing emphasis on addressing transnational problems. The plex development projects and focused on rural areas, discourse on aid and development has begun to incor- on the assumption that most of the poor lived there. porate these concerns by emphasizing environmental In the 1970s surging oil prices and the rise and issues (such as global warming) and the spread of infec- subsequent collapse of prices for other primary prod- tious disease. What is often not recognized is that a con- ucts—combined with extensive commercial bor- cern with global problems implies a shift from promoting rowing—produced a severe debt and balance of growth and poverty reduction in the world’s poor coun- payments crisis in many African countries. As gov- tries toward addressing problems wherever they occur. ernments sought debt relief and additional assistance A final shift evident at the end of the 1990s involved to supplement their dwindling foreign exchange a growing emphasis on social justice and humanitarian earnings, donor governments and international insti- assistance. The emphasis on gender equality, the im- tutions began to condition their aid and debt relief portance of integrating ethnic minorities into society, on stabilization and economic adjustment programs. and efforts to help the disabled and street children and So, in the 1980s the focus of aid began to shift back to empower local communities arise as much from the to policies perceived to enhance growth—but unlike strongly held values of groups supporting these pro- in the 1960s, the state was often seen as an obstacle grams as from the contribution such activities can to growth. In Africa aid became an incentive and make to development. source of finance for adjusting exchange rates, reduc- ing fiscal deficits, reforming monetary policy, liberal- Source: Lancaster 1999. 239 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? and other major Western powers. By 1997 only one of these countries (Tanzania again) remained among the top five aid recipients; the others were Mozambique, Uganda, Madagascar, and Ethiopia. These latter countries had undertaken extensive political and economic reforms, and Ethiopia, Mozambique, and Uganda were recovering from long civil wars. Changes in the composition of the top recipients reflect the shift- Nongovernmental ing considerations of donors—geopolitical strategic alliance is no longer organizations have the dominant factor. become increasing Since independence France has been the largest source of aid to Africa, sources of aid to Africa primarily for its former colonies in West and Central Africa. Two multi- lateral institutions, the World Bank (through its soft loan window, the International Development Association) and the European Union, have periodically traded places as the second and third largest donors to Africa. Aid flows to Africa have become less concentrated. In 1981–82 the five largest bilateral and multilateral aid sources (France, the World Bank, the European Union, Germany, the United States) provided three-quar- ters of net aid flows. By 1997 the five largest sources (the World Bank, France, the European Union, Germany, Japan) provided just over half of net aid flows. Nongovernmental organizations (NGOs) headquartered in developed countries have become increasing sources of aid to Africa, using resources from the citizens of their countries as well as their official aid agencies. The purposes of aid are not broken down by region, but data pub- lished by the OECD’s Development Assistance Committee show the worldwide breakdown. In 1997 technical assistance accounted for one- quarter of bilateral assistance, and the amount from multilateral sources is believed to be substantial. At some $4 billion a year, technical assis- tance has been one of the largest components of official development assistance to Africa. Quick-disbursing aid in support of economic reforms has averaged $3.1 billion a year excluding debt relief (World Bank 1998). The remaining aid has funded investment projects and other activities. Aid to Africa is not only to governments. NGOs (indigenous and for- eign) have proliferated in number and activities, and many donors chan- nel their aid through them. In 1997 donors channeled 2 percent of their worldwide aid—nearly $1 billion—through NGOs. (These data do not include private funds raised and spent by NGOs). It would be surprising if this percentage were not higher in Africa given the growing reliance by the United States and other major aid donors on NGOs to implement 240 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS their programs, especially for relief and reconstruction. The United States estimates that more than one-third of its development assistance world- wide is channeled through NGOs. Influences on and Outcomes of Aid Despite criticisms, aid has had many successes D ESPITE CRITICISMS, AID HAS HAD MANY SUCCESSES IN AFRICA— in Africa controlling river blindness in West Africa, expanding family planning in Kenya and elsewhere, developing and disseminat- ing better varieties of maize in Kenya and Zimbabwe and of rice in West Africa, developing and spreading oral rehydration treatment. These and other achievements have improved the lives of many Africans. Even in difficult environments, aid has funded many productive investment pro- jects—roads, ports, public utilities and communication facilities, vacci- nation programs, the expansion of schools and health clinics. Without increased balance of payments support in the 1980s, it is hard to imagine how Africa would have coped with huge terms of trade losses. In postwar countries such as Mozambique, generous aid has underpinned political reconciliation (chapter 2). Aid has also helped sustain essential reforms, including trade liberalization, that have adverse short-run effects on fiscal revenues. And donors, including international financial institu- tions, have been crucial for building capacity in certain institutions, notably central banks and ministries of finance. Yet the perception of a disappointing record on growth and poverty reduction has prompted questions. Where did all the aid money go, and what has it bought? Why, despite high aid flows, was the income of the average African lower in 1997 than in 1970? Was this due only to exoge- nous factors, such as civil wars or terms of trade losses? A number of donors—the World Bank, U.S. Agency for International Development, U.K. Department for International Development, France, Sweden— assess the effectiveness of their aid by sector and region. These assessments often show less success in Africa in areas such as agricultural and rural development, development finance organizations, industrial projects, and especially projects (such as civil service reform) intended to strengthen African institutions. If aid had fully augmented national savings and high productivity was maintained, it would have raised per capita income in Zambia to levels comparable to those in OECD countries (Easterly 1997). 241 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Aid has clearly not been the only factor at work. But why are outcomes so far from the possibilities? Poor Selectivity The domestic environment is a critical determinant of aid effectiveness. To be most efficient in Some aspects of Africa’s geography that have been held to impede devel- reducing poverty, aid opment—its tropical location, variable (and in some cases low) rainfall, should be higher for small share of population near the coast (Bloom and Sachs 1998)—also countries with better reduce the returns to aid. Poorly managed, extensive natural resources can policies and lower also inhibit development, making governments less accountable to their incomes people and spurring civil conflicts as groups vie to control resources (chap- ter 2). But geography and resources are not destiny. The remarkable eco- nomic progress made by Botswana—located in the tropics, landlocked with a small population, and endowed with abundant mineral resources, but with a demonstrated record of using aid well—shows that these fac- tors are not insurmountable obstacles to development or to effective aid. Policies can be even more important than physical factors. Collier and Dollar (1999) show that aid is more effective when it goes to countries with sound economic management—yet this criterion has had little influence on allocations. To be most efficient in reducing poverty, aid should be higher for countries with better policies and lower incomes. Instead, aid flows surge to countries with poor policies (figure 8.2), then are phased out prematurely as policies improve, even in poor countries. This approach greatly lowers the efficiency of assistance and its potential for increasing growth and reducing poverty. Can aid encourage good policies? Much of the recent debate on aid effectiveness has been couched in polar terms: whether aid should be given before or after proven reforms. One World Bank study argues that there is little relationship between aid and policy reform (Burnside and Dollar 1997). Where there is a significant domestic constituency for eco- nomic reform or where donors can anticipate turning points in govern- ment policies, aid can encourage reform. But turning points are not always easy to recognize. Further, donors have undermined potential incentives by providing aid even where conditions for its effectiveness are unfavorable. When aid is given to serve the political, military, and commercial interests of donors (or for humanitarian purposes), there is less chance that it will spur sound development policies. 242 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS Figure 8.2 Actual Aid, Poverty-Reducing Aid, and Policy Ratings Percentage of GDP 7 6 Poverty-reducing aid 5 Donor programs are fragmented and rarely 4 negotiated with broad constituencies 3 2 Actual aid 1 0 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Policy rating Note: Policy ratings are based on the World Bank's Country Policy and Institutional Assessments, which rank country policies from 1 (bad) to 6 (good). Source: Collier and Dollar 1999. Aid Delivery Mechanisms and Their Institutional Impacts Donors loom large in Africa’s small, aid-dependent countries, shaping development policies and identifying, designing, implementing, and evaluating projects. Donor dominance has several implications for the environment in which aid is implemented. Weakened ownership of development policies and programs. A lot of aid comes with a lot of conditions attached. Even if donors’ desired policies are appropriate—and the record confirms that good policies are needed for growth and poverty reduction—they are rarely negotiated with broad local consultation and so are widely seen by Africans as imposed. This creates what has been dubbed “choiceless democracy.” Compounding the problem, aid programs are highly fragmented. In the health sector alone the typical aid-receiving African country might have 30–40 donor and NGO initiatives, all with different priorities and proce- dures. To circumvent the weaknesses of African governments, donors often create project implementation units to ensure adequate accountability and rapid implementation. But in many cases these arrangements make mat- 243 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? ters worse, preventing integrated management of public spending and siphoning off talented civil servants (through high salaries) to work as pro- ject managers or consultants for donors. The accounting standards and salary scales of the aid “economy” frag- ment budgets and programs and divert senior government officials from development challenges. Senior officials often spend more than half their Senior officials often time dealing with donors: seeking funds, negotiating, writing multiple spend more than half reports, and managing successive rounds of debt relief. their time dealing with Less accountability to Africans. Since at least the early 1990s, bilateral donors donors have offered support for democracy in Africa, while multilateral organizations have stressed broad participation in development pro- grams. Aid is not the cause of weak institutions in Africa; institutions are no stronger in countries, such as Nigeria, where aid flows have been smaller. But when institutions are already weak, aid can make recipient governments less accountable to their people. With donors providing much development funding, there is less incentive to strengthen domes- tic accountability and economic governance for the use of resources (chapters 1 and 2). And with donors micromanaging aid, in many coun- tries development activities are reduced to satisfying their demands. Capacity building—and destruction. Despite massive technical assistance, aid programs have probably weakened capacity in Africa. Technical assis- tance has displaced local expertise and drawn away civil servants to administer aid-funded programs—precisely the opposite of the capac- ity-building intentions of donors and recipients. In some countries tech- nical assistance accounts for 40 percent of aid, and much of the remaining aid is tied. But with large numbers of technical experts from donor countries in Africa—estimated by some at 100,000—a lot of technical assistance is also effectively tied, flowing back to donor coun- tries with less long-run impact on the development of recipients’ economies. Reduced sustainability and transparency. Aid and its accompanying reforms have not been well marketed. As a result recipient countries have a lim- ited understanding of what aid and its reforms intend to achieve and how they intend to achieve it. Aid agencies used to seek allies within African governments who were supportive of reforms (often ministers of finance and governors of central banks). But these allies were often limited in number and not always in office for the time needed to implement and consolidate reforms. Understanding the ends and means of aid-funded programs has therefore been a problem in Africa, especially where com- 244 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS plicated reforms or technical assistance programs have been urged on gov- ernments by bilateral and multilateral aid agencies. Stories of African officials not even having access to studies and data developed by multilateral institutions are common, so it is hardly sur- prising that such officials have invested little in the success of such pro- grams. Neither have parliaments been adequately involved in discussions on aid and its applications—even though these usually have sizable bud- Recipient countries have get impacts. But over the past 10 years considerable efforts have been a limited understanding made to strengthen consultative processes and to share data. (For exam- of what aid and its ple, the World Bank is making its databases available in electronic form.) reforms intend to achieve And there appears to be better understanding and support for reforms and how they intend to than 10 or 20 years ago. achieve it Funding difficulties and complexities have also weakened sustainabil- ity. Rather than fund balanced programs fully integrated with national budgets, donors have supported capital investments without adequate attention to the need for both counterpart funding and additional domes- tic resources to operate and maintain facilities. Without sufficient bud- get support, investments are likely to be ineffectively used and maintained—especially with debt service draining public budgets. Finally, the number and complexity of aid projects have sometimes over- whelmed African government agencies, leading to their collapse once aid ends. The integrated rural development projects of the 1970s and early 1980s required that multiple activities be managed and coordinated by a variety of government ministries—a challenge that would have taxed even the most efficient governments in developed countries. Excessive country focus. Africa is the world’s most fragmented region. It is demarcated by 165 borders into 48 countries—22 with less than 5 mil- lion people, 11 with less than 1 million. Small size imposes real con- straints on development, and without economic cooperation and integration Africa will fall further behind the global frontier (Jaycox 1992, p. 66). Yet with few exceptions, aid programs are confined to national eco- nomic spaces. African countries confront similar economic problems— and so need to support regional and international public goods (box 8.2). Regional public goods include regional infrastructure (roads, railways, ports, electric distribution and power-pooling systems), infectious disease control, centers of excellence for training, the underpinnings of regional markets and trade, and agricultural research and early warning systems for drought. A regional approach could lead to lower costs and faster 245 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? growth than individual country efforts, while also encouraging policy coordination. Excessive debt. High debt crowds out the effects of new aid in two ways (Elbadawi, Ndulu, and Ngung’u 1996). First, in stagnant economies rising debt service drains the fiscal resources needed for development. Even if total aid inflows exceed debt service outflows, most aid goes to projects: quick- High debt crowds out disbursing nonproject assistance is less than debt service payments. As a new aid result funds for recurrent spending shrink even as programs proliferate. Second, a large stock of debt may signal taxes on future success and raises questions about the credibility and sustainability of announced reforms. High and fixed debt service obligations increase countries’ leverage and raise uncertainty, especially if donor funding is decided on a short-term basis. In such circumstances investors wait until returns are high enough to cover their risk. Some have argued that debt relief encourages moral hazard. But sustaining large volumes of unserviceable debt does the same thing. It can pressure donors to continue funding countries despite weak development Box 8.2 Public Goods and Development Assistance TWO PROPERTIES DISTINGUISH PUBLIC GOODS FROM the different geographic extent of spillovers gives rise other goods. There is no easy way to extract payment to the principle of subsidiarity, in which cross-border from those who use them—so they are nonexcludable. issues are dealt with at the relevant level of decentral- And one user’s consumption does not diminish the ization through available institutions. benefits available to others—so their benefits are non- Some global public goods—limiting global warm- rivalrous. International public goods (or bads) gener- ing, curbing organized crime—are not especially rele- ate benefits (or harms) that spill over national borders, vant to Africa. But others—such as finding an effective either within a region or globally. “Public” does not vaccine against HIV/AIDS—are of special importance. necessarily imply that government must supply the The low income of many of those affected (or poten- good. Some (such as national defense) are indeed pro- tially infected) by HIV/AIDS has led to calls for donors vided by the government. But others may be offered to support private research by committing to purchase by the private sector or by both the private and public an effective vaccine, once developed, for distribution in sectors. Africa. Eliminating malaria is an example of a regional International public goods differ from one another good, as are transit corridors, immunization programs, along at least three dimensions—the geographic range and peacekeeping forces. Policy coordination that of benefit spillovers, the individual actions needed to widens the scope of markets and investments and supply the good, and the extent to which potential increases efficiency can also be considered a regional beneficiaries can be excluded. Each of these features public good. has implications for schemes to address undersupply— and hence, for development assistance. In particular, Source: Kanbur, Sandler, and Morrisson 1999. 246 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS policies and reduce recipients’ sense of accountability for outcomes. In such circumstances the impact of new aid—even if devoted to development— may not offset the negative effects of the debt stock. Forging a New Strategic Partnership Consensus is emerging that aid must change and H OW CAN AID BE MADE TO FOSTER DEVELOPMENT? SERIOUS that it must focus on rethinking is under way, and consensus is emerging that aid reducing poverty must change. The new approach must: s Clarify the purpose of aid in the post–Cold War era. s Deconcentrate aid flows to bring delivery closer to recipients. s Broaden aid beyond national boundaries to fund and encourage cross- border public goods. s Take decisive action on the lingering debt burden. There also seems to be broad consensus that the new approach to aid should be underpinned by four key principles: s Being more selective in choosing aid recipients. s Designing aid activities with the participation of potential beneficia- ries and implementing them in partnership with other development organizations. s Strengthening the capacity of recipients—whether central or local governments, private enterprises, or NGOs—charged with imple- menting programs. s Restructuring aid delivery mechanisms to make recipients responsible for development—while recognizing the interest of donors that resources be used effectively. What Purpose Should Aid Serve? With the international community’s endorsement of the International Development Goals for 2015, consensus seems to be emerging that aid should be targeted to poverty reduction. The World Bank and the International Monetary Fund (IMF) have found common ground, anchored on poverty reduction. In its Comprehensive Development 247 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Framework, the Bank restates poverty reduction as its central mission (box 8.3). Similarly, the IMF has changed the name of its Enhanced Structural Adjustment Facility to the Poverty Reduction and Growth Facility. Poverty reduction is not a new objective. But there are different emphases on how to achieve it. For some, the main avenue is through the resumption of growth—and this invokes a wide agenda. Others see poverty Delivery must bring reduction through the lens of programs targeted to the poor, including assistance closer to community development projects. As described in previous chapters, how- beneficiaries ever, Africa does not offer an either-or situation. Both channels are crucial for success. Deconcentrating Delivery To make aid more responsive to the needs of the poor, its delivery must be deconcentrated to local governments and communities (chapters 3 and Box 8.3 The Comprehensive Development Framework and Poverty Reduction Strategies INTRODUCED IN EARLY 1999 BY WORLD BANK Framework Paper and will form the basis for the IMF’s President James Wolfensohn, the Comprehensive Poverty Reduction and Growth Facility, which replaces Development Framework (CDF) has gained wide the Enhanced Structural Adjustment Facility. In low- acceptance within the development community as a income countries the PRSP will also provide the con- guide for thinking on long-term development and text for the World Bank’s Country Assistance Strategy. poverty alleviation. The CDF calls for country owner- The PRSP process is to be consistent with the princi- ship of a comprehensive, results-oriented development ples of the CDF. agenda integrating macroeconomic, structural, and While the principles underlying the CDF and PRSP social policies, developed with the broad participation are widely accepted, countries vary in their readiness to of civil society. This approach is to be supported by implement them. Experience in some of the countries donors on the basis of long-term, strategic, and coordi- where the CDF has been piloted illustrates some of the nated partnerships. tensions. Broadly based consultation can be take time In September 1999 the World Bank’s Development to develop. When faced by the tight deadlines that Committee and the International Monetary Fund’s often accompany donor processes, consultation and Interim Committee linked debt relief and assistance ownership may suffer. Another tension arises from the programs more generally to the preparation of poverty comprehensiveness of the approach. Despite the clear reduction strategies by low-income countries. These focus on poverty outcomes, it will be challenging to pri- strategies will be summarized in Poverty Reduction oritize interventions. Finally, it is easier to improve Strategy Papers (PRSPs) that will be presented to the country-driven donor coordination than to enhance Boards of the Bank and the IMF along with a staff selectivity among donors across activities in line with assessment of the PRSP. The PRSP replaces the Policy their comparative advantage. 248 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS 4). At the same time, these entities need to be strengthened to improve their capacity to manage development programs. Transparent aid delivery systems and monitoring are essential to enable local communities to take charge and to prevent local elites from captur- ing limited resources. This approach does not, however, reduce the need for a capable central government—because managing decen- tralization and targeting will be a major challenge. Assistance should be delivered more widely to Moving beyond Boundaries encourage cross-border activities and As noted, aid delivery mechanisms tend to focus on individual coordination countries. Although this approach has been convenient for individual recipients and donors, the 21st century will see increasing cross-bor- der activities in Africa and a growing need for policy coordination. Assistance should be delivered more widely to encourage this trend and to deliver regional public goods (see box 8.2), contain regional public “bads,” and strengthen regional approaches for acquiring knowledge. New technology holds huge potential for Africa, opening the way to a regionwide communications network (chapter 5). Regional capacity-building networks—such as the African Economic Research Consortium or the Council for the Development of Social Science Research in Africa—could offer models for extension to the sciences, engineering, and other critical areas. Just as current initiatives emphasize stakeholder participation in devising national programs, mechanisms need to be implemented to develop regional criteria on policies, programs, and aid delivery. Cross-border trade facilitation is an important regional public good. Cross-border transactions are still hampered by Africa’s weak institutions and inadequate support services. For example, it is diffi- cult for an African construction company to compete with firms from OECD countries for competitively bid contracts in neighboring countries because of the high costs of obtaining a performance bond—if such bonds are even available to the African firm. The over- head costs of initiatives to facilitate cross-border trade are prohibitive for small African countries. Donors are assessing proposals for regional approaches, such as an Africa Guarantee Facility modeled after examples in Eastern Europe. But current mechanisms for regional assistance are weak. 249 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Enhancing Debt Relief As noted, aid will not be effective unless debt is reduced to sustainable levels. The approach has proceeded in incremental steps, first with the Heavily Indebted Poor Countries (HIPC) initiative in 1996, then with the enhanced HIPC initiative in 1999 (box 8.4). The enhanced initiative is Aid will not be effective expected to provide deeper and faster relief and to help fight poverty. But unless debt is reduced to the effectiveness of the enhanced initiative rests on adequate funding. And sustainable levels critics still question the adequacy and speed of relief, particularly when debt service is seen from a fiscal perspective (rather than relative to export rev- enues) and against the scale of social needs (Center for International Development 1999). Box 8.4 The Enhanced Heavily Indebted Poor Countries Initiative AFTER EXTENSIVE CONSULTATIONS WITH CREDITOR and s Clearly monitoring the use of the resources freed debtor governments, NGOs, religious organizations, through debt relief—particularly how they are academics, and the general public, in September 1999 reflected in spending on key elements of the the World Bank and International Monetary Fund poverty reduction program, as well as the results of (IMF) announced a major expansion of the Heavily the program. Indebted Poor Countries (HIPC) initiative. The 1996 These changes are expected to double the amount of initiative will be modified in two main ways. First, it will relief provided under the HIPC initiative. For countries provide deeper, broader, and faster debt relief by: covered by the Special Program of Assistance to Africa, s Qualifying countries for relief when the ratio of their this will total about $20 billion in net present value terms. net present value of debt to exports reaches 150 per- This relief will be in addition to that provided by the Paris cent. Previously this ratio was 200–250 percent at Club of official creditors. Moreover, the G–7 countries the initiative’s completion point. plan to cancel the debt owed on official development s Commencing debt relief from the decision point, assistance loans by countries qualifying for HIPC relief. with irrevocable relief to be delivered at the comple- The enhanced HIPC initiative is expected to lower tion point. Previously, relief from multilateral debt debt service to the World Bank and IMF by about $1 service began only at the completion point. billion in 2000–02. Depending on donor contributions s Basing the length of the interim period on achieving to the HIPC Trust Fund, other multilateral institutions key development actions rather than on a prespeci- may also be able to increase debt relief. fied period. One of the basic principles of the enhanced initia- Second, the enhanced initiative will link debt relief tive is that the resources released should be in addition to poverty reduction programs by: to the resources—including aid—now being provided. s Grounding debt relief—and indeed, all assistance Because the enhanced initiative aims to expedite from the Bank and IMF—on poverty strategies to be poverty reduction, recipient countries are expected to developed by each country through a consultative adjust macroeconomic policies to accommodate the process and agreed in a new instrument, the Poverty resources freed by debt relief. Reduction Strategy Paper (see box 8.3). Source: World Bank 1999. 250 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS What Basis for Selectivity? With the Cold War over, there are no longer compelling political or diplomatic reasons to channel large amounts of aid to corrupt govern- ments (like that of Mobutu Sese Seko of the former Zaire). As a result donors have become more selective. Today almost 80 percent of quick- disbursing donor assistance to cofinance World Bank and IMF programs Greater transparency is in Africa goes to good performers (OED 1998). And since 1996 World needed in implementing Bank adjustment lending has become more selective. But weaknesses selectivity remain in monitoring outcomes—and must be addressed if aid is to move away from detailed conditionality (World Bank 1998). Aid donors and recipients may agree that selectivity is important for effective aid. But there is a long way to go before consensus is reached on how to implement such a strategy in Africa. The World Bank’s Country Policy and Institutional Assessments rate a wide range of areas, including poverty reduction efforts, budget management, social and environmen- tal policies, and structural and financial policies and institutions (chap- ter 1). But these assessments are confidential, so it is not clear how much consensus they reflect. If partnerships and transparency are to be institu- tionalized in the aid relationship, the Bank’s assessments will need to become more open to public scrutiny, which requires that they be dis- cussed with the recipient countries as well. This could encourage discus- sion between donors and recipients with the objective of reaching consensus on development priorities. At a more general level, some actions are supported by a strong con- sensus, and donors can justify including these among their selectivity cri- teria. Examples might include enhancing the rule of law, promoting sound public auditing, and improving the delivery of human develop- ment services when cost-effective solutions are known. But in some areas there is legitimate controversy, such as policy toward the capital account. In these areas there is an argument for moving cautiously and learning by doing, so donors might agree to support different policies in different countries. How to Implement Partnerships and Participation? Each recipient and donor will likely have different views on the best ways to reduce poverty. Thus partnerships and dialogue are needed to build consensus and support coherent programs. Donors, governments, 251 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? and NGOs must agree on the main goals of development, the barriers to their achievement, the priority actions for aid, and the strategies for applying aid (Lancaster 1999, p. 24). If goals and strategies were to derive from recipients’ political and economic processes—rather than from donor demands—it would mark a sea change in the aid relationship, opening the way to more effective use and higher capacity for absorption. Partnerships and How can these principles be implemented? dialogue are needed to There is a strong base on which to build. Aid agencies, including the build consensus and World Bank, have worked with a variety of entities in developing coun- support coherent tries, as well as with each other, to achieve development goals. In recent programs years civil society organizations and local governments have become involved in designing and implementing collaborative aid projects in Africa. The Bank’s Comprehensive Development Framework, now being implemented in a number of countries, places external aid agencies and internal organizations in a broader context based on national consensus on development strategies (see box 8.3). Donors will still need to decide how the concept of partnership trans- lates into decisions on aid allocations—including to countries with views on development that differ from theirs. Donors might also consider adopting a code of conduct for their dealings with new democracies to ensure that civil society (including the press) and its representative insti- tutions (particularly parliaments) are kept well informed and properly involved in aid programs and processes (chapter 2). Confronting Capacity Constraints Government capacity is key for development. Where governments are unable—or unwilling—to identify broad goals, adopt appropriate policies, implement processes and programs, and evaluate their opera- tions in a transparent, predictable, and accountable manner, they are unlikely to be able to manage their economies or their aid effectively. For technical and political reasons, many African governments lack capacity. Technical factors include inadequate expertise, poor professional development, weak evaluation and other systems, and disorderly and ineffective planning, budgeting, and programming. A number of initia- tives have been launched to address these shortcomings, including the African Capacity Building Foundation, the Partnership for Capacity Building, training and technical assistance programs, and civil service 252 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS reform programs. But a lot more of the large pool of technical assistance funding must be reallocated for Africa to develop, repatriate, and retain its own capacity. Political factors—which reduce the demand for and supply of capac- ity—are harder to address. And it is not clear how well the new approach to aid can work where governance is weak. But many of the principles, including decentralizing service delivery to clients, can support a civic Foreign technical counterweight to government and help create a constituency for more assistance must be cut effective and transparent management (chapter 2). and reallocated for Africa to develop, repatriate, Common Pooling: An Ideal Approach? and retain its own capacity At one end of the proposals for reforming aid is a common pool (box 8.5). Recipients would have complete ownership in the sense of having exclusive and final say on the development strategies that they followed. Donors would put unrestricted financing into a common pool to com- plement country resources, and the government would implement its strategies. Donors would not earmark funds for projects or programs, but would fund the common pool based on their assessment of the country’s strategies and implementation. Donor preferences might still shape development priorities, because countries would know what donors were willing to fund. But in an ideal form, a common pool would put an end to intrusive conditionality. Whether such an arrangement would satisfy donors is another matter. Donors need to respond to diverse constituencies and institutional requirements to show how—and how effectively—their funds are used. Steps toward Better Aid A number of African countries—Benin, Ghana, Tanzania, Uganda— have started to develop new aid relationships with donors, encouraging ownership and improving consultation and coordination. In addition, new instruments for delivering aid have been developed through the Special Program of Assistance (SPA), created in 1987 to increase quick- disbursing assistance in support of African reforms and coordinated by international financial institutions. One of the SPA’s early successes was to foster the untying of quick-disbursing assistance. Over time its agenda has broadened to include the development and monitoring of sector pro- grams, the implementation of guidance on public finance management, 253 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? and the specification of a fiscal framework for assessing aid flows and requirements. These efforts seek to bring aid flows—many of which do not flow through budget channels—into a unified system of public finan- cial management that integrates donor support with national budgets and increases coherence between donor and national procedures for manag- ing resources. Sector programs incorporate fragmented donor support into a com- prehensive sector strategy defined by the government, agreed by donors, Box 8.5 The Common Pool Approach to Donor Coordination and Ownership TODAY’S COUNTRY-FOCUSED SYSTEMS FOR DELIVERING of this or that donor’s funds to this or that item would aid must manage divergent views on development and not be permitted. poverty reduction while improving coordination, This is an idealized setting, and many pragmatic increasing ownership, and reducing aid dependence. and operational issues need to be settled. But the com- The development community’s response to this chal- mon pool approach builds on initiatives already under lenge has been partnerships. But partnerships are not way, and it provides a direction for new initiatives. a new idea for development—they have been sug- While increasing recipient ownership, it presents an gested since the late 1960s. institutional setting in which different views on devel- What is needed is a more radical approach in which opment—and therefore different donors—can coexist donors cede control to recipient governments, and better coordinate. Donors could keep or develop advancing their ideas on development through dia- a specialized focus. But this would not be in terms of logues with the country and with each other rather financing projects and programs in specific sectors. than through specific programs and projects. A “com- Rather, it would be in the realm of providing special- mon pool” approach to development assistance would ized evaluations of country performance and pro- build on current trends and experiences—but would grams, or providing specialized technical push them much further. A recipient country would assistance—but only if requested by the country create its development strategies, programs, and pro- within the framework of the common pool. jects, primarily in consultation with its people but also Aid recipients following the common pool approach in dialogue with donors. It would then present its might experience a short-term drop in development plans to donors, who would put unrestricted financ- assistance. But this drop could be planned for, the lower ing into a common pool. The common pool of devel- volumes would be used more effectively, and increased opment assistance, together with the government’s effectiveness would strengthen the argument for more resources, would then finance the overall develop- assistance over the medium term. For donors, the com- ment strategy. mon pool approach would greatly reduce the need for Donors’ financing would depend on their assess- staff to develop, monitor, and evaluate projects. ment of the country’s strategies and programs and on Although staff would still be needed to assess a coun- the country’s ability to implement them and monitor try’s program and to communicate with the govern- progress and spending. Donor views would be con- ment, the number of donor staff would likely decline. veyed to the country and to other donors in the dia- logue leading to financing decisions, but earmarking Source: Kanbur, Sandler, and Morrison 1999. 254 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS and based on a sectorwide analysis and a consistent medium-term bud- get framework. Sector programs link sector spending with the overall macroeconomic framework and so improve public spending manage- ment, while the medium-term framework allows for longer-run planning for the capital and recurrent costs of new programs. Commitments under sector programs have risen rapidly to almost half of quick-disbursing assistance. Commitments under Nevertheless, limited capacity for program implementation has slowed sector programs have disbursements under sector programs. Moreover, aid flows are rarely risen to almost half of pooled under these programs and subjected to common financial man- quick-disbursing agement (preferably aligned with national budget procedures). This is assistance partly because some donors face legal impediments to contributing to pooled funds. These impediments should be eased in cases where the financial management of pooled funds meets generally accepted stan- dards, even if these differ from donor requirements. Weak budget processes and financial management also impede aid pooling and other new approaches to aid. SPA guidance on public finance management is geared toward transforming the system for public expen- diture reviews from one in which donors—notably the World Bank—pro- vide assessments that are largely disconnected from the budget process, to a country-led approach in which the Bank and other donors advise and support the budget process and assess outcomes. This aim is to correct a number of problems: lack of ownership of public expenditure reviews by client countries, lack of integration with the budget cycle, recommenda- tions that cannot be implemented or translated into a plan of action, and a focus on budget allocations rather than on spending management and outcomes. A number of countries have started to implement the guidance, with some success. Another effort to develop new aid relationships is a pilot project in Burkina Faso (box 8.6) Away from Aid Dependence D EVELOPMENT AID IS NOT A WELFARE ENTITLEMENT AND IS NO substitute for people’s productive energies. Aid cannot be phased out rapidly, but plans should be made to free countries from high aid dependence. Such plans will not be credible, however, unless they are backed by comprehensive, realistic programs endorsed by 255 C A N A F R I C A C L A I M T H E 2 1 ST C E N T U R Y ? Box 8.6 Conditionality Revisited: A New Approach in Burkina Faso AT THE INITIATIVE OF THE EUROPEAN UNION, THE collected and analyzed between donor missions. The Special Program of Assistance to Africa (SPA) is pilot- pilot generated some important lessons. Outcome ing a new approach in Burkina Faso that aims to indicators shift attention to results—surveys found enhance donor coordination, foster country owner- that only a small part of budget allocations reached ship, and make aid flows less volatile. Burkina Faso had users, and the private sector complained of grave been receiving adjustment support since 1991, yet as problems with the judicial system and governance. A late as 1997 only a small group in the Ministry of results-based approach can also enhance ownership, Finance was familiar with the reforms supported— although broadly based stakeholder involvement is even though these often affected other ministries. not easy to achieve. Donor coordination confronted Disbursements were not conditioned on outcomes, so logistical difficulties but was appreciated by the there was little monitoring of actual results. Yet a large government. number of donors multiplied demands on government The pilot involves no actual assistance. Models for for a variety of data and sometimes imposed conflict- linking hypothetical disbursements to results will be ing conditions. simulated in 2000 and discussed with donors and the The government was asked to propose a matrix of government. outcome indicators for social sectors and perfor- mance indicators for budget management. Data were Source: Emblad and Hervio 2000. recipients and donors and anchored on an explicit ideology of making Africa economically competitive and reducing poverty. Even within the current framework there is room for strategic part- nerships that go beyond aid relationships. A one-size-fits-all approach will not work because African countries have very different starting points. Some have more poverty. Some have more human resources on which to build. Some—particularly those affected by conflict—have weaker insti- tutions and capacity for development. But whatever the country conditions, aid dependence cannot be reduced unless Africa begins to recover its lost share in world trade. Since the early 1970s Africa has lost trade equal to about 20 percent of GDP (chapter 1)—far more than it has received in aid. Part of this loss reflects declining terms of trade for many primary products. A larger part reflects the loss of traditional export shares and a failure to diversify exports into new, more dynamic sectors demanded by global markets. Trade policies are not the sole cause of Africa’s slow export growth and diversification: many other factors affect growth, investment, and productivity more broadly (chapters 1, 7). But reforms have stabilized and even slightly increased Africa’s world trade shares. In addition, exports have begun to diversify in a number of countries—particularly toward processed com- 256 REDUCING AID DEPENDENCE AND STRENGTHENING PARTNERSHIPS modities, including agricultural products. To help shift African countries away from aid dependence, development partners must do all they can to accelerate these developments. Protectionist policies in industrial countries have not been the main cause of Africa’s declining trade share. But many impediments to open market access affect sectors where Africa can probably realize compar- ative advantage (chapters 6, 7). These include barriers to processed and There are many areas temperate agricultural products and textiles and clothing, as well as outside aid for forging a large subsidies for agricultural products that compete with exports from development pact with Africa. Even moderately higher tariffs for, say, wood and leather prod- Africa ucts or textiles and clothing confer high protection on processing indus- tries in industrial countries. And the threat of antidumping restrictions and other measures imposed to slow “disruptive” import growth—such as the restraint on clothing exports from Kenya to the United States— increases risk to potential investors. Africa must also cope with new requirements, including sanitary and phytosanitary standards, that were less restrictive when other exporters were establishing their footholds. Thus there are many areas outside aid for forging a development pact with Africa. Emerging exporters should be granted full, tariff-free access to OECD markets for a wide range of exports, with exemptions from antidumping measures, countervailing duties, and other safeguards that create uncertainty about access. Such arrangements can be made com- patible with World Trade Organization requirements by embedding them in a framework of reciprocity, where African countries and their industrial trading partners gradually move toward free trade arrange- ments, with a longer transition in Africa. This principle is included in the successor to the Lomé Convention negotiated in Fiji in January 2000 and underlies the Africa Trade and Opportunity Act being discussed in the United States (chapter 7). Implementation of such proposals should not be piecemeal. Special efforts should be made to eliminate tariff peaks and high effective pro- tection to processing industries, extending tariff cuts to all stages of pro- duction. Rules of origin will need to be generous so that they do not impede economic integration in Africa. Industrial countries should ensure that information is easily available on technical regulations, prod- uct standards, and sanitary and phytosanitary standards. A fund could be created to help new exporters test products and meet standards, includ- ing through changes in processing and marketing. 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Helleiner, Professor Emeritus, Centre for International Studies, University of Toronto, This report provides in-depth analysis of the social and economic challenges facing Africa— and offers useful suggestions for addressing them. It is an extremely valuable book for those involved in charting the future development of the continent. Can Africa Claim the 21st Century? is a product of the growing collaboration among some of the main institutions involved in African development: the —Harris Mule, Former Permanent Secretary, Kenya Ministry of Planning, African Development Bank, African Economic Research Consortium, Global Coalition for Africa, United Nations Economic Commission for Africa, and Five major development institutions have joined World Bank. More than 50 scholars, policymakers, and development practi- their experience and expertise to assess Africa’s tioners—predominantly African—appraised the region’s development at the development agenda beyond the traditional start of the new century and articulated a road map for the future. clichés.The diagnosis of African economies is very clear and without indulgence toward African leaders and their development partners, bilateral Despite the enormous challenges facing a region caught in deep poverty, the or multilateral.This may become the bedside message of the report is eminently optimistic. Development in Africa is book of all stakeholders worldwide concerned possible—and the 21st century offers the region a chance to take its proper about Africa’s development—researchers, place on the world stage. Never before have the momentum and goodwill for African policymakers, donor agencies, and nongovernmental organizations. change been better. But the consolidation of the momentum requires Africans to take a more active, business-like approach to governance and economic —Kerfalla Yansane, management. The report provides a broad business plan that countries can African Economic Research Consortium, adapt—while also arguing for better, more effective partnerships between Board of Directors; Former Governor, Central Bank of Guinea, Africa and its development partners. E DE DE EL O P M E AIN V DEV NT IC EL FR AN F C O A RI UN PP UE AF EM D BANQ ENT NT FON ME K AF DS AN PE RI C FR A B AN P DEV NT IC EL O ELOPME AIN DE DEV African Development Bank African Economic Global Coalition United Nations The World Bank Research Consortium for Africa Economic Commission for Africa ISBN 0-8213-4495-1