Economic Management and Social Policy 185 CbeY SoNAL June 2001 Findings occasionally reports on development initiatives not assisted by the World Bank This article is one such effort. The views expressed here do not necessarily reflect the views of the World Bank orany of its membergovemments. 0 Raising Growth and Investment IV OANDa in Sub-Saharan Africa 2261 6 S UB-SAHARAN Africa's long-term son with other regions and have ( )s growth performance will declined over time. These trends need to improve significantly have reflected inefficiencies in re- for the region to visibly reduce pov- source allocation, poor delivery of erty and raise the standard of liv- public goods, notably health care ing to an acceptable level. Appro- and education; and the high risk priate actions will also be needed of doing business in many parts of to ensure that an adequate share the region. Moreover, although the of the growing income is devoted labor force has expanded rapidly, to reducing poverty - for example, its productivity has remained rela- by improving the delivery of social tively low because of generally poor services. In view of the low level of standards of health and education. per capita income in many sub- Saharan African countries, it is Improving the environment for difficult to see how redistribution investment alone could provide a lasting so- lution to the problem of poverty In the 1990s, the ratio of invest- unless the size of the pie increases ment to GDP in sub-Saharan Af- markedly. The evidence from em- rica hovered around 17 percent of pirical studies suggests, in fact, GDP, well below the ratios attained that the income of the poor in- inthe developing countries of Latin creases one for one with overall America (20-22 percent) and Asia growth and that economic growth (27-29 percent). The empirical evi- is one of the best ways to reduce dence and international compari- t ~ poverty. sons also suggest that the ratio of The key policy question for these private investment to GDP is low countries and their development in sub-Saharan Africa. This is wor- partners is how to spur economic risome for two reasons First, pri- xgrowth. Empirical studies suggest vate investment has been found to - ~ ~ that the contributions to growth of have a significantly stronger effect physical investment and total fac- on growth than government invest- phyicl ivetmet nd otl fc-ment - probably because it is tor productivity (defined as the rate m e ntrably some couns T A of growth of GDP that cannot be explained by capital formation or tries, less closely associated with labor force growth) in sub-Saharan corruption. Second, official devel- Africa have been low in compari- opment assistance, which provides the financing for a large share of public investment in Africa, is de- Organization for the Harmoniza- debt relief to as many as 30 coti clining. tion of Business Law in Africa - tries, mostly in sub-Saharan Perhaps the primary reasons for but much remains to be done. rica, while establishing a close li the low level of private investment Third, armed conflicts threaten between debt relief and pove in Sub-Saharan Africa is the per- the viability of growth-oriented reduction. ception, held by both domestic and programs. This is a difficult prob- foreign investors, that the risk-ad- lem, but the international commu- Raising productivity and growtl justed rate of return on capital is nity and African institutions like low. Three major sources of risk the Economic community of West The rates of return on both capi appear to be particularly relevant African States are now finding and labor and the overall prodi macroeconomic instability; inad- ways to support countries involved tivity of the sub-Saharan Afric equate legal systems - in particu- in peacekeeping operations (for ex- economies remain low because lar, the difficulty of enforcing con- ample, Nigeria in Sierra Leone) and a variety of distortions and ins tracts; and political risk, especially those that have had to cope with tutional deficiencies. The list armed conflicts. Reducing risk large numbers of refugees (such as problems is familiar: obstacles should greatly improve the attrac- Guinea). Organizations like the international trade; overvalued tiveness of holding assets in Sub- World Bank and the IMF are also change rates; poor infrastructu Saharan Africa and, therefore, helping those countries emerging bad governance and corruptic raise domestic investment and from armed conflicts to rebuild and insufficient competition a saving rates while reducing capi- their physical infrastructures and monopolistic structures in ma tal flight - a major problem in restore their ability to collect taxes sectors, notably agriculture. The many countries in the region. and deliver essential public ser- problems can be corrected if pt First, with respect to macroeco- vices. lic policies are set on the rig nomic instability, the countries of High tax rates are another rea- course, but change will be pol' sub-Saharan Africa have recently son for the low level of private in- cally difficult and will take time succeeded in cutting their budget vestment in sub-Saharan Africa. On the first issue, sub-Sahar deficits and reducing the rate of High tax and import duty rates Africa is less open to internatiot increase of the money supply and combined with pressures from spe- trade than other developing inflation. But arrears, both domes- cial interest groups have resulted gions. Several studies conclu tic and external, remain a serious in a vicious circle in which rising that trade liberalization shoL: problem in many of them. In re- exemptions erode the tax base improve the region's trade perfi cent years, events in Gabon and and, ultimately, lead policy-mak- mance significantly and thus sp Zimbabwe, in particular, have ers to further increase tax rates to the growth of productivity and ol shown how quickly monetary and avoid mounting budget deficits. put. Some African countries he fiscal control can be lost. These For this reason and also because made progress in liberalizing tra countries and their development they create microeconomic distor- over the past several years. F partners must therefore continue tions and provide fertile ground for example, the implementation to focus on macroeconomic stabil- corruption, tax exemptions should the common external tariff in t ity as a key feature in the design be sharply reduced as part of a West African Economic and Mc of programs. strategy to boost growth and in- etary Union will contribute r Second, inadequate legal sys- vestment. only to intraregional trade liber tems are a major problem. Private The debt overhang that many ization but also to a considera investment will not take off in a African countries have accumu- reduction and simplification oft country where investors and lend- lated discourages private invest- region's external tariff structu: ers lose their capital because a ment by reducing the expected af- Such progress must now dysfunctional court system fails to ter-tax rate of return on capital. strengthened and extended enforce contracts and property The World Bank and the IMF's en- other parts of sub-Saharan Afri( rights. Some progress is being hanced Heavily Indebted Poor Although trade liberalization made at the regional level -for Countries (HIPC) Initiative aims to the region is crucial, it is equa example, through the work of the provide faster, deeper, and broader important that African produce granted better access to the vestment in, and maintenance of, stances of fraud be investigated rkets of the advanced econo- infrastructure are related to policy: and, together with the World Bank, ~s. In particular, the advanced insufficient budgetary resources, has asked for external audits of )nomies should reduce tariffs at fraudulent diversion of public major public sector entities in stages of production, with a funds, and inefficiencies caused by countries where fraud, financial w to lowering the effective pro- corrupt management (for example, improprieties, or a lack of trans- tion on goods of actual or po- of ports) and cartels. parency was suspected. In a few tial interest to sub-Saharan Af- Many of the structural and bud- countries, the IMF has had to de- an countries, such as clothing, getary difficulties confronting the lay, interrupt, or refrain from ex- a, processed foods, and leather continent are associated with bad tending a program because a ma- ducts. governance. Corruption, in par- jor episode of corruption or fraud Vhile selected industries in sub- ticular, hinders growth and invest- was unresolved. -laran Africa may have benefited ment by raising transaction costs, m a protectionist trade policy, thereby reducing profitability, and Raising labor productivity !rall production and exports in by diverting public resources from region have often been hurt by their intended uses. Moreover, cor- The labor force has grown quickly ~rvalued exchange rates. One ruption and fraud feed on govern- in sub-Saharan Africa because of *tivation for such a policy is the ment policies that generate rents the rapidly increasing population. ,ire to provide cheap imported and allow a few members of soci- In parts of the region, however (in )ds to the urban elite. But the ety to acquire undeserved profits southern Africa, in particular), em- .ulting bias against the tradable by bribing government officials. For ployment growth has been hin- ds sector has been very costly this reason -as well as for rea- dered by labor market rigidities, :erms of lost output and employ- sons of efficiency - the IMF has including the excessively high .nt. consistently asked for the removal wages obtained by powerful labor Iortunately, policy in this area of import and export quotas, tax unions for unskilled workers. )lved in the right direction dur- exemptions, subsidies, and other Moreover, the growth of employ- the 1990s. The most spectacu- policies that grant privileges to ment and the labor force is likely example was the devaluation of special interest groups. The IMF to be seriously affected by the CFA franc in 1994, which, fol- has also sought to liberalize agri- sharp increase in the number of ring a lengthy period of stagna- cultural sectors throughout the deaths from HIV/AIDS. n in the CFA franc zone, pro- region - notably the cocoa sectors Recognizing that human capital ed a strong boost to growth, in- in C6te d'Ivoire and Ghana and the formation is an important determi- ;tment, and exports in that re- cotton sector in many West Afri- nant of growth, the IMF and the n. can countries -with a view to World Bank have stressed that the mnother factor that inhabits pri- raising efficiency and improving sub-Saharan African countries :e investment and growth in the distribution of income in favor need to increase the share of gov- j-Saharan Africa -by increas- of poor farmers. In addition, the ernment spending devoted to edu- the cost of investing in physi- IMF will continue to call for the end cation and health infrastructure capital - is the poor quality of of agricultural subsidies and pro- (including improved sanitation and rastructure, particularly in sec- tection in industrial countries, in supplied of drinking water). Spend- s like communications (ports, some cases to the detriment of Af- ing is not the whole story, however. ids, and railroads) and electric rican producers. There is statistical and anecdotal xver generation. The poor qual- Corruption also can lead to the evidence of a large gap between of the infrastructure imposes misappropriation of public funds budgetary appropriations and ef- avy costs on producers of trad- in violation of the law and budget fective improvements in health le goods, on top of the costs procedures, sometimes in conniv- care and education in sub-Sa- mming from the low population ance with officials in the spending haran Africa. The difficult task -asity and the fact that many Af- ministries or with potential taxpay- ahead is to ensure that outlays earmarked for health care and edu- an countries are landlocked. ers. In several African countries, e reason for the inadequate in- the IMF has required that in- cation are not diverted to other uses and that schools and hospi- What can be done? * Support regional integration tals in rural areas get their fair forts, that contribute to trade I share of public funds. In recognition of the limited eralization, strong macroe( progress achieved so far in reduc- nomic policies, and the build- Major risks ing poverty, particularly in sub- of institutions that promote gc Saharan Africa, the IMF has re- policies; Policies aimed at removing the ob- cently modified its concessional . Improve infrastructure, partic stacles to private investment and lending programs. The new Poverty larly ports and communicatio- raising productivity, along the Reduction and Growth Facility will to encourage trade and inve lines suggested in this article, continue to address the funda- ment; should allow sub-Saharan Africa to mental constraints on economic . Increasetheshareofgovernm make the most of its resources. growth, but programs under this spending directed to educati However, for several reasons, the facility will place greater empha- and health and improve the extent to which these policies will sis on poverty reduction and, livery of services in these are succeed in raising per capita in- hence, on adequate financing and lIvery ofsrvs in thes are *Intensify efforts to root out c come growth may be limited. First, delivery of social services, as well ruption; and there is the risk that the spread of as on governance issues. More- armed conflicts might jeopardize over, governments are increasingly precinve risk by i the ongoing economic restructur- taking the lead in developing ideas proving the quality and the ing and poverty alleviation efforts and plans for poverty reduction in tegrity of the legal system. in a number of countries. The con- the framework of a broad dialogue tinuation or escalation of conflicts with civil society. In many of these areas, the Wo will damage investor confidence Raising growth and reducing Bank will have a larger role to pl and trigger capital flight and thus poverty will be a difficult task, but But the IMF can help through pose a major risk to the achieve- one that can be accomplished, pro- financial programs, policy advi ment of rapid and sustained vided that policy-makers in Africa and technical assistance. It c growth. and the international community also contribute by helping cot Second, the spread of HIV and are ready to do their part. As part tries that have been ravaged AIDS, particularly in southern Af- of that effort, the IMF will continue armed conflicts, taking an act rica, could have a devastating im- to encourage countries to part in extending and deepen pact on income and welfare. It is . Pursue strong macroeconomic debt reduction, and pressing t clear from several case studies that policies: no one benefits from advanced countries to open th there will be considerable demo- high inflation, particularly not borders to the exports of sub-s graphic, macroeconomic, and the poor; large budget deficits haran Africa. health care repercussions, includ- crowd out private investment ing a significant deterioration in and discourage exports; and ar- per capita income growth over the rears deter investors; This paper, written by Erne medium term. * Improve economic efficiency by Herndndez-Catd is based on liberalizing trade and maintain- author's "Raising Growth and ing competitive exchange rates, vestment in Sub-Saharan Afni removing the state from direct What Can Be Done?" (IMF Pol involvement in the production of Discussion Paper 00/4), which c marketable goods and services, tains extensive references to and enhancing domestic compe- empirical literature. tition in all sectors, especially agriculture;