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Note: This document is from the archive of the Africa Policy E-Journal, published by the Africa Policy Information Center (APIC) from 1995 to 2001 and by Africa Action from 2001 to 2003. APIC was merged into Africa Action in 2001. Please note that many outdated links in this archived document may not work.


Africa: Economic Report on Africa, 2 Africa: Economic Report on Africa, 2
Date distributed (ymd): 020807
Document reposted by Africa Action

Africa Policy Electronic Distribution List: an information service provided by AFRICA ACTION (incorporating the Africa Policy Information Center, The Africa Fund, and the American Committee on Africa). Find more information for action for Africa at http://www.africaaction.org

+++++++++++++++++++++Document Profile+++++++++++++++++++++

Region: Continent-Wide
Issue Areas: +economy/development+

SUMMARY CONTENTS:

This is the second part of a two-part posting containing the overview section from the annual Economic Report on Africa 2002, released by the Economic Commission on Africa last month. For the full report, see http://www.uneca.org/era2002

+++++++++++++++++end profile++++++++++++++++++++++++++++++

[continued from part 1]

Lessons from East Africa - sound economic management is key to poverty reduction. In East Africa two countries provide an illustrative comparison-Ethiopia, credited with being a well-managed reformer, and Kenya, mired in pre-election uncertainty, locked out of multilateral lending since 2000, and registering only anaemic economic growth over the past five years.

Since 1992 the Ethiopian government has focused on reorienting the economy through market reforms, including structural adjustment. It has cut tariffs, relaxed quota constraints, simplified licensing procedures, eased foreign exchange controls, begun privatization, authorized private banks, decontrolled interest rates, introduced interbank money and foreign exchange markets, and discontinued compulsory cooperative membership and grain delivery. The government has also adopted agriculture-led industrialization as a central plank of its development programme. The strategy focuses on promoting productivity growth on small farms, primarily through an extensive extension programme and labourintensive industrialization. These reforms, combined with peace and favourable weather conditions for most of the past decade, produced good economic outcomes.

In 1992-2001 real GDP growth averaged 6% a year. Exports grew by about 5% a year, though there was considerable volatility. Inflation averaged about 4% a year. And by 2000/ 01 investment had risen to 16% of GDP. These outcomes reflect big improvements over 1975-91, suggesting that the policy stance has helped to strengthen economic performance. And the positive trends are expected to continue, with GDP growth of 8.7% in 2000/ 01 and 7.0% in 2001/ 02.

Despite the good news on the macroeconomic front, uncertainties remain that may hurt private sector operations and thus economic performance. One issue is contraband trade, which the business community argues has undercut legal operators through cheap imports, limiting their capacity to grow and even endangering their survival. Developments in the financial sector-particularly the anti-corruption campaign, which has affected the country's largest bank, and the withdrawal of some foreign participants-may also have created uncertainty, eroding private sector confidence. These developments appear to have reduced the confidence of bank officials in making business decisions, curtailing credit to the private sector. It is still too early, however, to quantify the effect of these factors on the country's economic outlook.

On the social front, Ethiopia's relatively strong economic growth supported gains in the past decade. The growth reversed the secular decline in per capita income, and the national poverty rate dropped significantly. Per capita consumption spending rose in both urban and rural areas. Moreover, net school enrolment ratios moved up, and both child mortality and malnutrition rates declined. Still, Ethiopia remains one of the world's poorest countries. The country needs to raise productivity much further and attain significant structural transformation. Effective institutional reform with improved governance and a better civil service will be key in achieving these objectives.

For Kenya the main impediment to development is poor economic governance. Weak infrastructure, widespread corruption, escalating insecurity, poorly managed public resources, and the public sector's inability to deliver services efficiently have undermined development. These governance problems have hurt private sector activities, as shown by the decline in investment. Gross fixed capital formation fell from 21% of GDP in 1995 to 15% in 1999.

Reflecting these circumstances, recent economic trends in Kenya have been disappointing. GDP growth, declining since the mid-1990s, has fallen substantially below the population growth rate, estimated at 2.4%. In 2000 real economic growth turned negative, dropping to -0.3%-its lowest level since independence-from 1.4% in 1999 and 1.8% in 1998. These rates are far below government targets of 2.7% for 2000/ 01, 3.5% for 2001/ 02, and 5.0% for 2002/ 03. Agriculture, which traditionally accounts for the largest share of GDP, shrank by 2.4% in 2000, while real manufacturing output fell by 1.5%. The balance of payments worsened, with current account and trade deficits increasing.

Deteriorating economic and social conditions are also reflected in other key measures. Poverty has increased, and income inequality and social indicators show worrisome trends. In 2001 the number of Kenyans living below the poverty line increased to an estimated 15 million. More than three-quarters of rural and urban poor cannot afford private health care and so depend on public health facilities. Yet nearly three-fifths of the poor do not even seek public health care because drugs are unavailable. Education indicators are also weak for the poor: 13% of the urban poor and 29% of the rural poor have never attended school-and education's high cost is cited as the main reason. Thus the country's most crucial challenge is reviving economic growth and reducing poverty.

To meet this challenge, the government needs to successfully restructure the public sector, reform the management of public spending, strengthen public sector accountability, and combat corruption. It also needs to take steps for the resumption of multilateral lending, which will require passage of a constitutional amendment to re-establish the Kenya Anti-Corruption Authority and an economic crime bill to create a code of conduct for public officials. Since parliament has rejected these bills many times, the prospects for their passage remain slim before the elections that have to be held before January 2003.

Lessons from West Africa - political stability and credible reforms enhance opportunities for integration. In West Africa, compare Guinea with Nigeria. Though both are richly endowed with natural resources, they face different challenges.

Guinea is making tremendous progress in moving from a command to a market economy, though it has been a difficult road. Major reforms undertaken since the political transition from a socialist regime indicate a political commitment to rehabilitating the economy and fighting poverty. Macroeconomic reforms focus on improving the public sector, liberalizing the exchange rate regime, deregulating prices and interest rates, restructuring the banking sector, monitoring public spending, and strengthening national capacities to manage a market economy-all while emphasizing a participatory approach to development. Though results are not uniform, overall progress has been good.

The Guinean government has also embarked on ambitious reforms in the mining sector, which dominates the country's economic activity and provides much of the employment. The reforms are aimed at improving the sector's legal and regulatory environment and restoring its competitiveness. In addition, the state has initiated a privatization programme to reduce its involvement in mining and encourage private sector prospecting in new regions. These programmes are expected to significantly expand production and create links between mining and other sectors.

To complement these reforms, the government is undertaking massive investments in transport, energy, and telecommunications. It has also introduced a wide-ranging privatization programme, focusing on energy and telecommunications, to encourage private sector participation, especially in building infrastructure. These efforts will help to increase use of the country's largely unexploited mineral resources, bolster its position as an important mineral exporter, and accelerate its economic recovery and integration with the global economy. Moreover, the cessation of cross-border conflicts in the subregion provides an opportunity to increase cross-border trade with Guinea's partners in the Economic Community of West African States (ECOWAS).

Meanwhile, Nigeria is struggling to deliver a "democracy dividend", expected to include faster economic growth and higher standards of living. GDP growth in 2000 and 2001, though higher (at 3.8% and 4.0%) than in 1999, was still too low to bring about an appreciable increase in per capita incomes because of the high population growth (2.9% a year). Economic growth is also insufficient to absorb the 3.5 million secondary school and university graduates joining the labour force every year. So unemployment is increasing, especially among educated youth, and living standards are declining.

The weak growth has made it difficult for Nigeria to meet its external obligations. The country has failed to meet its 2002 debt servicing requirement of $3.4 billion and has met few of the targets for fiscal consolidation, lower inflation, economic liberalization, and privatization required by the International Monetary Fund. Despite these challenges, the long-term outlook (over the next 5-10 years) remains cautiously positive. Foreign investment is picking up, for example. In February 2002 Shell announced a $7.5 billion project that will increase oil production in the country by 1.5 million barrels a day.

The optimism in Nigeria's long-term economic outlook stems from two major factors: abundant growth reserves in the form of unexploited natural and human resources, and underused industrial capacity. But Nigeria's recent economic history suggests that the country has rarely committed to the right policy mix to translate its formidable potential into economic performance. Nigeria suffered under the previous military regimes from substantial leakage of public revenue and dissipation of oil export earnings through mismanagement and political patronage and corruption fuelled by ethnic divisions.

Nigeria's ability to sustain economic growth has also been undermined by its overreliance on oil for both foreign exchange and public revenue. That overreliance has heightened the economy's susceptibility to the vagaries of oil prices.

To ensure sustainable growth and development of the economy, the Nigerian government will need to persevere in maintaining political stability-by improving governance and by providing a durable solution to the rampant ethnic and religious conflicts in the country. It will also need to address the fundamentals underlying its fiscal operations, particularly by building into the federal revenue sharing formula new mechanisms for smoothing out national current spending from oil windfalls. And it will need to commit resources to expanding economic opportunities for Nigerians by opening the economy to international trade and investing in economic diversification and human capital development.

Lessons from North Africa - integration into global markets reduces economic vulnerability and creates new opportunities. The one North African country featured in the report, Morocco, experienced impressive GDP growth in 2001-6.5%, compared with a meagre 0.9% in 2000. But this growth resulted less from the structural adjustments and policy improvements adopted by the government than from the strong agricultural performance, which benefited from particularly favourable weather in 2001. Fully realizing the danger of the country's heavy reliance on agriculture, which has repeatedly proved vulnerable to weather conditions in recent years, the government is taking steps to diversify the economy.

The Moroccan government is also committed to promoting greater integration into global markets, a commitment reflected in policies to attract foreign direct investment from beyond the Middle East and North Africa. These include implementing a transparent privatization programme, removing tariff barriers, reforming financial sector regulations, and strengthening stock exchange operations. The government has also intensified efforts to improve domestic competition, expand rural infrastructure, and reform agriculture-all with the aim of ensuring a more equitable distribution of the gains from trade. Moreover, several improvements have been made in monetary and financial sector policies. The Central Bank has established credibility in maintaining price stability and taken steps to strengthen financial sector supervision and regulation, helping to maintain a healthy banking sector.

Morocco's generally sound macroeconomic environment supports economic diversification and global integration. But the growing budget deficit is emerging as a major threat to reform. Indeed, the deficit remains within an acceptable range only after privatization receipts are taken into account. Once all assets are sold, the government faces a real danger of having to fall back on building up arrears to domestic suppliers and increasing public debt. These are issues that need to be addressed. Success in diversifying the economy away from agriculture and promoting a non-agricultural export sector may also require adopting a flexible exchange rate, a policy advocated by interest groups in tourism and manufacturing. Overall, however, Morocco appears well placed to gain from greater integration into global markets.

The need to track performance across the board

A key part of fostering economic well-being in African countries is having a clear idea of how individual countries are performing. That, indeed, is the main motive for producing the Economic Report on Africa.

This year's report shows general improvements in the Expanded Economic Policy Stance Index, which combines quantitative elements of fiscal, monetary, and exchange rate policies with the results of the Country Sustainability Assessment Survey. Those qualitative assessments take into account judicial independence, respect for property rights, the effectiveness of regulatory institutions, and policies to reduce poverty among women. Completed for 23 countries, the index for 2001 shows that 10 have scores rated as good, up from 7 the year before. Nine were rated fair, and 4 poor. South Africa had the top score, inching out Botswana. And Ethiopia moved from fair to good.

In other publications the Economic Commission for Africa will be reporting on country performance in areas important to economic and social development. The Sustainable Development Indicators, improving on previous work for the Economic Sustainability Index, capture country achievements in economic transformation, institutional development, and environmental conservation (see the forthcoming report, Harnessing Technologies for Sustainable Development). On overall sustainability, Mauritius, South Africa, and Botswana rank at the top. But they do less well on environmental sustainability. Of 38 countries, Mauritius is among the bottom three, Botswana is 33rd, and South Africa 17th.

The Africa Regional Integration Indicators, just developed by the Economic Commission for Africa, bring together different facets of integration to show how well-or poorly-countries are placed to benefit from external markets. The indicators reveal that Africa's integration has been slow and uneven (see the forthcoming report, Assessing Regional Integration in Africa). The average African country conducts only 8% of its trade with other African countries-and 92% with the rest of the world.

The Governance Indicators, also just developed, capture three broad elements: political representation, institutional capacity, and economic management and corporate governance (see the forthcoming Africa Governance Report). The indicators are intended to help in monitoring efforts to create and sustain capable states-and to promote broader understanding of what constitutes such states. They should also aid in identifying gaps in institutional capacity.

The way forward-to mutual accountability

Another key part of fostering economic well-being in African countries is having credible commitment mechanisms to reduce the risk of policy reversals and implementation failures. A proposal for an African mechanism was adopted by the Heads of State and Government Implementation Committee of the New Partnership for African Development (NEPAD) in Abuja in March 2002. Following in the spirit of the NEPAD, the proposed African Peer Review (APR) mechanism will build on the concepts of African ownership and mutual accountability.

The APR mechanism will strengthen African ownership by allowing credible assessments of economic and corporate governance in African countries by Africans. Moreover, it will contribute to accountability, demonstrating to African citizens and the international community that African countries have the political will and commitment to conduct selfmonitoring and to take corrective action where needed. And it will promote development by creating systems of good economic and corporate
governance-encouraging private investment and enhanced aid flows and thus stimulating growth and poverty reduction. Ideally, the APR process will lead to a convergence of interests for African countries and their development partners.

The APR mechanism also offers the potential to transform African countries' relationships with external partners. By providing a means for assessing progress towards mutually agreed performance targets and standards for both donors and recipients, it will move away from the old model of donor-imposed conditionalities. Mutual accountability is a core element of the new development paradigm endorsed by the NEPAD. And it is a critical part of Africans taking responsibility for the continent's destiny while closing the development gap that has opened over centuries of unequal relations.

The African Peer Review mechanism will not only support mutual accountability. It will also reduce the transaction costs associated with aid recipients' need to negotiate separately with different donors supporting the same project and to account to each of them in turn. It will help eliminate or reduce the tying of aid. And it will help create an environment conducive to greater and more predictable long-term flows of resources.

To be credible and effective, the new peer review mechanism-indeed, the entire set of activities being launched under the New Partnership for African Development-needs to be firmly anchored in rigorous monitoring and evaluation of performance. The Economic Report on Africa-with its analysis of trends and prospects and its in-depth country studies-provides some of the technical and analytical underpinnings for those efforts.


This material is being reposted for wider distribution by Africa Action (incorporating the Africa Policy Information Center, The Africa Fund, and the American Committee on Africa). Africa Action's information services provide accessible information and analysis in order to promote U.S. and international policies toward Africa that advance economic, political and social justice and the full spectrum of human rights.

URL for this file: http://www.africafocus.org/docs02/eca2002b.php