Africa and the fast changing global economy Washington State - - PDF document

Africa and the fast changing global economy Washington State University August 24, 2012 Moeketsi Majoro (mmajoro@imf.org)

• I. INTRODUCTION

I am ecstatic to share with you a few thoughts on Africa, in the context of a rapidly evolving global economy. As already introduced by Ken, I am WSU 1990 alumni. I went back to Lesotho late 1990 and started off as a lecturer in undergraduate economics, before joining the public service in 2000. In late 2008 I joined the Executive Board of the International Monetary Fund to represent 21 African countries, mostly English speaking, although also Angola and Mozambique (Portuguese), Sudan (Arabic), Burundi (French) and Africa’s new country, South Sudan which joined the IMF in April, 2012, raising total membership of the IMF to 187. In addition to my representation responsibilities, I, together with 23 other colleagues formulate IMF policies and provide oversight over implementation and governance in line with IMF’s purpose of safeguarding global monetary stability. Until the global financial and economic crisis, the IMF was relatively obscure and increasingly irrelevant, at least in advanced countries. Total credit outstanding fell to $10 billion in 2007, contrasting sharply with a previous high of $72 billion in 2003. Staff strength fell from 3 to 2½ thousand, reflecting reduced operations and an apparently obsolete mandate. Major advanced countries shunned its advice and the IMF itself censored the advice it gives to these countries, while being more direct and candid to most emerging and developing economies. With these developments, long standing concerns about legitimacy of the institution began to resurface.

2 While the crisis has broadly restored faith in the Fund’s mandate, regaining legitimacy will require more time and significant redistribution of power more evenly between advanced countries (AEs) and emerging market and developing countries (EMDCs) and in line with global economic weights. Africa, a region notably impacted more than any other over the years by IMF policies, needs more voice and influence over IMF policies.

• II. DEVELOPMENTS IN AFRICA

Post independence folly Many of you are familiar with persistent negative reporting on Africa going back many decades that highlighted in graphic details incidents of famine, gruesome and heart-rending images of war and poverty, corruption and plundering of national resources by African strong men, and excessive over-population. Most of Africa’s new states are about 50 years old, following independence from colonial Europe beginning in 1958 (Ghana). At independence many sub-Sahara African countries boasted better socio-economic conditions than most of Asia, but this was soon reversed. A widespread anti-colonial sentiment amongst post-colonial leaders exacerbated by cold-war political alignments, an unfortunate choice of economic strategy that prioritized import substitution, and the elevation of a developmental state and relegation of markets held the continent back and even reversed the gains at independence. Meanwhile Asia remained open to markets and adopted to great effect human centered and export strategies.1 In his memoirs Lee Kuan Yew, the post-colonial prime minister of Singapore observed, during his visit to Africa in 1964, “… after seeing Conakry (Guinea) and Accra (Ghana) and meeting leaders who talked in socialist terms of the distribution of wealth, I believed they would be paupers”. History has borne out this observation for most countries with some exceptions such as Botswana. Africa’s share in global GDP fell more

3 precipitously in the 1980s to mid 1990s before staging a steady recovery to just over 2 percent currently. Other metrics including trade and investment show a similar pattern evolution. Times seem to have changed In recent times, observes Mckinsey and Company on Africa “…there has been sea change. Africa is on the move”.2 They are not alone—media and many global think tanks have changed script and are singing praises about Africa rising. The first and most important change is perception—in part driven by what I consider to be hysterical media reporting and in part by actual progress on the ground. The dismal failure of the import substitution strategy and structural adjustment programs to stimulate growth and reduce poverty, accumulation of high external debts and a wave of democratization created room for new thinking on economic policy both in Washington (consensus) and in African

• capitals. For their part, the World Bank and the IMF continued to learn from their

experiences with structural adjustment amidst considerable criticism and in 1999 began to integrate social protection in their advice to governments. The assumption of power by newly elected leaders, pro-reform, more pragmatic and less tethered to cold war ideologies created climate conducive to widespread policy reform. President Nyerere, the father of African socialism, quietly abandoned this brand and conceded that it had brought harm to Tanzania. He paved way for new leadership and encouraged it to experiment more with market driven

• policies. It took about a decade, but perception has now turned positive and is resonating

globally in official and investment circles.

4 Africa has now experienced more than a decade of high growth, although somewhat below the 7% needed to meet the UN millennium development goals (MDGs). Today, 7 of the 10 fastest growing economies are in Africa.3 Africa is the second fastest growing region after Asia and its large population is expected to propel domestic demand and sustain growth for

• decades. The UN Economic Commission for Africa (ECA) has predicted that by 2034 Africa

will join China as a new pole of global growth.4 The IMF has explained that the observed progress is due to years of reform and renewed commitment to good macroeconomic policies. The conjunction of macroeconomic stability, renewed focus on education and health, reduced burden of state enterprises through past privatizations under structural adjustment programs (SAPS), political reforms, debt relief, and more importantly widespread adoption of good macroeconomic policies are at the heart

• f Africa’s growth success today.

Investment A resumption of macroeconomic stability and a gradually permissive business environment have enabled brave investors to explore opportunities and to scale up investment in the face

• f relatively high returns on investment. Foreign direct investment (FDI) is stepping in to

make up for the continent’s perennially low saving rate, climbing to $62 billion in 2009 from $9 billion, before retreating slightly in 2010 to $55 billion.5 The key factors behind the low but rapidly rising FDI flows include external demand for minerals particularly from China and the rest of Asia and an emerging African middle class estimated at more than 300 million

5 people which is bolstering local demand for manufactured goods and services. Domestic demand is increasingly fuelling large investments in mobile telecommunications and banking, as well as the technological convergence between the two sectors. Banking reforms in the 1990s created privately owned banking sectors that are better governed, well capitalized and profitable. But to achieve profitability, banks had to close rural branches, leaving many citizens unbanked. Mobile telephony has bridged this gap in intermediation by providing some form of banking, money exchange, and transaction services more cheaply than banks would have been able to (M-PESA).6 Aviation is also reviving with a real prospect to ease travel and trade bottlenecks. The three surviving flag carriers, Ethiopian Airways, Kenya Airways, and South African Airways have recently committed to expand their Africa and international route networks and are briskly acquiring new equipment to reconnect Africa after the failure of flag carriers.7 Although country-to-country connections continue to lag, particularly in west and central Africa, this is beginning to change with the launch of Asky and Fastjet airlines in West Africa. In addition, Middle East players led by Emirates, which collect and funnel passengers and cargo to destinations worldwide through their hubs in Dubai and Doha, are rapidly expanding their destinations in Africa. Improving aviation networks creates trade spinoffs. Last January, Ethiopia Airways began lifting flowers daily into Washington DC from which they are distributed across the US. This has been possible through to a purchase by Ethiopian Airways

• f several higher capacity planes (B777LR) from Boeing Corporation, and also holds

promise for other countries in east Africa such as Rwanda, Congo, and Burundi that have significant potential for high value perishable cash crops.

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• III. STRATEGIC PARTNERS

While business has led the rediscovery of Africa, governments have also quickly followed

• suit. China has been quick off the mark with its unorthodox brand of strictly commercial

interests underwritten by non-judgmental diplomatic backstop. For oil and mineral rich countries, investments involve installation of infrastructure aimed at facilitating trade, usually in oil and minerals. For others, prestige projects, such as palaces, stadiums tend to dominate. However in the last few years, Chinese firms’ investment has grown rapidly and now surpasses that of firms from Western Europe, traditionally the main source of investment for Africa, and the US, both of which have scaled down considerably during the crisis. An

• verwriting objective in China’s strategy seems to be to secure the commodities it needs for

fueling its industrial complex and voracious exportation. As Moyo8 points out, China combines the strength of the Communist Party, state-owned banks and corporations, party supporters, and a strong public purse to execute its pursuit of commodities imports. China Export Import Bank (aka Exim Bank, a state owned corporate) and other state banks underwrite most of the investment by Chinese corporations in Africa with highly concessional lending terms. Interestingly, the mineral acquisitions in Africa will ultimately flow in modified form to the rest of the world through Chinese exports. Marshalling state resources behind China’s commodities acquisition strategy contrasts sharply with the grudging US policy to support exports. While the charter of the US Exim bank was finally extended to 2014 in May 2012, the preceding divisive debate demonstrates

7 strong divisions amongst politicians and business (Boeing, GE, and Caterpillar supports; Delta opposes) on the usefulness of the Bank.9 At the official level, powerful nations are taking note of Africa’s mineral and trade potential. Several Heads of State and of Government summits are used to promote political and strategic partnerships. Notable meetings include the Africa-EU, China-Africa, Turkey-Africa summits whose outcome variously include commitments to solidarity in world politics, development of Africa, and trade.10 The US also pursues its interests though the Africa Growth and Opportunity Act (AGOA) and Africa Command (AfriCom), which focuses on US security threats emanating from Africa. AGOA, which serves as the US equivalent of the Africa summits, falls short on several fronts. The third country fabric provision, which allows African manufacturers to obtain raw materials elsewhere other Africa or the US, creates uncertainty through its frequent renewals and has possibly undermined investments in raw material production such as fabric mills; this having been one of the pillars of AGOA. More critically, US firms have not followed with investment into vertically integrated production value chains Africa was expected to develop under AGOA. Turkey, the 17th largest economy in the world, has also identified Africa as a strategic partner (lower population and landmass than Ethiopia) and been identified by the African Union as

• such. Trade has tripled since 2003 to about $20 billon and aviation links are also steadily

increasing.11

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• IV. THERE IS SOME MUTED ANXIETY REGARDING CHINA RISING

Media and global think tanks take the view that Organization for Economic Cooperation and Development (OECD) investors will fall behind the “new scramble for Africa” unless they wake up to the reality of Africa as an important investment destination. In recent statements

• n Africa, the US consistently warns of a threat of new colonialism and about the extraction
• f Africa’s mineral resources by outsiders. Under pressure to appear to do something, the US

government has recently articulated a new policy for Africa titled “U.S. Strategy toward Sub- Saharan Africa”. The 2012 strategy appears to encompass security cooperation, which has been the focus of the last decade, but also extends the scope to governance and economic relations.12 It is too early to assess whether the expanded ambition will be matched by additional financial resources or to what extent governance with be seen as intrusive. Views differ on what the US and other erstwhile partners can do to effectively counter Chinese reach in Africa. Without the checkbook to finance roads, rail, seaports, airports, and prestige projects, an area where Chinese capital seems most desired, it is not clear where else the US can be effective. The Millennium Challenge Account (MCA) modality can be transformational, but is beset by draconian conditionality. The US President’s Emergency Plan for Aids Relief (PEFPAR) is a low-key initiative, but appears to have been effective in complementing the Global Fund in the fight against HIV and AIDS. Ultimately however, US FDI will only match Chinese FDI if it is backstopped by official financial assistance and guarantees.

9 This conundrum is even more severe for Europe, which apart from its economic present woes was already facing a revolt on its divisive and unbalanced Economic Partnership Agreements (EPAs) with Africa. Benjamin Mkapa, former president of Tanzania writes “…EPAs as they stand, contain many problematic elements that will have an impact on African countries’ ability to develop and industrialize… we could end up as … raw materials and primary commodities producers”. Soludo has also charged that Europe is looking out for only itself under the EPAs it is negotiating with Africa.13 European FDI has dominated FDI flows to Africa in the past, but has retreated somewhat during the crisis. With the make-or-break decision on EPAs looming and Africa likely to balk as signing, recovery of Euro FDI to match Chinese FDI is looking less likely.

• V. CAN AFRICA BE A GROWTH POLE LIKE CHINA?

The renewed interest in Africa is generating considerable thinking globally. On the one hand there is well of opinion that says Africa can replicate the success of China by using its considerable mineral wealth to drive economic dynamism. On the other hand is a few voices that caution again unmitigated exuberance, pointing to Africa’s still immense constraints to rapid development. To be precise, Shimelse Ali and Uri Dadush maintain that Africa must still confound the challenges of low investment and saving rates, lagging demographic transition, low productivity, and low level of exports.14 Leading the constraints is inadequate energy and transport infrastructure to fuel and connect countries within and with each other, as well as adequate financing to fund in-country and regional infrastructure projects. A drought-induced famine at the horn of Africa and the Sahel

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• ccurs in tandem with surplus production in Malawi and Zambia simply because intra-Africa

trade is heavily curtailed by lack of transport networks.15 Energy is also a big impediment to manufacturing and food processing activity, which affects severely countries such as Burundi with its ample potential for cash crops that remains untapped. Africa is still 54 very dissimilar countries with different institutions. Investment in one country does not guarantee access to the other countries’ markets through trade and may require duplicating presence in several countries. Indeed most of the investment diverts to South Africa, which the investor community considers the gateway to Africa because of its relatively advanced business climate.16 A deeper form of trade integration, akin to that of Europe would allow the continent to trade more efficient than presently. As the difficulties faced by Europe demonstrate, deeper structural balancing and policy integration would be needed for sustainability. Existing structural imbalances between countries are already slowing current efforts to establish effective free trade areas. Even more importantly, Africa is less ready than its strategic partners for the marriage they both seek. The African Union provides the collective voice, but the power and authority remains with its member states. The various summit commitments agreed collectively are nonetheless executed individually with each of the member state and entirely in line with the strategic interests of outside partners. For its part, the Union is preoccupied with numerous political developments to match its expertise. Strategic economic work is adhoc and mainly relegated to Africa’s ministers of economy. Research and development has dwindled, along with the demise of once powerful centers of higher learning due to inadequate state funding.

11 It is thus difficult for the continent to react swiftly to fast changing developments in the global economy.

• VI. CONCLUSION

Africa seems to have shrugged off the crisis, but the slow recovery and lingering threat of relapse presents new challenges, given that its ammunition to fight the external shocks have been exhausted. However there is consensus that growth will remain strong. At the policy level the rebalancing the IMF is calling for in the global economy presents new challenges that Africa has not had to chart. Domestic demand driven growth in China might open export

• pportunities for Africa in China’s traditional export markets, while a rebalanced export-

domestic demand mix for the US might tone down Africa’s export performance under

• AGOA. The deep and painful adjustment in Europe will also persist for some time, and will

hurt many countries in the region through investment, trade and remittances. Ultimately, vastly increased intra-Africa trade will have to take the slack created by these challenges. But that will require better dialogue internally and management of the cacophonous scramble for Africa, while also strengthening institutions and investing heavily in infrastructure.

1 The Structural Adjustment Programs designed and implemented by the World Bank and International

Monetary Fund with strong support from the US Treasury are also blamed for the poor economic and poverty performance in SSA. The overdone belief in markets and inadequate attention to social safety nets were at the heart of the failure of the early generation of Washington adjustment programs. An improvement was introduced in 1999 in which developments in poverty were directly integrated in the programs and governments asked explicitly to articulate their policies in this area. There was also specific discussion of the amounts that should be devoted to poverty programs.

2 McKinsey Quarterly. June 2010. Acha Leke, Susan Lund, Charles Roxburgh, and Arend van Wamelen. What

is driving Africa’s Growth?

3 These are Ethiopia, Mozambique, Tanzania, Congo, Ghana, Zambia and Nigeria. But the story is more

• widespread. Sierra Leone is expected by 33% in 2012 and double digits through 2015.

4 UNECA. 2012. Economic Report on Africa 2012. They define a growth pole is an economy that accounts for

significant proportion of global economic activity with forward and back linkages.

5 Wendy Atkins. May 2012. This is Africa: a Global Perspective.

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6 The challenge of financial innovation is that soundness and safety usually lags behind and regulation is

inflexible when it finally catches up. The issue with mobile banking was that the telecoms companies did not register under the banking acts and could therefore not be supervised. The innovative decision has been to established collateral accounts in the banking system to underwrite the transacting on M-PESA.

7 There are other flagship carriers undergoing various stages of reincarnation. 8 Dambisa Moyo. 2012. Winner Take All. 9 Incidentally the legislation renewing the Exim Bank charter includes a $2.95b loan to an Australian gas project

that will export most of its output to Chinese and Japanese companies. Story from Reuters.

10 About 3 summits with Europe (2010, 2007), one with Turkey (2008), and more than thee with China, with the

latest one in July this year

11 Alain Vicky. http://mondediplo.com/2011/05/08turkey 12 The streamlined focus of the US cooperation with Africa echoes concerns outlined by Marina Ottaway.

Spring 2001. Rethinking US Policy in Africa. African Geopolitics. Reprinted in Carnegie Endowment.

13 Chukwuma Charles Soludo. Will Europe Under-develop Africa Again? New African. April 2012. 14 Shimelse Ali and Uri Dadush. March 3, 2011. Whither Africa. In Carnegie Endowment Policy Outlook. 15 Many African countries are devoting increasing amounts of resources toward infrastructure. In addition,

regional institutions allied to the African Union have articulated energy and transport projects that could ease the connectivity deficit in Africa. Despite these domestic efforts, financial resources remain woefully

• inadequate. It is estimated that Africa could need somewhere near $100 billion a year, but is managing only

about $30 billion.

16 Improvement business climate and opportunities for investment is one key theme of the new US strategy for

Africa.