African Growth: Beyond Metals, Minerals and Energy

19 March 2008 13:00 - 14:15 GMT+00
Public event

Speakers:

Prof Benno Ndulu - Governor, Bank of Tanzania

Patrick Smith - Editor, Africa Confidential

Chair:

John Battle MP

Description

This meeting will look at the impact of politics on real growth, as well as analysing the growth that has occurred in certain countries in Africa in recent years and ask whether it is sustainable. Questions such as how dependent is it on the US and Chinese economies and how can it be diversified and made more pro-poor will be examined by the speakers; Prof Benno Ndulu, Governor of the Bank of Tanzania and Patrick Smith, Editor of Africa Confidential.

Committee Room 15

Speaker: Professor Benno Ndulu (BN), Governor, Bank of Tanzania

Between 1960-2004, Sub-Saharan Africa grew erratically at an average of 0.5%, whereas other developing regions grew steadily at an average of 2.5%. These countries missed out on two decades of global growth.

African countries with the same endowments, took different paths and reached different outcomes.  For example, Cote d’Ivoire and Mauritius are both resource poor countries which pursued different development paths, with very different outcomes. Mauritius grew rapidly between 1960-2004 whilst Cote d’Ivoire remained stagnant. Zambia and Botswana are both landlocked and resource rich. Botswana managed resource rents effectively and grew rapidly whilst Zambia remained stagnant.

Six key conclusions from 45 years of African Growth Experience:

(i) African countries’ growth experiences are extremely varied and episodic:

  • Large countries (DRC, Nigeria, Ethiopia, Sudan) have grown more slowly.
  • Extreme instability of growth for most countries  - especially resource rich nations.
  • Suggests focus on large countries for spillovers (e.g South Africa) and management of responses to shocks.

(ii) Slower productivity growth more sharply distinguishes African growth from other   
    Regions:

  • Same level of investment generated what would be 1/3 to ½ the growth in Asia.
  • There is a need to look beyond conditions for raising investment levels.

(iii) Policy and governance  matters a great deal for growth:

  • It accounts for between 25% and 50% of growth difference with other regions.
  • The policy and governance gap with other regions has narrowed but it is still very significant.

(iv) Disadvantages from geography and resource curse accounts for one third of the
      gap of growth with LDCs:

  • 40% of Africans live in land-locked countries.
  • 90% of Sub Saharan Africa (SSA) exposed to Tropical disease burden.
  • Fragmentation characterizes Africa: 48 small economies with small markets, 4 neighbours on average each and an average GDP of $3 billion.
  • More than a third of SSA countries subject to the potential resource curse.

(v) Trading partners’ growth important for African growth:

  • Importance of export-led growth.
  • Focus on competitiveness.
  • Reducing barriers to trade (especially behind the border constraints).

(vi) Age dependence a big drag on growth:

  • More mouths to feed than hands to cook. Increasing population, particularly of children of school-going age puts pressure on public services, whilst the tax base is not increasing in proportion.
  • Fiscal and private spending burden (and impact on saving).

Critical areas of action - The Four Big “I”s

Investment climate

  • Focus on reducing indirect costs and risks.
  • Target both foreign and local investors & investment areas.

Infrastructure:  a “Big Push” in investment and efficiency

  • Particular attention to landlocked countries.
  • A Regional approach - coordination and cost effectiveness.

Innovation for increasing productivity

  • Skills: tertiary education and ICT key for competitiveness.

Institutional capacity

  • Contract enforcement; enhanced public scrutiny; revenue transparency in    resource rich countries; country-driven anti-corruption.

6 Key messages to Africans

(i) Message of hope: the development challenges Africa faces are daunting but not insurmountable.

  • Asia’s and even African success is instructive.
  • African nations would have the advantage of being late starters.

(ii) Africans will have to shape their own destiny – and this includes all Africans wherever they are in the world.

  • Taking the lead but more importantly being creative, bold and decisive.
  • Make this an inclusive undertaking across all stakeholders.

(iii) Unorthodox approaches can engender results, as seen in East Asia.  There needs
to be a greater focus on government errors of ommission (what governments
have not done to spur development).

(iv) Leadership has a defining role in achieving success. There is a need to put a
huge weight on how leaders are chosen and more importantly how they are held
accountable for results.

(v) Need for collective action to spur good reputation, agglomeration economies and
provide regional public goods

(vi)Reaching for Deeper Pockets

  • Domestic resource mobilization is required in the form of: savings, local loan syndications and IPOs.
  • Prudent commercial borrowing by the public sector, including the use of sovereign bonds.
  • Cashing in on the growing remittances - $40 billion estimated remittance flows into and within Africa annually.

2 Key Messages to Development Partners

(i) More and better aid is needed in order to:

  •  Help meet the ambitious MDG agenda and fulfill the promises of support.
  •  Foster innovative approaches to leverage public-private partnerships.

(ii) Help engender a supportive global trading environment. A major part of this is to 
     get the WTO talks back on the rails.

Speaker: Patrick Smith (PS), Editor, Africa Confidential

During the last decade, African economies have benefited from sustained growth, a decrease in their fiscal deficits, increase in FDI flows, decreasing inflation and a greater stability of their currencies. Last year, at a meeting of the major investment banks, consensus was forming amongst the banking fraternity that Africa was a frontier market for investment and held much opportunity.

However, not long after this, the Kenyan election disaster occurred, the Chad coup happened and the crisis in Darfur hit the headlines again. The international press and the global investment community then sadly put Africa back into the basket case category. This is despite the fact that not much had changed across many of the other nations in the continent. This shows how fickle the international community can be with their judgements.

Are the African economies tied in to the wider international economy? In that regard, will they be affected by the US recession?
Previously it was thought that only the South African economy was tied to the international economy and that only it would be affected by the US recession. However, African nations do seem to be tied to the international economy more so than before and this may act in their favour actually. We find that when people in Africa are asked about the likely impact of the USA recession on African economies, most people think that the demand in China, Japan and India would offset the fall in US demand. Also, whilst stock markets might be affected in African nations, the actual economies may not be. We noted that in Zimbabwe, the downturn in the stock market was not affecting the Zimbabwe economy and that investors were not pulling out of the country.

What are the causes of African growth? Are they structural or cyclical?

It is not just cyclical. Substantive reforms have been made, financial and economic administration has improved and FDI in-flows have increased.

The EPA negotiations are an important issue for Africa and more energy must be focused on their successful completion. If these trade treaties are sorted out, this would probably be far more important for African economies than all the work donors are doing in Africa. European investment in Africa needs to be increased. China is targeting 100 billion dollars of investment in Africa which will soon outstrip European investment levels.

Question and Answer Session:

  • What is the scope for greater regional development in Africa?

BN highlighted that there were regional development initiatives in place in Africa which acknowledge that some developmental initiatives can be more productive when smaller nations work in collaboration. For example, the East African Community is looking at developing common infrastructure programmes between East African nations (eg. common power grid) and other inter-regional development initiatives.

  • There is an argument that African nations need to restructure their economies away from agriculture  towards manufacturing. Is it possible to make the manufacturing sector in Africa an export orientated sector, even if this would require the protection of infant industries via tariff and non-tariff barriers?

BN indicated that the Tanzanian agricultural sector used to represent 50% of GDP and 70% of exports. However, this has fallen to 26% and 11% respectively. In Tanzania, tourism is a fast growing economic sector and manufacturing exports are at higher levels than agricultural exports. The key thing for African nations is to develop cost advantage in the manufacturing sector, for which upskilling of the work force and technological innovation are prerequisites.

  • What is your view on the importance of foreign aid for growth? How important are good governance and good policies for aid effectiveness with respect to fostering growth?

BN: Flows of FDI and remittances exceed ODA flows in Tanzania, and FDI and the private sector are more important for growth. ODA still plays an important role in tackling the under-provision of public goods as the private sector response here has been slow. It also has a role in capacity building within the public service. Accountability arrangements in African governments also needs to be addressed.

  • You (BN) said in your presentation that it is important for larger countries in Africa to grow and this will help smaller African nations also. Could you elaborate on this?

BN: The reason for this is that if the most populous African nations grow then the largest number of Africans will be brought out of poverty. Also, when the largest nations grow, there will be economic spillovers for the others.

  • How will the current credit crunch and oil price increases affect Africa?

BN: Yes, higher oil prices are applying cost-push inflationary pressures on African economies which needs to be managed. With the USA economy in a downturn and potential recession, this will particularly affect African Central Banks as most of their reserves are held in US dollars.

  • Can current growth levels be sustained in Africa, particularly given that they may be driven by high commodity prices to an extent? Does Africa need growth strategies based on service sector development?

BN: Yes, service sector strategies must be developed and implemented in African countries, particularly if we are to move beyond agriculture and natural resource extraction.

  • Is the UK and the EU going to help African students with the very high tuition fee levels for UK universities?

John Battle (Chairman): I will take this issue up with the Education Minister so that the fact that students from African nations are having to pay very high tuition fees is brought to his attention.  This is particularly in light of the fact that Professor Ndulu highlighted the importance of education in Africa in terms of fostering growth.

  • What is the African Union doing to deal with political instability in Kenya, Zimbabwe and other countries?

BN: The AU has been working to resolve political instability in African nations, although more work does need to be done by them.

  • What are African Governments doing regarding the environmental impact of foreign investment?

BN: African governments need to improve their capacity to prevent environmental problems and manage them when they occur.

  • What would you say are the biggest development challenges African nations face in their aim to reach the MDGs by 2015?

BN: Due to the migration of youths from the rural to urban centres, youth unemployment is the biggest challenge, including the crime and violence associated with it. Tanzania (and Africa for that matter) needs to work on economic diversification away from agriculture. In Tanzania, tourism is the second largest economic sector, and with its linkages to other sectors, this is bringing much employment. However, the African economies need to provide jobs in labour intensive industries and not just in mining.

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