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Date: Wed, 7 Aug 2002 20:21:24 -0500
From: Africa Action <[log in to unmask]>
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Subject: Africa: Economic Report on Africa, 1

Africa: Economic Report on Africa, 1
Date distributed (ymd): 020807
Document reposted by Africa Action

Africa Policy Electronic Distribution List: an information
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Policy Information Center, The Africa Fund, and the American
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+++++++++++++++++++++Document Profile+++++++++++++++++++++

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

SUMMARY CONTENTS:

This two-part posting contains the overview section from the annual
Economic Report on Africa 2002, released last month by the Economic
Commission on Africa, based in Addis Ababa. The report, containing
data through 2001, is "cautiously optimistic," noting that Africa
was the only developing region to see faster growth in 2001 than in
2000. The carefully worded report acknowledges, however, that this
macroeconomic growth hides wide disparities among countries and is,
in any case, not sufficient to meet goals of reducing poverty.

Critical observers may also raise questions about possible changes
in the prognosis given global economic developments this year and
the continued spread of the AIDS pandemic, as well as about the
assumptions about economic policy and the validity of the
indicators used in the report. Nevertheless, this is an important
and substantive document on Africa's economic prospects.

In addition to a continental overview, the report presents detailed
case studies of seven countries in different regions of the
continent: South Africa, Ethiopia, Zimbabwe, Kenya, Nigeria,
Morocco and Guinea.

For the full report, see http://www.uneca.org/era2002

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

Overview-tracking performance and progress

Africa grew faster than any other developing region in 2001,
reflecting better macroeconomic management, strong agricultural
production, and the cessation of conflicts in several countries.
But Africa's average GDP growth of more than 4% in 2001 masks wide
disparities among countries. Moreover, economic growth remains
fragile, and at current rates of progress Africa will not achieve
any of the Millennium Development Goals set by the United Nations.

Still, there are many reasons for cautious optimism about Africa's
medium-term prospects-including the opportunities created by the U.
S. African Growth and Opportunity Act, the European Union's
"Everything but Arms" initiative, the New Partnership for African
Development, and the launches of the Doha Development Round and the
Africa Union. Ultimately, though, Africa's future depends on how it
addresses economic and political governance, resolves civil
conflicts, and responds to the need for deeper economic and social
reforms.

Africa was the only developing region to see faster growth in 2001

Forecasts made soon after the September 11 attacks predicted that
economic growth would stagnate in Africa because of lower commodity
prices, reduced foreign direct investment, and diminished private
capital flows. But the global slowdown has had a much less
pronounced impact on Africa than expected. Output has remained
relatively strong. Africa's overall GDP growth is estimated to have
increased to 4.3% in 2001 from 3.5% in 2000.

Changing commodity prices provide mixed blessings for Africa.
Commodity prices are the main channel for transferring external
weaknesses to most African economies. Global nonoil commodity
prices recovered 2% in 2000 after dropping sharply in 1998 and part
of 1999, but prices remained below 1996-97 levels. Moreover, the
World Bank's price index for primary commodities from low-and
middle-income countries has fallen steadily since 1995.

Terms of trade show no signs of improving in 2001-02. In the first
11 months of 2001 the prices of primary commodities fell in
response to the strong downturn in global economic activity.
Lowered growth expectations for the world economy after September
11 accentuated weak demand, while supply remained high and the
dollar (the currency in which most commodities are priced) stayed
strong. In September 2001 average commodity prices were 17% below
their cyclical peak of one year earlier.

African exports to the United States jumped. U. S. imports from
Africa have grown considerably in recent years, from about $1.5
billion a month in 1999 to $2.3 billion a month in 2000. African
exports received a further boost with the January 2001
implementation of the U. S. African Growth and Opportunity Act.
Although total U. S. imports fell between January and June 2001,
imports covered by the act increased sharply-suggesting that these
African exports may be insulated from the U. S. economic slowdown.

Africa's emerging markets experienced a sharp increase in private
capital flows. Unlike emerging markets in other regions, those in
Africa-Algeria, Egypt, Morocco, South Africa, and Tunisia-were not
hurt by the September 11 attacks. In fact, between 2000 and 2001
net private flows to these countries nearly doubled, from $4.9
billion to $9.5 billion. In addition, net equity investment jumped
from $5.2 billion to $9.3 billion, mainly reflecting large-scale
deals in Morocco and South Africa. Net direct equity grew from $3.5
billion to $4.8 billion, driven by privatizations in Algeria and
Morocco. And despite weaknesses in global equity markets, net
portfolio equity flows shot from $1.7 billion to $4.5 billion. Net
outflows are likely in 2002, however, as risk-averse investors
avoid emerging equity markets. Elsewhere in Africa, stock markets
had mixed performance in 2001.

Private credit flows to Africa's emerging markets increased
slightly, from a net outflow of $400 million in 2000 to an inflow
of $200 million in 2001. Still, for a group that includes Africa's
largest economy-South Africa-this is an extremely modest amount
relative to flows to other regions and to Africa's needs.

Africa has seen a shift in foreign direct investment. Foreign
direct investment (FDI) is the most important source of external
finance for developing countries-more important than commercial
loans, portfolio investment, and official development assistance.
Africa's share of FDI in developing countries dropped from 25% in
the early 1970s to just 5% in 2000. South Africa is by far the
continent's most important source of FDI. Since 1994 South African
FDI in other African countries has averaged $1 billion a year.

Aid to Africa remains low and volatile. Aid to Africa increased
from just under $1 billion in 1960 to $32 billion in 1991. But by
the end of the 1990s aid had fallen to almost half the 1991 level.
(Here aid is defined as gross official development
assistance-whether grants or concessional loans-from multilateral
and bilateral sources.)

Aid from the countries that make up the Development Assistance
Committee of the Organisation for Economic Co-operation and
Development (OECD) has been extremely volatile, rising from $1.3
billion in 1970 to $23.4 billion in 1991-then falling to $11.8
billion in 1999. Aid from multilateral organizations has been less
volatile, increasing from $0.4 billion in 1970 to $9.5 billion in
1994 and then falling to $6.6 billion in 1999. Aid from Arab
countries hardly changed, increasing from $0.1 billion in 1970 to
$0.3 billion in 1999.

African economies grew faster than expected. In 2001 just 16
African countries experienced GDP growth of less than 3%, down from
27 countries in 2000. The number of countries with growth rates
exceeding 3% increased from 26 in 2000 to 37 in 2001, and 3 more
countries are expected to join this group in 2002. Thus most
African countries appear to be converging towards growth rates
above the "traditional" 3%-with positive implications for poverty
reduction.

Africa's average per capita income grew an estimated 1.9% in
2001-better than the 0.7% increase in 2000 but still not sufficient
to achieve the Millennium Development Goal of cutting poverty in
half by 2015. In 2001, 30 African countries achieved per capita
income growth above 1.5%, and in 2002 this number is expected to
increase to 32. Still, raising per capita income remains the
biggest challenge for African governments and their development
partners.

Economic policies have focused on boosting growth and reducing
poverty

Driven by a desire to rapidly reduce poverty, economic policies in
Africa in 2000-01 sought to promote macroeconomic stability and
higher growth and to improve the delivery of social services. Many
governments revived stalled structural reforms such as deregulation
and external liberalization. The main themes of economic policy
included creating an enabling environment for producers, investors,
and employers and improving governance and public finances.

Fiscal policy. In many African countries fiscal policy is now
focused on minimizing domestic debt and freeing resources for
private sector activity by reducing fiscal deficits and making tax
administration and government spending more transparent. But
because of higher social spending, among other things, overall
fiscal policy was expansionary in 2000.

Monetary policy. To lower inflation, many African governments
adopted tight monetary policies in 2000-01. Central banks were
compelled to manage broad money supplies by deepening interbank
money markets through more regular issues of treasury bills and
more effective open market operations.

Exchange rate policy. Exchange rate realignment remained a key
challenge, particularly in countries with flexible exchange rates
and loose monetary policies. In Africa, where CFA countries have
long enjoyed fixed exchange rates through an institutional
arrangement with the French government, the 1997-98 East Asian
crisis revived a long-standing debate on the merits of flexible and
fixed exchange rate systems. CFA countries have preferred fixed
exchange rates to promote stables prices, but other countries have
relied on managed floating rates.

Prospects for 2002 look favourable

The outlook for African economies in 2002 is shaded by the global
slowdown, particularly as it affects South Africa-the continent's
largest economy. But South Africa's outlook for 2002 is positive,
because strong economic fundamentals and a stable macroeconomic
environment should allow continued robust expansion over the medium
term. Despite increased uncertainty about global economic prospects
in the wake of the September 11 attacks, international investors
are not writing off emerging markets as an asset class but instead
are viewing countries on their own merits.

The three large North African economies-Egypt, Morocco, and
Tunisia, which account for 25% of Africa's GDP-provide the greatest
potential benefits for Africa in 2002. Macroeconomic conditions are
favourable in all three countries: inflation is low, external
reserves are adequate, debt has been reduced to more acceptable
levels, and substantial progress has been made on structural
reforms (particularly privatization and price decontrol).

With oil prices likely to stay below $20 a barrel this year,
African countries are expected to grow by an average of 3.4% in
2002. Thanks to booming oil revenues, real GDP growth in Equatorial
Guinea-Africa's fastest-growing economy-continues to be extremely
high, at around 65% in 2001. Prospects for continued growth look
good with the resolution of a territorial dispute between
Equatorial Guinea and Nigeria.

Performance among non-oil exporters is also expected to improve in
2002, reflecting reduced political instability and increased
agricultural output. Lower oil prices and a modest recovery in the
prices of some key commodities, such as cocoa and cotton, should
ease import constraints for several non-oil exporters. In many
countries, moderating political instability or the cessation of
violence should improve investor and consumer sentiment, and the
resumption of official development assistance to some countries
will support higher public spending.

African countries present striking contrasts in performance and
prospects

The seven countries featured in the report have achieved tremendous
progress in some dimensions of well-being and little in others. An
important lesson from these seven country studies is how closely
related different facets of well-being are. The studies show that
lack of progress in some elements-such as those relating to
governance-hinders progress in others.

Lessons from Southern Africa - building human capital and promoting
good governance are crucial for well-being. Compare South Africa,
the continent's largest economy, with Zimbabwe, where impressive
progress in reducing poverty and improving health and education in
the 1980s has been reversed in recent years.

For South Africa the economic outlook is encouraging. The economy
weathered the global slowdown better than most other emerging
market economies-from Asia to Latin America. Low external
borrowing, depreciation of the rand, and sound financial sector
supervision and regulation contributed to the economy's resilience.
And thanks to stronger export competitiveness, the country managed
to improve its external accounts.

South Africa's macroeconomic fundamentals were robust in 2001. The
government met its key fiscal and monetary policy targets.
Inflation remained within the target band, and interest rates fell.
But South Africa has been unable to transform its impressive gains
on the macroeconomic front into high, sustained economic growth.
Real GDP growth has stalled below 3% for the past several years,
too slow for robust job creation in a country where unemployment
remains around 20%, posing a major development challenge.

Moreover, the South African labour market is highly segregated.
Unemployment rates differ sharply between the skilled and the
unskilled, groups that are clearly divided along ethnic lines.
Further exacerbating the situation, new jobs are created in sectors
requiring specialized skills, such as the export and financial
sectors, while jobs are disappearing in older sectors depending
mainly on low-and semi-skilled intensive labour. Difficulty in
finding workers with appropriate skills is becoming a major
constraint to growth.

South Africa's integration into the global economy has made science
and technology education a growing priority. The move from
labour-intensive to knowledge-based production depends on
technologically sophisticated production procedures, in agriculture
as well as in industry. Thus developing human capabilities is
essential to accelerate growth and poverty reduction. The key is
education that reflects the demand for skilled labour. The South
African government has recognized the importance of improving
education standards, and fiscal stability is opening the door to
large increases in social spending-particularly in education and
health-that should boost the economy's long-term growth potential.

By contrast, the situation in Zimbabwe is dire. An estimated 75% of
the population lives in poverty. Unemployment is high and growing.
And inflation and the balance of payments are worsening. The
economy contracted by an estimated 7.3% in 2001 and is expected to
shrink by another 5.0% in 2002. Moreover, the 2002 budget leaves
little room for optimism. The budget gives no indication that the
authorities will allow market forces to determine interest rates
and the value of the local currency. And it provides no timetable
for lifting the price controls that are exacerbating shortages of
consumer goods and driving large parts of industry and commerce
into insolvency. Instead, the government appears to be persisting
with the strategies that have contributed to the economic crisis.

Poor weather conditions have contributed to the serious decline in
agricultural production in Zimbabwe. But land invasions were the
straw breaking the camel's back. They not only contributed to the
poorest growth performance by agriculture in several years (-9.5%
in 2001). They also sparked distress calls in manufacturing and the
financial sector as international confidence in the economy waned,
export receipts slumped, and capital inflows tapered off. Growth of
manufacturing output decelerated by 5% in 2001, and tourism
continued its downward trend as Zimbabwe became the only African
country to record a decline in international visitors in 2000.


Economic measures adopted to deal with the crisis in production
have proved to be unsatisfactory. As the Reserve Bank of Zimbabwe
attempted to control inflation by curtailing monetary expansion,
the government continued its runaway fiscal spending supported by
massive borrowing from the central bank. This policy not only has
fuelled inflation but also has crowded out the private sector's
access to credit, leading to further deterioration in employment
opportunities for ordinary citizens. Export competitiveness
declined as the real exchange rate appreciated with the high
inflation rate and fixed nominal exchange rates, while rising
production costs stifled manufacturing activity.

Zimbabwe faces a crisis of governance that has effectively put a
stop to economic progress. The best opportunity for averting a
deepening of the crisis and a worsening of the living conditions of
ordinary Zimbabweans lies in improving governance, adopting sound
economic policies, and minimizing political alienation and
maximizing pluralism. Whether Zimbabwe seizes this opportunity is
largely in the hands of the government.

[continued in part 2]

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