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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, 2

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

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+++++++++++++++++++++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.

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