International Politics and Society

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Politik und Gesellsc= haft Online
International Politics and Socie= ty 1/1998

Benno J. Ndulu
From Stabilization to Sustained Growth in Africa

Vorl=E4ufige Fassung / Preliminary version

Growth and stability seems to be slowly returning to Sub-Saharan Afr= ica (SSA). The region's output growth during 1994-96 rose from an average of 1.0% in 1994 to 4.0% in 1995 and 1996 (see table 1). What is more striking about this revival of growth is that it has been widely spread across count= ries in SSA. Only two countries registered declines in output during 1996. (UNCT= AD, 1997). There is however still a wide dispersion in the growth performance across the region. According to the above cited report and the IMF (1997a), 10 countries managed to post real GDP growth rates of 6% or better. Another 28 countries achieved GDP growth rates of between 3% and 6%. Although this performance is quite impressive by the region's own history, it still pales relative to that of the fast growing developing world. East Asia for exampl= e has maintained an average growth rate in excess of 7% for nearly two decade= s now. Furthermore given the In any event African economies would need to sustain faster growth in view of its significantly higher rate of populatio= n growth and the much higher incidence of poverty and its severity.

Export growth is similarly rebounding after nearly a decade of decline between mid- 1970 and mid- 1980. Between 1986 and 1993 export earnings grew at an average rate of 3.5%. (Hadjimichael et al, 1994). For 1995 and 1996 the average growth rate was 8% (see table 1) with half of this expansi= on attributable to the increased volume of exports (UNCTAD, opt. cit.). Howeve= r, SSA's share in world trade currently stands at 1% down from 3% in the mid-1= 950s. (Yeats et al. 1997). The continued marginalization of SSA in world trade in spite of the recovery in the growth of exports, and for that matter also imports, is explained by the relatively slower expansion of the region= 's output (Rodrik, 1997). The declining trend appears to have been halted in the nineties on account of higher growth in trade, but the region's share of world trade remains trapped at a very low level indeed.

Stability likewise is recently returning to the region. The high inflati= on of the 1980s is subsiding and currencies are more stable now outside of the CFA franc zone than they have been after the dismantling of currency boards in the former British colonies. Inflation in a large number of these countries is now in the intermediate range of 10% to 20%, having come down from levels in excess of 30%. A few of them, such as Uganda, Kenya, Guinea, Lesotho, and Gambia, have joined the CFA countries in maintaining inflation at below 10% (IMF, 1997b). The number of countries that have liberalized the external current account transactions and bound them by signing article VIII with the IMF is growing, signifying faith in the conditions for stabil= ity of their currencies. To a large extent this has been a result of reducing the recourse to inflationary financing of budget deficits. Ultimately howev= er sustenance of price stability will depend on reducing the size of budget deficits through concerted efforts to raise revenue collection and reducing wasteful expenditures. These have persisted at unsustainable levels in spite of marginal success in compressing them, particularly in countries outside the CFA franc zone.

Political and social stability is also gaining ground as the number of cases of civil unrest is declining and more open political regimes are being established. Southern Africa has largely returned to peace with the resolution of the civil strife in South Africa and the end of wars in Mozam= bique, Namibia and partly Angola. Resolution of conflicts in Liberia, Ethiopia, Eritrea, Rwanda and to some extent Somalia has also reduced the number of trouble spots in the region. Although investor perceptions of region-wid= e risk remain high due to the effects of past civil unrest and the fear of recurrence, some improvement in country risk assessment has been recorded, particularly for Southern and East Africa (Bhinda, Griffith-Jones and Marti= n, 1996).² The scores remain significantly below the ratings for East Asia, Middle East and Europe. However the fact that all the key indice= s now include ratings of some African countries on a regular basis signals attention by investors to the encouraging developments in the region.

In spite of these recent improvements in the region's economic performan= ce and its gains in stability, there are significant reasons to worry about their sustainability and effectiveness in reducing the pervasive and deep poverty. First, poverty in the region remains both very broad and severe despite some marginal gains in the growth of income per capita. The surveys by Ravallion and Chen (1997), which cover the period 1981-94, put the count of those below the international poverty line of one dollar a day in SSA at approximately 40%. This proportion has marginally increased from 38.5% in 1987 although it varies across countries, with those doing better in growth having more success in reducing the incidence of poverty (Demery and Squire, 1996). If one adjusts the poverty line for growth in income as Ali (1996) does, the incidence of poverty is much higher at nearly 50% of the population. What is perhaps even more worrisome is the fact that the severity of poverty has increased as the poor have fallen further away below the poverty line.⁴ This is happening against the backgroun= d of a rising polarization of incomes within countries (UNCTAD, 1997; Ravalli= on and Chen, 1997).

Second, the sustainability of the recent economic recovery in the region depends to a large extent on a rise in investment. The response of investme= nt to the variety of reform measures has at best been very weak. Private fixed investment in the region has averaged 8.4% of GDP between 1985 and 1994, slightly below the average of 8.8% during 1980-84. In comparison, East Asia had an investment rate of 20.4% over the period 1985-94. Public fixed investment similarly declined from an average of 10.6% to 9% between 1980-8= 4 and 1985-94, mainly to accommodate the budgetary crunch caused by stabiliza= tion (see Table 2). Furthermore, the average level of total investment as a proportion of GDP during 1985-94 in SSA, which was 17.4%, pales in contrast to East Asia's 28.8% (Elbadawi, Ndulu and Ndung'u, 1997a).

The rest of this paper, therefore, will seek to provide an explanation of the fundamental causes of the slow progress of the region's economic development, delineate the main approaches currently being pursued and suggest future action to address the constraints to economic and social progress.

The following section will summarize the empirical evidence and the international consensus on the fundamental obstacles to Africa's economic and social development. This review is also informed by the lessons from recent reform programs. Thereafter, two sections will highlight the changin= g conditions affecting the regions future development and identify the key challenges for implementing the required action.

Fundamental Obstacles to Economic Development in Sub-Saharan Afric= a

There are two dimensions of economic development which I wish to focus on here. The first indicator of progress is that of economic growth as measured by the rate at which income per-capita expands. This is the base for the expansion of consumption and the well-being of a country's populati= on. The second dimension is that of reducing the incidence, breadth and severit= y of poverty in a country. In this respect distributional concerns play an important role since the benefits of growth may not necessarily be widely shared. Although sustained growth has been found to be broadly beneficial for reducing poverty (Ravallion and Chen, 1997), rising inequality has significant adverse effects, thereby dampening the effectiveness of growth in reducing poverty. The obstacles to development reviewed in this section, therefore, relate to both dimensions.

Recent empirical research based on the analysis of cross-country long-te= rm growth differences has identified five major categories of explanatory factors. These are differences in: the initial conditions for growth affect= ing the potential trajectory of productivity growth; the policy environment which influences the allocation of resources; the ability of the economy to prudently manage the consequences of exogenous shocks; political and social stability, which affects the perceptions of risks for long-term commitment of private resources to gainful activities; the quality of insti= tutions governing the security of property and more generally the cost of doing business. The first three of these factors largely affect the efficiency of resource allocation while the latter two operate mainly through their influence on investment and hence the expansion of productive capacity.

Studies explaining the slow growth performance of SSA have concluded that the region is capable of significantly higher rates of growth in incom= e per capita if the right conditions are created. The recent high growth performance in some countries of the region confirms this assertion. Estima= tes from growth regressions show that continued improvements in the policy environment alone to the level obtained in East Asia could add as much as 2.6% higher growth in per capita income (Sachs and Warner, 1997: 2.2%; Easterly and Levine, 1997: 1.5%, Elbadawi, Ndulu and Ndung'u, 1997: 2.6%). Enhanced human capital, institutional improvements, a reduction in debt stress, and a more stable political and social environment could add anothe= r 1.7% to this.

Given the widely cited sustained high growth performance of East Asia, we adopt the conditions obtaining in these countries as a basis for the counterfactual. Table 3 presents this counterfactual based on three studies which tried to explain Africa=B4s growth performance (Sachs and Warner, 1997; Easterly and Levine, 1996; and Elbadawi, Ndulu and Ndung'u, 1997a). The following conclusions are instructive.

(Table 3)

(a) Based on the explanation provided by the five categories of factors, Sub-Saharan African countries as a group could have registered a maximum per capita growth rate of 5.2% per annum during the past two and a half decades, if conditions obtaining in East Asia were replicated. In reality per capita income grew at a rate of 0.9% in SSA.

(b) A better policy environment (similar to that obtaining in East Asian countries) by itself would have enabled additional growth in income per capita ranging from 1.5% to 2.6%. This category of factors include a more prudent fiscal balance; an exchange rate regime that sustains competitivene= ss and profitability of exports; price stability; a deeper and more mature financial sector; and a more open trade regime which exposes domestic produ= cers to foreign competition for greater efficiency and widens opportunities for larger markets and technological progress. Together they would have accounted for 50% to 70% of the additional growth by these estimates.

(c) Better initial conditions for growth in the form of better health, education and infrastructure would have rendered an additional 1% growth in per capita income.

(d) Improvements in the quality of institutions emphasizing the rule of law and security of property as well as a more stable political and social environment conducive to higher investment would have added another 0.6% growth.

(e) Exogenous shocks impact growth performance negatively. The lower level of shocks faced by East Asia, particularly with respect to debt overh= ang and debt service impacts, would therefore have resulted in an additional 0.21% growth.

(f) Reducing civil conflicts and engendering civil liberties would creat= e a more stable political and civil environment and would add about 0.1 perce= nt to per capita income growth. It is important to note here that East Asia does not represent a model for this category of factors, particularly with respect to open political systems. This may partly explain the small differ= ence in growth performance attributed to this factor.

Another way of assessing the relative significance of the various factor= s in explaining the slow growth performance is to look at their influence on private investment, which is the base for long term growth. Here the difference between East Asia and SSA is also very large. Elbadawi, Ndulu and Ndung'u (1997b) show an estimated difference of 10.5 percentage points in the private investment to GDP ratio: 9.6% for SSA against 20% for East Asia. The above listed set of factors together explains nearly 90% of this difference. The policy environment accounts for nearly 75% of this differen= ce.

We can now link these findings to five key obstacles to growth identifie= d from a fairly broad international consensus. Ndulu and Van de Walle (1996) summarize this consensus as follows.

First, low and inadequate technological and institutional capacities have provided very poor basic conditions for growth in Africa. Second, economic policy distortions have had undesirable and deleterious effects on growth and efficiency in resource use. Uncertainties arising from macroe= conomic instability have proven inimical to private investment, while distortions in incentives have spurred inefficient resource allocation and hampered productivity gains. Third, the undiversified and highly dependent character of African economies has left them with a weak capacity to respond flexibly to external and natural shocks. Their poor creditworthiness accentuates this problem, making countries unable to borrow on the international financ= ial markets to cover themselves against even reversible temporary shocks. Fourt= h, political instability and civil strife have disrupted the growth process by destroying human and physical capital, as well as by raising risk percep= tions, thus discouraging investment. What is worse is the fact that the negative effects of such instability are not contained within the countries concerne= d as they spill over to other countries in the neighbourhood and infect it with the bad reputation of a risky environment. Finally, development has been undermined by the more general deficiencies in governance, i.e. the low ability of the state to manage the development process, as well as the pervasiveness of corruption, rent seeking and cronyism (Brautigam, 1996; Gyimah-Boadi and Van de Walle, 1996).

There are two major reasons for the increased attention being called to poverty reduction. One is failure to reduce poverty in the region in spite of the recent revival of growth. The lack of attention to redistribut= ive policies has been singled out as a major explanation. Recent literature has shown that tackling poverty requires a combination of growth and distri= bution measures as encapsulated in the term "broad-based growth" (World Bank, 1994). The previous evidence that growth and inequality are conflicti= ve has now been shown not to hold (Bruno, Ravallion and Squire, 1996; Fields, 1989). Attention to higher growth and a wide spread of benefits from it, therefore, offers a way for implementing a strategy for broad-based growth. Furthermore, recent studies on long-term growth have shown that tackling poverty through enhancing the capability of the poor to earn a decent incom= e also benefits growth via improvements in human capability (education and health as investment) and through engendering social stability (Appleton and Mackinon, 1996; Persson and Tabelini, 1992). Initial redistribution of productive assets in favour of the poor has been shown to have a large potential for spurring growth through increases in the overall accumulation of both physical and human capital (Bruno, Ravallion and Squire, 1996). Inequality in land ownership has been shown to be associated with lower capital accumulation and growth (Persson and Tabelini, 1993).

Second is the fact that social stability, which is itself important for reviving growth, as we argued earlier, can be seriously undermined by a high incidence of poverty and the associated tensions in societies. In this regard reducing poverty is not only a goal of development but indee= d also a means to it (Ndulu, 1997a). In recent cross-country studies of growt= h, civil strife and instability have been found to have a strong negative association with growth (see Easterly and Levine, 1996 for Africa's case). In turn, there is a strong association between poverty and political instab= ility (Alesina and Peroti, 1993; Collier, 1996).

The Challenges of a Negative Legacy and a Changing Environment=

African economies are confronted with four other dimensions related to their past and the changing environment in which they operate. The effec= ts of past bad reputation, be it linked to policy malpractice, political insta= bility or civil strife, have been shown to be persistent (Collier, 1996). Investor= s wait and see whether current positive changes are sustained. In some sense, this is a credibility problem. The countries concerned have to show a proof of sustenance to reduce risk perceptions. It is not only current good behav= iour that matters to investors. The potential for setting off a virtuous circle of growth from recent economic reforms faces immense pressures as potential investors seek assurance against a possible return to the unattractive past.

The second dimension relates to the changing global environment which simultaneously expands opportunities for growth and raises the stakes for the misconduct of policies. The global economy is rapidly getting more integrated with a significantly enhanced mobility of goods, services and capital. Countries are much less able to ensure the location of capital including that of domestic proprietors. Therefore, a hostile environment to capital seriously compromises the growth potential of the country concer= ned. This raises the importance of government in relation to investment. Previou= sly, concerns for attracting investment to the region were focused on reducing the cost of doing business as affected by the delivery of high quality services and a few commercial sweeteners. It is becoming increasingly clear that non-commercial risks as affected by the security of property, openness to trade and finance and policy credibility are much more important. On the other hand, the opportunities offered by a globalized world economy pertain to larger markets, increased access to technology, chances to learn through trade and international investment, and enhanced efficiency brought about by competition. Access to these opportunities is conditioned by the policy stance and improved learning capabilities of the country concerned.<= br>

The third dimension is that of a changed domestic policy environment. Over the last decade, the demands for a more informed, more participatory and more precise policy making have increased significantly in the region. This is more so in those countries which pursue both economic and political reforms. Furthermore, policy issues have increasingly come under public scrutiny to supplement pressures from donor agencies. The impulses for these changes emanate from four sources (see also Ndulu, 1997b).

The transition from a directive-based control economy to an incentive-b= ased market economy, which requires more information on behaviour of various entities and markets and more knowledge of the efficacy of policy instrumen= ts in inducing desired responses. This change also requires the development of new institutions to enable the efficient operations of markets.

The ongoing transition in at least two-thirds of the countries from closed political regimes operating largely along patron-client relationship= s to more open contested political regimes. This has expanded the scope for a participatory policy process and the need for consensus to cater for a variety of interests.

The apparent rise in technocracy propelled essentially by conditionalit= y-based reform programs which emphasize "rule-driven" mechanisms for policy choice (Gordon, 1996). The recent increase in the prominence of central banks and the emergence of independent revenue authorities can be understood in this context.

The stronger pressures from both the donor community and local interest groups for more effective local ownership of development policies and strat= egies.

A growing media involvement in some of these countries have sharply raised the costs of policy mistakes, performance failures and non-transpare= ncy. Governance has thus been brought much closer to the center of the developme= nt process than it has ever been in the region.

The last dimension of changes in the development environment is the rapid rise in the diversity of the African economies which highlights the need for specificity in development strategies. The differences in the initial conditions for renewal of development pertain to resource endowment= s, incomes, social status and human capacity of the population. Moreover, there are differences in the extent of the pursuit of reforms and the stabi= lity of the civil environment. In the latter case we can distinguish three broad categories of countries.

Those half a dozen or so countries which have essentially collapsed amid civil strifes. They are characterized by a widespread threat to life and property as well as a breakdown of public authorities. These countries can not pursue the renewal of development until law, order, and public authority are restored.

Countries with public authority but a high degree of political instabil= ity on account of the political regimes in place. Here, the state machinery is preoccupied with the survival of the regime in power, which detracts it from sustained development initiatives. Perceived risks keep away invest= ors and official development assistance.

Perhaps roughly two-thirds of the countries in the region are character= ized by a relatively stable civil environment, move towards more open contested politics and pursue economic reforms, albeit at different paces. The bigges= t challenge here is that of pursuing economic and political reforms simultane= ously. In a few cases a third transition from war-to-peace (e.g. Uganda, Ethiopia, Mozambique) is superimposed on the first two. For these countries, the legacy of pervasive rent-seeking, corruption and controls makes for the most serious psychological barriers to a virtuous circle of a market-based development process.

These distinctions are important for the design of appropriate national strategies for development (Ndulu and van de Walle, 1996)

Selected Challenges for the Future

While subscribing to the above-mentioned consensus on areas of needed action for renewing development in the region, I wish to focus in the rest of this paper on four areas whose treatment in my opinion have received relatively less attention and are probably much newer in the sequence of learning from past experience. I applied the criteria of value added to the discussion on African development and my own appreciation of what appea= rs to be the new areas of policy preoccupation in the region.

The first area relates to managing an orderly transition to less depende= nce on official development assistance. Three reasons account for this choice: the emerging reality of decreasing aid budgets, encouraging signs of sustai= nable development in SSA, and the broad inclusiveness of a wide range of issues in the context of aid regimes.

The second area pertains to enhancing the investment response; for among the least successful outcomes of the reforms undertaken the sluggish respon= se of investment has been singled out as the most worrisome.

The third area is the reduction of poverty in the process of rekindling growth. The reasons here include the fact that success in reforms to date has hardly been accompanied by poverty reduction on an effective scale and the previous tendency of dichotomizing growth and poverty reduction (mainly via redistribution). Furthermore we are informed by recent research that reducing poverty is a means to further growth as it enhances civil stability and raises the economy's human capacity of growth. This is a perspective distinctly different from the one of the past where poverty-red= ucing programs were considered essentially as consumption programs rather than investment in development capacity. My focus will be on agricultural transf= ormation as a key to poverty reduction.

Finally, state capacity to support private sector-led initiatives in development must be strengthened. This issue will be discussed against the background of the previous preoccupation with downsizing the government and in light of the successful East Asian experience.

(a) Pursuing an Orderly Transition to Less Dependence on Official Development Assistance (ODA)

The challenges which SSA countries face in making an effective transitio= n from the current high dependence on ODA pertain to four major areas of action:

Raising the effectiveness of aid in engendering sustained growth and efficacy of resource use. This takes into account the fact, that SSA is unlikely to increase further its share of total ODA which reached 35% by early 1990s that aid budgets are declining and that private capital flows are rapidly rising and dwarfing those of ODA.

Creating in the recipient countries conditions which are conducive to a diversification of sources of external finance and a the reduction over time of the share of ODA in the total external financing of developmen= t. There is a continuing need for external resources to complement the mobiliz= ation of own resources in order to ensure that recent efforts aimed at reforming the SSA economies are sustained and growth is revived. Furthermore donor support or a seal of approval from international financial institutions have been taken by investors as signals of prudent behaviour.

Stepping up domestic resource mobilization including increases in domes= tic saving, the generation of foreign exchange and the collection of government revenues. This arises from the understanding that own resources will form the financial base for sustained development initiatives.

Strengthening the local capacity to initiate and manage sustained chang= e, including the capacity of governments to plan and implement macroeconomic and sectoral policies. The aim should partly be to reduce reliance on techn= ical assistance over time which should free resources for programme and project support.

Raising the effectiveness of official development assistance requires a candid and thorough reappraisal of the approaches to the provision and utilization of aid by all parties concerned, learning from past experience and taking into account the major changes taking place in the recipient countries and the donor community. It entails a review of donor practices in designing and implementing programmes of assistance on the one hand and creating conditions for efficient and transparent use of committed resources on the side of recipient.⁵ It should emphasize a resul= t-oriented approach in designing and using development assistance. In the light of the empirical evidence that ex-ante conditionality does little to improve the policy environment (Burnside and Dollar, 1997), greater selectivity in external support should prove more effective.

Fundamental to the effort of diversifying the sources of external financ= e are four related areas of consideration.

a) Improved creditworthiness to attract private external finance. In this respect sovereign risk as influenced partly by the ability to service debt and by constraints to the cross-border transfer of profits is a key factor (Jaspersen et al, 1995). Because of both higher costs of private finance and the tenuous nature of private sector's willingness to lend, creditworthiness takes on greater importance in determining whether or not progression from official to private lending will be smooth (Kharas and Sishido, 1991). Potential financiers pay greater attention as to whethe= r or not efficient mechanisms for allocating resources are in place as well as to countries' growth and export performance. Furthermore, stability, policy credibility and sustained efforts to maintain both are important for reducing uncertainty and raising creditworthiness. Key elements in securing policy credibility are the adequacy of finance and the assurance of its continuation (Helleiner 1993). This underscores the critical importa= nce of stability of ODA in reducing the perceived likelihood of policy reversal= s in response to sudden resource crunches. In this way, aid can play a signif= icant catalytic role in attracting other forms of foreign capital in the future.<= br>

b) It is important to develop co-financing arrangements between ODA and private capital in a way that will permit ODA to leverage private resou= rces. The scope for partnership between ODA and private capital has also expanded in view of the recent interest of private capital for investing in infrastr= ucture. Divestiture from power and other utilities, previously the sole domain of the public sector in the region, widens this scope further.

c) Conditions which are more specific to foreign direct investment must be created. This includes putting in place adequate infrastructural service= s, strengthening the operation of transparent property rights with a judiciary which can enforce them, and strengthening human competence which can absorb the new skills required by foreign firms. A stable political and social environment is critical for the protection of property. These factors are more important than commercial incentives typically offered by countries seeking to attract foreign investors.

Domestic resource mobilization is the main source of development financ= e. Low-income countries now save up to 30% of GDP, as compared with 22% in 1980, dwarfing even the recent spectacular rise in private capital flows as a source of finance (Stiglitz, 1997). Increased revenue collection by governments is perhaps one area with the greatest potential judging from recent successful experiences of Ghana, Uganda, Tanzania and Kenya. To a large extent, success in this effort hinges on three main areas of action= .

First is to reduce leakages and raise the productivity of the tax system by reducing exemptions and opportunities for evasion. An improved and simpl= ified tax structure, a strengthened tax administration, improved incentives for collectors and firms as well as definitive action against misconduct on the side of collectors and payers are essential for plugging the leakages.

Second is the widening of the tax net to enlarge the tax base. Bringing a large part of earnings from previously untaxed earners is critical for expanding the tax base.

Third is encouraging voluntary compliance through tax education and engendering fairness in treatment. Demonstration of value for money on the side of government expenditure, simplified tax structures, and avoidanc= e of prohibitive tax rates are conducive to voluntary compliance.

On the side of export performance concerted efforts need to be made not only for raising the volume of exports but also achieving a diversified export base. It has been noted that those countries which have increased volumes of exports in response to realignment of incentives towards product= ion of tradeables were much less successful in raising real export earnings due to a sharp deterioration of the terms of trade. Producers of primary commodities have been particularly hard hit by this deterioration of the terms of trade, partly offsetting success in increased volumes. Diversifica= tion away from dominance of this category of exports is therefore critical for sustained higher export earnings. In order to succeed in the diversificatio= n effort, it is important that export competence in non-primary commodities sectors be developed, particularly in terms of production capacity for the higher quality goods to meet the more discerning consumer standards, improved market access and infrastructure.

(b) Supporting Investment Response to a Virtuous Circle of Reforms=

Among the most critical challenges faced by SSA countries now is that of promoting private investment to support economic expansion and help sustain the virtuous circle of economic reforms. Sustained growth heavily depends on increased investment which is necessary for enhancing the produc= tive capacities of these economies. To date SSA region has not been successful to partake in the ongoing boom of the global capital market, attracting only 4% of the international capital flows. Available evidence shows that the response of private investment to reform measures has been slow. Where such response has occurred it has tended to be dominated by short-term investment particularly in trading activities, with quick returns rather than long-term higher risk irreversible investment in production (Elbadawi, Ndulu and Ndung'u, 1997; Severn, 1996). Furthermore, anecdotal evidence suggests that where flight capital returned, it has tended to be held in liquid assets such as foreign currency deposits in domestic banks and treas= ury bills rather than irreversible capital assets.

The above suggests that stabilization by itself may not be enough to trigger the "good equilibrium" which is consistent with a virtuous circle - from stabilization to growth. The would-be investors exercise their option to wait until the front-loading of investment returns are sufficient to compensate them for risk of long term investment or repatriat= ing flight capital.

The main factors behind this worrisome situation are three-fold. First, while current gains in economic and civil stability are a good signal to investors, their decisions are based on future expected returns. Fears of policy reversals or relapse into civil disorders keeps long term commitm= ent of resources away. Imperfect policy reforms creates value for the option to wait before investing in irreversible assets (Rodrik, 1991). Policy credibility is thus fundamental to breaking the tendency of the market to wait. Second and partly linked to the first factor is the uncertainty-in= duced effects of the large debt overhang. The large overhang creates doubts on fiscal-sustainability given that a large proportion of outstanding debt is public or public-guaranteed. Future debt service burdens are viewed as a threat to sustaining reforms and a potential for high inflation tax to meet debt service requirements. Third is the problem of legacy of bad reputation linked to previous regimes particularly in the cases where expro= priation of wealth were practiced and attitudes towards the private sector were negative. The problem of bad reputation is not confined to national boundar= ies particularly when it comes to foreign investors. Spillovers of civil strife= s are a real threat to investment which gives this problem a regional dimensi= on.

To date governments is SSA have emphasized provision of infrastructual services and commercial sweeteners to attract investment. Not as much effor= t has been directed at strengthening human capacity - especially skills - necessary for ensuring high returns and productivity of investment. The most neglected area is that of non-commercial risk associated with the factors mentioned earlier. To repeat them, these are associated with securi= ty of property, openness to trade and finance, and policy credibility. The concerned governments need to signal safety of investment through clear binding mechanisms for ongoing reforms, strengthening institutions which guarantee security of property and more generally create an environment which is friendly to capital.

On the other hand, strengthening of human capacities is required to raise returns to investment. The private sector needs to acquire skills to manage enterprises efficiently. These should be supplemented by an array of technical and scientific skills to enable absorption of technology. Institutions need to be developed to provide information on markets and investment opportunities so as to improve efficiency and productivity.

(c) Promoting Poverty-Reducing Growth

Poverty in Sub-Saharan Africa is both broad and deep. Its reduction therefore requires a combination of frontal action focused on expanding opportunities for the poor to earn a decent income and targeting special needs. It demands accelerated growth which is at the same time broad-based and labour-using. While growth has been shown to be broadly effective in reducing poverty, worsening of inequality in the process of growth may more than offset this gain (Ali, 1996). Empirical evidence confirms that incidence of poverty is more sensitive to changes in income distribution (GINI coefficient) than to changes in mean income, with the corresponding elasticities of 3.9 and 2.3 respectively. This underlines the need to pay attention to distinguishing bad and good qualities of a growt= h strategy which revolves around the extent of spreading benefits from growth= .

During the 1970s, focus was on redistribution often at the expense of growth. Emphasis on redistributive measures alone via transfers in SSA proved ineffective for dealing with pervasive poverty as resource constrain= ts, particularly for government budgets quickly asserted themselves. Where such action undermined growth by distorting incentives, it also eroded the fiscal resource base of transfers (Ndulu, 1992). Furthermore market-wid= e subsidy programs were often ineffective in reaching targets due to leakages in favour of those who did not need the transfers in the first place. It also became quickly clear that the public sector can not shoulder this task alone and needed to act as a catalyst for private sector and community initiatives.

For benefits from growth to be widely shared and contribute to reducing poverty in the region four strategic considerations are instructive.

(i) Growth has to begin in the country side and in the urban informal sector from where the majority of the poor derive their incomes. Agricultur= al transformation to spur productivity growth is the single most important action in this respect.

(ii) Redistribution of productive assets in favour of the poor is fundam= ental to enhancing their capabilities to engage in productive or income earning activities. Land and human capital are the key productive assets in this regard.

(iii) Improvements in infrastructure to favour locational concentrations of poverty will support rise in incomes as it will spur efficiency and reduce transactions costs with market integration.

(iv) Conserving natural resources and environment is pro-poor in the SSA's context given the high dependence of the poor on this resource for their livelihood.

The above requires mainstreaming of poverty reduction in the context of development strategies and can not simply be a by product of efforts in raising growth. Action has to be grounded on local initiative and politi= cal commitment to poverty reduction. Those with higher income can use their wealth to leverage political influence in favour of policies which raise returns to their own investments and in the process disadvantage the poor who have to bear the burden of policy distortions arising from such interve= ntions (Persson and Tabelini, 1992). An open political system where the citizen's voice plays an influential role in determining policy is perhaps the best defense against such actions. Decentralization of the management of poverty= -reducing programmes to local authorities and communities (e.g. on Uganda) is also proving effective for broadening accountability to those who benefit from them, apart from encouraging supplementary efforts and initiatives.

The renewal of growth will need to start in the countryside, and agricul= tural transformation thus needs to be reinstated onto the development agenda (Ndulu and van de Walle, 1996). Thirty-five percent of Sub-Saharan Africa's GDP and 70 percent of Africa's population depend on agriculture, and povert= y alleviation will depend on agriculture's performance for the foreseeable future. Although recent measures have focused on incentive structures to elicit increased supply from existing capacity, inadequate attention has been paid to improve agricultural productivity and aggregate production capacity, yet these are fundamental to the sector's development and to the health of the overall economy.

The thrust of the strategy should focus on the pursuit of investment in new sources of productivity growth (Delgado, 1996). These sources of growth revolve around the reduction of transaction costs in the sector, particularly in relation to transport costs, the adoption of technological innovations to enhance supply responsiveness, and the creation of schemes aimed at reducing risks so as to enable specialization according to ecologi= cal comparative advantage. In this respect a fresh look at the transformation of agriculture needs to incorporate strategies for strengthening human capabilities, redefine the roles of the public and private sector in the transformation process, focus on investments in rural infrastructure, and strengthen the rural institutions needed to promote longer-term investments in the sector, in particular land tenure and credit institutions.

(d) Strengthening State Capacity in Support of Development<= /u>

A successful development strategy in Africa must include a constructive role for the state in fostering and managing the development process. The role of the state in efforts to initiate, implement, monitor; manage, and evaluate policy change is now increasingly recognized, as is the need to strengthen the present capacity of the state, even as the scope of' its activities is circumscribed. It has been argued that rapid economic growth of the kind witnessed in East Asia probably requires the state to take a more proactive role than simply providing basic public goods like stable property rights, basic infrastructure, and law and order. In the immediate run, all African governments should make sure that they are capable of providing these basic public goods. The longer-term challenge for African governments is to overcome the weak capacities of current public institutio= ns so that governments can play a more proactive role. Until the state's curre= nt weaknesses are alleviated, however, to be effective, such a proactive role will have to be undertaken rarely and with caution, notably regarding its budgetary sustainability and administrative implications (Ndulu and van de Walle, 1996).

Four critical challenges are identified here for enhancing state capacit= y to fulfill its roles in the changing context reviewed earlier under section two. First is to strengthen the bureaucratic competence and cultivate perfo= rmance culture of the civil service. Initially civil service reforms tended to pay more attention to downsizing for the purpose of narrowing the budget deficit. More recent focus on improving the efficacy of the civil service to deliver public services in a cost-effective manner and enhancing the policy making capabilities of a small number of core state institutions is a step in the right direction. This builds partly on the rise of technoc= racy in economic management spawned by more than a decade of adjustment which has taken the direction of rule-based rather than discretionary management (Gordon, 1996). In combination with enhanced incentives and esprit de corps among the civil servants, these measures will galvanize efficiency and initiative in the civil service. At the same time the rising trend towards accountable public action puts pressure on effective performance.

Second, economic reforms that dismantle state controls or divest the state public enterprises can help promote state effectiveness, by concentra= ting resources and effort on a limited number of functions. This assumes greater significance as more demands are placed on the limited state capacity for efficient and accountable economic management. Setting priorities for the activities of the state therefore is necessary with the scope increasing only as capacity is strengthened.

Third, with the current process of democratization in Africa, public participation and competition in the policy process has put a different kind of pressure in relation to opening up and improving the state's perfor= mance. It calls for a careful balance between enhancing participation in decision making at the same time avoiding to be overburdened with constituency press= ures which do not serve national interest. Part of the solution is to strengthen administrative structures so that they are capable of processing, channelin= g, and where necessary, rejecting demands. The other part is strong-willed protection of civil service by political leadership for the implementation of politically difficult decisions. Yet another aspect is that establishing agencies of restraint which can protect policy processes from political pressure (Collier, 1991). Policy making in these countries therefore has now to contend with mechanisms for arriving at consensus for implementable policies while at the same time leaving sufficient room for administrators and technicians to proceed with implementation without unproductive interfe= rence.

Finally, strengthening of the institutions of law for protecting propert= y rights and enhancing ability to provide expeditions settlement of commercia= l disputes is fundamental for reducing risks and transactions costs to invest= ors. To a significant extent this entails revisiting provisions for due process of law and insulating the judiciary from political pressures and corruption= .

Conclusion

I wish to conclude by reiterating the following observations. The major challenge for development in SSA in the near future lies in the successful transition from stabilization to renewing growth on a sustained basis. Countries in the region need to confirm that ongoing reforms are sustainabl= e, begin in earnest to pursue poverty-reduction through a wide distribution of benefits from this growth, and embark on a path towards reducing depende= nce on ODA. Creating conditions which are friendly to enhanced private investme= nt is a major part of these initiatives. Similarly the strengthening of state capacity for a judicious initiation and management of the development proce= ss is a sine qua non. This task however needs to take into account changes in the policy environment which has become more participatory and accountable and also place efficiency at the center of how the government does its business.

Table 1: Output and Export Growth in SSA 1990-1996

1. Output Growth by Sub-Region

(Percentage Change - Valued at 1990 prices)

1990-95 1994 1995 1996

(a) Central Africa -2.5 -1.3 5.0 4.4

(b) East Africa 2.9 4.5 4.5 4.3

(d) West Africa 2.4 2.5 3.4 4.2

Simple Average (SSA) 0.93 2.05 3.85 4.0

North Africa 1.5 1.8 1.8 4.4

2. Exports (Including North Africa)

Africa 4.3 8.3 8.1

Developing Countries 13.5 16.2 6.1

South and East Asia 14.8 18.0 5.8

Latin America 9.2 9.9 9.3

Source: UNCTAD, Trade and Development Report, 1997, tables 6 (output) and 2 (exports)

Table 2. MACROECONOMIC PERFORMANCE AND SOCIAL DEVELOPMENT IN SUS-SAHARAN AFRICA 1970-1994.

A. Macroeconomic Performance (Medium)

	1970-79	1980-84	1985-94
1. Real GDP Growth (%)	4.37	1.78	2.68
2. Real Per Capita GDP growth (%)
3. Fixed Investment Ratios (%)=20 Total GDP Private Investment/GDP	17.4=20 7.9	19.5=20 8.9	17.4=20 8.4
4. Investment Productivity¹	21.0	8.0	12.0
5. Fiscal Deficit (%) of GDP	-2.69	-4.78	-4.78
6. Inflation (%)	10.42	12.14	9.86

Source: Calculated from World Tables data base

B. Social Development Indicators For Performing Countries (22 African ESAF Countries)

	1981-85	1991-95
1. Illiterecy (% of age above 15)	62	55
2. Secondary School Enrollment	15	17
3. Infant Mortality (per Thousand live births)	125	100
4. Life Expectancy at Birth (years)	48	50

Source: From Fig.15, IMF(1997b.), p.38, based on World Bank Socia= l Indicators of Development.

Table 3: By How Much Would African Economies Have Growth if Condit= ions for Growth Obtaining in East Asia Were Replicated?

Total Additional Growth

Explained Sources

a) Macroeconomic Policy Environment and openness to trade

b) Initial Conditions for Growth (excluding initial income)

c) Political and Social Stability Institutions & Politics

d) External Shocks

e) Quality of Institutions

f) Geography and Resources¹

Unexplained Differences in Estimated Growth

Sacks and Warner, 1997 (Policy Sources only)

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=A9 Friedrich Ebert Stiftung | technical support | net e= dition=20 bh&ola | Januar 1998

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