Politik und Gesellschaft Online

International Politics and Society
1/1998

Benno J. Ndulu

From Stabilization to Sustained Growth in Africa

Vorläufige Fassung / Preliminary version

Growth and stability seems to be slowly returning to Sub-Saharan Africa
(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 countries
in SSA. Only two countries registered declines in output during 1996. (UNCTAD,
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 example
has maintained an average growth rate in excess of 7% for nearly two decades
now. Furthermore given the In any event African economies would need to
sustain faster growth in view of its significantly higher rate of population
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 expansion
attributable to the increased volume of exports (UNCTAD, opt. cit.). However,
SSA's share in world trade currently stands at 1% down from 3% in the mid-1950s.
(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 inflation
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 stability
of their currencies. To a large extent this has been a result of reducing
the recourse to inflationary financing of budget deficits. Ultimately however
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 Mozambique,
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-wide
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 Martin,
1996).2 The scores remain significantly below the ratings for
East Asia, Middle East and Europe. However the fact that all the key indices
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 performance
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 background
of a rising polarization of incomes within countries (UNCTAD, 1997; Ravallion
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 investment
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 1980-84
and 1985-94, mainly to accommodate the budgetary crunch caused by stabilization
(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 changing
conditions affecting the regions future development and identify the key
challenges for implementing the required action.

Fundamental Obstacles to Economic Development in Sub-Saharan Africa

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 population.
The second dimension is that of reducing the incidence, breadth and severity
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-term
growth differences has identified five major categories of explanatory
factors. These are differences in: the initial conditions for growth affecting
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 institutions
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 income
per capita if the right conditions are created. The recent high growth
performance in some countries of the region confirms this assertion. Estimates
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 another
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´s 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 competitiveness
and profitability of exports; price stability; a deeper and more mature
financial sector; and a more open trade regime which exposes domestic producers
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 overhang
and debt service impacts, would therefore have resulted in an additional
0.21% growth.

(f) Reducing civil conflicts and engendering civil liberties would create
a more stable political and civil environment and would add about 0.1 percent
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 difference
in growth performance attributed to this factor.

Another way of assessing the relative significance of the various factors
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 difference.

We can now link these findings to five key obstacles to growth identified
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 macroeconomic
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 financial
markets to cover themselves against even reversible temporary shocks. Fourth,
political instability and civil strife have disrupted the growth process
by destroying human and physical capital, as well as by raising risk perceptions,
thus discouraging investment. What is worse is the fact that the negative
effects of such instability are not contained within the countries concerned
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 redistributive
policies has been singled out as a major explanation. Recent literature
has shown that tackling poverty requires a combination of growth and distribution
measures as encapsulated in the term "broad-based growth" (World
Bank, 1994). The previous evidence that growth and inequality are conflictive
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 income
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 indeed
also a means to it (Ndulu, 1997a). In recent cross-country studies of growth,
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 instability
(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 effects
of past bad reputation, be it linked to policy malpractice, political instability
or civil strife, have been shown to be persistent (Collier, 1996). Investors
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 behaviour
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 concerned.
This raises the importance of government in relation to investment. Previously,
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.

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-based
market economy, which requires more information on behaviour of various
entities and markets and more knowledge of the efficacy of policy instruments
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 relationships
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 conditionality-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 strategies.

A growing media involvement in some of these countries have sharply
raised the costs of policy mistakes, performance failures and non-transparency.
Governance has thus been brought much closer to the center of the development
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 endowments,
incomes, social status and human capacity of the population. Moreover,
there are differences in the extent of the pursuit of reforms and the stability
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 instability
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 investors
and official development assistance.

Perhaps roughly two-thirds of the countries in the region are characterized
by a relatively stable civil environment, move towards more open contested
politics and pursue economic reforms, albeit at different paces. The biggest
challenge here is that of pursuing economic and political reforms simultaneously.
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 appears
to be the new areas of policy preoccupation in the region.

The first area relates to managing an orderly transition to less dependence
on official development assistance. Three reasons account for this choice:
the emerging reality of decreasing aid budgets, encouraging signs of sustainable
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 response
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-reducing
programs were considered essentially as consumption programs rather than
investment in development capacity. My focus will be on agricultural transformation
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 transition
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 development.
There is a continuing need for external resources to complement the mobilization
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 domestic
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 change,
including the capacity of governments to plan and implement macroeconomic
and sectoral policies. The aim should partly be to reduce reliance on technical
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 result-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 finance
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 whether
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 importance
of stability of ODA in reducing the perceived likelihood of policy reversals
in response to sudden resource crunches. In this way, aid can play a significant
catalytic role in attracting other forms of foreign capital in the future.

b) It is important to develop co-financing arrangements between ODA
and private capital in a way that will permit ODA to leverage private resources.
The scope for partnership between ODA and private capital has also expanded
in view of the recent interest of private capital for investing in infrastructure.
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 services,
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 finance.
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 simplified
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 avoidance
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 production
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. Diversification
away from dominance of this category of exports is therefore critical for
sustained higher export earnings. In order to succeed in the diversification
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 productive
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 treasury
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 repatriating
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 commitment
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-induced
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 expropriation
of wealth were practiced and attitudes towards the private sector were
negative. The problem of bad reputation is not confined to national boundaries
particularly when it comes to foreign investors. Spillovers of civil strifes
are a real threat to investment which gives this problem a regional dimension.

To date governments is SSA have emphasized provision of infrastructual
services and commercial sweeteners to attract investment. Not as much effort
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 security
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 growth
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 constraints,
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-wide
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. Agricultural
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 fundamental
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 political
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 interventions
(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 agricultural
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 poverty
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 ecological
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

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 institutions
so that governments can play a more proactive role. Until the state's current
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 capacity
to fulfill its roles in the changing context reviewed earlier under section
two. First is to strengthen the bureaucratic competence and cultivate performance
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 technocracy
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 concentrating
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 performance.
It calls for a careful balance between enhancing participation in decision
making at the same time avoiding to be overburdened with constituency pressures
which do not serve national interest. Part of the solution is to strengthen
administrative structures so that they are capable of processing, channeling,
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 interference.

Finally, strengthening of the institutions of law for protecting property
rights and enhancing ability to provide expeditions settlement of commercial
disputes is fundamental for reducing risks and transactions costs to investors.
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 sustainable,
begin in earnest to pursue poverty-reduction through a wide distribution
of benefits from this growth, and embark on a path towards reducing dependence
on ODA. Creating conditions which are friendly to enhanced private investment
is a major part of these initiatives. Similarly the strengthening of state
capacity for a judicious initiation and management of the development process
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

(c) Southern Africa 0.9 2.5 2.5 3.0

(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 (%)

Total GDP

Private Investment/GDP

17.4

7.9

19.5

8.9

17.4

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 Social
Indicators of Development.

Table 3: By How Much Would African Economies Have Growth if Conditions
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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© Friedrich Ebert Stiftung
| technical support | net edition
bh&ola | Januar 1998