Africa and the fast changing global economy Washington State - PDF document

Africa and the fast changing global economy Washington State University August 24, 2012 Moeketsi Majoro (mmajoro@imf.org) I. I NTRODUCTION I am ecstatic to share with you a few thoughts on Africa, in the context of a rapidly evolving global economy. As already introduced by Ken, I am WSU 1990 alumni. I went back to Lesotho late 1990 and started off as a lecturer in undergraduate economics, before joining the public service in 2000. In late 2008 I joined the Executive Board of the International Monetary Fund to represent 21 African countries, mostly English speaking, although also Angola and Mozambique (Portuguese), Sudan (Arabic), Burundi (French) and Africa’s new country, South Sudan which joined the IMF in April, 2012, raising total membership of the IMF to 187. In addition to my representation responsibilities, I, together with 23 other colleagues formulate IMF policies and provide oversight over implementation and governance in line with IMF’s purpose of safeguarding global monetary stability. Until the global financial and economic crisis, the IMF was relatively obscure and increasingly irrelevant, at least in advanced countries. Total credit outstanding fell to $10 billion in 2007, contrasting sharply with a previous high of $72 billion in 2003. Staff strength fell from 3 to 2½ thousand, reflecting reduced operations and an apparently obsolete mandate. Major advanced countries shunned its advice and the IMF itself censored the advice it gives to these countries, while being more direct and candid to most emerging and developing economies. With these developments, long standing concerns about legitimacy of the institution began to resurface.

2 While the crisis has broadly restored faith in the Fund’s mandate, regaining legitimacy will require more time and significant redistribution of power more evenly between advanced countries (AEs) and emerging market and developing countries (EMDCs) and in line with global economic weights. Africa, a region notably impacted more than any other over the years by IMF policies, needs more voice and influence over IMF policies. II. D EVELOPMENTS IN A FRICA Post independence folly Many of you are familiar with persistent negative reporting on Africa going back many decades that highlighted in graphic details incidents of famine, gruesome and heart-rending images of war and poverty, corruption and plundering of national resources by African strong men, and excessive over-population. Most of Africa’s new states are about 50 years old, following independence from colonial Europe beginning in 1958 (Ghana). At independence many sub-Sahara African countries boasted better socio-economic conditions than most of Asia, but this was soon reversed. A widespread anti-colonial sentiment amongst post-colonial leaders exacerbated by cold-war political alignments, an unfortunate choice of economic strategy that prioritized import substitution, and the elevation of a developmental state and relegation of markets held the continent back and even reversed the gains at independence. Meanwhile Asia remained open to markets and adopted to great effect human centered and export strategies. 1 In his memoirs Lee Kuan Yew, the post-colonial prime minister of Singapore observed, during his visit to Africa in 1964, “… after seeing Conakry (Guinea) and Accra (Ghana) and meeting leaders who talked in socialist terms of the distribution of wealth, I believed they would be paupers”. History has borne out this observation for most countries with some exceptions such as Botswana. Africa’s share in global GDP fell more

3 precipitously in the 1980s to mid 1990s before staging a steady recovery to just over 2 percent currently. Other metrics including trade and investment show a similar pattern evolution. Times seem to have changed In recent times, observes Mckinsey and Company on Africa “…there has been sea change. Africa is on the move”. 2 They are not alone—media and many global think tanks have changed script and are singing praises about Africa rising. The first and most important change is perception—in part driven by what I consider to be hysterical media reporting and in part by actual progress on the ground. The dismal failure of the import substitution strategy and structural adjustment programs to stimulate growth and reduce poverty, accumulation of high external debts and a wave of democratization created room for new thinking on economic policy both in Washington (consensus) and in African capitals. For their part, the World Bank and the IMF continued to learn from their experiences with structural adjustment amidst considerable criticism and in 1999 began to integrate social protection in their advice to governments. The assumption of power by newly elected leaders, pro-reform, more pragmatic and less tethered to cold war ideologies created climate conducive to widespread policy reform. President Nyerere, the father of African socialism, quietly abandoned this brand and conceded that it had brought harm to Tanzania. He paved way for new leadership and encouraged it to experiment more with market driven policies. It took about a decade, but perception has now turned positive and is resonating globally in official and investment circles.

4 Africa has now experienced more than a decade of high growth, although somewhat below the 7% needed to meet the UN millennium development goals (MDGs). Today, 7 of the 10 fastest growing economies are in Africa. 3 Africa is the second fastest growing region after Asia and its large population is expected to propel domestic demand and sustain growth for decades. The UN Economic Commission for Africa (ECA) has predicted that by 2034 Africa will join China as a new pole of global growth. 4 The IMF has explained that the observed progress is due to years of reform and renewed commitment to good macroeconomic policies. The conjunction of macroeconomic stability, renewed focus on education and health, reduced burden of state enterprises through past privatizations under structural adjustment programs (SAPS), political reforms, debt relief, and more importantly widespread adoption of good macroeconomic policies are at the heart of Africa’s growth success today. Investment A resumption of macroeconomic stability and a gradually permissive business environment have enabled brave investors to explore opportunities and to scale up investment in the face of relatively high returns on investment. Foreign direct investment (FDI) is stepping in to make up for the continent’s perennially low saving rate, climbing to $62 billion in 2009 from $9 billion, before retreating slightly in 2010 to $55 billion. 5 The key factors behind the low but rapidly rising FDI flows include external demand for minerals particularly from China and the rest of Asia and an emerging African middle class estimated at more than 300 million

5 people which is bolstering local demand for manufactured goods and services. Domestic demand is increasingly fuelling large investments in mobile telecommunications and banking, as well as the technological convergence between the two sectors. Banking reforms in the 1990s created privately owned banking sectors that are better governed, well capitalized and profitable. But to achieve profitability, banks had to close rural branches, leaving many citizens unbanked. Mobile telephony has bridged this gap in intermediation by providing some form of banking, money exchange, and transaction services more cheaply than banks would have been able to (M-PESA). 6 Aviation is also reviving with a real prospect to ease travel and trade bottlenecks. The three surviving flag carriers, Ethiopian Airways, Kenya Airways, and South African Airways have recently committed to expand their Africa and international route networks and are briskly acquiring new equipment to reconnect Africa after the failure of flag carriers. 7 Although country-to-country connections continue to lag, particularly in west and central Africa, this is beginning to change with the launch of Asky and Fastjet airlines in West Africa. In addition, Middle East players led by Emirates, which collect and funnel passengers and cargo to destinations worldwide through their hubs in Dubai and Doha, are rapidly expanding their destinations in Africa. Improving aviation networks creates trade spinoffs. Last January, Ethiopia Airways began lifting flowers daily into Washington DC from which they are distributed across the US. This has been possible through to a purchase by Ethiopian Airways of several higher capacity planes (B777LR) from Boeing Corporation, and also holds promise for other countries in east Africa such as Rwanda, Congo, and Burundi that have significant potential for high value perishable cash crops.