The Hindu Business Line : Pulling Africa out of low-growth loop

An Unctad report, analysing the low economic growth of African nations, argues that only strong state intervention can ensure efficient functioning of markets and allocate the available limited resources in an optimum manner consistent with development goals, says

Africa always evokes mixed feelings of a formidable region with immense natural resources, rugged people, abject poverty, political turpitude due to the venality of rulers and a continent largely bypassed by the post-War prosperity, in general, and the more recent liberalisation and globalisation, in particular.

The end of the Cold War, the advent of the WTO with its binding agreements on all members under its ‘single undertaking’ principle, and major advances in science and technology, including information and communication technology (ICT), which could enable “leapfrogging for the laggards” have hardly had a distinctive impact on the Dark Continent, as they have had on the rest of the world.

The United Nations Conference on Trade and Development (Unctad), an inveterate sceptic of the Washington Consensus that placed its faith in market forces for ensuring high growth and development, has recently come out with an incisive monograph on economic development in Africa titled “Reclaiming Policy Space: Domestic Resource Mobilisation and Developmental States”.

Sole exception

According to the report, some regions of the developing world have made sufficient progress towards achieving one of the most prominent objectives of the Millennium Development Goals (MDGs) adopted at the UN Millennium Summit in 2000 which was to have member-states halve their levels of absolute poverty by 2015. But sub-Saharan Africa (SSA) has been singled out as one region that is unlikely to meet the target by that year if current trends continue.

Thus, half-way through to the target year, the latest data on poverty reveals that SSA is the only developing region where the absolute number of poor people has been steadily increasing, even if the relative number declined from 47 per cent to 41 per cent of the total population between 1999 and 2004.

One of the reasons why SSA might miss the 2015 target is its relatively low rate of economic growth. Despite the recent gains made by a number of countries in terms of export revenue, thanks to high prices of some major primary products, the growth rate in SSA as a region continues to fall short of the 7-8 per cent necessary to achieve the MDGs target on halving poverty.

According to Unctad estimates in 2000, investment rates must perforce reach 22-25 per cent in order to increase sustainable growth rates to 6 per cent per annum. Investment rates realised by SSA in recent years, 2000 to 2004, averaged only 18.1 per cent of GDP, while the figure for all of Africa was 20.7 per cent.

The report identifies domestic financial resources as one source that could contribute to closing this resource gap, though these would have to be complemented by Overseas Development Assistance (ODA) and Foreign Direct Investment (FDI). Unctad argues that the role of the state in the support and development of markets and other capitalist institutions is critical. A ‘strong state’ is required for the efficient functioning of these institutions.

Considering the large liquidities in the financial sector of many African economies, countries could consider channelling part of them into a long-term investment fund, it suggests.

Pension funds also hold large financial resources that could be partly invested in the long-term investment fund. Pooling resources would not only allow for funding large projects, but also minimise the loss incurred by each investor should the investment fail. Alongside refocusing development banks’ activities on those sectors that are not traditionally attractive to commercial banks such as agriculture, non-farm rural activities and small and medium sized enterprises, African countries could consider fostering a micro-finance fund dedicated to small credit applicants in urban and rural areas.

The central bank could also allow commercial banks to contribute a portion of their legal reserves to the fund. The report notes that savings and credit could not boost investment in a climate that is not friendly to investors. Hence, it says regulatory measures should focus on the improvement of the investment climate.

First, investment requires reliable infrastructure such as roads, electricity and telephone communication and putting this infrastructure in place if necessary on a regional basis should be a development priority in Africa.

Second, unnecessary bureaucratic barriers could be reduced dramatically without any serious adverse effects. The report also urges African countries to gain by re-designing their tax systems to make them simpler by adopting fewer but differential tariff lines for import of capital or intellectual goods and consumption goods and by relying more on direct taxes. It also asked African economies to be integrated internally before they could integrate gainfully into the global economy. This meant the African economies strengthen their weak domestic linkages, particularly between urban and rural segments, as well as their sectoral input-ouput linkages.

State intervention

Finally, Unctad says the failure of the past development model advocated by the Bretton Woods Institutions has illustrated the need for African states to re-engage in the development business from which they had been marginalised.

It says state’s intervention is needed to ensure that the country’s limited resources are mobilised and allocated in a way that is compatible with its overall development strategy. Pooh-poohing the proposition that state intervention means reversion to protectionism, Unctad unequivocally argues that successful developmental states in both developed and developing world combined subsidies, protection and free trade in proportions that are determined in accordance with the special national situation in their strategic intervention.

Unctad’s message of a strong state intervention in select areas for African countries could also hold lessons to emerging economies like India, suffering from the paradox of high economic growth accompanied by heightened deficit in social and physical infrastructure that has put paid to implementing inclusive growth strategy in any effective manner, despite the persistent call for effective public-private partnerships (PPP) in these projects by the authorities.

G. SRINIVASAN.