Economic Reform Issues in Africa

Economic Reform Issues in Africa Lessons for Ethiopia

Keynote Address at the

Inter-Africa Group Symposium to Review Ethiopia’s Socio-economic Performance 1991-1999

by Dr. K. Y. Amoako

UN Under-Secretary-General and Executive Secretary of ECA

Addis Ababa, 25 April 2000

 

 

 

Chairperson,

Your Excellency, the Prime Minister of Ethiopia, Mr. Meles Zenawi,

Friends,

Ladies and gentlemen,

 

It is an honour to be here today. Gatherings such as these, at which government, the private sector, academics, civil society and international colleagues come together to brainstorm, are a microcosm of the sort of partnerships that we are working to forge at the Economic Commission for Africa (ECA). Being based in Addis Ababa, we interact daily with the Government and people of Ethiopia on a range of practical issues. It is a special privilege to have this time and space to exchange views with our host country on the lessons that we are learning regarding Africa’s economic development and how these might apply to Ethiopia. We are all indebted to the Inter Africa Group for convening this important event.

 

I am fortunate today to be part of a distinguished panel that is far better versed in Ethiopian realities than I am. Indeed, the panel includes no less than the Prime Minister of Ethiopia who is widely credited with having a firm grasp of economic policy issues. The Prime Minister has already given us an excellent overview of the key challenges facing Ethiopia. I will thus concentrate on the lessons from the rest of Africa. But, taking advantage of being a guest who has been in the home long enough to be more part of the family than a visitor, I will link these lessons to Ethiopia where appropriate. These remarks are of course not in any way intended to be prescriptive – it is far easier for the crowd at a soccer match to proffer advice to the players than to play the game themselves! But any comments I make are intended in the same fervent spirit of the crowd at the match that wants only one thing: for its team to win!

 

There are hopeful signs that Africa is winning - but needs to train much harder for the world economic league match. Over the

last five years, and for the first time in decades, average growth in gross domestic product outstripped population growth; meaning a small growth in average per capita income. But our studies at ECA show that if the continent is to achieve the internationally agreed target of halving poverty by 2015, average growth will need to double to approximately 8 percent per annum. Ethiopia has set itself a target of doubling per capita income in fifteen years. This implies a GDP growth rate of 7 to 8 percent per annum.

 

The first and obvious lesson from Africa and Ethiopia’s experience is that economic growth is imperative. Many African

countries, including Ethiopia, have made impressive efforts to reverse their declining fortunes through macro economic reform

programmes that have removed the most glaring price distortions. Far more worrying as we look to the future is how sustainable such growth will be.

 

In our bid to answer this question, ECA’s annual economic report last year introduced a sustainability index that took into account a range of factors necessary for long term economic growth. In this year’s soon to be released report, we deepen this analysis by comparing the performance of African countries over the last twelve years. Our finding is that if sustainability is understood to include such factors as human resource development, structural diversity of economies, a variety of dependency ratios, transaction costs, savings and investment, the challenges are daunting.

 

In June this year, the Economic Commission for Africa, the Global Coalition for Africa, the African Development Bank, the World Bank and the African Economic Research Consortium will publish a landmark report titled: "Can Africa Claim the 21st Century? ". We will argue that Africa can claim the 21st century. But it is a qualified yes, conditional on Africa’s ability-aided by its development partners- to overcome the development traps that kept it confined to a vicious circle of under development, conflict and untold human suffering of the 20th century.

 

The report will highlight four key areas critical to Africa’s ability to claim the 21st century. These are: improving governance and resolving conflict; investing in people; increasing competitiveness and diversifying economies; reducing aid dependence and

strengthening partnerships. Central to all these measures is the recognition that structural adjustment is far more than

macroeconomic stabilisation or getting the prices right, although this is an essential first step.

 

Among the many African countries that have taken this first bold step, Ethiopia is credited as one of the more resolute and better performers. Pursuit of macroeconomic stability has been firm; painful reforms have often been taken with speed and decisiveness; and the Government has taken ownership of these measures. Except for the drought years of 1993/94, and again in the recent period that I will return to later in the speech, growth has been impressive; averaging 6 percent over the period 1992-1997. This symposium is timely because- like many other African countries- Ethiopia must now determine what the elements of a more comprehensive and longer term approach to economic reform should be.

 

As in the rest of Africa, agriculture must remain a key focus. Our upcoming report shows that agriculture is a classic example of a sector where getting the prices right is not enough. Better producer prices and liberalisation of markets have not induced the necessary supply side response either to ensure food security or provide the basis for agro-industry. Ethiopia is fortunate in the African context in that it has a fairly even distribution of land. But lingering land tenure concerns from the past are a deterrent to greater investment. Use of fertiliser and yields lag behind. Not surprisingly, under the circumstances, agricultural production remains closely linked to the vagaries of the weather. Issues of land tenure, credit and productivity need to be addressed if the sector is to be the requisite engine of growth as well as provide food security - a matter I will return to later.

 

Africa’s experience further shows that economic and social transformation cannot take place without the industrialisation so

central to economic diversification and growth in export earnings. Growth and diversification of exports rank highly on Ethiopia’s economic agenda- rightly so, considering that the country has the lowest exports per capita in the world and that coffee accounts for some two thirds of exports.

 

Available evidence shows that there is significant unexploited potential in Africa’s manufacturing export sector. International and African experience tell us is that no country can industrialise without a clear trade and industrialisation strategy managed by a capable state. The success of such a strategy is also closely linked to private sector development, and here there are major

concerns in Africa.

 

The lack of confidence by the African private sector in their future is manifest in the poor supply side response to the economic

reforms undertaken over the last decade. It is shocking that fifteen years after adjustment began, we should be looking solely to foreign aid to plug Africa’s financing gap rather than to internally generated domestic savings or indigenous private entrepreneurs. This links to another barometer of sustainability- the brain drain that continues at an alarming rate.

 

Foreign Direct Investment (FDI) is another measure of confidence. The rate of return on FDI to Africa is 29 percent per year,

higher than in any other region of the world. Yet only 4 percent of the total investment pouring into developing countries is going to Africa. Rightly or wrongly the perception among foreign investors are that the risks of doing business in Africa are still too high.

 

I know these comments strike a particular chord in Ethiopia, given this country’s rich entrepreneurial traditions; the hundreds of

thousands of Ethiopians residing abroad who represent an enormous force not just for transfer savings but for investment.

 

Important efforts have been made in Ethiopia to improve understanding between the Government and private sector. These

include the establishment of the Ethiopian Investment Agency and the Export Promotion Council, chaired by the Prime Minister, which has proved to be an especially effective consultation mechanism. I understand that a similar body with broader private sector participation is in the process of being set up. These mechanisms help to surface the lingering concerns of the private sector, including remaining regulatory impediments; high transaction costs; and the debates around the desirable extent of state involvement in the productive sectors which remains quite high in Ethiopia.

 

There are of course no simple answers to these questions. But experience tells us that a happy balance can be found between the private sector leading investment in the productive sectors -- with the state playing the role of regulator and providing a safety net for the most vulnerable where profit incentives are not sufficient to guarantee this.

 

An important global phenomenon of the last decade, and one warranting far greater attention in Africa, is private provision of

infrastructure that is in a perilous state in many African countries, including in Ethiopia. Why should infrastructure be the sole

preserve of government when its provision and management are potentially profitable, and when it is a sine quo non for business

development?

 

Of particular concern is the telecommunications sector. Traditionally a government preserve, this sector is one now crying out for

This century. The great advantage of information technology is that it can by pass many of the infrastructural requirements of the past. Indeed, it is an Ethiopian who is showing us, in the rather amazing World Space project, that four billion people in the so called emerging markets of the world can be linked with just a satellite orbiting in space and beaming to hand held receivers!

 

Our ability to take advantage of such developments is directly linked to the dynamism and flexibility of governments around

telecommunication and information policies. Restraints and high costs of telecommunications, high tariffs on computers and

Internet equipment, and other artificial barriers to information and media will retard our growth and our transition to a better

functioning society.

 

ECA, as secretariat of the Africa Information Society Initiative, and convenor of an African Development Forum conference last year on information technology, has been at the forefront of forging partnerships on, and advising governments on

telecommunication and information technology policy issues. We welcome further engagements with our Ethiopian hosts on this

important area for Africa’s future.

 

Chairperson,

Honourable Prime Minister,

Excellencies,

 

Growth, development and innovation are ultimately by people, for people. No country that ignores investment in its most precious resource, its people, can hope to progress. In the recent growth literature on Africa, low levels of investment in health and education have been identified as major impediments to growth. They are at the core of the initial conditions that must be

addressed for Africa’s economic and social transformation in the 21st century.

 

In Ethiopia, years of under investment, neglect of the sector and war led to a steady deterioration of schools enrolment between 1984 and 1994. There has since been a recovery, but enrolment rates are far below the Sub Saharan African average of 73 percent. It is encouraging that human resource development is an area that the government has been giving increasing attention to in its budget allocations over the last decade; although current economic uncertainties threaten to erode these fragile gains.

 

All of Africa’s fragile gains, dear friends, will be lost if we do not confront the single biggest imponderable to our common future: that of insecurity. A key finding of the ECA’s forthcoming report is that almost all the bad performers suffered from serious civil conflict and unrest.

 

The historical relationship between fluctuations in GDP, war and peace is evident in the case of Ethiopia. After contracting by 3

percent in the year that civil war ended, and the year after that, GDP grew in the subsequent five years at a rate averaging 7

percent per year. Even in the drought year of 1993/94, GDP grew at a reasonable rate. In 1998, at worst, overall GDP stagnated when the drought resulted in a decline in agricultural production. The continued drought and cost of the war with Eritrea have cast doubts on growth prospects for this year.

 

Insecurity takes various forms:

 

First, there is insecurity from war. The peace dividends of the Cold War, as we are seeing in many parts of Africa, have been

short lived; overtaken often by civil wars with high civilian casualties and devastating economic costs.

 

Second, there is insecurity from natural disasters. The extremes of floods in Southern Africa and drought in East Africa are proof, if ever proof were needed, that unplanned calamities are a feature of the African landscape that we have no choice but to prepare for. The real enemy is not so much the disasters as our lack of preparedness for dealing with disasters. Solutions must therefore be long term. These must include improving productivity; increasing food storage capacity at a household level and national level; as well diversifying sources of income.

 

Before the current crisis, Ethiopia had in fact come a long way in addressing problems of food insecurity such that the drought of 1998, while leading to a decline in agricultural earnings, did not lead to famine. Thus, even as we support calls for urgent

international help and for the safe passage of food to those who need it, let us look at what we need to do in future to prevent such crises from recurring.

 

Third, adding a painful dimension to insecurity as we look to the future is HIV/AIDS. Later this year, ECA will devote its annual African Development Forum to the theme: "AIDS: Africa’s Greatest Leadership Challenge". In Ethiopia, I am told that over two million people, or 12 percent of the population, is estimated to be HIV positive. Yet we need to go no further than neighbouring Uganda, which took the AIDS bull by the horns to know that it is a challenge that can be overcome- given the right political and leadership commitment.

 

This leads me to a final point: the need for strong and capable states to lead Africa in the 21st century. The list I have given you is daunting. It is not for the faint hearted. As Prime Minister Meles Zenawi has often articulated, it calls for stronger not weaker

states. Strong states should not be confused with more government. Governance is not just about government - but about the

whole range of institutions that make up the state: the legislature, judiciary, the executive, the private sector, media and civil

society.

 

Capable states nurture all of these. Confident governments welcome the views of academics, civil society, the media, even of

opposition parties. To go back to where I started: this is precisely why this symposium, bringing together as it does so many people ultimately united by their love of Ethiopia, is so important. I wish you all the very best in your deliberations.