Kenneth S. Rogoff
Kenneth S. Rogoff

Speeches

United States and the IMF

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Speech on the African Economic Outlook
By Kenneth Rogoff
Economic Counselor and Director, Research Department
International Monetary Fund
Given at the African Development Bank Symposium on NEPAD
Addis Ababa, May 27, 2002

I first wish to thank Mr. Omar Kabbaj, President of the African Development Bank for his kind invitation to address this esteemed audience. It is impossible to sit at this conference and fail to be impressed by the clarity, vision and breadth of the NEPAD initiative to enhance growth in Africa. I am honored to be here.

As some of you may know, I am a relative newcomer to the Fund, having only arrived ten months ago from my academic position at Harvard. There are many distinguished guests here today, but I want to particularly note the presence in the audience of my colleague Mr. Abdoulaye Bio-Tchané, who has recently arrived at the IMF as the new Director of the African Department. I am indeed fortunate to have a colleague here who is both well known and highly regarded by this audience. Frankly, I am also happy to see Abdoulaye here today because he is the only IMF Director who has been at the Fund fewer months than I have!

Later on this afternoon, I will be giving a press conference on the World Economic Outlook, with special focus on Africa. Remarkably, this is the first time that the World Economic Outlook has been presented in Africa: I hope it is the beginning of a tradition. Later on in my talk, I will give you some flavor of what we see as the economic outlook for Africa - it is actually rather positive, especially in light of the slowdown elsewhere in the world. I wish to particularly thank the two African executive directors at the IMF, Messrs. Cyrus Rustomjee, and Alexandre Barro-Chambrier, who have both strongly encouraged us to present the WEO in Africa. In recent years, the International Monetary Fund has expanded its commitment to Africa in many ways. Beyond the visible initiatives such as the PRSP process, PRGF and the HIPC initiative, the IMF has also redirected its energies towards African development issues in a number of other ways. At the end of my talk, I will discuss some of the ways the IMF's Research Department is trying to enhance its work on issues relevant to Africa.

Earlier this month, the IMF's Managing Director, Horst Köhler, completed his third trip to Africa during his first two years in office, more than to any other developing country region. The Managing Director has impressed upon me, and upon the entire IMF Staff, his deep personal commitment to Africa. His vision, and I certainly share it, is that the partnership between the IMF and Africa will continue to grow much stronger during this first decade of the new millennium, and beyond. I commend to you Mr. Köhler's speech, delivered in Ghana on May 3, 2002, on "Building a Better Future for Africa," in which, among other things, he strongly endorses NEPAD, and details progress that the IMF sees across the continent. Certainly, inflation is far lower than a decade ago, with the median inflation rate now standing at 5 percent in sub-Saharan Africa, and it is even projected to fall slightly in 2002. This is an outstanding performance indeed. Low inflation is not an end in itself, but important as a foundation for growth. Benin, Botswana, Burkina Faso, Cameroon, Ethiopia, The Gambia, Mauritius, Mozambique, Senegal, Tanzania and Uganda are all countries that have recently sustained GDP growth rates in excess of 5 percent or more. Their governments have curtailed domestic financing of budget deficits and reduced inflation, while doing a better job meeting the needs of their poorest citizens.

I now turn to the April 2002 World Economic Outlook. We see global growth in 2002 at 2.8 percent rising to 4.0 percent in 2003, at or near potential. For the United States, our projected growth rate is now 2.3 percent for 2002, but the 3.4 percent we project for 2003 more accurately captures where we expect the US to be by the end of this year. Africa, interestingly, has experienced reasonably good growth despite difficult external conditions. Overall, Africa did not experience as sharp a slowdown in 2001 as the rest of the world. Average growth in 2001 in Africa was 3.7 percent; for sub-Saharan Africa, the growth rate was 3.4 percent. We project similar growth rates in 2002 (3.4 percent and 3.5 percent for African and sub-Saharan Africa respectively) with the corresponding numbers for 2003 being 4.2 percent for both groupings. As the WEO notes, the improved performance of Africa in 2001 partly reflects a reduced number of conflagrations and a reduced incidence of droughts. Commodity prices play a very important role in Africa. Despite the steep drops in non-fuel commodity prices in recent years, we do not see this trend continuing in 2002 or 2003. Our projections, based in part on models but also on futures prices, show a slight uptick with prices for cotton, robusta and wheat being particularly strong. Our projections show a slight rise in prices for metals and coffee, with prices for sugar, soybeans and coca being flat. Tourism, which is particularly important for countries such as Morocco, Kenya, and Tunisia, is also likely to pick up somewhat in 2002, after being adversely affected by September 11.

How confident are we in the global upturn, and in our projections for Africa? Forecasting is a difficult game, but there are some good reasons for a reasonable degree of optimism. First, we see the technology boom continuing to be played out throughout the world over the next decade, with benefits also accruing to Africa, partly through direct import of technology, partly through enhanced trade opportunities. Also, as discussed in the April 2002 World Economic Outlook, we find that recessions have been becoming steadily milder over the past 100 years, implying that the recent downturn was fairly typical. There are, of course, risks to global growth, which we detail in the World Economic Outlook, including a deflation of global equity markets, a too sudden reconfiguration of global current account imbalances, and other non-economic risks resulting from possible regional conflagrations. Such risks are always present in Africa, but they have been notably reduced in recent years.

What are some economic policy lessons from the recent African growth experience? The first is the importance of flexibility, both in product market prices and in labor markets. It is important to let price signals pass through to markets so that needed adjustments can take place. Another lesson is the importance of free trade. African countries that have emphasized outward orientation have benefited. Of course, access to markets is critical. In this regard, recent US trade policy slippages have been unfortunate. However, I want to be clear on two points. First, the main problem for Africa is not the tariffs the rest of the world puts on its exports, but the tariffs Africa places on itself. Despite marked improvements, average tariff rates in Africa are higher than for any other region of the world. Second, the US trade policy changes will hurt some African countries, particularly cotton exporters. But my real concern is not the direct impact of US trade policy setbacks, but the indirect impact. When the US backpedals on trade, it makes life more difficult for those espousing liberal trading regimes all over the world. Please understand that the United States is the leading champion of free trade in the world, and the level of its farming subsidies are still well below that of Europe even after the recent farm bill. The whole world looks to the United States as its moral leader in trade. If the pope were to steal a dollar, it would be worse than an ordinary member of the church stealing a million dollars. But Africa must not react to the recent trade slippages by looking inward. In research at the IMF and the World Bank, we can find no examples over the past two decades of countries that have enhanced growth by looking inwards, by becoming less open to trade.

Over the longer term, a major challenge to Africa is how to attract a larger share of world FDI (foreign direct investment). Regrettably, Africa's share has been steadily declining, from 5.3 percent of global FDI in 1980, to 2.3 percent in 2002. Africa's share of FDI to developing countries has fallen by a similar magnitude. Reversing this unfortunate trend is a fundamental challenge. In addition to the steady improvements in the macroeconomic climate we are starting to see in many African countries, it will be important to press on to achieve the goals of NEPAD. This is particularly true with respect to governance and strengthening the rule of law, which are fundamental to improving FDI over the long term.

Finally, how are we trying to redirect long-term research at the International Monetary Fund to better meet the needs of our African members? Of course, the first thing is that we coordinate our efforts with those of the World Bank which, after all, is much larger than the IMF. It has four to five times the staff, depending on how you count. (As an aside, I might mention that the World Bank's presence in Washington is so much larger than that of the IMF that virtually no one knows who we are. When I tell ordinary people in Washington that I work at the International Monetary Fund, they often ask whether that means that I work at the World Bank, and by the way, do I know their friend there? By now, I have given up trying to explain that the IMF is somewhat different and just say, yes, I do work at the World Bank.)

Since the IMF's comparative advantage over the World Bank is in the field of macroeconomics, we are trying to focus our research there, rather than on the broad array of microeconomic issues, where the World Bank has far greater resources. Among the many issues we are working on in the Research Department of the IMF include the effects of commodity prices on exchange rates and output, and the implications for monetary policy, capital market access for Africa, and range of issues related to growth and fiscal policy. My own research concentrates particularly on the efficacy of alternative exchange rate regimes.

Many have asked me how research at the IMF compares to research in academics. There are many similarities, but also differences. Not long before leaving Harvard University, I attended a seminar by one of the world's leading young monetary theorists, who presented a brilliantly complex model on the foundations of money and inflation. In order to simplify the model, the author explained, he had to assume that the world is flat. Given this assumption, he proceeded to cleverly manipulate the model to yield new insights about inflation and monetary policy. One young graduate student, not yet fully socialized into academic research, raised her hand and timidly asked "But what if the world is round?" (motioning three dimensions with her hands.) The answer: "Sorry, that case is too difficult, there are no useful results." Seriously, as an experienced researcher, I know that often one needs to work out the case where the world is flat before rising to the challenge of the realistic case where it is round. But as a policymaker, I know that is important not to always take theoretical models too literally, even where they give important insights.

At the Research Department, we are deeply engaged in issues related to poor countries, and to Africa in particular. I cannot promise that the answers will come easily or that our answers will suggest easy alternatives. But I can promise that at least I will try my best to offer ideas that work when the world is round, not just when it is flat. Thank you, and I very much look forward to hearing your ideas and your input on any issues where you think new research or policy thinking is most needed.




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