Africa’s Economic Transformation—the Road Ahead

An Address by Dominique Strauss-Kahn, Managing Director of the International Monetary Fund
At the Kenya International Conference Center
Nairobi, March 8, 2010

As Prepared for Delivery

Good morning. It’s a great privilege to take part in this distinguished panel discussion. A year ago, I participated in a similar dialogue in Tanzania, focused on how the global financial crisis was affecting Africa. And now, a year later, attention turns to Africa’s economic transformation after the crisis. This debate could not be more important or more timely.

Africa and the crisis

Let me begin by talking about how Africa fared during the crisis. As I’ve said many times in the past, African countries were largely innocent victims of the crisis. The crisis struck Africa through many different channels. We saw trade plummet, capital flows dry up, remittances slow, and banks run into difficulties.

The result was a disappointing year for the African economy, marking the end of the longest and broadest expansion in modern history. In 2009, growth in sub-Saharan Africa was close to 2 percent, while it had been humming along at 5-7 percent beforehand.

Average per capita incomes fell marginally in 2009, the first decline in nearly two decades. Behind this lies an enormity of human suffering. Jobs were lost in both formal and informal sectors. Progress in reducing poverty was set back. Nutrition suffered. In other parts of the world, you might lose your job, or maybe your house, in this kind of crisis. In Africa, you could very well lose your life, or the life of your child.

Thankfully, the tide seems to have turned. In line with the rest of the world, an African recovery began in the latter half of 2009. All across the continent, we can see signs of life, with rebounds in trade, export earnings, bank credit, and commercial activity. In 2010, the IMF expects growth of around 4½ percent. In short, I think that Africa is back—although a lot depends on a global recovery that is still in its early stages.

Policy responses to the crisis

As the dust settles, I think one thing is clear—it could have been worse. This recession could have been deeper and longer. Indeed, this was the historical experience—traditionally, recoveries in Africa tended to lag well behind the rest of the world.

But this time was different. Why? The main reason is that many African countries ran good policies before the crisis, policies that inoculated them against a more severe downturn—strengthening budget positions, reducing debt burdens, bearing down on inflation, and building comfortable reserve cushions. Because debt positions had improved dramatically, many countries were able to use the budget to counteract the crisis, rather than making it worse. They strived to preserve—and sometimes even increase—public spending, at a time when revenue was falling rapidly. Fiscal policy was appropriately countercyclical in two-thirds of sub-Saharan African countries in 2009.

A major benefit of the fiscal cushion is that it can protect the poor and vulnerable. Fortunately, during the crisis, social spending was preserved. Thirty-two countries operated conditional cash transfer programs. Some countries adopted a developmental approach to social protection, encompassing public works programs and food security.

For many countries, it is still too early to remove the fiscal crutch. The recovery is still hesitant and unsteady, in need of policy support—especially when there is access to non-inflationary, and preferably concessional, sources of financing. But plans should be laid now to begin rebuilding the buffers that served Africa so well during this crisis.

The role of the IMF

While most credit goes to the countries themselves, the international community also helped Africa cope with the crisis. The IMF certainly played its part. In 2009, we committed $3.6 billion in zero-interest lending to Africa, more than three times greater than in 2008.

More fundamentally, we have revamped our financial toolkit to tailor our lending to the diverse needs of an increasingly diverse group of African countries. We have moved toward less intrusive conditionality, focusing only on core policy measures that are critical for stability, growth, and poverty reduction. And we make sure programs have sufficient measures to protect social spending and pro-poor initiatives.

We have also adopted a more flexible approach to debt. Countries with lower debt vulnerabilities and strong capacity to manage public resources will have greater leeway to borrow more from both concessional and non-concessional sources. We all know that Africa lacks sufficient infrastructure for development.

The IMF also helps through its extensive technical assistance. Sound policies must be built on sound foundations. In many countries, there is still a need to strengthen institutions and build capacity. The IMF runs three well-established regional technical assistance centers—in Tanzania, Mali, and Gabon—with two more coming, in Ghana and Mauritius.

The current challenge

This is not the time to rest on our laurels. Africa remains highly vulnerable to economic dislocation from many different sources. Think about swings in commodity prices, natural disasters, or instability in neighboring countries. Think about the risks that come from relying heavily on remittances, aid, and financial flows. Think about climate change.

So Africa will continue to face large, persistent and costly shocks, and these shocks will continue to cause great human suffering. Without a secure standard of living, people might turn to unproductive or even violent activities, possibly leading to instability, a breakdown of democracy, or war—all compounding the initial suffering. Especially in resource-rich countries, the blessings of riches can turn rapidly into the curse of conflict.

The twin challenges for Africa are to revive strong growth and reinforce resilience to shocks. The first place to start is with macroeconomic policies. A major lesson from the crisis is that countries that sowed in times of plenty were able to reap in times of loss. Policy buffers must therefore be rebuilt, to allow for future countercyclical responses, with fiscal policy and with reserves. Social safety nets must be strengthened—this is the first line of defense for the population against adverse shocks. We should also beware that widening income inequality—across regions or segments of the population—can aggravate tensions and make shocks more destabilizing.

How else can countries increase resilience to shocks? Better insurance can soften the economic hardship from shocks and make public finances more predictable. Policymakers should explore some innovative approaches. For example, countries might benefit from debt instruments with flexible repayment terms, natural disaster insurance, or sovereign hedging instruments. The IMF is doing its part. One of our new facilities, the Rapid Credit Line—designed to deliver fast financing with limited policy conditions—can help countries suffering from shocks, conflict, or other fragilities. We are thinking about ways to further enhance our support for shock-prone low-income countries.

Climate change and climate financing

When we talk about shocks, we cannot ignore climate change. In fact, this could well be the shock to end all shocks. Unfortunately, it will hit low-income countries soonest and hardest. Africa has contributed little to the carbon emissions that endanger our planet, but Africa is already paying the price. Without action, Africa will suffer more from drought, flooding, food shortages, and disease—possibly provoking further instability and conflict. We must take urgent action.

Some may rightly argue that climate change is not in the mandate of the IMF and that it is the job of our colleagues in the World Bank and elsewhere. But the amount of resources needed has clear macroeconomic implications—sustainable growth in developing countries will require large-scale, long-term investments for climate change adaptation and mitigation. The Copenhagen Accord suggests that $100 billion a year is needed by 2020, over and above existing aid commitments. This will be difficult to do with the standard approach—a series of “pledging conferences” for decades to come.

This is why IMF staff is working on the idea of a “Green Fund” with the capacity to raise $100 billion a year by 2020. Let me be clear: the IMF does not intend to manage such a fund. Rather, the intention is to offer something that, we hope, can make a significant contribution to the global debate and for consideration by the international community. And now is the time to put new ideas on the table, as the United Nations High Level Advisory Group on Climate Change Financing—co-chaired by Gordon Brown and Meles Zenawi—is about to begin its work.

Much of this financing should come as grants or highly-concessional loans. For this, we need subsidies. Ultimately, these will have to come as budgetary transfers from developed countries, drawing on scaled-up carbon taxes and expanded carbon trading mechanisms. But these new revenue sources will take time to put in place. So we need an interim solution. A “Green Fund” could provide a mechanism that could act as a bridge to large-scale carbon-based financing in the medium term. And IMF quotas could provide a key for burden sharing, to help overcome one of the obstacles to an agreement.

Launching such a scheme would entail a major political effort. But the potential pay-off is enormous--for Africa and the world. I hope to come back to this theme in a few weeks.

Conclusion

Let me conclude. Transforming Africa’s economy to boost living standards and increase resilience to shocks is a hefty agenda. Africa must take a leadership role, and I commend the stance taken by African leaders, including here in Kenya, on climate change.

Of course, the international community must also play its part. In our increasingly integrated world, a prosperous Africa is in everybody’s interest. It is a two-way process.

Good governance underlies all these endeavors. And good governance begins at home. Africans must put the common good ahead of parochial concerns. At the same time, richer countries must not cave in to domestic political pressures at the expense of future generations and poorer countries. They must resist the temptation to reduce aid, or engage in protectionism.

These are serious challenges. But they are not insurmountable. As Nelson Mandela once said, “It always seems impossible until it’s done”. Thank you.



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