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Finance & Development
A quarterly magazine of the IMF
December 2006, Volume 43, Number 4

To the Editor

Corruption taking its toll on growth

In "Rethinking Growth"(March 2006), the authors describe six lessons that may help explain the stunted growth of many developing countries in the 1990s. I agree entirely with those lessons, but would add a seventh, which is no less important: poor governance and corruption.

I am surprised that the countries of Africa—which I know well—experienced any growth at all during the period in question, given what was going on in terms of misappropriating funds. Sadly, citizens of those countries are for the most part unaware of what is happening. Otherwise, how can we explain the fact that some government officials are still getting away with misappropriating meager state resources, placing them in foreign banks, or investing them abroad?

Is growth possible without optimizing funding? Even foreign direct investment is not well received in those countries owing to corruption: often, those in power require investors to pay them personally a percentage of their capital before they can obtain authorization to invest in the country. This is an enormous disincentive for investors. Bogus investments are also very common in developing countries due to corruption. And donors are undoubtedly party to this.

Isidore Dagoudo
Student of Economics
University of Abomey-Calavi, Benin

A missed opportunity

Congratulations on your fascinating issue "The Economics of Demographics" (September 2006), which is well crafted and most timely. Unfortunately, you missed the opportunity to put a much stronger focus on sub-Saharan Africa. Today, 31 of the 35 countries that still have total fertility rates higher than five children per woman are in sub-Saharan Africa. The rapid population growth in Africa, despite the impact of the HIV/AIDS epidemic, will have far-reaching implications for economic growth and development prospects in the region as well as repercussions in other regions (for instance through emigration pressure toward Europe). In addition, the commitment and leadership needed to address these issues both among African governments and development institutions are timid at best. Much more information, policy dialogue, and advocacy are needed. All this would have called for an African story of its own in your otherwise excellent issue.

John F. May
Senior Population Specialist, World Bank
Washington, D.C.

Financial sector is key to Africa's growth

The article by Anne Marie Gulde and Catherine Pattillo on financial deepening in Africa (June 2006) was a very interesting read. It is true that Africa could achieve higher growth through financial sector reform since we know that the financial sector—especially the banks with their capacity to internalize information—is better positioned to lend to companies whose financial situation may be difficult to assess. The small number of banks in Africa, compounded by the lack of product diversity in the banking sector, does not create the conditions for competition. Furthermore, if we look at the distribution of capital, we see that most of the main banks operating in sub-Saharan Africa are subsidiaries of European or American banks. This also stymies competition.

The vulnerability of African economies to external and domestic shocks creates further risks that the banks need to take into account. In most African countries, the stock market is either nonexistent or embryonic. As a result, only a few companies are able to raise funds in the stock market to finance their activities. As for the use of cash in payments, the central bank of the West African Economic and Monetary Union (WAEMU) has only recently issued instructions institutionalizing the use of electronic funds in commercial transactions. In sum, the financial sector as it currently operates cannot effectively finance the national economies.

Sanou Erdjouman
University of Ouagadougou
Burkina Faso