The Challenges of Globalization for Africa --Alassane D. Ouattara
IMF News, May 21, 1997
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- Published: May 21, 1997
Introduction and definition of globalization
- Globalization defined as "the integration of economies throughout the world through trade, financial flows, the exchange of technology and information, and the movement of people."
- Drivers identified:
- Rising importance of world trade and capital flows.
- Phenomenal growth in cross-border financial flows, especially private equity and portfolio investment.
- Revolution in communication and transportation technology and improved information availability.
- Success of multilateral tariff reduction and trade liberalization efforts.
- Acceptance of current account convertibility by more than two-thirds of the Fund's member countries (accepting Article VIII obligations).
- Evolution in economic thought favoring outward-oriented, open economies.
- Key effect: market perception of the orientation and predictability of economic policy increasingly determines economic success, rather than relative resource endowments or geographical location.
Benefits and risks of globalization
- Benefits:
- Wider choice of low-cost goods incorporating advanced technologies; more efficient use of global resources.
- Greater access to world markets allows countries to exploit comparative advantages more intensively.
- Rapid increase in capital and private investment flows raises resources available to countries able to attract them, accelerating development.
- Increased employment in tradable goods sectors (primarily skilled labor) and expanded opportunities for unskilled labor in nontradable sectors (construction, transportation).
- Movement of labor reduces production bottlenecks, raises recipient-country supply response, and increases income in supplying countries via remittances.
- Openness to foreign expertise and management improves production efficiency.
- Risks:
- Investment capital seeking most efficient markets exposes and intensifies existing structural weaknesses.
- Speedy information flow reduces margin for domestic policy maneuver; policy mistakes quickly punished.
- Increased capital mobility can lead to destabilizing flows and heightened exchange rate volatility when domestic macroeconomic policies are inappropriate.
- Non-participating countries risk marginalization.
Distributional effects and prerequisites for benefiting
- Globalization described as non-zero-sum: gains possible without others losing, conditional on correct positioning and policies.
- Those most likely to benefit:
- Economies that open to trade and capital flows on a free and fair basis and attract international capital.
- Economies with good macroeconomic policies and the capacity to respond swiftly to international changes.
- Short-term structural change will disadvantage some societal segments even as overall gains occur; governments should embrace globalization while providing protection for vulnerable segments.
- Credibility and predictability of economic policy are critical; poor or inconsistent policy records risk exclusion from expanding trade and private capital flows.
Recommended policy response (three complementary objectives)
- Success linked to an appropriate combination of policies with three main objectives:
- (i) Achieving and preserving macroeconomic stability.
- Elements: low inflation, appropriate real exchange rates, prudent fiscal stance.
- Rationale: essential for expanding domestic activity and sustaining private capital flows.
- (ii) Promoting openness to trade and capital flows.
- Elements: rationalize and liberalize exchange and trade regimes to exploit comparative advantage.
- (iii) Limiting government intervention to areas of genuine market failure and providing necessary social and economic infrastructure.
- Elements: create enabling environment for investment; eliminate structural weaknesses exposed by international competition.
- Note: No single policy set is sufficient; poor policy in one area can obstruct progress in others.
The challenges of globalization for Africa — progress and statistics
- Institutional and financing support:
- Advanced countries encouraged to further open their markets to products and services where developing world has comparative advantage.
- Need for continued reform support with adequate concessional financing.
- IMF has put the ESAF on a permanent footing to support reform efforts of poorer countries, especially in Africa.
- Fund and World Bank implementing framework to resolve external debt problems of heavily indebted low-income countries (HIPC), including large multilateral debt; three African countries among first considered under the Initiative: Burkino Faso, Côte d'Ivoire, and Uganda.
- Sub-Saharan Africa macroeconomic progress (exact figures preserved):
- "Average real growth has increased from less than 1 percent in 1992 to over 5 1/2 percent in 1996, and this positive trend is expected to continue;"
- "average inflation is expected to fall from the peak of 60 percent in 1994 to 17 percent in 1997;"
- "The external current account deficit has fallen from an average of 15 1/2 percent of GDP in 1992 to about 9 percent projected for this year;"
- "the overall fiscal deficit has been cut from almost 12 percent of GDP to 6 percent over the same period."
- Trade and exchange liberalization indicators:
- "31 Sub-Saharan African countries have accepted the obligations of Article VIII of the Fund's Articles of Agreement, almost all of them since 1993."
- "Number of countries in Sub-Saharan Africa with a 'restrictive' exchange regime declined from 26 in 1990 to only 2 in 1995."
- "Number of countries with a 'substantially liberal' trade regime rose from 26 to 38 over the same period."
- Structural reforms underway:
- Reduction of government intervention; removal of administrative price controls; liberalization of agricultural marketing.
- Restructuring and privatizing state enterprises (speed and success vary).
- Fiscal reform: rationalizing tax systems, reducing exemptions, enhancing administrative efficiency.
- Reorientation of expenditures toward improved public investment and spending on key social services, particularly health and basic education.
Five priority areas for further progress in Africa
- Maintaining macroeconomic stability and accelerating structural reform:
- Emphasize stability and reinforce structural policies to increase flexibility, diversification, and reduce vulnerability to exogenous shocks.
- Further reforms: public enterprise activity, labor markets, trade regime.
- Ensure reliable and cost-efficient public services: transportation networks, electricity, water, telecommunications, health services, education.
- Ensuring economic security:
- Create strong national capacity for policy formulation, implementation and monitoring.
- Guarantee transparency, predictability and impartiality of regulatory and legal systems; eliminate arbitrariness, special privileges, and ad-hoc exemptions.
- Reforming financial sectors:
- Accelerate development and liberalization of financial markets.
- Enhance banking regulation and supervision; develop more flexible financial structures.
- Strengthen financial institutions that are in many cases weak and poorly managed.
- Achieving good governance:
- Tackle corruption and inefficiency; enhance accountability in government.
- Reduce distortionary rent-seeking; eliminate wasteful or unproductive public spending; provide domestic security.
- Reform civil service to reduce size while enhancing efficiency.
- A partnership with civil society:
- Encourage participation of civil society in economic policy debate and secure broad public support for adjustment efforts.
- Pursue active information policies explaining objectives and soliciting input from intended beneficiaries.
Globalization and regional integration
- Regional coordination benefits:
- Coordination of national policies within regional frameworks helps ensure appropriate policies among partners.
- Regional cooperation can overcome small-size disadvantages, open access to larger markets, and realize economies of scale.
- Membership obligations in regional organizations can facilitate regulatory and judicial reform (example: CFA franc zone), rationalize payments facilities and relax restrictions on capital transactions (Cross-Border Initiative), and develop mutual economic infrastructure (SADC).
- Strengthening intra-African trade enhances global trade participation and supports nondiscriminatory multilateral trade liberalization.
- Guidance for regional organizations:
- Should be effective vehicles for integration into the world economy and mutual support in reform efforts—not defensive mechanisms.
- Set common objectives aligned with international best practices.
- Push reforms in legal and regulatory frameworks, financial sector restructuring, labor and investment code reform, and exchange and trade liberalization toward international standards.
- Pace of progress should be feasible, not limited by the slowest member.
Address by Alassane D. Ouattara, Deputy Managing Director of the International Monetary Fund, at the Southern Africa Economic Summit, Harare, May 21, 1997