## The Challenges of Globalization for Africa --Alassane D. Ouattara

_IMF News, May 21, 1997_

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## Bibliographic details
- Published: May 21, 1997

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### 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*

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## References

- [Uganda and the IMF](http://www.imf.org/external/country/UGA/index.htm)
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