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Africa and the IMF: The Challenges Ahead--Address by Michel Camdessus
December 14, 1995
Thank you for your invitation to address the Society for International Development. I am especially pleased to be here, knowing of your commitment to promoting international cooperation and deepening the dialogue on global development issues. Today, I would like to talk to you about one of the most important development issues of our time: the challenges facing Africa, and by extension, the challenges facing the IMF and, indeed, the rest of the international community in our efforts to assist these countries in becoming full participants in the international economy. The challenges facing Africa are no doubt many, but I would like to focus on three that, in my view, capture the essence of its adjustment task.
The first challenge is globalization. We talk a lot about it, and we in the International Monetary Fund have some first-hand experience with it. For instance, on January 31 of this year we had to put huge amounts of money on the table to avoid the financial collapse of Mexico and the spill-over effects that in a few hours or days could have forced many Latin American and other countries to resort to exchange controls and debt moratoria and could have caused a dramatic disruption in private capital flows to developing countries. That experience was a stark reminder that we are already operating in the global economy of the 21st century. Our experience also indicates, however, that thanks to larger capital inflows and higher investment, improved technology and expanding export markets, globalization offers considerable opportunities to accelerate economic progress throughout the world. At the same time, experience suggests that countries that are unable to adjust enough to integrate themselves into the mainstream of the global economy risk marginalization. In this respect, the challenge for African countries is the same as for every other country in the world: to pursue an adjustment strategy that enhances the prospects of benefiting from globalization, while avoiding the risks.
The second challenge concerns growth in Africa--because even if Africa is now doing better, economic progress is still much too slow to have a significant impact on poverty and to make credible headway toward sustainable growth. Indeed, since the early 1980s, sub-Saharan Africa as a whole has slipped farther behind the rest of the developing world in terms of average real GDP growth and per capita income, as well as in terms of its share of total capital inflows and world exports. Part of the explanation for this poor overall record is that, regrettably, there are a number of countries where civil strife, the breakdown of the rule of law, and other adverse political developments have had catastrophic economic effects.
The third challenge comes from the first-hand knowledge that there are African countries that have markedly improved their performance, allowing the region as a whole to achieve a recovery in real GDP that could reach 4-5 percent per annum in 1995-96. This is the challenge to do a better job--always a central concern in the IMF--a better job of assisting our member countries through a process of cross-fertilization of ideas and sharing of experiences on the requirements of sustainable growth and development, and of catalyzing international support for African countries' own efforts.
Yes, these are the three challenges I see, and this is why when I visit Africa--which is frequently indeed--or when I meet with those African leaders whom I see as successful, instead of trying in my job as missionary-in-chief to sell the structural adjustment gospel, I say: "Let's look at Africa. Something more, something better should be done there, for your own success to spread throughout the continent. So tell me your secret; why are you successful where the others are not? And you, investors, why are you taking risks and investing in country X and not in country Y?"
Many African leaders, including President Masire of Botswana, President Compaoré of Burkina Faso, President Konaré of Mali, President Museveni of Uganda, President Soglo of Benin, and several others whom I met recently on the occasion of the Global Coalition for Africa meeting in Maastricht, could tell you about our conversations. And it is with the lessons we draw from them that we continuously seek to adjust and refine adjustment and reform programs. So let me share with you directly what I have learned from successful African leaders and investors in Africa--then you will know almost everything about what we in the Fund--together with the World Bank and others--are trying to do in this region that has so much potential. You will also understand why I believe that Africa can succeed in taking advantage of the opportunities in the global economy and overcome the risk of marginalization.
So what do we take from one country to another, like bees in this process of African cross-fertilization? What we have learned is simply that the process of development can get under way, provided a few basic conditions are met. The crux of the matter is that in order to compete internationally, economies must first function well domestically. To do this, they must overcome the sense of economic uncertainty--about domestic security, the direction of future macroeconomic policy, the permanency and predictability of the regulatory system, property rights and the enforceability of contracts, and the reliability of public services, among other risks--that pervades many countries. When this uncertainty is reduced, economic decision-making can proceed, especially the investment decisions that are critical to getting economies moving on a sustainable basis.
A major task for improving international competitiveness is, therefore, to establish an environment of domestic economic security. What does this entail?
The first requirement is getting the economic fundamentals right, beginning with restoring and maintaining financial stability, including relatively stable prices. Do you know what President Museveni answered when I asked him about the secret of Uganda's remarkable success? "First, eliminate inflation! Second, eliminate inflation!" Accordingly, fiscal deficits have to be reduced to the point that they can be financed in a non-inflationary way, do not crowd out private sector activity, and remain consistent with a sustainable debt situation. This requires, of course, a major effort to mobilize increased domestic resources--and they exist--so that adequate provisions can be made for health and education, agriculture, appropriate social safety nets, and basic infrastructure. To this end, a strengthening of tax administration and enforcement, a broadening of the tax base, and the elimination of exemptions are often necessary and, I would add, preferable to inexorably raising taxes. Reducing unproductive expenditure and tackling the problems of loss-making public enterprises are also inescapable tasks for increasing public savings and making room in the budget for well-targeted public investment and essential services. This brings me to a further must: strengthening financial intermediation in order to provide a means of channeling domestic savings back into productive investment. In the absence of such intermediation, savings in many African countries are largely kept in non-financial form. If such a channel existed, a larger share of required investment could be financed domestically. All of the above is what my eminent interlocutors mean by "getting the fundamentals right."
The second requirement is to establish an institutional framework in which both domestic and foreign entrepreneurs have confidence to invest. A key step in this regard is to ensure a positive perception of the government's role in the economy. This can be created and sustained if governments concentrate on doing a few things well, notably: ensuring law and order, providing reliable public services, establishing a simple, transparent regulatory system that is equitably enforced, and providing an independent and professional judiciary. Governments must also give their full attention to preventing corruption. In several countries in Africa, but also in countries in transition, I have been told that the most important Minister for development is not the Minister of Planning, but the Minister of Justice!
Experience also shows that to make a decisive difference in the domestic economic climate, policies must be reasonably consistent and achieve a critical mass of reform, thereby convincing economic agents that reform is irreversible, and that the country is truly integrating into the world economy. Partial reform may not elicit much response if substantial impediments to economic activity remain in place. In some countries, the domestic consensus does not yet permit the pace of reform required to attain this critical mass. In these cases, it is up to national leaders to build the required consensus. This, ladies and gentlemen, is not the job of the IMF--nor is it the job of the World Bank, UNDP, or bilateral donors. It is the responsibility of African leaders to take the initiative to deepen the national dialogue and bring about the needed consensus. Let me be very frank: we have every reason to be concerned about the real chances for development when our interlocutors are distinctly more concerned about the amounts of assistance to be obtained from abroad rather than about building the consensus to support the inescapably tough internal adjustment measures that reform and development entail.
With these preconditions for a well-functioning domestic economy in place--sound economic policies and good governance--other economic initiatives are more likely to bear fruit. In particular, sub-Saharan African countries could spur regional economic activity and attract more foreign capital by increasing the linkages among their economies. In this regard, the initiatives currently being implemented or prepared in various parts of the continent--notably the Cross-Border Initiative for Eastern and Southern Africa, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Southern African Development Community--could yield very positive results. In addition, for many small African countries, regional solutions to the provision of public services--such as regional power grids, transportation networks, and universities--may be more cost effective and provide better service than national programs. Likewise, the harmonization of domestic policies--such as common tax and tariff systems, as well as common business codes and regulatory frameworks--would facilitate cross-border transactions, create larger areas of stable economic conditions, and gradually establish a framework within which regional free trade could develop--consistent with comparative advantage and without increased outward protection.
In this regard, however, I would like to add a word of caution. From my conversations with African presidents, I am convinced that they are committed to regional economic integration and development. But, many at lower levels of government are less committed to this process. Hence, there is a need to ensure that all are fully on board regarding this potentially key element for growth in Africa, and that its positive impact not be offset by costly bureaucratic regional development.
Economic adjustment, reform, and integration are clearly essential for the achievement of sustainable development; but, of course, a constructive partnership with the rest of the world is also indispensable. To this end, we must all also review our present actions and strategy for supporting Africa's efforts.
At the outset, I would point to the need for the international community to do what it can to assist African countries in preventing national conflicts, which are so destructive of national and regional prosperity and such a setback to economic development. And where such conflicts unfortunately take place, there is a need for early reconciliation and reconstruction with international assistance. In this connection, I am pleased to mention that the Executive Board of the Fund has recently expanded the scope of IMF emergency assistance to include "post-conflict" situations so that we can act more quickly and efficiently in these circumstances.
The rest of the world also needs to open its markets more fully to the products in which developing countries, including sub-Saharan African countries, have or are likely to develop a comparative advantage: in agriculture, mineral products, and basic manufactured goods.
Further, the international community must continue to give strong support, including adequate concessional assistance, to countries that undertake serious reform. The Fund's instrument for doing this is ESAF--the enhanced structural adjustment facility. This year, it was decided to put ESAF on a permanent footing beginning early in the next century. We are now exploring options for financing ESAF in the interim period, before it becomes self-sustaining. I would support mobilizing a portion of the Fund's gold holdings for this purpose, provided that these resources are matched by at least an equivalent amount of bilateral contributions.
But ESAF is only a little--albeit an essential--part of the needed support. The replenishment of IDA, the World Bank's concessional window, is essential, as is the replenishment of the African Development Fund, and the continuation of concessional bilateral aid. I would add that while it is laudable that many industrialized countries are trying to reduce their fiscal deficits, this should not become a pretext for cutting the already limited amounts of budgetary resources that are devoted to official development assistance. I was very pleased that President Clinton conveyed this message most clearly to our Annual Meetings in October.
Finally, I would like to add a word about Africa's external debt, especially the multilateral debt of heavily indebted poor countries. As you may know, the staffs of the IMF and the World Bank are working together to analyze the nature and extent of this problem on a country-by-country basis. Our analysis to date suggests that for the majority of these countries, debt service burdens should be manageable. However, some countries will have difficulty in bringing their debt burdens down to a sustainable level, and in a few cases, more relief may be needed than is currently available under existing mechanisms. We are committed to put our conclusions to the Interim and Development Committees next April.
It is important to keep in mind, however, that even if all debt to all creditors were written off, most African countries would continue to have serious external financing problems. For example, while actual debt service payments consume about 20 percent of the export earnings of low-income rescheduling countries, their current account deficits represent about 70 percent of export earnings. Thus, even in the absence of debt service problems, these countries would still need external aid flows equivalent to some 50 percent of export earnings to pay for current import bills. Hence, whatever solutions are found to ease these countries' debt service problems, one should not lose sight of the larger problem of how to get domestic economies moving on a sustainable basis, so that countries can finance an increasing share of their needs themselves, and progress toward fully sustainable growth.
In conclusion, ladies and gentlemen, I would like to emphasize that the stakes for Africa in today's global economy are high. For countries that are able to take advantage of the opportunities that globalization has to offer, the potential rewards are great in terms of more investment, higher exports and stronger growth. But so, too, is the risk of marginalization for countries that cannot meet the challenge of globalization. Fortunately, we have discovered a great deal about the requirements for successful structural adjustment from the experience of African countries themselves. Our job now is to help support African countries as they put these requirements in place.
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