"Opening and Liberalizing Markets in Africa
—A Response to Globalization"

Berlin, Federal Republic of Germany, December 2, 1998

I.  Introduction¹

For several years now, policymakers in Africa have been encouraged to step up Africa’s integration into the world economy, so as to benefit from expanding world trade and gain access to the private capital needed to accelerate investment and growth. This advice has held up the experience of the successful Asian economies as examples of the advantages of integration into the globalized economy. However, since the outbreak of the international financial crisis, the question facing African policymakers now is a different one. Having escaped the worst effects of the crisis, are the calls for more openness and faster integration of African economies still justified? Are the risks inherent in globalization outweighed by its potential benefits? It seems difficult to be optimistic about Africa’s prospects in the global economy when the "best" performers over the last three decades have come upon such hard times. If it could happen to them, how much more could happen to Africa?

Our meeting here in Berlin is a timely opportunity to examine the Asian crisis and draw lessons that will enable African policymakers to avoid the pitfalls that ensnared some Asian countries, and to ensure that the benefits of globalization do indeed outweigh the potential risks. Looking at the choice of topics, and at the quality and experience of the participants in this conference, I am convinced that our dialogue will indeed result in useful insights and concrete policy recommendations.

In the spirit of a contribution to this dialogue, let me first outline a few key policy lessons from the Asian experience. I will then offer a few thoughts of my own on why Africa has not been as deeply affected by the international crisis as other regions. And finally, I will draw a few conclusions on Africa’s development agenda for the next few years, including what we must do to avoid a resurgence of such crises.

II.  Lessons from Asia

By now, we have all heard the various analyses of what went wrong in Asia. There is no denying the reality that East Asia has benefited greatly from its openness over the past few decades, achieving impressive growth and an enviable record in poverty reduction. However, there was another side to this prosperity—weaknesses in the financial sector; a lack of: transparency and accountability in government and corporate affairs, corruption and nepotism; a paucity of reliable and timely economic information, including on private sector activities; and the absence of a sound legal system. The effects of certain policy errors—such as inappropriate exchange rate policies—have been compounded, though not caused, by openness to short-term capital flows. These deficiencies have now been glaringly exposed.

I shall not go into detail here, but the question that arises is how has Africa fared through this, and what can Africa do to emulate the successes of the Asian economies in raising growth rates and reducing poverty, while avoiding their mistakes.

III.  How does Africa compare?

Sub–Saharan Africa has by and large escaped the worst of the financial contagion, although it has been affected by recent commodity price changes. Why is this? First, Africa’s policy environment has steadily improved over the last ten years and is now less susceptible to financial shocks from abroad. Although Africa’s dependence on foreign financing is still large by international standards, there has been progress in bringing the external debt situation under control. And in contrast to some of the Asian and Latin American economies, foreign capital inflows are mostly long term and government guaranteed, while private firms have relatively little exposure in foreign currency.

Second, Africa’s financial systems are still underdeveloped. Banking systems in many countries are only just emerging from a protracted period of weakness, and asset markets are rudimentary. Moreover, capital account restrictions have protected the weakened banking sector from exposure to the additional challenges of managing large–scale capital flows.

Third, Africa is still less integrated into the world economy than other emerging markets. For the most part, while trade regimes in sub-Saharan Africa have been substantially liberalized, they are still too restrictive. Thus, sub–Saharan Africa has escaped the worst of the financial contagion in part because it has lagged behind other regions in opening its markets to world trade and private capital flows.

IV.  Managing Africa’s integration

While the slow pace of integration has shielded Africa from the crisis, it has also meant that prosperity still eludes much of the continent. Africa cannot continue in this mode if it wishes to exploit the real benefits of globalization: increasing the resources available for productive investment and enhancing the efficiency of their use, and facilitating the transfer of technologies. For Africa, with its low rates of domestic savings, widespread poverty, and overdependence on primary commodities, failure to open and liberalize its markets would deepen its marginalization, and further widen the income disparities with the rest of the world.

The task ahead—for national policymakers and the international community—is to accelerate the process of integration. In this context, I see three main areas of importance for Africa:

Accelerating the integration into the world economy

On the policy front, it goes almost without saying that African countries must keep up the momentum of policy reform aimed at restoring and maintaining macroeconomic stability. Beyond this, however, most African countries will need to strengthen their efforts to liberalize their trade regimes and undertake the structural reforms necessary to further open markets and strengthen their efficiency. They should continue to provide the right incentives to attract foreign direct investment, as well as strengthening and developing the domestic financial systems and regulatory and supervisory capacities.

Our discussions this morning have already given us some insight into what this entails. There has been progress in trade liberalization, but there are still major steps to be taken. We’ve seen several examples in Africa where regional integration has been a driving force behind trade reform, and in many cases, the integration effort has already been extended well beyond trade issues. Continuing this process of regional integration will certainly facilitate Africa’s integration into the global economy, provided that it complements, and does not substitute for, non-discriminatory multilateral trade liberalization..

I see important additional advantages in regional integration: first, greater intra-regional trade will promote the export competitiveness of participating countries and enhance their ability to compete on international markets; second, common policy formation reduces the influence of narrow national interests and creates peer pressure that may help to maintain the momentum of reform, even in difficult issues; third, participating countries can pool of resources to build up the necessary human and institutional capacity, affording each individual country access to a higher level of technical and administrative competence that might otherwise be the case; and finally, a regional approach to trade reform may engender greater confidence and assertiveness on the world stage, enabling Africa to represent its interests more effectively.

Enhancing economic security

There is a widely held perception that it is still hard to do business in Africa. Despite the improved economic performance of the 1990s, most sub-Saharan African countries still have much to do to create secure economic environments, without which domestic and foreign investors will continue to shy away from the many profitable business opportunities that Africa offers. One area where most African countries need to do much more is in making the public administration a supportive factor in private economic development.

First and foremost, the role of government must be redefined away from direct production toward the provision of essential public services. In keeping with this new role, governments need to rationalize the composition of expenditure to ensure that the greatest possible share of available resources is indeed directed at providing key public services, above all education, health, and the necessary infrastructure. Second, no effort should be spared in building up an efficient civil service, with the competencies necessary to set the appropriate parameters for private economic activity and administer this framework equitably and impartially. Finally, judicial reform, by promoting an open and level playing field, will help to attract much-needed foreign investment.

Establishing greater transparency in economic policymaking and the management of public affairs

As recent experience in some Asian countries has shown, economic security depends on achieving the required standard of governance in public and corporate affairs. One key element is compliance with international best practices in banking, fiscal management, and the compilation of statistical information. Another is a greater involvement of the private sector and of civil society—media, community organizations, local and foreign NGOs, and ordinary citizens—in discussing and deciding on the objectives of policy and the priorities for development. This involvement helps to create a consensus that sustains and strengthens the adjustment and reform effort. As I have had occasion to note elsewhere,² the right to participate in the public policy debate is one of the foundations of effective democracy, and one which Africans are increasingly demanding.

V.  Towards a better international environment

While domestic reforms are the sine qua non for growth and prosperity, an enabling international environment is equally important if these reforms are to succeed.

First, a strong international monetary and financial system. The abrupt outbreak of the financial crisis in Asia and its spillover to other regions have also revealed shortcomings in the international financial system. There is now broad agreement on the need to modernize the system to catch up with the rapid expansion of private capital flows and to lessen its vulnerability to financial shocks. While the issues are complex, the key elements of the necessary reforms include greater transparency on the part of all participants—private, public and multilateral—in the world economy; sounder and more efficiently regulated financial systems; wide acceptance of international standards and codes of good practices in areas such as fiscal and monetary policies, accounting, auditing, and disclosure rules; and closer involvement of the private sector in forestalling and resolving crisis situations.

Second, export markets and foreign investment. For sustained growth and development, Africa also needs continued international support, in the form of an opening of markets to its goods on equal terms and not on the basis of special preferential arrangements, which tend to blunt the incentives for African exporters to explore new possibilities and enhance their international competitiveness. Moreover, there is a need for a substantial rise in private foreign direct investment, to supplement Africa’s low domestic savings and facilitate the transfer of technology and know-how.

Third, debt relief. For some time to come, Africa will need considerable assistance in ridding itself of the external debt overhang that has slowed the return to external viability. This will require the continuation of concessional flow and stock reschedulings, as well as substantial debt reduction including, in some cases, under the HIPC Initiative.

Finally, an end to civil strife. Even if the external debt is reduced, and the right economic policies are implemented, no progress will be possible if armed conflicts persist. African countries need to focus their efforts on resolving ongoing disputes and devising effective mechanisms of conflict prevention. Regional institutions, particularly the OAU, should play a central role in these efforts. Only then will the international community be able to provide humanitarian, technical, and financial assistance to post-conflict countries, and here I emphasize post-conflict countries. International support should be, and increasingly is, focused on those countries that demonstrate the ability and commitment to implement the necessary political and economy reforms, to break with the corrupt practices of the past, and to foster the development of market structures and participatory, democratic institutions.

VI.  Conclusion

My answer to the question I raised at the outset is therefore that Africa must continue along the road to economic integration and full participation in the global economy. It must resist the temptation to pull back into a protective shell, and pass up the benefits of globalization. But in doing so, African policymakers must be fully aware of the potential pitfalls. A resolute, well-measured approach is called for. The international community, for its part, must stand ready to support these initiatives through open markets, trade, investment, and debt relief.

This conference has identified some of the main policy areas where a more determined approach can facilitate this process of integration. If we can maintain the momentum toward greater openness and integration, we will succeed in bringing African countries into the partnership of nations and participating as equal partners in the strengthened international financial system, to the benefit of all.

Thank you.