Africa--Adjusting to the Challenges of

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Adjusting to the Challenges of Globalization
Proceedings of a seminar held in Paris—May 4–5, 1998
International Monetary Fund • Ministry of Finance of Japan
©1999 International Monetary Fund

Laura Wallace

  1. Improving the Environment for Private Investment and Activities
    1. Opening Remarks
      Motomichi Ikawa
    2. Lessons on Regulatory Reform: The Philippines' Experience
      Florian Alburo
    3. Lessons on Regulatory Reform: Kenya's Experience
      Harris Mule
      Vina-Seeburn Dabeesingh
      Iain T. Christie
    General Discussion
    1. Developing Sound Banking Systems and Practices in Africa
      Piero Ugolini
    2. Relevance of Banking Lessons for Africa: Zimbabwe's Experience
      Leonard Tsumba
      James Cross
      Hiroyuki Hino
    General Discussion
    1. Liberalizing the Trade System
      Robert Sharer
      Hirohisa Kohama
      Ibrahima Makanguilé
    General Discussion
  2. Strengthening the Contribution of Government
    1. Better Public Sector Resource Management: Capacity Building and Good Governance
      Emmanuel Tumusiime Mutebile
      Kwesi Botchwey
      John Roberts
      Reinold van Til
    General Discussion
    1. Quality and Composition of Public Spending in Africa:
      Suggestions for Increased Effectiveness
      Luca Barbone
      Gray Mgonja
      Emmanuel Tumusiime Mutebile
      Takuma Hatano
      Jan Willem Gunning
      Sanjeev Gupta
    General Discussion
  3. Reform Priorities for Africa
    1. Panel Discussion
      Tomáz Salomão
      Koichi Hamada
      Jesus Estanislao
      Anupam Basu
      Micah Cheserem
    General Discussion
    1. Concluding Remarks
      Evangelos Calamitsis

    List of Participants


Laura Wallace

As Africa attempts to better integrate itself into our increasingly globalized world economy, East Asia's remarkable growth and prosperity over the last few decades provides inspiration. For that reason, African and Asian officials and academics--along with representatives from the IMF, World Bank, and other multilateral institutions--met in Paris on May 4–5, 1998, to exchange experiences.

But as Co-Chairman Motomichi Ikawa asked in his welcoming remarks, in light of the recent financial crisis in East Asia, was it still possible for Africa to draw lessons from Asia? He said the answer was yes, because countries can learn from both successes and failures. He cautioned, however, that it would be wrong to conclude that some of the basic policies behind Asia's past high economic growth--primarily, an active government role in the area of industry and finance--were misdirected. Rather, an active government role was indispensable for creating an environment conducive to private capital flows. And for Africa, it is now essential to promote private investment. Ikawa called on the seminar participants to find a common modality to help Africa realize its potential in the coming century.

Session I.  Improving the Environment for Private Investment and Activities

The first session opened with Asian and African perspectives on how best to foster a good regulatory environment.

Fostering a Good Regulatory Environment

Florian Alburo of the Philippines suggested a key problem was that, in a regime of open economies, differing regulations among trading partners tended to reduce trade volume, compared with a situation where regulatory environments were consistent. He said the Asia-Pacific Economic Cooperation (APEC) group has shown the virtues of focusing more on informal barriers to entry and trade than on the formal ones, and then taking steps to ensure that reform programs are consistent with one another. An example would be in the adoption and alignment of product standards to conform with international standards. This theme of the beneficial role of regional arrangements would be heard repeatedly throughout the seminar, especially in the areas of regulatory reform, trade liberalization, and good governance. Benefits mentioned were larger common markets, a more even playing field to help eliminate distortions in resource allocation, and--just as important--a public commitment and peer pressure to help sustain reform. All together, these added up to a more stable and secure environment for investors.

Florian Alburo also underscored the need for eliminating corruption. Certainly, a more transparent regulatory environment would help. He cautioned, however, that corruption is a by-product of many things: asymmetrical information access, weak legal frameworks, and cultural characteristics. For that reason the APEC region was trying to tackle corruption by promoting an infrastructure facilitation network, with the goal of ensuring that information became a public good.

Harris Mule of Kenya raised a disturbing point in his paper: despite the serious implementation of economic reforms since 1993--including steps to make the regulatory framework market-friendly--Kenya's economic performance had not rebounded. Was this surprising? He thought not, because economic performance was determined by many factors. He suggested that while economic reforms and the underpinning regulatory framework were vital, they were by no means sufficient for the resumption of sustained growth. What could explain the seeming discrepancy between reform and performance? Mule suggested five hypotheses:

  • economic agents require confidence that the laws and regulations are stable, predictable, and uniformly applied;

  • regulations need to be clear, and there must be incentives for administrative agents to enforce them;

  • administration of laws and regulations must be transparent;

  • time-phasing and sequencing of policy must be carefully thought out; and

  • institutional capacity, especially in the civil service, must be built up.

Nonetheless, Vina-Seeburn Dabeesingh of Mauritius insisted that Kenya's reform efforts were not misdirected. Kenya was in a state of transition and it took time to create conditions for the market to work effectively. What could Africa do to attract investors? She suggested better infrastructure, legal and regulatory reforms, and institutional reforms. It was the efficiency of implementing policy decisions that would determine the attractiveness of the country to investors at large and, consequently, the rhythm of industrialization. She also called upon policymakers to get the word out on reform efforts to foreigners and the local populace--the latter to build a consensus for reform.

Iain Christie of the World Bank stressed the importance of a policy dialogue with all stakeholders. Time and again it has been proven in Africa that "stroke of the pen" reform does not work. Indeed, this need to include the various segments of civil society in the ownership of reforms was one of the main themes of the seminar, echoing a sentiment that is increasingly felt in donor and recipient circles. Christie also urged policymakers to look at privatization in a broader context than the transaction itself, to include market structure and the policy environment. In telecommunications, for example, it was much more important to introduce competition than to simply privatize the national carrier.

In the general discussion that followed, many African participants expressed concern that their countries had undertaken difficult reforms, yielding results, yet foreign investors were still slow to respond. Mansour Cama of Senegal, speaking for the private sector, suggested that the problem was, in part, Africa's image to the rest of the world--what Co-Chairman Motomichi Ikawa later called "the image gap." Cama suggested that Africa, along with its partners, should do a lot more to project a positive image for investors.

Participants agreed that other needed items were political stability, macroeconomic stability, good infrastructure, institutional capacity, regional integration, and a sound financial sector. Iain Christie of the World Bank also suggested that the risk associated with investing in Africa was much overplayed in the media. He said rates of return in Africa were very attractive and investors just needed to manage risk by diversifying their portfolios.

Developing Sound Banking Systems and Practices

The seminar focused on financial reform, looking at priorities in banking sector reform, key operational lessons, and "new lessons" from Asia.

Piero Ugolini of the IMF stressed the need for Africa to accelerate structural reforms, especially in this area, if it hoped to attract large volumes of capital investment. Critical elements would include an independent and accountable central bank with autonomy in conducting monetary policy to maintain price stability; a sound banking structure; an appropriate banking supervision framework, based on best international standards; and a well-functioning payments system. Also, responsibility for bank licensing and supervision should rest in an independent authority, free of political interference. He said the international community could help by providing technical assistance and training--areas where the IMF was considering how best to intensify its assistance in Africa.

For Leonard Tsumba of Zimbabwe, the emphasis was on ensuring that financial sector reforms were undertaken in an environment conducive to both domestic and foreign investment, otherwise, they would be meaningless. This means adopting transparent, consistent, and predictable procedures and policies--along with subscribing to international standards. He said prospects of an economic boom in Africa were immense. But given Africa's limited financial resources and shallow export capacity, aggressive market-oriented policies would have to be the order of the day.

James Cross of South Africa concurred with both speakers, choosing to elaborate on a few points. Financial market specialists and regulators seemed to agree more and more on the importance of a stable macroeconomic environment as a prerequisite for sound banking, yet this message was not being fully conveyed to the public at large. Yes, Africa had few well-trained nationals, but ironically, competition from abroad might well be needed to strengthen human capital and raise service levels and professionalism in the domestic banking sector. A key reason why South African banks--unlike banks in other countries--were not having problems funding credit was because their holdings of government debt had been whittled down to only 7 percent of their assets. And on exchange rates, the central bank had found that the key to pacifying the markets was transparency.

Hiroyuki Hino of Japan provided an Asian perspective and suggested that the "new lessons" from the Asian crisis were really just an application of the "old lessons" of the Asian miracle to the management of banking systems in an era of globalized financial markets. These included the need for effective government, strong banking institutions, and flexibility in exchange rate management. He urged Africa not to overreact to the Asian crisis by reversing or unnecessarily slowing financial liberalization. After all, Asia's tremendous economic growth over the last three decades was, in large part, thanks to the capital inflows that had come about in a liberal policy framework.

In the general discussion that followed, many African participants cited the need to bring down interest rates and to deepen financial intermediation. Mansour Cama of Senegal suggested that West Africa's main challenge now was in devising ways to mobilize savings and investment through effective financial intermediation. Jan Willem Gunning of the University of Oxford, however, asked if solving the problem of intermediation would really bring about high investment rates in Africa? He submitted that the answer was no. The binding constraint was not a lack of credit, but rather a wariness on the part of private entrepreneurs to invest, in part because of policy credibility problems. Financial sector reform was, thus, important but not a magical solution.

Liberalization of the Trade System

Turning to trade liberalization, Robert Sharer of the IMF noted that, although much progress had been made in recent years, Africa had started from a highly restrictive position. As a result, most African trade regimes remained significantly more restrictive than those of other developing regions. Thus, the issue was not whether trade regimes should be liberalized but rather how fast and how deeply.

As for lessons from East Asia, he said the main one should be that trade reforms--combined with other structural reforms and a strongly supportive macroeconomic climate--contributed to the region's impressive economic growth and export performances over the past few decades. But he also highlighted another lesson from the recent financial crisis: only lowering tariffs and nontariff barriers can mask a high degree of administrative discretion, hence the need for transparency and good governance.

Hirohisa Kohama of Japan added a note of caution and controversy, suggesting that over the medium and long term, Africa's growth potential was lower than Asia's, even with policy reforms. He also suggested that political stability and investor confidence in the region were more critical for Africa than rates of returns, if Africa hoped to attract more foreign direct investment. Africa should seize the opportunity--as Japan had done in the late 1950s and 1960s--and prepare itself for future competition with foreign companies by encouraging fierce competition among domestic companies.

Ibrahima Makanguilé of Mali, speaking for the private sector, added a different note of caution, asking whether Africa should really make trade reform a high priority? Mali's trade relations were among the most liberal, yet the well-being of its people had not kept pace with economic progress. He also felt that trade and business should be liberalized under the aegis of a strong state, but in most African countries, administrations were weak, inefficient, and corrupt. Even so, trade liberalization in West Africa was now unavoidable, and for that reason, policymakers should focus on human and physical capacity building; the private sector should better organize itself for lobbying; and the bilateral and multilateral institutions should be sure to include civil society in the search for solutions to development problems.

In the general discussion that followed, several speakers again suggested that Africa had an image problem, so much so that it was a major impediment to foreign investment. Tomáz Salomão of Mozambique conceded that political stability was vital, but so was a new world attitude. Kwesi Botchwey of Ghana quoted studies showing that businesspeople around the world had a high level of ignorance about Africa's progress in the 1990s. Compounding matters was a "neighborhood effect" that hurt small countries doing the right things but that were geographically situated next to large countries in trouble.

A few participants wondered if trade reform was really that important for Africa at this point in time. Jan Willem Gunning of the University of Oxford countered the skeptics by making a strong case for trade reform. He said studies showed that trade restrictions in Africa were actually more damaging than when countries elsewhere adopted the same restrictions--the reason being that so many African economies were quite small.

Session II.  Strengthening the Contribution of Government

In the second session, the seminar examined capacity building and good governance, with perspectives from donors, multilateral institutions, and recipients.

Better Public Sector Resource Management

Emmanuel Tumusiime Mutebile of Uganda, in his paper, told the story of Uganda's 1994 Capacity Building Plan, which predated the World Bank-supported Partnership for Capacity Building in Africa, launched in 1996. The plan was formulated after several years of consultations with all the major stakeholders, and was founded on three precepts: sound economic management, private-sector capacity building, and civil service reform. A milestone in the restoration of good governance and the rule of law came in 1995 with the promulgation of a new constitution. Uganda now tries to monitor progress through national integrity workshops and national integrity surveys, the results of which are published. Citizens are asked which governmental departments and districts are the most corrupt, and which services are likely to entail a bribe.

Kwesi Botchwey commended Uganda's capacity building program as being comprehensive, with the right focus and all the right objectives. But he said there were many operational pitfalls, as Ghana well knew, because it had pioneered some of the initiatives. At root was a problem of lack of ownership, which in turn gave rise to other problems, such as undue reliance on foreign consultants and programs that were project driven. The solution was to repose some trust in the governments to determine their own capacity building needs.

John Roberts of the European Commission gave the donor perspective, depicting good governance as a hierarchy of building blocks, in ascending order of staff, systems, ethos, and leadership. External partners could help develop the capacities of individual staff and advance into institutional capacity building. But they often lost their way in a fog of alternative agendas if the ethos of the host country counterparts were in question. Indeed, development cooperation worked best when the host country showed a strong spirit of public service and strong leadership.

Reinold van Til of the IMF asked if it was possible to reform the civil service from within, or was it necessary to move certain functions outside the core civil service and entrust them to quasi-autonomous bodies. He felt it was noteworthy that when certain functions had been removed from the civil service, the efficiency of government had improved. But when those same functions were left within the established structure of government ministries, even after reorganizations and reforms, they tended not to be well executed.

In the brief general discussion that followed, several speakers agreed with van Til's comment on civil service reform. Godfrey Simasiku said Zambia's revenue authority and export board became more efficient once they were made independent. Gray Mgonja of Tanzania noted that removing certain functions from the civil service, in effect, redefined the role of government. Jan Cedergren of Sweden seconded Botchwey's observation that capacity-building programs tended to run into trouble because of lack of ownership. Indeed, this was a central message of the 1998 external evaluations of the IMF's Enhanced Structural Adjustment Facility (ESAF) and the World Bank's Special Program of Assistance for Africa.

Quality and Composition of Public Spending

The seminar then looked at ways to improve the quality and composition of public spending. Luca Barbone of the World Bank observed that, so far, project assistance from donors had proven simply to be a Band-Aid approach; and because the patient was constantly changing positions, the Band-Aid eventually came off. For there to be consistent delivery of services, there needs to be both a stable flow of resources and sound management. How could a stable resource flow be assured? That requires a commitment on the part of the government--and the more depoliticized the budget allocation process can be, the better.

How could sound management be assured? That involves policymakers and donors thinking in terms of desired outcomes over the medium and longer term. In other words, donors need to replace the project enclave mentality with an approach that emphasizes institution building, predictability of resources, and accountability by public officials. To do this, Barbone said the emphasis must change from individual projects to medium-term expenditure frameworks (MTEFs).

Mgonja commented on Tanzania's experience with trying to mobilize resources and deploy them effectively. One avenue was through fiscal discipline, given the importance of maintaining macroeconomic stability. Here, he noted, the debt burden was taking away a sizable amount of government resources. Another avenue was through switching to a program approach from the project approach. Tanzania was preparing an MTEF, with the request for such a framework originating with the government, and the priority sectors already designated by the government. The next step was to discuss the proposal with all of the stakeholders, including donors, as the government took greater ownership.

Mutebile commented on Uganda's experience with MTEFs, which were adopted to improve long-term expenditure planning. The main shortcoming was its exclusion of donor-funded projects, which in most African countries comprised the largest share of the development budget. He also worried that African governments lacked the capacity to make detailed assessments of the effectiveness of expenditures--insufficient manpower compounded by poor data. Moreover, he suggested that the World Bank's and IMF's detailed conditionalities for structural adjustment loans could be counterproductive to long-term institution building because they removed the responsibility for taking politically difficult decisions.

Takuma Hatano of the Export-Import Bank of Japan focused on how governments could help attract private investment, noting that they stood to play a decisive role in private infrastructure investment. He called on governments to ensure public investment was efficient, provide a sound regulatory framework, and pursue macroeconomic stability--a key lesson of the recent Asian financial crisis.

Gunning welcomed Barbone's advocacy of monitoring the outputs rather than inputs of a project--a positive step towards performance-based lending. But on Barbone's suggestions for monitoring, he worried that the methods would only find the symptoms of the disease but not address the fundamental problem; the main reason behind Africa's poor public service provision was not simply insufficient spending. On the importance of ownership, he concurred with Barbone, pointing out that this was a key finding of the 1998 external ESAF evaluation. He disagreed, though, that donors should be "honest brokers between political players to maintain the MTEF agreement," as he worried that this would fundamentally undermine ownership.

Sanjeev Gupta of the IMF elaborated on Barbone's mention of the need to improve the composition of public expenditure, especially in outlays for health and education. Was this process under way in Africa? Yes, but substantially more needed to be done. Recent data--weak as they were--showed that social expenditures were biased against primary education and primary health care over the 1980s, and this trend continued in the 1990s. What could be done? Some possibilities included a better intrasectoral allocation to benefit the poor; shifts in geographical targeting to benefit the poor; stronger civil service reform; devolution of spending to the lower levels of government; and a bigger role for the private sector.

In the general discussion that ensued, many participants--both on the donor and recipient side--underscored Barbone's message of the need to move away from the individual project mentality. Peter Freeman of the United Kingdom Department of International Development suggested that aid was already changing from a separate series of project inputs to a program of financial support directly related to the budget and sectoral priorities.

Several participants also observed, however, that with this change in emphasis would come new challenges. Roberts mentioned that donors were unsure what criteria should be applied, especially toward judging intrasectoral efficiency. Gunning suggested that donor countries be more selective, just financing those governments that met the donor country's criteria, but doing so on the basis of a broad assessment, not detailed micromanagement, and doing it over the long term instead of quarterly monitoring.

Session III.  Reform Priorities for Africa

The final session began with a panel discussion on reform priorities for Africa. Tomáz Salomão of Mozambique argued that liberalizing the economy while adopting an outward-looking policy orientation was not enough. Three other steps--often overlooked--were needed: knowing when liberalization required new and different regulations; ensuring that the benefits of globalization were broadly shared; and undertaking tough institutional reforms. On the last step, gains were likely to be slow. It was easy to change the law but hard to change habits and ways of doing business, although in the end it could be done. The country that did it the best would reap the rewards.

Koichi Hamada argued that the IMF's ESAF should pay more attention to intertemporal choice--viewing the balance of payments as a dynamic, forward-looking concept. In Asia and Africa during the past few decades, both continents had been running current account deficits. But whereas in Asia both savings and investments had been high (of course, until the recent financial crisis), in Africa both savings and investment had been low. The key difference was that in Asia high investment had generated economic growth, which was vital because only with an increase in long-term growth could countries afford to pay off their debt.

Jesus Estanislao of the Philippines stressed three lessons from the Asian crisis: (1) the importance of strong macroeconomic fundamentals (including keeping exchange rates at realistic levels); (2) the importance of a strong banking system (ensuring that the central bank has enough autonomy to avoid the crony capitalism evident in East Asia today); and (3) the importance of a strong commitment to reforms. On the last point, it was critical to strike precisely in a period of crisis, and to build up civil society. "While we take care of economics and finance," he said, "we cannot disregard the politics, the social aspects, and indeed the broader aspects of society."

For Anupam Basu of the IMF, the critical issue was the need to pinpoint a set of reform priorities--not the need to establish a hierarchy among them. This was because the reforms being discussed (i.e., regulatory, financial sector, role of government, and trade) were complementary and mutually reinforcing. At this stage, Africa needed market-oriented policies, aimed at both promoting private sector development and accelerating Africa's integration into the global economy.

Micah Cheserem of Kenya, in his written remarks, singled out two top-priority areas for Africa. The first was the need to educate all stakeholders, as economic reforms also affected ordinary citizens, and not just the elite who controlled information. This effort should be done by African countries in collaboration with the IMF and World Bank. The second was the need to more aggressively implement economic and political reforms. After all, for economic reforms to be successful, they must be accompanied by political reforms--including a multiparty democracy, good governance, a free press, and respect for human rights. For this reason, he felt it was opportune for the IMF to become actively involved in political reforms.

In the final discussion, participants focused on reform priorities, with the most common theme being the need for better communication--especially of Africa's successes. This included exchanges between the public and private sectors, within these sectors, between African policymakers and civil society, and between Africa and the rest of the world. As Cama put it, the world needed to know that African governments had undertaken reforms, and that the reforms were working. He also echoed Basu's message about the need for a set of reform priorities, rather than a hierarchy among them, because, in the end, everything would become a priority given all the interlinkages.

Concluding Remarks

In the concluding remarks, Co-Chairman Evangelos Calamitsis noted that even though Africa's development partners have a vital role to play in supporting reform programs, everyone agreed that efforts to develop effective institutions and regulations--and to remove any remaining official tolerance for corruption--must be homegrown. This was consistent with one of the central findings of the IMF's 1998 external ESAF evaluation.

Moreover, where there is successful reform, the countries and donors alike need to do a better job of conveying the message to foreign investors. "In other words, we must help bridge the 'image gap' between the old and emerging Africa."