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Growth in Africa: can it be sustained?

Written by Dirk Willem te Velde

African economies are booming. This was a key message from a recent meeting organized by the City of London Corporation in collaboration with Rwanda and Tanzania, and DFID, Africa Matters and Africa Practice. Developed countries are looking at Africa once again, but it is different this time, it was suggested. Firms are now able to obtain very good financial returns in Africa, no different or even better than elsewhere. Telecommunications companies and banks, including from Africa, are highly profitable. Development funds such as Actis record high internal rates of return running close to 30 per cent.

Africa’s growth is entering new avenues. World Bank data show that despite developed country preference schemes (e.g. AGOA) targeting mainly African manufacturing, and despite rising demand from China for Africa’s natural resources, the share of services in African incomes has recently increased. Globally, over the period 1990-2005, the share of services has grown by 10 percentage points. The same shift is happening now for Africa, with services contributing more to growth than other sectors. Examples of successful services sectors include ICT in Rwanda, tourism in Tanzania, IT enabled services in Mauritius and financial services in South Africa.

The IMF forecasts real growth in sub-Saharan Africa to be a marked 6.1 percent in 2007 and 6.8 in 2008. There are some immediate risks. For one, the increases in oil prices since July this year may knock some USD 5 - 10  billion or 1% off Africa’s GDP. A greater risk, however, is whether increased revenues might hinder future growth in natural resource rich countries by inducing Dutch disease effects through an unchecked real exchange rate appreciation.

A key question then is how growth can be sustained and how potential future Dutch disease can be avoided? Of course, the solution lies mainly with African countries themselves. Countries such as Botswana and Mauritius have been star performers over recent decades. They have overcome constraints related to smallness, landlockedness, natural resource abundance and losses in trade preferences by introducing good policies, institutional reform and innovative mechanisms to diversify the economy and raise growth. Successful countries have improved the environment in which business operate and have promoted effective state-business relations.

One may ask whether developed countries can assist if they and developing countries desire it. In the current context, I suggest there are at least three ways worthy of further, immediate attention.

Firstly, at the City of London meeting, Baroness Vadera, a minister from the UK Department for International Development, suggested they are keen to establish partnerships with developing countries to support their growth. African countries, and at the meeting President Paul Kagame, welcomed this new emphasis on growth. But it needs further details. As a first step, it would be good for African countries to diagnose growth and assess the binding constraints for further growth. But are development agencies sufficiently ready, flexible and private sector friendly to deal with possible consequences when an efficient response includes a scaling-up of support for infrastructure, tertiary education and ICT, in addition to social projects in agriculture, rural poverty and so on to promote inclusive growth? Further, and beyond aid, can such partnerships include more sensible immigration policies and more developmentally friendly labeling systems in the UK to the benefit of both the UK and Africa?

Secondly, the WTO’s general council meeting later this month will hold its first review of Aid for Trade. It is an appropriate forum to monitor the delivery of developed country support for the efforts of developing countries to gain from trade liberalisation. An obvious starting point would be to make this an annual event where developed countries are held responsible for their aid for trade promises, and where both developed and developing countries are reminded of the importance of supply side measures in development programmes. Developed countries could also listen to the messages from regional Aid for Trade meetings organized by the WTO and regional development banks.

Finally, the City of London meeting discussed development finance including for private sector projects in regional infrastructure. The African Development Bank is overcapitalized, some comments suggested. Similarly, one could argue that the IFC (and other DFIs) with retained earnings in the area of USD 10 billion could be using its balance sheet more efficiently and more of it in riskier activities in Africa. At times the European DFIs can show the way. CDC shows it can invest successfully even when restricted to invest mostly in poorer countries. FMO’s innovation in designing local currency loans with fewer risks for developing countries is also well regarded. Would it be possible for the EU-Africa summit in Portugal in December this year to consider riskier, innovative yet sustainable and private sector friendly finance in order to support and sustain Africa’s growth and investment climate?