What Africa needs

The past seven or eight years have generally been good in terms of economic growth for most African economies. Ironically, the pickup in economic growth over the past five years to around 5% overall for Africa, happened after The Economist magazine labeled Africa "the hopeless continent" in an article in 2000.

The reason for the relatively high economic growth has had much to do with the sharp escalation in commodity prices, although some countries have also made advances in diversifying their economies and have consequently become more competitive in general. However, the extent to which Africa had fallen behind during nearly four decades of economic stagnation pre-2000 while most of the rest of the world progressed in leaps and bounds, becomes clear if per capita output numbers are analyzed. In 2006, per capita GDP levels in Sub-Saharan Africa were only back at their 1980 levels. In fact, Sub-Saharan real GDP per capita in 2006 was only 19% of the world average, compared with the 29% that prevailed in 1980. Real GDP per capita growth in Sub-Saharan Africa averaged 0.0% p.a. during 1980 to 2006, compared with average growth rates of 6.6% recorded in East-Asia/Pacific, 3.7% in South Asia, and 1.8% for the World as a whole. Even Latin-America managed 0.7% growth in per capita GDP over the period.

Economy theory teaches us that the quantity and quality (productivity) of the factors of production (essentially capital and labor) are what determine output and hence a nation's wealth and prosperity. Hence, the argument is often made that Africa needs more "investment", and that more and sustained foreign direct investment (FDI) flows into Africa will provide the required economic stimulus to lift the continent out of severe poverty.

Indeed, many observers will argue that Africa has not received its "fair share" of global FDI flows. Looking at global FDI flows from certain angles, there may be ample evidence to support this view. In the early 1970s FDI flows to Africa constituted around 5.4% of global FDI flows, while the whole of Asia received only marginally more — some 6.4% — of global FDI flows. But since the early 1980s the situation has changed dramatically, with FDI flows to Africa averaging only 2.2% of the global total, while Asia received no less than 17.3% of the total. However, these numbers hide the important fact that the population and GDP numbers of Asia are much higher than that of Africa. In fact, the 2.2% of global FDI flows received by Africa is virtually on par with its share of global GDP of 2%. These numbers should nevertheless not distract from the argument that FDI can be a crucial element in promoting growth and development, and that attractive returns on investment at acceptable levels of risk in a particular country or region can in turn result in FDI flows that may be disproportionate to the size of that economy.

In a 1998 study on national wealth estimates by the World Bank, it was found that with the exception of the oil-rich Middle East, in all regions of the world human resources accounted for most of the value of national wealth estimates. This applied even to African regions where human resource development has been sorely neglected.

So, what needs to be done to attract the required capital to Africa and develop the continent's skills? The short and logical answer is of course to improve the environment in which capital and people can get on with the job of producing goods and rendering services. Regrettably, a much higher proportion of African countries compared to other continents, have become notorious for the prevalence of domestic strife — often leading to civil wars, and cycles of violent unrest and cross-border conflicts. Add to this the fact that the World Bank has recently again bemoaned Africa's standards of governance, that Africa consistently scores the worst in terms of corruption indices, that African countries generally feature in the bottom part of competitiveness rankings, and it is not difficult to explain why skills in Africa are in short supply and capital formation has not experienced much more vigorous growth.

In very broad terms, the following can be seen as the most important aspects that would need attention to ensure that African countries succeed in reducing poverty and increasing levels of prosperity:

Political stability, rule of law, democratic government

As mentioned previously, civil wars, faction fighting and ethnic and religious intolerance are major obstacles in the way of prosperity. Political and institutional reforms in African countries are basic preconditions for attracting capital and skills. Undemocratic, authoritarian and corrupt governments will have to make way for stable, democratically elected leaders; dictatorial tyrants in the Mugabe style will once and for all have to make way for leaders that have the interests of their people and countries at heart. Without a stable socio-political environment and sane leaders, no economic progress is possible. People need the assurance that law and order will be maintained to safeguard not only their lives, but also their property and the fabric of society. This can be seen as an overriding condition for the proper functioning of a society and hence an economy.

Infrastructure

A sound, modern and well-developed infrastructure is of immense value to any economy. In fact, no economy can hope to prosper without it. A country's networks of ports, railways, roads, communication, electricity and water, can be regarded as part of the factors of production, and these need to be maintained, upgraded and expanded. Although these do not form part of individual companies' assets, they influence the functioning of business entities and all others participating in the economy. Often, a distinction is made between social and economic infrastructure, with the former consisting of housing, hospitals and schools, all of which have a direct influence on labor productivity.

Promoting competition and sound regulation

One of the preconditions for the successful working of a free-market economic system is sufficient competition, as this forces all players to either become efficient or face bankruptcy. This is the market's way of ensuring that the country's scarce production resources are optimally utilized. As such it is a vital ingredient for the successful functioning of an economy.

Strengthening and modernizing African countries' legal systems that is aimed at aiding rather than hindering business activities, need to be given a high priority.

Skills development

The citizens of a country are its most valuable assets. They constitute the human resource base, which is the only factor of production with the ability to reason, motivate, organize and control the other factors of production. Labor is usually also the factor of production that receives the largest share of a country's national income. However, contrary to Marxist doctrine, labor is not the only factor of production entitled to share in the national income. The owners of capital and those possessing entrepreneurial talents and skills need to be compensated for the risks that they take in the production process.

It stands to reason that labor resources, being a country's most valuable asset, must be optimally utilized. An important element in achieving this is motivation. Theories on the best way to do this abound. Generally, factors such as freedom of choice as to where a worker wants to sell his/her labor are important; as is freedom of choice as to what product or service is produced and where and how; the obstacles that are placed in the way of entrepreneurs; whether people feel they are treated fairly; whether their work is challenging enough; and a whole array of factors stemming from the environment in which people live and work.

Even if a country succeeds in motivating its people, satisfactory results are unlikely unless the people are sufficiently equipped with the skills to perform their tasks. This brings one to the vital issue of training and retraining to enable people to deal with the problems and challenges that confront them in a modern world.

Although formal education is important, functional literacy remains vital, and the emphasis should be on technical training.

Stable macro-economic environment

The importance of a stable macro-economic environment should not be underestimated. Creating a stable macro-economic environment is mainly the task of the government of the day and its institutions. Macro-economic policies will largely determine the success or failure in this regard.

There are a number of factors that have an effect, but they normally have their roots in the fiscal, monetary and trade policies. Labor policies are also important and in this respect the labor movement and labor legislation have a crucial part to play.

What entrepreneurs require is a climate in which they can have reasonable certainty regarding the outlook for prices of factors of production, the internal and external trade policies, tax rates, demand conditions and all other factors that can have a disruptive effect on input cost, domestic demand and domestic and international trading conditions. Stop-go economic policies must therefore be avoided. Economic policies must be consistent so as to instill confidence and encourage long-term business planning.

A crucial element of ensuring a stable macro-economic environment is the adoption of sound fiscal and monetary policies. Broadly speaking these would entail the following:

• Maintaining a low and stable rate of inflation. Contrary to what populist doctrine propagates, inflation has a much more severe redistributive impact in favor of high income groups since they can protect themselves better through investment in inflation-proof assets. The disruptive economic effects of high inflation are not always appreciated. A high inflation rate simply means that a country's cost structure is increasing faster than that of its international competitors. No firm or country can hope to remain in business if it prices itself out of the market due to excessive cost increases. Sound monetary policy is very important to support financial stability. This requires that over time, excess money growth (i.e. the rate of increase in the money supply in excess of the growth in real economic activities) should be limited and ideally be avoided. This is an important prerequisite for a low and stable rate of inflation and consequently a stable exchange rate.
• Having taxes as low as possible. The entrepreneurial spirit and zest for work can be seriously undermined by punitive tax rates. Taxes that are too high, too complicated and too numerous, can smother the initiative of individuals and can render the after-tax return of new ventures unprofitable, thus stifling new capital formation and productivity to the detriment of all. They can also inhibit the savings propensity of the population, leading to a financing gap that can restrain capital formation and hence growth. Of course there would always be growing needs that will have to be addressed in the sphere of government functions. In the long-run, the best way of dealing with this is to create a climate conducive to growth in which production and income can be increased and, in tandem with that, also the tax base. Taxes must furthermore be fair, neutral, simple, certain, administratively efficient, cost-efficient and pliable. Low, broadly based taxes are preferable, as is a sound balance between direct and indirect taxes.
• Sound fiscal policies. The proper prioritization and efficiency of public spending are at the heart of fiscal policy. The following norms should ideally guide the execution of fiscal policy:
  • Government should provide only those services that the private sector is unwilling or unable to provide, and it should concentrate on providing only the most essential services.
  • Subsidies should be kept to a minimum as this distorts the efficient working of the market via the price mechanism and is therefore harmful to the economy.
  • Unlike the private sector, public bodies do not operate in a competitive environment. Special attention should therefore be paid to providing services as efficiently as possible, while market-related user charges must be the aim.
  • Expenditure growth should be kept in line with the rate of expansion of the general economy, and should be financed with the utmost care.
  • The deficit before borrowing should be contained, ideally to below 3% of GDP, and dissaving (i.e. the use of long-term funding for current expenditure), should be avoided as far as possible.
  • Great care should be taken that the deficit does not reach a point where a government is forced to borrow excessively on the capital markets. This normally leads to a large increase in the public debt and it may result in a debt trap for government.
  • Barring extremely adverse economic conditions, the use of bank credit to finance deficits should be avoided, as this normally leads to excessive money growth, higher inflation and financial instability.

Promoting domestic savings

Broadly speaking, the national income can only be used for two purposes: consumption or saving (which in turn is used to finance capital formation). If a country saves too little, it cannot finance the required capital formation in a non-inflationary way. If its households save too little or spend too much on consumer goods, interest rates will have to increase and this may put a damper on capital formation and growth. Furthermore, if domestic savings are lower than capital formation, the current account of the balance of payments will show a deficit, which, if it becomes too large, could have negative consequences for an economy.

Much still needs to be done to strengthen Africa's growth foundations. Unfortunately the cold recession winds have started to reach Africa's shores as well, and the weak commodity prices will most certainly affect economic growth throughout Africa. This will put a tremendous responsibility on Africa's political and business leaders to ensure that the progress made over the past few years on various fronts is not undone, and that numerous crucial preconditions necessary for sustained growth, development and poverty reduction are addressed, despite the difficult times that may lie ahead.

Author: Christo Luüs

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