inefficient import substituting activities in which FDI will therefore be less interested. As for exports, African economies have not the required conditions of adequate infrastructure, of skilled labour, and of efficient administration and legal and judiciary system. It is countries which satisfy these conditions which have attracted FDI the most. Because of the lag already developed, it is unlikely that Africa will increase its share in World FDI above
its current level.
In addition, Africa does not have any of the emerging financial markets and has not been able to attract portfolio investment either. On the contrary, there have been outflows of this type of investment for the last several years, amounting to over US$ 1 billion with respect to the DAC countries in 1993. Similarly, export credits granted by the private sector of DAC countries have also been dwindling, giving rise to negative net flows during the
years 1992 and 1993.
(a) The historical scenario Growth and investment
The historical scenario is based on certain assumptions involving growth, investment,
capital productivity, trade and other balance-of-payments items. Table III. 11 gives some of
the main indicators of Africa's economic performance. Weak growth performance has persisted too long, averaging 2 per cent per annum over the period 1980-1993 and resulting in a continuous decline in GDP per capita. The growth pace has slowed down significantly during the more recent period of 1987-1993, standing below the average of 1.5 per cent perannum and resulting in a total decline of about 10 per cent in GDP per capita. Dunng the
same period, performance in the developing world has been much better, with growth accelerating from 4.1 per cent to 4.5 per cent per annum on the average between the first half of the eighties and the period 1987-1993. The nineties have so far been characterized by an even more dismal growth performance in Africa, although the year 1994 has shown some signs of recovery with GDP growing at 2.4 per cent even if the pace remains much slower than in the other developing regions.The weak performance of the region has been the result of a decline both in the investment effort and in the efficiency of resource utilization, as table (in. 11) shows. The ratio of gross investment to GDP decreased from an average of 23.5 per cent during the period 1980-1986 to 20 per cent over the period 1987-1993 and reached 19 per cent in 1993.
This investment rate has been much lower than the average for all developing countries which stood at almost 24 per cent in 1993. Efficiency in the use of these scarce resources, which was already low in the first half of the eighties, has also deteriorated further, as illustrated by the rise in the incremental capital-output ratio (ICOR). In gross terms, the ICOR stood at an average of 10.7 during the period 1980-1986, meaning that a gross investment of over US$10 was required in order to permanently increase GDP by one dollar.
During the same period, the average value of the ICOR in the developing world stood at about half of that of Africa. In the period 1987-1993, the productivity of capital worsened
for Africa, with the ICOR rising to a value of about thirteen, whereas it improved for the
developing world where the ICOR declined to a value of about five.38
As table in. 13 brings out, there has been a significant decline in Africa's saving rate, from an average of over 21 per cent in the first half of the eighties to less than 17 per cent in 1993, the rate being much lower in sub-Saharan Africa (South Africa excluded).
Table in. 13 Main economic indicators (19i
Growth of GDP in constant prices Africa
ICOR: Incremental capital output rat
0-1993 (in
-Sources: World Bank, "World Tables" and IMF, "International Financial Statistics
Yearbook".
The historical scenario does not therefore carry bright prospects for Africa's growth and welfare. Under the historical conditions, the investment-GDP ratio will persist at the low level of 20 per cent and the incremental capital-output ratio will still be very high, equal to a value of 13.3, the region's average of the period 1987-1993, which is twice as high as the ratio prevailing in the developing world as a whole. Under such conditions, real GDP growth will not exceed 1.5 per cent over the period 1995-2008, which is more or less the same as the average rate experienced during the period 1987-1993. Obviously, this pace would result in a further significant worsening of the standard of living of the African population, by almost 20 per cent between the years 1995 and 2008.
The results of the historical scenario are presented in table (III. 14).
38 The grow ICOR haa been eatknated »ioce it ii very difficult to estimate depreciation at the aggregate level. For thia rcwoo, ihe capital requirement* to mcreaae output may look too high.
39 The ICOR ia given n the table in grata tenni became depreciation investment U difficult to estimate. Under the aatumption that the latter mvettnent repreacata about 15 per cent of GDP, the value of the net ICOR for the period 1987-93 would be of the order of 3.5 mtne rtfwa and 2 o the developinf world. Projections of GDP growth and investment requirement* are baied on net ICOR.
Table HI. 14 Growth, balance of payment* and debt in the historical scenario (1995-2008)
GDP growth in constant dollars GDP in nominal dollars
As stated above, exports have shown very wide fluctuations over the period 1980-1993. Their value declined during the period 1980-86 at an average annual rate of 8.1 per cent, then rose at 6.7 per cent per annum during the following period 1987-1993. These fluctuations have been largely determined by changes in earnings from commodity exports which declined at more than 9 per cent per annum in the first period, then rose at an average of 5.4 per cent in the period 1987-1993, resulting in quasi-stagnation over the period 1980-1993. Given these wide fluctuations, receipts from these exports are projected to stagnate, in the historical case, at their 1994 value, equal to about US$70 billion.
Manufacturing exports have steadily grown since the beginning of the eighties, at more than 9 per cent per annum up to 1993. During the more recent period of 1987-1993, the growth pace has slowed down to the rate of 6 per cent which is the rate projected in this
scenario. For Africa as a whole, including South Africa, these exports amounted to over US$23 billion, representing 24 per cent of total export earnings.
In this scenario, total exports will thus grow over the period 1995-2008 at the annual rate of 2 per cent, with total earnings reaching US$123.3 billion in the year 2008, broken down in 70.4 billion of commodity exports and 52.9 billion of manufacturing. This implies that the share of manufacturing in exports will increase from 24 per cent in 1994 to about 43 per cent in the horizon 2008.
It is worth mentioning that the evolution of total exports will depend essentially on the performance of six countries, South Africa, the three main oil producers: Algeria, Libya, Nigeria, Morocco and Tunisia. These six countries accounted for two thirds of Africa's total
export earnings in 1994.
Merchandise imports
The region's total merchandise imports showed large fluctuations over the period 1980-1993, declining at more than 7 per cent per annum in the first half of the eighties (1980-1986), then rising at an average rate of 4.5 per cent in the following period 1987-1993. Normally, imports are tightly linked to the level of economic activity, a relationship that has not been confirmed by data in the African case. One explanation is that there was probably a rundown of inventories of imported goods in the first period during which imports significantly declined even though growth was somewhat faster than in the second period.
The expansion of imports in the second period came probably in response to the depletion of inventories accumulated in the first period.
Africa's imports will continue to be concentrated in manufactured goods which will cover both its investment and consumption needs. Over the long period of projections (1995-2008), the volume of these imports is bound to depend largely on changes in the level of economic activity. Trade liberalization, towards which an increasing number of African countries has been moving, is likely to increase the imports response to changes in GDP in the future. A conservative estimate for this response is that the volume of imports will change in the same proportions as income, so that the projected growth of 1.5 per cent in the region's GDP will induce a yearly increase in imports at the same rate.
The value of imports, which are highly concentrated in manufacturing, will also depend on future inflation in the developed countries, the major exporters of these goods.
Inflation has been relatively low in these countries in the last several years, with an average rate not exceeding 3 per cent in the G-7 countries. The export unit value of manufactures (MUV) sold to developing countries increased at the average rate of 3.3 per cent per annum in the eighties and at less than 3 per cent in the first half of the nineties. In this historical rate, the latter rate is used to project the unit value of Africa's imports. The total value of imports will thus increase in nominal dollar terms at 4.5 per cent per annum which is the average rate of growth of imports experienced during the period 1987-1993. Imports will thus increase from about US$95 billion in 1994 to US$ 178 billion in the last projection year
2008.
With exports and imports rising respectively at 2 and 4.5 per cent per annum over the period 1995-2008 the trade deficit will worsen at a very rapid pace at the rate of almost 21 per cent per annum, increasing from about US$1.7 billion in 1994 to almost US$ 55 billion in 2008. Under this scenario, the trade deficit in the latter year will therefore be thirty
times higher than in the base year.
Non factor services
The balance of these transactions has been in deficit since several years because of the region's weakness not only in transportation but also in private services involving education, health, finance and many other private services. The non-factor services deficit stood in 1994 at US$9.3 billion. It rose at the average annual rate of 1.7 per cent during the period 1987-1993. Under the present scenario, it will rise to US$10.5 billion in the horizon 2008. Table (III. 15) gives the breakdown of these projections by type of service.
Table m.15: Projections of non-factor services (net): 1995-2008 (value in million US$ and growth rates in percentage)
Transportation
The transportation balance is dependent largely on the freight deficit which exceeded
US$7 billion in 1994. During the period 1987-1993, this deficit grew at a yearly rate of 3.7
per cent, which is somewhat below the growth rates of the region's trade. Under thisscenario, it is reasonable to assume that it will remain constant relative to the sum of
merchandise exports and imports and equal to 4.1, which is the value registered for the pastfew years. Given the projected trade values, this will result in a worsening in the deficit at
annual rate of 3.4 per cent correpsonding to an increase from US$7 to over US$12 billion between the base year, 1994 and the end projection year 2008.
Other transportation has been in surplus, with a growth rate in the latter reaching an average of 7 per cent per annum over the period 1987-1993. Dues collected by Egypt on the use of the Suez Canal account practically for all of this surplus. Under the present scenario, it is projected that the historical trend of 7 per cent per annum will also reproduce itself until the year 2008. This will result in an increase in the surplus from US$1.9 billion to over US$5 billion in 2008.
Africa has been lagging in terms of passenger services, with the use of its fleet by non-residents being almost matched by its imports of similar services from foreign companies. In 1994 it ran a very small surplus amounting to US$100 million. The balance has been highly fluctuating without showing any trend. Because of its high variability, it is assumed that it will remain at the average level of 1993-1994 which stood at US$235
million.
Receipts from travel services, essentially from tourism, have been by far the fastest growing source of foreign exchange earnings, increasing in net at the average rate of 9.5 per cent per annum during the period 1987-1993. This trend has been due to the rapid expansion of tourism worldwide from which the region has greatly benefited and which still offers great opportunities in the future. Extrapolation of this trend, which fits well in the historical scenario, leads to an increase in the travel surplus from about US$2.2 billion in 1994 to over US$8 billion by the year 2008.
The projected worsening in the balance of other services, especially of the non government sector, will have a more serious effect on the external payments situation than that of shipment. Although in deficit, the balance of government services (diplomatic and other representations, official education and health expenditures, etc.) has rapidly declined over the period 1987-1993, at an annual rate of 13 per cent per annum. If this trend persists, the deficit will fall from over US$1 billion in 1994 to about US$150 million in 2008. In contrast, the region has run huge deficits in non-government transactions in insurance, finance, private education or health care and in many other private services. The deficit in the these transactions has also been steadily growing, at 6.8 per cent per annum over the period 1987-1993. On the basis of an extrapolation of this trend, the deficit will rise from about US$5.7 billion in 1994 to US$14.4 billion in 2008.
With the surpluses from travel and waterway rights offsetting a large part of the freight and other services deficit, the balance of goods and non-factor services will be dominated by the year 2008 by the trade deficit. This balance will increase six fold, from US$11 billion in 1994 to over US$65 billion in 2008.
Income payments
Table 8 summarizes the projections of factor income payments, the most important category of which is of course interest payments. The compensation of employees being marginal, turning around US$200 million in net and not showing any trend, is projected to remain at that level over the whole projection period.
As for direct investment income, it rose significantly during the period 1987-1993, at an annual average of 7.5 per cent. In 1994, its flows amounted to US$5.2 billion against US$3.5 billion in 1987. Projections of these flows should be linked to those of flows of foreign direct investment (FDI) since the former are returns on the cumulated value of the latter. Under the present scenario, FDI flows will stagnate at about US$4.8 billion. Given a reasonable rate of return of the order of 10 per cent this will add about US$50 million yearly to FDI income over the projected period. This income will thus increase at 0.9 per cent per annum during the period 1995-2008.
Portfolio and other investment income are largely dependent on interest payments and thus on changes in the stock of debt and debt conditions. These payments stood in 1994 at US$12.2 billion and increased during the period 1987-1993 at an average rate of 1.1 per cent per annum. Future payments will thus depend on the base year debt stock, future cumulated current account deficits of the region, sources of financing by other than borrowing, as well as on loan conditions, particularly interest rates. Unlike many other categories of the balance of payments, interest payments projections cannot therefore be based only on historical trends, even if the scenario used is the historical scenario, which is the one being analyzed.
Given the starting debt of 1994 and the new loans to be contracted (see below), interest payments will amount in each year to an average interest rate and the debt stock of the preceding year. The rate on new commitments contracted in 1994, equal to 4.7 per cent, is taken to be the nominal rate that the region will have to pay, on the average, on its debt.
As table 9 shows, interest payments will increase at 3.4 per cent over the projection period, rising from US$12.2 billion in 1994 to over 23 billion in the year 2008.
Under this scenario, Africa's income receipts will increase at the relatively high rate of 6.3 per cent p.a, thus partially offsetting the interest payments burden, but net payments will almost double between the base and the end year of the projection period.
Table HI. 16: Projections of balance of income payments (1995-2008) (value in million US$ and growth rates in percentage)
Compensation of
Source: The historical growth rates and the values for 1994 are based on IMF, Balance of Payments Yearbook data (various issues).
Transfers and current account
The current account before transfers will be more than three times as high in the year 2008 than in 1994, rising from US$26 billion to over US$88 billion respectively. Unrequited transfers, worker's remittances, general government transfers as well as other transfers, are projected at relatively high historical trends, respectively at 10, 10 and 8.6 per cent per annum. This assumption, probably over-optimistic as far as unrequited grants and workers' remittances are concerned, means that these transfers will increase from about US$17 billion in 1994 to over US$64 billion in 2008. With such an increase it will be possible to sustain the US$88 billion current deficit before transfers.
Financial flows and debt
Table III. 17 summarizes the projections of financial flows, debt and debt burden under the historical scenario. Foreign direct and portfolio investment will stagnate at their 1994 values of US$4.8 and US$1.4 billion. The remaining foreign exchange gap, with due account taken of reserve accumulation, will have to be met by borrowing at an increased rate of 11 per cent per annum. These debt flows would then rise from about US$ 5.5 billion in 1994 to US$19.5 billion in 2008 with an average of about US$14 billion over the period 1995-2008.
Table III. 17: Projections of financial flows and debt under the normative scenario 1995-2008) (value in million US$, growth rates in percentage)
Total net inflows
The stock of debt would thus increase at the rate of 3.6 per cent, exceeding US$500 billion by the year 2008. The debt-GDP ratio would decline from 69 per cent in 1994 to 60 per cent in 2008, due to more rapid growth in the nominal GDP of the region.
Table in. 18: Projections of financial lows and debt under the historical scenario 1995-2008 (value in million US$, growth rates in percentage).
Total net
Growth and efficiency gains requirements
We will start considering as to what is needed in order to improve the standard of living of the African population. Given an annual population growth rate of the order of 2.9 per cent and which, for structural reasons, is unlikely to show any significant decline over the projection period, a GDP growth rate of 4 per cent per annum will result in a yearly rise in income per capita of about 1 per cent, or in a total increase of about 15 per cent by the year 2008. Compared to the recent history of the region and to the historical scenario which
We will start considering as to what is needed in order to improve the standard of living of the African population. Given an annual population growth rate of the order of 2.9 per cent and which, for structural reasons, is unlikely to show any significant decline over the projection period, a GDP growth rate of 4 per cent per annum will result in a yearly rise in income per capita of about 1 per cent, or in a total increase of about 15 per cent by the year 2008. Compared to the recent history of the region and to the historical scenario which