Economic Report on Africa 1999 : The Challenge of Poverty Reduction and Sustainability

Economic Commission for Africa

Economic Report on Africa 1999

The Challenge of Poverty Reduction and Sustainability

© Economic Commission for Africa, 1999

Addis Ababa, Ethiopia

For this and other publications, please visit the ECA web site at the following address:

http://www.un.org.ldepts/eca/divis/index.htm

or contact The Director

Economic and Social Policy Division (ESPD) Economic Commission for Africa

P.O. Box 300 I

Addis Ababa, Ethiopia Tel: (25 1- 1) 5 1 72 00 Fax: (25 1- 1) 5 I 44 16 E-mail: ecainfo m un.org

Economic ReII(W(^OJ/Afric« 1999: TheChallenge:(~IPlJI't,,.ZI"Reduction (melSustainabilitv

Table of Contents

Foreword v

I d . ..

ntro

uction VII

Executive Summary ix

I. The State ofthe AfricanEconomies in1998 ix

II. The Challenge ofReducingPoverty inAfrica x

III. Performance and SustainabilityofAfrican Economies xii

IV. The State ofWell-being-1998 : xiii

V. Performance and Sustainability xiv

VI. Interrelationshipbetween Indices: xv

VII. Final Observationsand Policy Implications: xv

The State of African Economies in 1998 1

The VVorld Economy 1

The African Economy 2

Growth Performance 5

Sectoral Performance 7

Commodity Prices 10

Balance ofPayments 10

Resource Flows and External Debt 11

Savings and Investment 12

Macroeconomic Stability 14

Medium-TermProspects 16

II The Challenge of Reducing Poverty in Africa 17

Introduction 17

Measuring Poverty 17

The State ofIncomeDistribution 18

The StateofPoverty 20

Required Growth for Poverty Reduction 22

Development Finance Requirements 23

Policy Challenges 24

III Performance and Sustainability of African Economies 27

Introduction 27

Analytical Framework 28

The State ofWell-being,1998 29

Results 30

Performanceand Sustainability 33

Performance, Sustainability and Policy Stance 35

Observations 36

Economic Report onAfrica 1999: The Challengeof Poverty ReductionandSustainability

References 39

Technical Notes 41

Statistical Annexes 47

List of Tables

1.1 : Growth performance in the world: 1995-1998 1

1.2: Salient Features ofGOP and Population Distribution in Africa:1998 2

1.3: Africa'seconomic growth performance by subregion and economic grouping 6 1.4: Frequency distribution ofAfrican countries according to growth performance 6

1.5: Share and sectoral performance 7

1.6: Sub-Saharan cereal imports and food aid requirements 9

1.7: Indicators ofexternal trade (Percentage change over previous year) 9

1.8: Balance ofpayments: 1995-1998 11

1.9: External debt and related statistics 12

1.10: Trends in Savings and Investment in Africa: 1975 - 98 13

1.11: Indicators ofmacroeconomic stability 16

2.1:Inequality measures for Africa 18

2.2: Inequality measures by world regions (1990s) 19

2.3: Poverty in a sample ofAfrican countries,by region 20

2.4: A summary ofsectoral poverty in sub-Saharan Africa 21

2.5: Growth requirements for poverty reduction 23

2.6: Development finance requirements for poverty reduction in Africa 24

3.1: Rank correlation between indicators 36

3.2: Population ofSSA in Five Policy Environments 37

List of Figures

1.1: World economic growth, 1995-1998 , , 2

1.2: Subregional share in GOP and population 1998 4

1.3: Per capita income by region and economic groupings,1998 4

1.4: GOP and Population Shares of G-5 and Least Developed Countries;1998 5

1.5: Share in Population and GOP of Oil and Non-Oil Exporting Countries 5

1.6: African GOP and population growth,1994-1998 5

1.7: Sectoral contributions to GOP; 1980 and 1998 share (%) 7

1.8: Sectoral growth rates;1997-1998 Growth rates (%) 8

1.9: Commodity prices; 1990-1998(1990=100) 10

1.10: Evolution ofthe current account and its components; 1995-1998 11

2.1: Inequality measures by world Region , 19

2.2: Poverty and income distribution for rural areas ofselected African countries 21 2.3: Poverty and income distribution in urban areas ofselected African countries 22

2.4: Development finance required to reduce poverty by half by 2015 24

3.1: Well-being 31

3.2: Well-being and income 31

3.3: Competitiveness and investor risk ratings 32

3.4: 1998 Annual Performance Trend Index by Region 33

3.5: Population share by cluster ratings, 1998 APTI 34

3.6: 1998 Economic Sustainability Index by Region 34

3.7: Population share by Cluster Rating,1998 ESI 35

3.8: Population Share by Cluster Rating, 1998 EPSI 35

List of Boxes

1: Financial Crisis in the Emerging Markets: What Lessons for Africa 3

2: Food Supply Outlook in Sub-Saharan Africa 8

3: An Update on the HIPC Initiative 12

4: Recent Trends in Foreign Direct Investment (FDI) in Africa 15

Economic Report nil Atrica 1999: The Challengeo/Pn\'('I"/.I'ReductionandSustainab ilit v

Foreword

A

^{s in th.~ past~ this} edit.ion of the _[~o n o m i c Re~)ort

on Aln ca (ERA) reviews the performance 01 the region's economy during the past year and con- side rs the prospects for the shor t and medium term. But unlike in the past. performance over the prcvious year and challengeslucing African policymakersare cvaluatcd from the perspective of reducing poverty by halI'over the next decadeand a hal

r.

Erad ication ofpovert yisthe ovcrarching objectiveolal I development effortsinAfrica.and reducing it by hallover the medium term isdeemed an essential first step toward s this final goal.

The reasons for the focuson pmcrty are wellknow n. Some

XO per cent of LowHuman DcvelopmcntCountries- coun- tries with high population growth rates. low income. low literacy,and low life expectancy- are inAII·iGl. Four of

cvcry 10 Africans live in conditions of absolute ^IX)\crt)'.

and recent evidence sugges ts that poverty on the conti- nent is increasing.

This year 's ERA develops a set of indices on the basi I' wh ic h both short-term performance and long-term sustainability can be evaluated. The sustainabilii y analy- sis e\ aluates socia l. economic and other performance. out- comes,and pol icy effortsof countries in termsof progress towards a well-defined long-term goal of halving poverty by the year 2015. The central message is a simple one.

Despite recent progress in economic policy reforms. most of the countries of the continent lack the fundamentals for sustained future growth. Not surprisingly. the lowest scor- ing countries on all the indices were those significantly impacted by ci\ il conflict.

Unde rstand ing the dimensions of poverty is essential for constructing policies and programmes to reduce it.

That is why measuring performance and sustainability becomes vita l. But understanding the depth and extent of poverty fully is only a first step - a necessary but not suffic ient ste p - to achie ving poverty alleviatio n.

The analyse s in this Report raise fundamental issues.

from wh ic h arc dra wn a number of key policychallenges to be addressed by each country within the spec ific ities of itsnational conte. xt. Add rcssinu the~ se chullcnu~csdocs not provide a formula forcertain success, Indeed. there is no sing le formula that will guarantee growth and pov- erty reduction in all Africa n countries. The utility of the Report as a tool therefore lie. in the Iact that it chal- lenges pol icy makers to design approaches that are ca- pab!c of addressing the unique circumstances obtaining ineac h of their countries. while learning from the experi- ence of others .

As Africa enters the next millennium. the long-term sustainability of economic and social progress of many countries is at best uncertain - as evidenced by the results reported in thisedition of the ERA, It isclear that while macroeconomic policies arc very important and nec- essary for economic growth. and have spurred the re- cent good performance across an impressive array of African countries. they are by themselves inadequate to sustain it. The challenges ahead for Africa - to deepen economic and social progress and to sustain it at the level necessary to reduce poverty oyer the next two de- cades- are formidable. We fully intend to build on the results or this and subsequent editions of the ERA, to better assist EC A member states in addressing these chal- lenges,

K. YAmoako Executive Secretary

Economic Report^OilAfrica fC)C)C): The Challenge ofPoverty Reduction and Sustuinability

Economic Report on Africa1999: The Challenge ofPoverty Reduction and Sustainability

Introduction

T

his edition of theEeonomic Report on Africa([~RA)

departssigniIicuntly from earl icrVersions. Its con tents are dramatically re-oriented to respond to changing needs. and to anchor the Economic Commission IlH'Africa'sanalysis olAfrican economies in a framework that benchmarks their performance to"best practices" and also provides systematic insights about ^11l)\\ the year-to- year or period-to-period performance departs from. or co- heres with. thespccilied long-term development agenda of these economics. The "best practice" criteria against which country performances are evaluated are drawn from those African countries that have had the highest possible achievements during the period under review. as well as from the capability of each country of attaining and sus- taining a level of performance that is necessary to satisfy the stated objectives. In other words. a distinguishing fea- ture of the ERA. both from the previous Series and from every other similar exercise on Africa. is the evaluation of performance (outcorncsj and policy efforts in terms of progress towards a well-defined long-term goal ofpoverty eradication. and more so. the sustainability of obscrvcd outcomes. In this respect. this edition develops a sustainability index It)!" African economics. in addition to a performance index and a policy index.

1 The sustainability index is a composite of macro- economic elements (savings-investment and export perlor-

mancc).and a wide range of other indicators. It is designed to measure and indicate the capacity of each country to attain and sustain a rate of growth that is sufficient to im- pact signi ficantly on poverty. The framework for this yearly exercise (summarized in the technical appendix to this Re- pOI1) clearly distinguishes between the primary performance indicators. the sustainability performance indicators. and the composite policy stance index. It is hoped that such a comprehensive overview of AIrican economies and the year-to-year country rankings with respect to both out- comes and policy effort, will provide policy makers and their analysts with different perspectives and deeper in- sights about the relative states of these economies. An

important clement of this Report that wiII be continued in future series is the information to policymakers about. and analysis of the implications 01: the composite indices and ratings of African economies by other institutions. Indices such as the various country risk ratings. the \ frica Com- petitiveness Index. the corruption perception index. index of political freedoms. human development index. human

POVCI1. index.ClC. are scrutinized. not only for the informa- tion they contain but also because of the demonstrable implications for understanding the stale of these econo- mics and the policy measures needed to improve country performance and ranking.

3. The Report I(KUSeSpredominantly on the economic performance of the continent but without losing sight of the imperatives of the social dimensions as both the es- sence and sustenance of economic progress. It concludes that as Africa enters the next millennium. the long-term sustainability of economic and social progress of many countries is at best fraught with uncertainty. While macro- economic policies are very important and necessary for economic growth. and have spurred the recent good per- tormance across an impressive array of African countries.

they are by themselves inadequate to sustain it. The chal- lenges facing Africa in terms of deepening economic and social progress and sustaining it over the next two de- cades include addressing issues in the following critical areas: human capital. institutions, structural diversification, lowering transaction costs. raising competitiveness. good... ... c,

stewardship of envirollmenta I and ecological resources, and mobilising resources for development financing. All of these

... ...

are crucial elements in increasing the capacity of Africa's economies to accelerate growth and sustain it at a break- through level of 7 per cent annually.

4. Considering the strong effort which led to the good recent performance, attaining and sustaining GOP growth at that rate, through optimal use of resources and appropri- ate policy reforms. is a formidable task, and no country can afford to be complacent. For Africa's decision-makers, the

Economic Report on Africa /999: The Challenge ofPoverty Reduction and Sustainability

lessons and policy implications of the analysis inthe con- text of addressing the above challeng e are many. Subse- quent editions of the ERA, as well as other ECA publica-

tions. will address someof the policyissuesunde rlyingthe components

o r

the indices, which Africa's policymakers need to address.

Economic Report on Africa 1999: The Challenge ofPoverty Reduction andSustainability

Executive Summary

T

^{he 1999}Economic Report on Africa (ERA)reviews the performance of the region in 199~ from the per

specriveof the capabilityof the region to attain the developmental objective of reducing poverty by half by the year 2015. This objective derives from the post-inde- pendence commitment ofAfricangovernments toimprove the standard of living of their people. More recently. a consensus has emerged among AIrican governments and their development partnersthat thisgoal istheovcrarching objective of development on the continent. The latest ar- ticulation of this objecti ve was at the Second Tokyo Inter- national Conference on African Development (TltAD II) held in Tokyo. Japan. in October 1998.

I. The State of the African Economies in 1998

6. For the fourth consecutive year. gross domestic product (GOP) in Africa grew lasterthan population. con- trasting markedlywith a decade and a halfofdeclining per capita income. The 3.3 per cent GOP growth of 1998. com- pared with 2.9 per cent growth in 1997. was the highest among regions of the world.

7. This growth is a very welcome achievement for Af- nca. However. the level of growth is below that necessary to have a significant impact on poverty. [I'Africa is to reduce poverty by half over the next decade and hall'. it would need to attain and sustain an average growth rate of 7 per cent per annum. This is the major challenge for Afri- can policy makers and their development partners.

8. The recent growth of African economies is all the more remarkable considering the declining momentum in_{'-' '-'} global growth. World economic growth slowed to 2 per cent in 1998, from 4 per cent in 1997. The slowdown in Asia triggered by the East Asian currency crises rippled through the world in three ways. Market economies in emerging

countries shrank as governments pursued restricti ve fiscal and monetarypolicie s for curative and protective reasons.

Globally. there wasreduced demand for exports. And there was downwardpressureon commodityprices. ln combina- tion. these factors contributed to the reduction of global trade from () per cent in 1997to.2 per cent in 1l)9~.

9 Using continent-wide averages for Africa can be misleading because substantialpopulation andGDP differ- ences exist among the subregions of North Africa. West Africa,CentralAfrica.EastAfrica andSouthern Africa. and also within subregions. The live biggest economies of the continent (South Africa. Algeria. Egypt. Nigeria and Mo- rocco) account ItH' 37 per cent of total population. and 59 per cent orGDP. The 33 leastdeveloped countries(LDCs) have 45 per cent of the population. and only 17 per cent of GOP. From another perspective.the II oil-exporting coun- tries ofAlgeria.Egypt. Libya.Tunisia. Cote dlvoire.Nige- ria.Cameroon. Gabon. Republic ofCongo. Angola and Equa- torial Guinea account lor 49 per cent ofG DP, and 36 per cent of the population.

10. AIrica's positive aggregate economic performance in 199R (3.3 per cent GOP growth. compared with 2.<.) per cent in 19(7) was not shared evenly across the continent.

Only the North and Central African subregions grew in

199X;there were declines in the eastern, western and south- ern subregional rates of growth. The oil-exporting coun- tries maintained their growth momentum as a group (3.7 per cent in 1998 versus 3.6 per cent the previous year). but growth in Gabon and Angola declined by half, while the Republic of Congo and Algeria grew substantially. Largely because of the recovery in agriculture and the decline in oil prices. the non-oil-exporting countries grew at 2.9 per cent, from 2.3 per cent in 1997. It is encouraging that the 33 LDCs increased theirGDP growth rate from 2.4 percent in 1997 to 4.1 per cent. Growth in the live largest economies (see paragraph 9 above) increased from 2.2 per cent to 3.1 per cent. Only two economies (Comoros and Democratic Re- public of Congo) had negative GOP growth in 1998 com-

EconomicReport on Africa1999: The Challenge ofPovertv Reductionand Sustainabilitv

pared with fo urtComoros.Democ rat ic RepublicoI'Congo.

Republi c ofCongo .and Morocco) in Il)l)7. Sti llonlythree coun tries (Botswa na. Republ ic of Congo and Equator ia l

Gu i nea) grc « at per ecru or ^more in 199:';. the a\ ^cragc growth rate required to reduce poverty by half by the year 20 1S.

II. Agriculture remains the dominant secto r in Africa and itsrccox crv in ^Il)t)X fue ll ed GDPurow th . ioodweather

and ^{re forms.\\ hic h} improved the^availabilityand distribu- tion of modern inputs including credit. contributed to the

betterperformance .How ever. theremoval ofsubsid iesand

the reduction of public ^{exten sion services.} which ^resulted

from thereforms.ncgutivcIyaIlcctcd sm aII produccrsinthe au~ri c u lturn l sector, Constra ints in the sec to r were a!!!!ra-~

v.u cd by the decline in donor support ^for rural develop- ment projects. and the reduction of inv csun cnt in rural so- cial scrvices. These dev el opmen ts impacted negat ivelyon

the dri ve by!\lricancount r iestoattain^{loodscl l-su}lfi ci cncy.

12. The industriaIsector grcv by ,).2 per cent in 19t)X.

down from,).Xper centin 1997, The1~111 ininv estm entwas one of the reasons for the drop ingrowthof the manulac- turing sub-sec to r. lrom2.5per cent in 1997 to 2,0 pCI' cent in

I t)t)X, although weak competitivene ss due largely to rela- tivel y low productivity were also factors.

U. The recession inemerging marketswas transmitted to Africa mainly through depressed commodity prices. All

ol'Africasexportable productswere affected.with oilexpc- ricncing the largest fall. But the decline in oil prices did benefit the oil-importing African countries.

loot There was serious pressure on the balance of pay- mentsin 199X, Exportrevenue declined by 17 per cent. For the first time during the decade of the 1990s, the trade bal- ance turned negative. boosting the current account de ficit to a high ofS16 billion . The perennial imbalance in the services sector. driven by external debt payments and the cost of transport and financial sen ices. continued to put pressure on the current account balance. and to claim an inordinate share of foreign revenue from merchandise ex- ports.

15. Resource flows into Africa declined to S3 billion from

$4.5 billion in 1997 as the result of reduced private flows and bilateral credit. For sub-Saharan countries. net trans- fers declined by nearly 40 per cent. The ratio of debt stock to GDP increased moderatelyand the ratio to exportsgrew steeply because of the latter's decline. Debt service in- creased to S35 billion, or 31 per cent of goodsand service s exports. Ongoing debt reduction initiativesdid not signifi- cantly affect the debt burden. Only one country of the 41 potentially eligible has benefited from the H IPC initiative.

That country. Uganda, had its debt reduced by 20%. Only four additional countries (Burkina Faso,CotedIvoire. Mali

and Mozambique) an: currentlysched uled to receiveactua l de bt reduction in the next three years.

\6. 1m csun cnt as a percen tage0 I'G DP increuscd lrorn

2\ per cent in 19l.)7to23 percent.mainlybecauseolu I per

cent i^ncrcasc in dorncstic sa\ i^ngs. Highcr incom es and

lower consumption. espe cially in the public sector. were the major contri butory facto rs in the change in domestic

sav i ngs.

17. lnllution declined lrom 15 percent in 1997to 12 per cent. Increased agricultural production and the 1~J11 in the price olimponshelped^containconsumer prices. The decline in externaltrade resulted in an increasein government deficits due to reduced revenue s lrom international trade taxes.

IX. lcdium-t crrn prospects are brightened by the past

lour _.years of increased ^{GDP u}_~^{row t h. However,} two ^{kc v}- determi nan tsor future growtharc weatherand the interna- tional economic environm ent. which arc both exogenously determined. Good weather cannot be counted on every vca r althouuh it has occurred lor the last four. nd the

. - ^~

glo ba l eco nomy seems unlikely to change lor the better overthe mediumterm.

II. The Challenge of Reducing Poverty in Africa

19. The firstchapter. The Stateof African Eco nomics in 199R. rcvicwcs economic progress and compares the out- turn with the growth rate required to achieve the target of reducing povertybyhalfinAfr icaby2015, ChapterII looks at the policy implications of this developm ent object ive from the perspecti ve of development financing. Alle r a brief discussion of poverty measurement. a review of in- come distribution and povert y in Africa follows.Estimates ofgrowth rates required to meet the developmental objec- tive, resources needed to finance the implied investment and indications of major policies that can be implemented by Ali- jean leaders conclude the chapter. There is no at- tempt to provideanswers to these complex issues but rather to provide a basis for informed discussion and debate on and about the region's development modalities.

20. Until recently,informationto measure the extentand severit yof Africa's povertywas inadequate for most coun- tries . The key data used for this purpose are from surveys of household income and expenditure that are time-con- suming and expensive to complete. Fortunately, sufficient data now exist for some African countries to make these calculations possible. Data used in this report are for coun- tries that have 60 per cent of the total population of Africa, and whichaccounted for 76 per cent of the continent'sGOP in 199R.

Economic Report^OilAfrica Jl)l)<): TIll: Challenge ofPoverty Reductionand Sustainability

ally taken as the per capita income of society in advanced countriesand per capita consumption expenditure (inc lud- ing the consumption or own production) 1\.)1' dcxeloping countries. The PO\crty line can he calculated and the ratio of poor to the tl)[al population (the "head-count ratio") can be dcriv cd. Alternative approaches combine indicators of

\\ ell- being. such as per capita income. Iitcexpectancy,in-

1~lI1t mortality and primaryschool enrolment.

...,..., Analysis or income distribution in Alrica shows a Iairlv high degree of inequality,Compared with other re- gions of the world. AIricu has the second most unequal income distribution nextto Latin America.The Ginicoclfi- cicnt 1\.1I· Africa as a whole is 43 per cent. The highest

\ ulues 1\.)1' inequality arc 1\.)1' South Afr ica.Kenyaand Zim- babwe. The lowest arc 1\.)1' Egypt. Ghana. Algeria. Niger and Tanzania. The picture or relatively high inequality is confirmed hy shares of total expenditure byquintilcs.

23. Although 44 per cent olAfricas population live be- low the region-wide povertyline or~.Nper capita per month.

the depth and incidence ofpoverty varies between and \\ ithin the subregions. In the North Afr icasubregion. only 22 per cent are under the poverty line 01'$54 per capita per month.

while sub-Saharan Africa has 51 per cent below the ^PO\crty line or 534 per capita per month. Significantly more poor people live in the rural areas. The a\ cragc income of the rural poor is only ~14 per person per month. compared with an average ofS27per month for the urban poor.

24. To reduce poverty byhalI'in A lrica bythe year 20 15 requires a 4 per cent reduction in the ratio of people living in poverty each year. Change in povert y can arise 1'01' two reasons: a change due to growth in mean consumption ex- penditure (appropriately adjusted for a change in the PO\- crty line): and a change in the distribution of income (the inequality measure). For Africa as a whole. GOP growth of about 7 per cent per annum would be required to achieve this annual reduction in poverty. Increases or 5-6 per cent arc needed for North Africa and Southern Africa. 6-7 per cent for Central Africa. and 7-~ per cent for the West and East African subregions.

25. In order 1'01' Africa's GDP to grow at an average 01'7 per cent per annum. additional investment will be needed.

An estimate of the amount can be made by employing the Harrod-Domar model. which uses the savings rate and in- cremental capital output ratio to derive the rate of growth of GOP. Thus, for a desired rate of GOP growth, required in- vestment can be calculated bv assuming an incremental

-

^...

capital output ratio. In recent years. the use of incremental capitaloutput ratios and the Harrod-Dornar model as a suit- able framework for estimating developmentfinancerequire- ment ,hascome under criticism. HO\\ ever.as no alterna- tive meth odology is available, this approach is used here.

C;DP \\ ould be needed to reach 7percent per annum growth.

to be financed partly by domestic savings and the rest by

foreign inllo« s. The current domestic sav ings rate isabout 15 per cent. Thus. a further IXper cent would be needed

trorn external sources. Off i c ial de\ clopmcnt assistance (OD A) 1\.))' the continent a\'eragesabout t) per cent. lcaving a residual Iinancing gap of about ^l} per cent.

27. Atrica-widcaverageshide largevariations among the subregions. NorthAIrica needsonlyabout 5 per cent01'<. ;DP in external resources to complete the financing needed to generate a (iDP gnm th rate high enough to halvethe poverty level in the subregion by 2015. )DA to the subregion has averaged about 3 per cent olG DP. leavinga financing gap llr about 2 per cent orGDP. Financing investment 1\.)1' needed GDP growth is mostdifficult inCentralAlricu where the rc- sidual ^financing gap isabout 27per cent.

2S. Recent lorcign resource llows to Alricu have been Iarshort of the \ olurnc needed to meet the povert y reduc- tion objective. ^{A f r ica}mustaddressthe key issue ofraising domestic sa\ ings rates. but in the short run. expectation of sig nificantchange isunrealistic .inview ol'thcexisting Il)\V

levelsolincomc. Giventhese ratherstark realities.what are the keypolicyissues1'01' the developmentofAfrica? Clearly.

in this global izcd \\ mid. the international economic envi- ronment impactson Africa. Commodity pricesarc beyond the control of African policy makers. and OD/\. flowsand the handling of the debt overhang can be influenced only indirectly by maintaining exemplary domestic economic management. OOA and debt issue s require the assistance ofAfricus dcv cloprncnt partners.

29. Pulicy issues that can be addressed directly by AI:' rican policy makersrelate to domestic savings and external resource inflows other than conventional OOA. such as foreign direct investment.and the causes of capital flight.

Stabilization of the macro economy will stimulate savings by creating an economic environment \\ here private agents can plan their future with a large measure of confidence.

Moreover. prudent gov crumcnt behaviour and fiscal disci- pline will be expected to contribute to increased savings.

30. financial liberalization \\ ill theoreticallv lead to highersavingsthrough theeffectsof high real interest rates on savings. However. most empirical work sugges ts that the effect of interest rates on gross savings isweakor non- existent. The most important determinant of savings in Africa has been found to be the level of real income. Very poor people save little or nothing and income must rise above the subsistence level before increases in income re- sult in higher savings. For example. it would take IRyears 01'5.3 per cent GDP growth for sub-Saharan Africa to reach the income threshold where further increases result in in-

Economic Report on Africa 199<): The Challenge ofPoverty Reduction an I Sustuinabilitv

creased savings rates. More research is needed to ad\ ancc understandinu of the factors determining savings rates in sub-Saharan countries. Current understanding olthc link- uuc between interest rates and sa\ ings indicates that Alri- can governments have tCw policy instruments to increase sav inus in the medium run and /ClI' as~ lonu~ as incomes re- main low.

~I. Alricu hassuIlcrcd mussi .e capita I 11 ight. estimated to total ~2 billion between 19X~ and ^J991. At the end or

199I. the average ratio or capital llight tn debt \\ as csti- mated at over 4() per cent lor a sample of IS countries for which data were availablc. "or four countries. the rate e:-..- cccdcd ()() per cent. (Nigeria: 94.5 per cent: R\\ anda: l)4.~

per cent: Kenya: 7-1..4 per cent: and the Sudan: ()()..:' per cent ).

~~. A number of past and current top African officials are thought to hold huge foreign currency denominated accounts outside their continent. Most or these assets are believed to be the result ofrent-seekingand corrupt activi- ties. Whatever the .ourccs and wherever they are. these resources need to be invested inAlricu. A difficult ques- tion is \\ hat Alrican governments can do to obtain the re- patriation or those funds. and how the countries in which the accounts are held can be persuaded to be or assistance.

3.1 Foreign direct investment (FDI) is needed as a non- debt-creating form of resource inflow. But experience shows that the share or FDI flow s to A lricn isvcrv small and that it is highlybiased in lavor ofmincral-rich countries. FDI in Africa seems to be caught in a vic ious circle since it re- quires a hospitable economic environment and sustained high growth, Yet. FDI is needed to help create that environ- ment and achieve that rate of growth.

34. The underdeveloped human resource base - exac- erbated by outmigration of skilled A Iricans-and the weak physical infrastructure of the continent deter foreign direct investment. Yet. huge investments are needed to develop a skilled labor force and expand transport, communications.

energy and related infrastructure. Domestic private sector resources arc inadequate to meet these challenges. For- eign direct investment could help. However. given the large volume of investment needed and the ^10\\ domestic sav- ings rate. targeted mechanisms and special arrangements may be required to entice FDI into these areas. Addition- ally. strategies need to be devised to increase productivity.

and to make judicious use of whatever domestic and for- eign resources that aovemmcnts can mobilize to enhance~ ~

investment and growth. African countries will need to deepen and expand their reforms. while making sure that the process supports. rather than constrains investment.

In this context. it is important to recognize that persistently high real interest rates enzendered bv financial liberali_{~ ~.} za- tion without sufficient institutional development to luster

competition. in addition to exchange rates that do not rc- fleet the true scarcity of foreign exchange. or that fluctuate wild!v. can distortinvcstmcnt incentivesand decisions,Simi- larlv.

-

trade liberalization that confers undue udvantauc^~ on foreign competitors has not been conducive to the expan- sion or domestic investment in the past.

35. Furthermore. political and ci\ il instabilit y.weak in- stitutiona l capacity and inefficiencies have not created an invcsuncnt-tricndl v climate. These conditions have had important ncgati\ c implications lor resource mobilization and utilizationinAfrica. including cxaccrbutingcapiral Ilight.

They \\ ill therefore need to be given urgent attention.

III. Performance and Sustainability of African

Economies

3(l. In 199X.Africa enjoyed its fourth consecutive year of positive GDP gnm th. despiteglobal financialand currency turmoil. But this favourable outcome cannot be assumed to mean that the aggregate AIrican economy has crossed the critical threshold to a sel I-sustainable. poverty-reducing growth path, For this to be true. the global environment and exogenous shocks would havechanged permanently for the better and/or the domestic foundations for sustainable de- velopment would have been put into place. lnfortunatcly, the global environment and exogenous shocks are not chang- ing in Alricas favour. ODA is stagnant or declining. little progress has been made in reducing the debt burden. protec- tionist tendencies continue in Africa's major markets. and erratic weather conditions persist.

37. Current growth theory posits aspecific group of vari- abies and factors to constitute economic growth fundamen- tals. Macroeconomic stability and other steps arc needed to reduce transaction costs. raise returns on investment, re- duce risks to investors. improve human capital. improve in- ternational competitiveness. and address the problems of poverty and inequality. To test whether or not Africa has built a critical mass of momentum towards sustained. pov- crty-reducing growth requires the use of multiple evaluation criteria. Unfortunately, comprehensive. Africa-specific com- posite indices needed for this purpose are not available.

Chapter III develops such indices. not only to assess current performance and policy stance. but also to evaluate the me- dium- to long-run sustainability of economic growth.

3R. An effective evaluation process requires a broad and consistent framework that reflects the current and future ca- pabilities and aspirations of Africa's people and the func- tions and constraints of their governments, The overalleco- nomic roleolthc state. it is generally agreed. i the su tain-

Economic ReportOil.·/ji-ic(/ /999: The Challenge ofPovertv Reduction and Sustainahilltv

surn csstandard ^functions rclating to cconom ic^gro-vth and stability. Human well-being is central to the notion and mea- surement ofeconomic de\ cloprncnt. Broadlyspeaking. eCO- nomic policies and pcrformunccs arc deemed good iftheir impact on well-being is both positi. e and sustainable. More

speci fi cal ly.an evaluative framework should Il)cUS on three dimensions.namely.the impact ofpolicies and performance onwell-being:the consistenc yofpolicic« with the desirable and feasible economic functions or the sta te : and the sustainabilit yolpolicicsand performance.

,W. The^definitionand measurement orwell-beingcan be approached in t\HJ \\'ays. First. by using the constituents⁰I' well-being, such as nutrition levels.educational auainrncnts.

and the expected length or life. The second is by using determinants such as income levels and the a\ ailability or educational and health sen ices. In practice. the simulta- ncous usc or both criteria is required.

4(), The analysisinChapter III useslour clementsto mea- sure the quality orlife: income levcis. health status. educa- tional attainment and political and civil liberties. Thus.cco- nomic development can beviewed asa sustainable and sus- tained increase in real incomes: improvements in health and educational status:and widening or the freedomsof people. 41. ln Africa. one \\'ayor summarizing the objectiveor enhancing well-being. which also translate s into the main object or dcvclopmcnt. is the eradication or pmcrty, PtJ\,- crty can beviewed as hav ing two main dimensions: mate- riaI poverty(measured inIe\cls⁰I'income) and human pov- erty (measured in termsor health. education and liberties).

-+2. The consensus is that the State can and should pro- mote economic development. and through it. the well-be- ing of its citizens. In a market economy.the basic economic

functions or the State include maintaining law and order.

ensuring macroeconomic stability and an incentives-com- patible microeconomic cnvironment. investing in basic so- cial services (health and education) and infrastructure (transport and communications networks). and protecting vulnerable people and the cJl\ironmcnt. To the extent that thesc functions enlargc thc cCL)]1omic space Ii.)]' efllcicnt and enl:cti\'t~ enterprise and gro\\"th. empo\\'er citizens to make choiccs. protcct the CJl\ ironment ror ruture gcnera- tions.and assist the weak and \ ulnerabk to li\'ea mcaning- ltd Iill:. they impact positivcly on \\"ell-being.

IV. The State of Well-being, 1998

43. Chapter[II summarizes the well-being⁰

r

Ali'icans in Tied 'core. result in more than10countriesbeing listed,

lour ^factors mentioned above. For the ^first three or these.

per capita income.Ii tc expectancyat birth. infant mortality and adult literacy arc the proxies measured and compared usinu Borda rank inus.~ ~ These are ordinal indices. usinu~

countrv scores that are the sums or the rank that a countrv

-

^-

obtainsaccording to the levelofeach ofthe variable: in the

we l fare index, (Hence. equal weight is given to each vari- ablc.) TheSUIll olthc rankings loreach country in termsof real per capita GDP. lite expectancyat birth.infantmortality.

and adult illiteracy yie lds the Borda rank. The best per-

former has the highest scores. the worst the lowest.

44. For the ^q() countries with complete data. result sarc used ttl rank countries by indices. and then ttl test lor cor- relation among rankings. The Ii.JCUSis on the I

n

countries that have the highest scores and the I() with the lowest sco res.

-1-5. The countries with the lowest Borda scores (in as- cending order. Sierra l.conc. Mali.Burundi. Mozambique.

Malawi. Ethiopia. Niger. Chad. Gambia. Guinea- Bissau.

Burkina FaSLl and Uganda ) come (rom all subreg ions ex- cept lorthAlricu. They arc mainlytropical countrieswith rclatively10\\ resourceendowmcnt. They include both large and sma ll countries. Eight are landlocked (Malawi. Ma li.

! igcr.Uganda.Ethiopia. Burundi. Burkina Faso and Chad ) although the sig nifi ca nce olthis fact is unclear. since there are landlocked countriesthat have performed wc!l (such as Hotswunn and Zimbabwe ). Most hav c experienced recent political instability, Although the precise relationship be- tween conflict and low Ie\els orwell-being is not quanti li- able. past neglect and destruction or assets arc probable

factors.

-1-6. The hiuhc~ st-scorinu~ countries (in usccndinu order.~

Egy pt. Gabon. Morocco.Cameroon. Botswana. Swaziland. Algeria. Cape Verde. Tunisia. Libya.SouthAfrica, Mauritius and Scychcl lcs) are predominantly Irorn the Nor th and SouthernAfrican subregions. Two of them - Botswana and Swaziland - arc landlocked. Population densities are not particularly high. Eight hav c enjoyed political stability for long periods (all cxcept South Arrica and Algeria).

47. The c10sc relationship bet\\'cen income and wcll- bein!.! is conl'irIned in refercnce to the_~ se two indices. Eight_~ or the I() best pl:rli.mners sclected by per capita income bclong to the top I() countries in the Borda ranking'. (The exceptions are Cameroon and S\\"aziland in the Borda top- tcn score. replaccd in per capita score by Gabon and Namibia). The sets or bottom-ten countrics in the two rankings share livc countries (Mozambique. Ethiopia. Si- erra Leonc. 8urundi and Malawi). This relationship sug- gests that citizens of countries with higher per capita in- cOllles arc more likelv to achie

-

ve bettcr well-being. Also.^~

Ecol/omic Rep (Jr/Oil.·I.fj-jC(/ 11)1)9: The Challellge (J/Pon>I"/YRecll/e/ioll tllldSl/shli/whili/,l"

the results suggest that policies targeted primarily at rais- ing incomescan help improve the overallwell-being otcom- munitics,

~X" With regard to the relationship between we ll-being and competitiveness.the Borda r.mkingsare compared \\ ith the AfricaCompetitiveness Index ( CI ).which was com- puted bythe WorldEconomicForum and the IIan ard lnsti-

tuic for International Development. The ACI consistsora weighted average orsixsub-ind ices covering openness to international trade, the sizeand role ofgovcmmcnt. finance.

infrastructure. labour and institutions" The po:itivc statis- tical correlation between the ACI and Borda rankingscon-

firms that wel fare and competitiveness move in the same direction" The implication is that policies that enhance the competitivenessolcountrics arc likely to contribute to im- provingthe wel fareoftheir citizens.

49. It is argued that a major determinant othoth FDI and capital llight is the risk perception that investors associate with individual countries and groups of related countries.

The status ofwe ll -being can be expected to relate to invest- ment through the growth-investment link. Several organi- zations attempt to measure and publish information on in- vestment risk" One of these is the Institutional Investor Country Risk Ratings(IlCRR) which covers35 Africancoun- tries. Alook at the 10 countries at the bottom of the Borda and IICRR runkings reveals only two countries in common (Sierra Leone and Mali ), Nevertheless. all of the bottom- ten IICRR countries for which there arc Borda scores arc idcnti lied as comparatively poor performers by the latter, By contrast, the two rankings share seven top-ten coun- tries (Mauritius. Botswana. Tunisia. South Africa. Egypt.

.... .

Morocco and Seychelles). It appears that countries with higher IICRR scores arc also more likely to achieve better welfareoutcomes.

v. Performance and Sustainability

50. A central issue in economic performance and policy evaluation is the question of sustainability. which explains why some African countries labeled "high performers" at one time drop out of the club. Sustainabilitv is defined in terms of three attributes: the consistency of the observed short-run outcomes with stated long-term uoals: continu-l,.,.. , - . "

ing replicability of observed (positive) outcomes in the fu- ture; and laying the foundations for 'take-off" and ensur- ing a stable acceleration path. In ECA's indices. emphasis is uiven to kcv elements ofsustainabilitv, includinz: macro-_{~. ~ ~} ' -

economic indicators. structural diversification, dependency, transaction costs/competitiveness. and human capital de- velopment. Outcomes are also affected by non-policy lac- tors such as the international economic environment. initial

resource endowment s.external shocks (terms of trade. Ii- nancial flow s. weather). donor preferences and civil politi- cal conflicts. Accordingly, the indices used in this report separate policy and non-policy factors. We plan to reline the indicators further in future editionsof the [:'RA"

51. Three indicators reported here havebeen newlycre- ated by ECf\: the Annual Performance Trend Index. the Economic Sustainahility Index. and the Economic Policy Stance Index.

52" The AnnualPerformanceTrend Index (:\ PT[) mea- sures improvement or decline in current account balance.

inflation. and per capita income. (This is only a year-on- year measure). Its results can be presented from two per- spectives: country performance; and population bene lit- ing fromperformance improxcmcnts or negativelyaffected b~ decline. Thirty-twoof the 50Africancountries for \\hich data were available experienced some improxcment in 19l)X.

Only 17countries were worse o IT. Yet. onlythe Central and North Alrican subregions experienced signi Iicant progress in 19l)X. Southern Africa wasbasically unchangedand the East and West African subregions declined (the latter heavily influenced by Nigeria's performance). Fourteen countries had negative ratings. including li\ c of the 11 oil- exporting countries (Gabon. Libya. Algeria. Angola and Nigeria).

53. It is important to note that I~ of the lowest-scoring countries recently experienced or arc currently expcrienc- ing some form of civilconflict orsoc ial upheaval.From the point of view of shares of the population affected by gains and losses. through cluster analysis. the APTI paints a mixed picture For the majority of the population of Africa.

there was little ifany,improvement in economic conditions.

This is because a majority ofthe population lives in coun- tries that score poorly on the index. largely because olncga- tive commodity price developments. The analysis high- lights the vulnerability ofAfrican economies to exogenous economic and non-economic shocks.

54. To complement the short-term focus of the APTL the Economic Sustainability Index (ESI) has been con- structed as a measure of a country's capacity to maintain long-term economic growth. The ESI currently is composed or 21 different indicators covering live categories: human capital development, structural diversification. dependency, transaction costs. and macroeconomic aspects of sustainability. More indicators will be added in future re- ports to enhance its utility as an information resource.

')') On the ESt. the top five countries are Equatorial Guinea. South Africa. Botswana. Mauritius and Tunisia are the top five. Notably. three oI'these (South Africa. Botswana and Mauritius) enjoy a high level of resource endowment.

Equatorial Guinea. which has enjoyed impre ive perfor-

EconomicRI!/NJI"fOil ..fIi·icu /<)99: TheChallenge ofPovertvReduction andSustainahilitv

deepen and broaden its dcvc lopmcn ta I para meters to con- linn its capacitv 1'01'sustainable growth. More data torEqua- toriul Guincu and Botswana onstructural divcrsitvand trans- act ion costs would rnakc the rcsultmore robust.

5(l. The countriesat the bottom ol'thc ESI rankings ha\ c sonic history ofcivil conflict (Sierra Icone. Niger, Benin.

ganda. Central African Republic and Rwanda). Suh-re- gionally. the Southern and North vlrican subreg ions rate considerablyhigher than Central Africa. The East and West Africansubregions arc at the bouorn. Ov cr t\\ o-thirds 01"

all countries arc classilicd as having 10\\ sustainability ^>

including large andsma ll. natural resource-rich and natural resource-poor. coururics with good policies and countries with bad policies - and arc found in all parts 01"Africa ex- cept the Maghreb.

57. The Economic PolicyStance Index(EPSI) measures the appropriateness or gm crnmcnt monetary and fiscal policy. indicators relate to budgets. taxation. monetary growth.and interest rates. Incomplete information has lim- ited coverage to only,:'3 countries. As \\ ith the ESI. coun- triesarc scored Irorn one to 1() based on ho« theycompare with the average 01"the three best . Ethiopia. Egy pt. Congo (Republic). Seychelles. and South Africa lill the top li\ c positions in the ranking, \\ ith the exception olCongo tRc- public). the policy stance or all or these countries also has rclatix dy high approval ratings Irorn the World Bank. No country achieved the bcst-pructicc score or seven, The top t\\0 countries scored somewhat above li\ c (Se ychelles and South Africa). In the clusteranalysis. howcvcr. nearly a third or the countries scored in the dustcr assnciatcd

\\'ith good pl:rllmnancc. and only a handrul 01" countrics rated as poor. This suggests thc cmphasis on policy rcll)rm in rl:Cent ycars has resulted in signi licant progress. although there is still somc distancc to go.

VI. Interrelationship between Indices:

5R. Correlation analysis is useu to tcst thc connections among the perilmmllKe. sustainability and policy stance in- dices. Thc APTI shows little cOITdation \\'iththe other \ ari- abies.suggesting that an Ali'ican cconomy\ perlorJnance in a gi\'en_{' - . . .}vear is not strongly connecteu to sustainabilitv or_{' - - ..}

well-being. The ESI shO\\_~ 'sa signilicant dcgrl:e orcom:lation_{~ ~} between most orthe other \'ariablc ·.implying that long-telln sustainability is linked to imprm'eu standards 01" li\'ing. re- duction in povel1y. anu an l:Il\'ironment more conuuci\'e to investment. The EPSI correlates signilicantly with the sustainability. well-being. competitiveness. and human de- velopment indice . 'ugge,ting that policy improvementscan lead to improvement in theseareas as well.

VII. Final Observations and Policy Implications:

59. The pilot application or indices Il)J' 19l)X has been limited tovariables that are quanti liable and 1'01'which there arc available data. E\'L' n this modest effort has vicldcd in- tcrcsting rcsults.

Nl. \\ hilc lour countries(Botswuna. Mauritius. Rcpub- lie olSouth Africa and Eq uatorialGuinea )score high on the ESI index.only three ofthem Hotswunu. Maur itius and South ;\ lrica satis fy the minimal requirements to sustain growth and dcv clopmcnt. These countries enjoy a high degree or human capital dcv clopmcnt and have Iairlv well divcrsilied economicsand rclarively low transactions cost.

L:quatorial Guinea sco res high on the susta inubility index dcspitc the non-d i\ crsilica tion0 I'the economy. due rnainly to high macroeconomic indicatorsofsustainabilitv driv en hv_. the oil revcnucs since the ear" Il)l)()s,_.

()I, Altho ug h 12 countries representing about 25 pCI' cent ol'Africus population lcll into the "good" performance cluster. eight olthcsc (see Table 1\111. 16 )have poor pros- pects 11.)1'sustainability. according to the E~I cluster analy- sis, Thus.onlylour countries (Equatorial iuinca. Mauritius.

Morocco and Egypt) xigniliLantl~ improvcd their pcrlor- mancc in Il)C)X and hav e a bcttcr-thnn-minimal cnv ironment 1'i)J'sustainingsuch performance. \larrllingl~.scven coun- tries (sec Table Al ll.Iri) that were rated "poor" in both per- tormancc trend and sustuinability account for about 27 per ccnt or the population or th~ continent. Vulnerability to cxtcrnal shncks and non-eL'onomic 1~lLtnrs. as \\ell as the signilicant impact or ci\ il conllicts arc at the root or this poor perll)(,(llancc,

(l2, It is orsingular importance to underline the 1~lLtthat an cconomy'sperll)('(llancc in a particularyea r is not indica- ti\ e or its0\crall strcngth and long-term potential. This is signi licant Illl' A li'ica's economics since many or thl:m arc prone to e.\ogenous shocks that could impact negati\'ely on their positi\'cpcrll)["(llancc li'om ycar to year,Ali'ican coun- tries therdixc neeu to takc erl"ecti\ c mea ures to plan ll)r and mitigate thc crippling erl"ects or negatin: natural amI eJl\ ironmcntal phcnomcna. through better scienti lic and polic) understanding. anu prn-acti\ c programs to apply science anu technology in sO"'ingeJl\ ironmcntal and natu- ral resource-baseu constraints. Ali'ica must also come to grips \\'ith natural and man-made human catastrophcs. par- ticularly the scourge orciviI \\'ars and con llict. and thc III V/

AI DS pandemic. which ha\'e ulH.!crmincd thc sustainability oI'den: lopment.

63. The results or this analysis arc consistent \\'ith the results or a study by Collierct al ( 1997a) orthe conditions

Ecollo mic RCfwr(Oil .Ui'ic ll /999: The' ('/wl/el/g"(!/Pol't'r/y Redl/oi()!lullel Sl/s/uil/u!Jili/y

considered necessaryfor growth.namely.a minimal degree ofsoc ia lstability. a minimal degree of macroeconomicstu- hility,and a minimal degree ofallocutivc efficiency. The stud_.v, usinu_.... a series of filters. found: six countries without peac e (Angola. Burundi. Liberia. R\\ anda. Somalia and Sudan): ^J~ countries (see paragraph 14~ 01' ERA for list) that satisfied the condition or minimum social order but failed to meetthat of minimum macroeconomicsta bility. and eight countries (see paragraph 143 of ERA ) that satis fied the first two conditions but lailcd the allocativcefficiency criterion. Eleven countries (see paragraph 14~ of ERA).

with2~ per cent ofAfrica "s population. met all three condi- tions. Coilicrs study \\ as based on 1996 data. It is esti- mated that barely 15 per cent ofAfrica 's population cur- rentlyIivein an environment consideredminimallyadequate for sustainablc growth and dcvclopment

(~. The frequency with which countries enter and drop out of the list 01'"high' or "'good" performers has been a cause of concern. While policies are very important. they are by no means sufficient to"sustain development. The unfortunate neglectofthe sustuinabilityvariables- macro- economic (savings-in,cstmcnt and exports). human capi- tal. institutions. struct ura l divcrsiIication.transaction costs and competitivene ss, as well as environmental and eCO- logical balance- must havebeen the major cause ofAfrica 's frngilc economic performance over time.

65. For most of the African countries now on the verge or recovery, the capacity to sustain growth and develop-

mcnt overtime isvery low. The keymistake of the pasttwo decades has been the Il.KUSon macroeconomic stab iIiza- tion while capacity. structural and institutional elements were neglected. Achiev ingstabilization has entailed sacr i- ficing expenditures needed to build the requisite institu- tionsand infrastructure. and to invest in human capital de- velopment and retention. Policies with the twin goals or macroeconomic stability and sustainability have either not been draw n up and adopted. or arc not being implemented.

These are the urgent tasks at hand.

66. The analysis and process or constructing the indi- cators of performance. sustainahiIity and pol icy stance underscore the man_..vchallcnucs_,-. lacinu decision-makers

-

in moving forwardwith theAfrica developmentagenda: imple- menting and sustaining macroeconomic reforms: human capital development: diversification olthe economy: insti- tutional development: competitivene ss and the capacity or the economy to internally generate resources; etc. These challenges call for appropriate policy response by Africa's decision makers. While this report Il.KUSeS on key indica- tors of economic performance and sustainability.which have been developed by ECA. subsequent editions \\ ill. in addi- tion to further refining the indices. address the key policy challenges for Africa underlying a particular sustainability index component or components thereof. The ultimate ob- jective is to help focus policy advice on longer term struc- tural issues while responding to the the sho rt e r term isues and measures that have tended to dominate economic policy discourse.

Economic Report on Africa1999: The Challenge ofPovertv Reduction and Susto inab iltty

The State of African Economies in 1998

A

^l'rica's economy elTeeted a turnaround in 1c)9 ~.

recording a gruwth rate or 3.3 per cent. ex- ceeding the 2.9 per cent rate 01' Il)ln and the population growth rate or.2.xpercent per annum.This per- Iormancc is significant lor at least three reasons. This \\ as the fourth consecutive year during which percapita income increased. a significant departure from the experience or the lastdecade and a hallwhen income per person declined consistently. The second point worthy or note is that this rate or growth was the highest in the world. giving the re- zion the distinction of bcinu the fastest urowinu cconomv.

... '- ... ... -

Thirdly. the rclativcly high leve l of performance \\ as achievedin the lace or declining global growth momentum.

1 Although the positivc growthtrajectory in per capita income dating from 1995 is a we lcome reiicf and seems to suggest a definitive turnaround in the lonuncs or the region. the fact that the magnitude has remained much below the rate of growth necessary to huv c signifi cant impact on PO\ erty needs to be taken in stride. II'Africu is to reduce poverty by halfover the nextdecade and a hall'.

itwill need to attain and sustain a growth rate 01'7 per cent per annum. This defines the major challenge ItH' Africa's policy makers and its dex clopmcnt partners.

3. The experience o lthc recent pa:t and. in particu- lar. the exceptional performance of 199 :\. should reas- sure A f r ic an_"-uovcrnmcnts that thc

. -

v

.

arc on the riuht track and that growth is possible e\ en with a hostile externa l cuv ironment. However. they will need to inten sif y their

efforts and accelerate the growth momentum in orde r to realize the goa l of reducing poverty and raising the standard o l' living or their people.

The World Economy

-1-. A remarkable feature of the wo rld eCOIWI11V in

Il)l)~ \\as its considerable .10\\do\\ n and the consequen- tial reduction in growth from a robust 4.1 per cent in 1997 to .2 per cent in 19l)X. The slowdown in the growth momentum was experienced in all regions. with the ex- ception of Africa. In Latin Ame rica. the rate of growth declined by more than 2 percentage points. from a high 01' 5.-1- per cent to 3 per cent. In the dev eloping coun- tries of the Western IIcmisphcrc. the Middle East and Euro pe. growth rates halxcd. However. the most severe decline was recorded in Asia where the growth rate fell by more than 70 per cent from nearly 7 per cent to less Table 1.1: Growth performance in the world; 1995-1998 (Annual percentage change over previous year)

Output

I

¹⁹⁹⁵

I

¹⁹⁹⁶

I

¹⁹⁹⁷

I

¹⁹⁹⁸

World

3.7 4.2 4.1 2.0

1.

Advanced economies

2.5 3 .0 3.1 2.0

Major industrial countries

2.1 2 .8 2.9 2.1

Other industrial countries

4.4 3 .8 4.2 1.4

2:

Developing Economies

6.1 6 .6 5.8 2 .3

Africa

2.9 4 .0 2.9 3.3

Asia

9.0 8.2 6.6 1.8

Excluding China and India

7.5 6.6 3.8 -6 .0

Middle East and Europe

3.8 4.7 4.7 2.3

Western Hemisphere

1 .2 3.5 5.1 2.8

Source: IMF (1998); UN (1998)

Economic Report^0/7Afiica 1(1)9: The Challenge ofPovcrrv Reduction and Sustainabilitv

8

7

(), In the developed econo my countries. the growth momentum also cooled. dragging CiDPgrowth down trorn 3,1 pCI' cent to 2 pCI' cent. Altho ugh the economics 01' these countries were unaffected bv the financial conta- gion that destabili zed emerging market economics. CiDP performance was nevertheless subdued bv the decline in world trade. However. countervail ing measures.most im- portantly the reduction in interest rates and increased liquidity to make up lor slack external demand. sustained business and consumer confidence and helped case the downward pressure.

The ri rst was the con t^I'act inn ^l)I' em erg ing m a^I'kc t eco no m ics a ltcr the rcsuicti v^L' lisc ul and muncuuy policies they pursued either ^1'01'cur.u ivc (in those coun- tries that came under the contagiou cffcct) or lor pru-

tcctivc purpose s. In these countries. the escalation or interest rates to contain the exodus orca p ita l. and the credit crunch. depressed the real secto r both trom the demand and the supp ly side . Seco nd ly. the slow down in the cmcruinu market~ ~ s reduced ulobu] demand~ ^1'01'

exports as a result or \\ hich growth or world trade de- ce lcr.ucd lrom l) per cent in ]l)t)7 to () per cent in 199X.

Thirdly. the decline in export demand and the dcprcci- atinu currencie~. s or cmcruinu market economic~ ~ s ex- cried stro ng down ward pressure on commodity prices.

The combination or these three luctors contributed to the rail in the rate 01' growth or de\ eloping countries from a robust () per cent in 1997 to a little over 2 per cent in 199X.

o

1995 1996 1997 1998

• World • Developing Economies Africa Asia 3

4

Western Hemisphere 9

2 6

5

Figure 1.1: World economic growth, 1995-1998

than 2 per cent. Exc lud ing China and India. the sca le or the deceleration in the rest ofAsia was enormous. 1~1I1­

ing Irorn just under -+ per cent to -() per cent (see table I,I ).

7. One ofthe most important features ofAfrican econo- mics that could assist in properly understanding the poor and uneven performance among the subregions and across 5. The decline in As ia as we ll as the slowdo w n in

the global economy were triggered by the East Asia n currency crisis and are the consequences of its spread to the rest or the \\ oriel. The financ ial crisis in the emerging markets or South-East Asia transmitted it- sell' to developing countries through three channels.

The African Economy

Table 1.2: Salient Features of GDP and Population Distribution in Africa; 1998

Region

I

No. of

I

Share in GDP

I

Share in population

I

Per capita income

countries % % ($US)

Africa 53 100.0 100.0 688

North Africa 7 40.3 21.9 1264

Sub-Saharan Africa 46 59.7 78.1 I 526

West Africa 15 17.3 29.0

I

409

Central Africa 7 5.1 3.8 937

East Africa 13 7.9 30.7 177

Southern Africa 11 29.4 14.6 1388

Oil Exporters 11 48.8 35.8 937

I

Non-oil Exporters 42 51.2 64.2 549

G-5 Countries*

I

^{5 59.1 37.3 1091}

Least Developed Countries

I

^{33 14.7 45.4 223}

Source: ECA Secretariat *South Africa, Nigeria. Algeria, Egypt, Morocco

F('OIlOl11icReportOil.,I/i"icli /C)C)C): T!Ie ('!I"lIellgeolPovcrtyReduction andSusta inuhilitv