Africa’s 2010 economic outlook: Promoting development after the economic recession

From  Consultancy Africa Intelligence
Written by By Daniela Kirkby (1)
Monday, 28 June 2010 22:56

On 24 May, the 2010 edition of the African Economic Outlook (AEO) was launched in

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Abidjan, Côte d’Ivoire. The AEO conducted a country-by-country analysis, covering the economic, social and political development of fifty of the continent’s countries, excluding Eritrea, Somalia and Zimbabwe. It was jointly published by the African Development Bank (AfDB), the Organisation for Economic Cooperation and Development (OECD) and the United Nations Economic Commission for Africa (UNECA), with financial support from the European Commission (EC) and the Committee of African, Caribbean and Pacific Group of States (ACP). The publication was disseminated worldwide with a series of conferences in Africa, Europe, America, and will later be circulated in the Middle East and Asia.

Overview

The report details that after being boosted by seven years of consistently measureable growth, Africa has recently experienced the affects of the most severe and widespread recession in over fifty years. Africa’s Gross Domestic Product (GDP) fell from an average of about 6% between 2006 and 2008 to 2.5% in 2009. Moreover, Africa’s export volumes declined by 2.5% and import volumes by an estimated 8%. Sectors such as mining and manufacturing in countries such as South Africa, Botswana, Namibia and Liberia were particularly affected by the fall of commodity prices and global trade in goods and services, while unfavourable weather in Burkina Faso, Burundi, Chad and Niger produced bad harvests, thus diminishing national and household incomes and increasing their dependency on foreign aid.

When analysing the regional performance of the African continent, the AEO found that southern Africa, which was hardest hit in 2009, will recover more slowly than other regions, with an average growth of almost 4% in 2010 and 2011. The report further stated that East Africa was able to deal with the global crisis best and was currently projected to achieve the highest growth with an average of more than 6% in 2010 and 2011. Lastly, it concluded that North and West Africa should both grow at around 5%, while central Africa will grow at 4% during the same period.

Mobilising public resources and tax reforms versus foreign aid

In order to curb the effects of the recent economic crisis, this year’s AEO investigated how public resource mobilisation could assist in reducing Africa’s dependency on foreign aid, by reviewing viable practices in tax administration, multilateral agreements and policy reforms. One perspective pointed to the reality that donor countries have generally maintained their aid flows to Africa, despite substantial fiscal pressures at home. Furthermore, debt relief under the Heavily Indebted Poor Countries (HIPC) initiative by the International Monetary Fund (IMF) and the World Bank has reduced debt service costs. This together with additional loans by the IMF, the World Bank and the AfDB has helped African countries to better cope with the economic crisis.

Be that as it may, the report also stated that while African governments raise 11 times more money from taxation than they receive in overseas aid, much of the tax revenues are concentrated in countries such as Angola, who benefits from oil or other natural resources and Mozambique, where growth continued to be driven mainly by large foreign investment in mineral resources and services, while the agricultural, energy and construction sectors benefited from strong donor support.  Aid income still exceeds taxation in a quarter of African countries, and in half of them it constitutes over a third of government revenue. What the report thus concluded was that too many African countries are still heavily dependent on aid, because during the process of allocating funds, donors have devoted little attention to public resource mobilisation.

However, if a larger share of aid were targeted at this goal, countries would become less dependent on aid in the long run, to the benefit of recipients and donors. For example, where resource mobilisation is concerned, Botswana’s economic development during the economic recession was largely financed by domestic resources rather than by capital or aid inflows from abroad. The AEO noted that the solution is not to simply raise existing taxes, but rather to implement strategies towards more effective, efficient and fairer taxation across the continent.

The solutions to changing policies included removing tax preferences, dealing with abuses of transfer pricing techniques by multinationals and taxing extractive industries more fairly and transparently. The report stated that in the longer term, the capacity constraints of African tax administrations must be eliminated to open up policy options and enable tax revenue generation through a more balanced tax mix. Indeed, taxing new potential payers was a crucial element in advancing domestic resources. The report identified in particular urban property taxation as an instrument that could be more easily implemented with the aid of development partners. This type of taxation is progressive and can therefore be scaled up with Africa’s rapid pace of urbanisation and the corresponding need for financing urban infrastructure.

The report did note that there are very large differences in the tax raising performance across individual countries. Annual taxes per capita range from as low as US$ 11 to US$ 3,600. In fact, tax effort estimates confirmed that some countries collect as little as half of what would be expected, given their living standards and economic structures, while others collect two to three times more than what was originally calculated.  Thus, by targeting a larger share of aid to this goal, it would enable countries to become less dependent on aid in the long run.

In light of this information, the report reinforced the need for Africa to reduce its dependency on external flows, and rely more on mobilising domestic resources for development, by arguing that taxation is key. More effective, efficient and fair taxation in Africa, through broadening the existing tax base, would help reduce aid dependence and help insulate Africa from future shocks in the global economy

Endorsing foreign direct investment

Many African governments have implemented frameworks to attract more foreign investment. Nonetheless, most foreign investment in Africa goes to extractive industries in a relatively limited group of countries. Attracting investment into diversified and higher value-added sectors remains a challenge for Africa. Constraints on investment such as weak infrastructure and fragmented markets also adversely affect foreign direct investment (FDI) flows to Africa and to countries such as Morocco, where the instability of the financial markets, soaring oil prices, and the loss of impetus of the country’s major European trading partners led to concerns which infiltrated the domestic market.

However, prior to the financial crisis, FDI to Africa had been rising strongly, driven by a surge in prices for raw materials, particularly oil, which triggered a boom in commodity-related investment. The global crisis led to a considerable decline in demand and preliminary estimates for 2009 indicate foreign investment fell by more than one-third.

The AEO highlighted that African countries are developing Special Economic Zones to attract FDI. Foreign investors, such as China, are promoting the creation of such zones, which provide employment, spill over to domestic economies and allow firms to benefit from better infrastructure and easier regulations. By investing in Africa, emerging countries also benefit from the preferential trade agreements of African countries with Europe and the United States (US).

Donors outside the OECD’s Development Assistance Committee are becoming more important for Africa. China gives aid to almost every country in sub-Saharan Africa. Some observers have argued that Chinese aid is only motivated by access to Africa’s natural resources. However, there is little evidence that China gives more aid to countries with more natural resources, or specifically targets countries with a poor governance record. Furthermore, the report highlighted that Africa’s strengthening economic ties with Asia contributed significantly in being able to cushion the impact of the economic slowdown.

Trade policies and regional integration in Africa – Promoting domestic development

A rising number of protectionist measures were adopted by advanced countries in 2009 to curb the effect of the financial crisis. Often, stimulus packages were geared to favour domestic sectors, such as measures to support export or preferences for buying, lending, hiring or investing in local goods and services. Such measures clearly discriminated against developing countries, including those in Africa. A critical reason for Africa’s relatively poor trade performance is the weak diversification of African trade in terms of structure and destination.

Most African economies depend on few primary agricultural and mining commodities for their exports and mainly import manufactured goods from advanced countries. As traditional markets in advanced countries were expected to grow less than those in emerging Asian and Middle East countries, as well as markets in Africa, the report stipulated that trade relations with these more dynamic markets must be enhanced.

Despite some progress, intra-African trade is still low, representing on average only about 10% of total African exports. Many factors contribute to the low trade performance, including the economic structure of African countries, which constrains the supply of diversified products, poor institutional policies, poor infrastructure, weak financial and capital markets, political instability, insecurity in several regions and intra-African trade barriers.

What the report indicated was the process that African countries, with the assistance of the regional communities and development partners, have begun working to strengthen infrastructure development. In addition, the regional communities have also begun to develop and implement laws, standards, regulations and procedures to ensure the smooth flow of goods and services and to reduce transport costs. Countries such as Rwanda, Uganda and Tanzania have already opened their borders to enhance trade relations between each other.

Political and economic governance – Maintaining legitimacy

According to the report, stability was broadly maintained throughout the economic crisis as lower food and energy prices relieved the burden on households, while several countries including Chad, have put measures in place to sustain internal demand, thus limiting social tensions. Nonetheless, rising unemployment has exacerbated social discontent in several countries such as Angola and South Africa.

Concerns remain for the future, as fiscal stimulus measures have to be phased out to restore fiscal sustainability, while at the same time unemployment may remain high or increase. Overall in 2009, countries such as Malawi and South Africa, successfully undertook fair democratic elections, and government accountability increased. While setbacks in Burundi and Niger for example were still common, improvements in checks and balance mechanisms bode well for future institutional consolidation in Africa.

High-intensity conflicts and rebellions generally calmed down, with some important exceptions. When confronted with tensions, many governments struck a better balance between hardening their military stance and launching or strengthening dialogue with rebellion movements, such in the case of Mali and the northern Tuareg tribes. By and large, governments reacted more strongly and more responsively than in the past, which in turn will contribute to reducing long-term tensions. To further strengthen political governance, however, and step up social progress, the report stressed that civil society must continue to develop and increase its capacity to become more involved in the political process. On the government side, institutional capacity needed to be strengthened and reforms pushed forward, in particular in the judiciary and security realms in order to ensure overall growth and a long-term development strategy for the African continent.

NOTES:

(1) Daniela Kirkby is an Analyst in Consultancy Africa Intelligence’s Africa Watch Unit ( // <![CDATA[
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