Globalization: An Opportunity For Catching Up Or A Risk Of Falling Behind in the Development Process?

Statement

by Mr. K. Y. Amoako,
Executive Secretary,
Economic Commission for Africa

Geneva, Switzerland
20 July 2001

I. Introduction

1. The process of globalization continues to be one of the most widely debated and controversial subjects in the world today. One of the central concerns regarding globalization is that the economic gains generated by the process have been spread unevenly. Per capita incomes have risen three-fold in the developing countries over the past century; but six-fold in the developed countries. African countries, however, have not benefited from these gains but have been marginalized from the process as indicated by their low share of trade, capital and financial flows in the world economy.

2. In addition to concerns about growing inequality, globalization has fueled other anxieties: volatile short-term capital flows threaten financial crisis and instability; workers feel threatened by low-wage competition and new technology; governments seem less able to offer social protection; and competitive pressures may create the temptation to lower labor and environmental standards.

3. The main concerns about globalization are therefore that while it offers unprecedented opportunities, the process is progressing unevenly with some countries integrating into the global economy faster than others, while others are becoming increasingly marginalized from the process. Countries that have been able to effectively integrate themselves into the global economy and take advantage of globalization have done so through outward oriented and market friendly policies that have provided them with the opportunity to benefit from more and larger markets around the world, increased capital flows, technology advances, cheaper imports and larger export markets.

4. Those countries that have not benefited from globalization tend not to have the structural and policy foundations in place to take advantage of more open trade, investment and financial flows. Moreover, they face a global trading and investment environment that does not address their concerns in a transparent and equitable manner. These countries, mostly located in Africa, also usually have inadequate capacity to manage the globalization process, thus making them more vulnerable to exogenous shocks.

5. This note explains the challenges that globalization poses for Africa and highlights some of the measures that Africa needs to pursue to adapt to globalization. It also identifies policy actions that the international community should pursue in support of Africa's efforts to achieve better integration in the global economy.

II. The Challenge for African Countries

6. The key challenge for African countries is to design strategies and policies to maximize the benefits from globalization while at the same time avoiding or minimizing the disruptive consequences to their societies and economies. Africa is the weakest partner in international interdependence; this testifies to the enormity of the tasks at hand to re-position the continent into the mainstream of international economic interaction and development. Exports are vital for Africa's economic development. Most African countries offer very small home markets: populations are small and income per head is low. It is, therefore, harder to follow the route of middle and large countries, which has been to produce first for the national market and then for regional and/or world markets once producers have become experienced and competitive.

7. The weak capacity prevailing in many African countries is also reflected in lack of: capacity to understand the linkage between trade and development and thereby mainstream trade in development; technical capacity to analyse trade issues and their implications on African economies; capacity to understand and appreciate the legal complexities of multilateral and bilateral trade agreements and arrangements; capacities to implement the Uruguay Round and WTO Agreements; and capacity to effectively deal with supply constraints that inhibit African countries from being effective partners in the global economy

III. Adapting to Globalization

8. From the point of view of a strategy and its accompanying actions, the key factors underlying the marginalization of Africa can be grouped into two broad categories. First, structural constraints and policy inadequacies of many African economies that result in supply bottlenecks, non-diversified output, low domestic savings, and inadequate inflows of foreign savings for investment. Second, an international economic system that still poses unnecessary obstacles in the efforts of African countries to benefit from the process of globalization. Thus, actions are required at the country, regional, and global levels.

Country-Level Policies

9. Africa needs to pay sufficient attention to the domestic part of the policy equation defining international outcomes in trade, investment and financial flows. Research on Africa's export performance shows that Africa has progressively lost her global market share in traditional exports to a broad range of competitors due to domestic supply factors that reduced the competitiveness of exports. Some of these factors are amenable to macroeconomic and structural reforms.

10. The nature and timing of domestic policy responses to external shocks has a strong bearing on the course of growth and development in the globalized environment. While most countries have undertaken substantial economic and political reforms, aimed at laying the foundation for sustained growth and development, there are significant policy measures that remain. The cost to Africa of loss of competitiveness has been phenomenal.

11. Taking country-level actions focusing on a number of key priority areas is essential. Two such areas are of special interest to African countries: (i) macroeconomic; and (ii) industrialization and trade policy. The benefits of macroeconomic, industrialization and trade policy coherence are well understood. In these areas, country policies need to be consistent, coherent and aligned with those of other countries to strengthen regional efforts to enhance the same national objectives.

Macroeconomic policy co-ordination and consolidation

12. Africa needs to consolidate macroeconomic stability by continuing to undertake sound fiscal and monetary polices including realistic exchange and interest rates, as well as maintaining an outward oriented trade and investment strategy. In this regard, there is a need for fiscal consolidation, which, among other things involves strengthening tax and customs administration, as well as re-allocation of expenditures from non-priority areas. Resources released should go to social and development sectors, such as basic, secondary and technical education, health, and infrastructure. More importantly, there is need to establish safety nets for addressing poverty and the adverse consequences of economic reforms on segments of society. At the same time, and given the limited revenue resources, there is need to develop incentives to attract the participation of the private sector in the provision of some of the basic social and economic services, such as infrastructure, education and health.

13. In the financial sector, it is essential for African governments to deepen and enhance the reforms that have already begun in order to mobilize savings, attract foreign capital and increase the efficiency of financial intermediation. This should be done paying particular attention to the need to develop sub-regional frameworks for delivering these services, as a key step to supporting regional trade. While significant progress has been made in this area, important issues remain:

· Most central banks still lack the necessary autonomy, and banking supervision and regulation are inefficient and subject to political pressure.

· The range of financial products is very limited and many financial institutions are fragile.

· The payments systems in most of the countries are inefficient and cannot ensure rapid settlement of transactions, and interbank markets are very thin.

14. These constraints reduce the efficiency of financial intermediation, raise borrowing costs, reduce savings incentives, and increase the risk of bank failures. In the period ahead, these impediments should be removed to lay a foundation for the development of a dynamic and efficient financial sector - which is critical for the social and economic transformation of the continent. Moreover, specialized financial institutions and instruments for mobilizing long-term savings as well as mechanisms for extending credit to the rural sector should be established.

Industrialization and trade policy

15. Development cannot occur without industrialization. At the core of the development strategy for Africa should be the need to promote co-ordinated trade and industrial development, in a regional integration framework with a stable and predictable policy environment. Maintaining a credible and stable policy framework is essential to minimising risks investors associate with possible policy reversal. Public policies charting the course of trade and industrialization are necessary because many African countries exhibit complex market imperfections and market failures, which are associated with externalities and economies of scale, imperfect and asymmetric information, co-ordination problems, deficient capital markets and the absence of supporting institutions and skills. Under such conditions, entrepreneurs are usually not prepared to undertake the investments necessary for industrial take-off. Government intervention is, therefore, required to provide protective support while at the same time promoting competitiveness. East Asian countries' experiences support this approach.

16. For Africa, as regional integration advances and industries become more competitive, countries need to accelerate the pace of removing trade restrictions, which tend to create inward looking tendencies by local entrepreneurs who do not seek export opportunities, thus preventing the economy from achieving attainable higher growth. Moreover, high tariffs and non-tariff barriers can significantly raise prices for production inputs in manufacturing activity and greatly diminish potential exporters' ability to compete in foreign markets.

Regional Level Actions

17. To ensure the success of the strategy to accelerate the pace of Africa's integration into the global economy, Africa needs to intensify its efforts at mainstreaming regionalism in the development process. The open regionalism concept should be applied not only to enlarge the economic space, but also to lock in trade reforms - and by negotiating regional convergence criteria on macroeconomic, regulatory, and infrastructure reforms -important as they are. However, the process of regional integration should be premised on three dimensions. Firstly, by extending and connecting Africa's physical space, with efficient regional infrastructures. Secondly, by integrating the production structure of key goods and services. Thirdly, by integrating markets, through trade liberalization, monetary harmonization, and facilitating private sector business interests and involving the private sector in the planning and implementation of this aspect of integration.

18. This means that the process will require broadening the areas of integration beyond macroeconomic policy co-ordination, trade liberalization and a common external tariff. Regional integration must include non-traditional areas for cooperation, particularly in the following:

· Regional transport and communication and other infrastructure projects, such as power projects;

· Higher education and training institutions and programmes, particularly science and technology education;

· Information and communications technologies and content;

· Conflict, post- conflict reconstruction and peace building;

· Institutional capacity building;

· Promoting regional capital markets development;

· Natural resources development planning, particularly for large projects - especially those where the resources straddle national borders;

· Agriculture and food security; regional grain marketing and drought early warning systems;

· Systematic learning from the experience of others who have successfully integrated their regional economies.

19. Africa, by moving ahead with the creation of an "African Union", has undertaken a historic opportunity to accelerate regional integration. The African Union is an expression of the political commitment of African leaders to regional integration and to a united Africa. A strong regional economy can facilitate the pooling of risks between otherwise vulnerable economies and enable Africa to exploit complementarities and attract FDI. For Africa to become an active player in the global economy, the process of regional integration must focus on improving Africa's competitiveness, integrating markets through trade liberalization, harmonizing monetary policies and promoting private sector investment.

Global Level Actions

20. A composite of international actions will be needed in support of Africa's development and better integration into the world economy. Such measures should encompass the areas of trade, market access, debt and resource flows.

Trade

21. Future rounds of negotiations need to go beyond trade liberalization to address the broad development needs of Africa, particularly the need for full liberalization of export commodities in which Africa has a comparative advantage. The international community should facilitate "a development round" during the next trade negotiations. Specifically, such a round should be one that takes up explicitly the question of adapting obligations and the timing of their implementation, to the needs and capacities of the poorer members of the WTO.

22. In this spirit, the main components of a development-oriented agenda of trade negotiations would need to ensure the developmental dimensions of trade liberalization - notably agriculture, whilst taking into account the special role of agriculture in developing countries and the need for food security and of services of particular interest to developing countries. It would also need to address a number of issues of interest to developing countries including: a fairly large across-the board reduction of tariffs, particularly peak agricultural and industrial tariffs for products of major export interest to developing countries; substantial expansion of the tariff rate quotas for developing countries and binding- in quota tariffs at the same rates as the average tariffs applicable to manufactured products.

23. Such negotiations would further need to agree on tighter disciplines on subsidies, including the removal of agricultural export subsidies and production incentives, and more stringent disciplines on export credit and associated measures in developed countries; and stricter disciplines on anti-dumping and countervailing duties.

24. In order to increase trade opportunities for Africa, it is therefore necessary to both tackle market access problems of these countries in developed economies, and also address the weaknesses that make it difficult for African countries to take advantage of the market access that they already have been given under various initiatives. An integral part of this aspect will need to be promoting mainstreaming trade into African countries' overall development strategy, and ensuring that trade-related technical assistance is coherent with, and complementary to, trade policy aims of the country concerned; and through the partnership, encouraging greater political priority in Africa for regional trade integration.

25. The issue of whether a new round of multilateral trade negotiations should be launched at the Doha WTO Ministerial Conference has as yet to gather a critical mass of WTO members. As African countries prepare for that meeting, a number of concerns have emerged. These include: the need for the negotiations to adequately deal with the major issues that have emerged in the negotiations on trade in agriculture and trade in services; the importance of moving forward in the discussions on "implementation issues"; the need to adequately deal with some of the asymmetries in the WTO Agreements between rights and obligations, especially in the TRIPS and TRIMS Agreements, anti-dumping and sanitary and phytosanitary measures. Other concerns include the need to avoid overburdening the negotiations for developing countries, through inclusion into the agenda of the WTO of the "new issues" as well as the importance of providing fast track mechanism for accession of LDCs to the WTO. Progress on negotiations on agriculture and market access is crucial for many developing countries (including those in Africa), prior to Doha, at Doha and after Doha.

Financing Africa's development

26. Trade is one facet of external sources of financing for Africa's development. At present levels of savings (about 15 percent of GDP) and projected ODA, and if the poverty reduction targets of the World Social Summit are to be met, there remains a financing gap equivalent to 9 percent of GDP. While private rather than public transfers will eventually be the decisive factor in sustaining growth, public investment in infrastructure and the social sectors needs to increase rapidly in Africa over the next few years in order to reduce operating costs of private enterprises and increase competitiveness. Two sources for financing those investments could be official development assistance (ODA) and debt relief.

27. Official Development Assistance: ODA in the past helped to bridge the resource gap and hastened the developmental process in a number of countries. International partnership has long been an important component of African development. But this has had a mixed record in terms of delivering development objectives for Africa. Lessons have been learned that enable us to derive key guiding principles that can stand as a minimum for making future development partnerships work. Towards this goal, a new partnership for improving ODA should be based on four fundamental guiding principles, namely:

· African ownership of visions and goals for national development, as well as policies and programmes for poverty reduction and the increased participation of African countries in the global economy.

· Stable long-term resource flows to Africa and the predictability of long-term donor support.

· A transformed partnership based on mutual accountability to agreed development outcomes, including peer review and performance monitoring among both African countries and international partners.

· Recognition of Africa's diversity. Some countries can immediately benefit from the full range of measures outlined, while others need to make progress in governance and economic management before they will qualify.

28. Debt Relief: Debt relief is a potential non-conventional source of financing public investment and poverty programmes, which also improve business confidence for private sector financial flows. Key actions needed are:

• Looking at debt initiatives not in terms of a sustainability issue, but in the context of the continent's overall development financing needs;

• Linking the impact of debt relief and the objective of poverty reduction;

• Strengthening the political will and moral courage on the part of creditor nations and institutions to resolve the debt overhang issues;

• Developing an effective partnership with African nations for a durable solution to the debt crisis, with the possible involvement of third-party mediation, if necessary at the technical and negotiating levels, to arrive at a fair arrangement, including debt moratorium options on terms designed to enable African economies to grow.

• Helping Africa to strengthen information management, administrative capacity and political structures to effectively manage and control public expenditure programmes for proper debt management in Africa.

29. The development problems of Africa are also problems for the entire international community and in particular the developed world. The contribution of the international community will, therefore, be important in addressing the constraints African countries face in their efforts to integrate into the global economy. That contribution is likely to further energize African countries to deepen their domestic policy reforms in a sustainable manner.