Reference Conference Document: " Promoting Trade and Investment to Accelerate Africa's Development "
Addis Ababa, 29 April 1997

We are greatly honoured, my colleague and I, to present to TEPCOW on behalf of the secretariat, this year's theme : "Accelerating Trade and Investment in Africa". We will begin with an introduction of the subject. Then we will outline the main issues involved in promoting investment in Africa. Finally, we will present the issues of trade.

I. Introduction : Trade, investment, and development.

First, Why the theme ? It is the view of the secretariat, as outlined in the Conference Discussion Paper "Promoting Trade and Investment to Accelerate Africa's Development", that trade and investment are an essential part of any credible strategy to accelerate this continent's development.

Poverty is perhaps the most intractable problem facing Africa. It is variously estimated that some 40 - 50 % of the population live under conditions of poverty. The source of this is low household incomes, caused in turn by high rates of unemployment. Yet the labour force is growing at annual rates as high as 4 - 5 %.

The way out of poverty is through creating jobs and income opportunities. This is an important development policy goal in African countries.

To have an impact on unemployment, it would require economic growth rates as high as 7 - 8 % per annum to be maintained. The Asian dynamic economies have demonstrated that it is possible. The Asian economies have shown that, with high rates of investment and a focus on trade, such growth rates can be sustained. Trade and investment, therefore, are like two keys that can work together to unlock development.

II. Investment to accelerate development

Let us first consider investment. What level is needed in order to sustain high growth rates? The answer is -- "It depends on the level of economic efficiency and productivity of capital". The answer to the question -- What level of investment African countries need -- is : High rates of investment accompanied by a high level of economic efficiency. To sustain 7 - 8 % growth rates, the Asian economies have had to maintain an investment rate of 32-35% of GDP.

BUT, where will this investment come from ? The answer is : From domestic savings and foreign investment.

Domestic savings have to come from households and the retained earnings of private enterprises of all sizes; plus savings from public revenues by all levels of government.

In the case of foreign investment, nowadays, the preferred choice is foreign direct investment. The reasons are that official development finance is dwindling; and it is of limited usefulness to private sector growth. FDI is preferred because it does not create external debt. This is a great advantage, in view of the great debt burden carried by most African countries. But FDI has other important advantages. It brings new technologies; new, high-value products; more efficient production processes, and new, more effective management methods; and links to important export markets. UNCTAD estimates that about two-thirds of world trade flows through multi-national corporations.

But, sustaining high investment and savings rates is a tough challenge. Domestic savings rates across Africa (especially in Sub-Sahara Africa) have remained low throughout the 1980s and 1990s. Widely accepted data indicates that gross domestic investment in North Africa is roughly 25% of GDP, while domestic savings are 20 % of GDP. Across Sub-Sahara Africa, the corresponding figures are 17% and 13%.

African countries also have had great difficulty attracting adequate levels of foreign investment. FDI to all African countries amounts to about US$ 3 billion annually -- which is less than 3.5 per cent of all flows to the developing world. And FDI flows to Africa are concentrated on a few countries.

As already indicated, African countries face two main challenges. The first is : To boost investment to the rates that are needed to sustain rapid economic growth. The second is : To achieve economic efficiency to assure high rates of return on invested capital. The first challenge involves two sub-challenges. The first is to boost domestic savings and investment. The second sub-challenge is to attract a "respectable" share of FDI.

The sub-challenge of boosting domestic savings and investment calls for promoting a greater commercialisation of economic activities to facilitate savings generation in liquid assets which, therefore, can be intermediated. The second step is to promote the development of efficient but prudent financial intermediaries -- commercial banks, mutual funds, insurance companies, building societies, capital markets, and so on. They should be encouraged to extend their services to rural households and informal sector enterprises, where the vast majority of African economic operators -- and the poor -- are to be found.

Boosting domestic savings and investment also calls for a stable economic policy mix geared to private sector profitability.

In the second sub-challenge of attracting a larger share of FDI flows, all the policies that promote domestic savings and the growth of local enterprises also tend to be good for FDI, as asserted in the secretariat's report. In addition, having a strong natural resource base can be an important source of attraction. Countries, therefore, should attract foreign investors to explore and help to develop their natural resource potential. A business-like outward-oriented development policy stance is essential to attract foreign investors.

But, more important than all these factors is the perception within international investment circles that there is peace and stability and orderly political processes surrounding the transfer of power.

The size of African countries may also have served as a negative factor inhibiting FDI inflows. Large-scale investments require appreciable economies of scale. A size of market offering these opportunities can be achieved through full-scale regional economic integration, removing political, physical, tariff and non-tariff barriers to the flow of goods and services and the establishment of branches across national borders by enterprises.

To attract foreign investors, also requires countries to take concrete steps to steadily strengthen their international competitiveness -- by improving different factors that have a bearing on the cost of doing business in Africa. Telecommunications is growing in importance. Internet connectivity is a vital tool for communicating business opportunities. Transport infrastructures; reliable water and power supplies; the skills base, productivity, and work ethic of the labour force all are important. So too is the level of taxation and the quality of the macro-economic policy framework.

The low level of FDI in Africa also indicates that foreign investors have limited objective information about Africa. African countries -- individually or in subregional groupings -- need to mount strong, credible and sustained sales pitches, marketing the investment opportunities that they have.

The second challenge -- to achieve economic efficiency -- requires a large number of improvements in the way economies function, allocate and utilise scarce resources. But, we will mention, just in passing, three prerequisites.

The first is to achieve a more clear-cut division of responsibilities between the Governments and the private sector in propelling development. The government, for example, is the best when it comes to providing essential public goods. Division of responsibilities also requires strengthening public-private partnership; maintaining low rates of corporate taxation; and gearing government spending to development priorities.

The second prerequisite is to maintain progress towards increased domestic competition -- through deregulation of markets; through the development of an adequate legal and regulatory framework; by reducing trade barriers on imports, thereby exposing domestic producers to external competition; and by opening all sectors of the economy to private (including foreign) investment.

The third prerequisite is to maintain macro-economic stability based on prudent fiscal and monetary policies conducive to low and stable inflation and interest rates, and a realistic but stable real exchange rate.

All these factors that are conducive to promoting investment are also conducive to promoting trade. We will now outline the role of trade in Africa's development.

III. Trade to accelerate development

The first question is : Why is trade important? In answer, we note that successful development is often associated with successful exporting, even though it may not be possible to establish the chain of causality conclusively. With trade come efficiency gains from specialization in production. There is growing recognition that trade can play the role of an "engine of growth" in the industrialization process, and that increased trade contacts can help countries to become more fully integrated into the global economy. Moreover, trade is essential for African countries because export earnings are the most important form of external resource flows.

The next question, therefore, is : What has been Africa's export performance? The general picture is that Africa has chronically under-performed developing countries and the world at large in terms of the rate of growth of its export sector. According to UNCTAD (1995) data, over the period 1950-1993, the value of Africa's exports (in current dollars) grew at a compound annual rate of 9% -- compared to 11% for developing countries as a group, and 11.2% for the world. Sub-Sahara's exports grew at a rate of only 8.2%. World trade in non-fuel goods increased by a compound annual rate of 11.8% from the early 1960s to the 1990s. For African exports, the rate was 7.3 %.

Africa's share of world trade, accordingly, has fallen dramatically over the past thirty to forty years. In the particular case of Sub-Saharan Africa, the share of that subregion's exports to the world at large has fallen from 3.1 percent of world trade in 1955 to less than 1.2 percent in 1990. Similarly, there has been marked erosion of Africa's international competitiveness. The continent's share of world trade has not only declined in absolute terms but also product by product. For instance, Africa once was the most important producer of copper alloys -- accounting for 32 percent of all OECD imports during the period 1962-1964. By 1991-1993, Africa's share had dropped by 22 percentage points to just 10 percent!

This has implied significant trade losses for the continent, estimated at US$11.0 billion annually. In contrast, OECD official development assistance received by Africa in 1991 was $10.9 billion.

BUT, what are the factors behind this disappointing picture? The implication is that there has been a marked erosion of Africa's international competitiveness. Another important factor is the below-average growth in global demand for Africa's key export products. This is partly because of many African countries' continued high dependency on primary products, the high degree of product concentration, as well as near exclusive dependence on a limited number of trading partners. There are additional factors for Africa's poor export performance -- such as :

Protectionism in the markets of the industrialized countries,

Inappropriate domestic policies,

Policies constraining private sector development,

High transport costs,

Poor infrastructure -- electricity and water supplies, telecommunications, etc.,

Bureaucratic red tape,

Political instability, and

Continued low level of intra-African trade.

The impact of OECD countries' protectionist barriers on Africa's exports, however, should not be exaggerated. The average tariff on African exports in the European Union typically ranges from 0.0% to just 0.3 %, with a high of 0.6 % for some countries that export temperate products. Accordingly, African countries receive, on average, preference margins ranging from 2 % to 4 %, and as high as 4.9 % for some countries. Thus, African countries in the pre-Uruguay Round trading system faced average tariffs below those for other, more successful exporters, such as the South-East and Pacific Asian economies.

Some African countries, nonetheless, face high tariffs in some OECD countries on specific products of export importance to them. Among African countries, Gabon and Nigeria face the largest adverse tariff differentials -- because the US customs regulations preclude the extension of general system of preferences (GSP) treatment to members of OPEC.

At the same time, OECD non-tariff barriers have in some cases worked against African exports. Nigerian and Mauritian exports of textiles and clothing have been subject to quotas in the US market. As a result, some of these countries' textile and clothing exports face effective tariffs exceeding 25 percent. Yet, textiles and clothing played an important role in the early stages of development of the Newly Industrializing Countries (NICs). Further, developing countries exports, including those of Africa, have been undercut by subsidies that industrial countries employed to dispose of surpluses generated behind high levels of external protection.

But even in the case of NTBs, the impact on African exports should not be over-rated. The pre-Uruguay Round NTBs coverage ratios for Africa's exports, were only about a half of those affecting the star-performing fast-growing developing exporting economies of South-East and Pacific Asia. The Uruguay Round agreement restricts WTO member states' recourse to countervailing measures (e.g., anti-dumping actions, safeguard measures, etc); converts NTBs on agricultural products into effective tariffs and provides a time-frame for their progressive reduction; and provides for an end to export subsidies and the conversion of producer subsidies into income support transfers. In the post-Uruguay Round multilateral trading system, however, the effect of NTBs on African exports is still unclear, as it will depend largely on whether OECD countries will implement safeguard measures that remain legitimate in such a way as to dilute the Uruguay Round spirit of far-reaching trade liberalization.

Compounding protectionist tendencies in the OECD countries is the spread of regionalism which has had an impact on African exports which compete with those from countries that are member of regional arrangements allowing them free-trade access. Regional trade arrangements in the OECD include the European Union (EU), the European Free Trade Association (EFTA), and the North American Free Trade Area (NAFTA).

BUT, besides NTBs, there other factors which may better explain Africa's poor export performance. The most significant of these are :

Africa's loss of international competitiveness;

High transport costs, which significantly raise the cost of doing business in Africa;

Poor support services for trade, such as telecommunications, poor infrastructure, high transport costs; and

Administrative inefficiency, excessive regulation, and bureaucratic red tape.

These are the factors which African countries must overcome, in order to secure the most benefits from the new multilateral trading arrangements ushered in by the Uruguay Round agreement.

The Uruguay Round agreement provides both opportunities and challenges to African countries. The opportunities will include : sustained expansion of global trade, lower protectionist barriers and opening up of markets, and the establishment of a rule-based multilateral trading system. The benefits to African countries' participation include an avenue for African countries to put their trade and development concerns on the table for discussion under the WTO negotiating framework. Africa will receive technical support for the development of its trade sector from the WTO, as provided for under the Comprehensive and Integrated WTO Plan of Action for the Least Developed Countries. African countries will also benefit from the right to make use of the dispute settlement mechanisms within the WTO framework. Countries could also benefit from the removal, between now and 2005, of quotas on exports of textiles and apparel.

The challenges of the Uruguay Round agreement and attendant costs that African countries will face include : stiffer competition in global markets, possibly higher costs on food imports, and further loss of market shares if measures are not put in place to improve Africa's international competitiveness. Additional costs of participation in the WTO include : the need for countries to adhere to trade liberalization and continue to satisfy market opening conditions, and the onerous demands of permanently on-going negotiations under the WTO framework.

In view of the challenges and opportunities offered by the emerging international trade system, what can African countries do to enhance their trading capacity? Countries should undertake a number of measures -- including :

adopting export-oriented development strategies,

liberalizing trade policy,

modernizing the production sector,

promoting greater efficiency and productivity among local producers,

attracting foreign direct investment,

accelerating the process of integration,

strengthening international competitiveness of African economies,

undertaking better analysis of start-up costs for becoming an exporter -- market research, product development, establishment of distribution channels, learning costs, etc., and

improving transport, and telecommunications connectivity.

Indeed, many African countries have already been implementing comprehensive reforms which should make their exporting sectors an engine of growth. There is an need, however, to intensify and broaden these efforts in order for Africa to gain from the post-Uruguay multilateral trade system under the WTO.

IV. Conclusion

In conclusion, we wish to stress that trade and investment are two key complimentary elements in a strategy to accelerate Africa's development, boost the rate of economic growth, and sustain progress towards the eventual eradication of poverty. In a liberalizing and integrating world economy, Africa will need to exert greater efforts at promoting trade and investment in order to reap benefits from the emerging world economic system. If one had to cite the key factors that Africa must overcome, the following four would feature prominently :

Reduce the cost of doing business in Africa;

Change the perception that Africa is a high risk place for investment;

Strengthen African countries' international competitiveness; and

Modernize and expand the production base.

To this end, African countries should stay the course of reforms, including trade policy reforms, which many have been implementing for almost a decade implementing. The expansion of trade and investment offers the best opportunity for the continent to accelerate its development process and eventually eradicate poverty, which is the principal goal of development.